He who wishes to grow rich in a day will be hanged in a year – Leonardo Da Vinci.

A line so true to its core and relevant to the topic to be discussed which talks about the greed of becoming rich faster and faster and thus ending in no where. Today we are going to discuss one of the biggest Accounting and Corporate Fraud that shattered common man and investors in India in 2009.

The article details about the Satyam Fraud of Rs. 7000 Crores that was neatly executed by the man who was once considered the IT czar and the Bill Gates of Andhra Pradesh. The man who founded and built Satyam into one of the top IT companies in India, which was very often referred to as the IT Crown Jewel of India.

Yes we are talking about the Promoter Founder and the Chairman of the Satyam Computers, Mr. Ramalinga Raju. This fraud or scam brought to the light the role of corporate governance in shaping the protocols related to the working of audit committees and the duties of the board members.

Now lets see how it started and got executed.

Background

Byrraju Ramalinga Raju was born on 16 September, 1954 to a farming family in Andhra Pradesh. He was the eldest child in his family. B Ramalinga Raju did his Bachelors in Commerce from the Andhra Loyola college at Vijayawada, and later completed his Masters in Business Administration (MBA) from Ohio University in the United States.

He ventured into many businesses including Dhanunjaya Hotels, Cotton Spinning Mill named Sri Satyam Spinning funded by Andhra Pradesh Industrial Development Corporation (APIDC). As the businesses failed Raju moved into real estate and started a construction company named Maytas Infra Limited.

The Founding of Satyam Computers

On June 24th, 1987, Ramalinga Raju formed Satyam Company Services Limited as a private company in Hyderabad with almost 20 employees. The company was formed along with his brother in law D.V. Satyanarayan Raju. They both were the promoters of the company and the company later became public in the year 1992 by getting listed on the Bombay Stock Exchange (BSE).

Satyam Computer offered a full range of IT consulting services spanning various sectors and it also served business process outsourcing (BPO) services. The company got listed on the New York Stock Exchange (NYSE) in 2001. The company got its big break by getting a Fortune 500 company as its client, John Deere and Co.

The business was growing rapidly and soon it became one of the top IT players of the market. Satyam became the fourth largest IT company after TCS, Wipro and Infosys. The company spread itself to more than 60 + countries with 50,000 plus employees all across the globe. Now let us see how Raju got engrossed in the fraud.

The Rise 

Satyam Computers was growing and flourishing with every passing day and was also acquiring new clients which increased its market reputation as well.

Satyam allied with Dun & Bradstreet Corp. in 1994 was declared as one of the 100 most pioneering technology companies by the World Economic Forum. Even Mr. Ramalinga Raju was awarded the Dataquest IT Man of the Year award in 2000. Both, Satyam and Ramalinga Raju were awarded with various titles and accolades for their performances. 

The 1990s marked a period of significant development for the organization. It also caused the development of various backup organizations such as Satyam Renaissance, Satyam Info way, Satyam Spark Solutions and Satyam Enterprise Arrangements, Satyam Info way (Sify) by chance turned into the primary Indian web organization to be recorded on the NASDAQ. Satyam gained a great deal of organizations and extended its tasks to numerous nations and marked MoUs with numerous worldwide organizations in the upcoming years.

Satyam also turned into a primary organization to begin a program known as the Customer-Oriented Global Organization program in 2000, marking contracts with various global players for example, Microsoft, Emirates, Advancements and Ford, asserting the benefit of being the first organization in the world affirmed by BVQI. And thus acquiring the name as a worldwide organization by opening offices in Singapore, Dubai and Sydney. In 2005, it procured a 100 percent stake in Singapore-based Learning Dynamix and 75 percent stake in London based Citisoft Plc. Satyam was considered among the top IT Consulting services companies by then.

During 1999, the company was declared as the fastest growing IT company in India. Few years later, Mr. Raju was awarded as the “Entrepreneur of the year” by E&Y in 2007. It was also awarded the “Global Peacock Award” by the World Council for corporate governance in September 2008. Just after 5 months of being awarded the Global Peacock award, the Satyam scam unfolded. 

The Beginning of the Fall

Now let’s go back and see how the scam started and got executed.

During the 2000s period, the real estate industry was in its boom in Hyderabad, and it diverted Raju’s mind for investing in the growing real estate and making money. He then started buying properties in Hyderabad and the near areas.

He established two companies named Maytas Properties and Maytas Infrastructures in 1988 and started buying properties aggressively. These companies were on names of his family members only and he started buying properties on names of his family members and on himself too.

He was so engrossed and fascinated by the real estate that time, that he even didn’t mind manipulating the financials of Satyam Computer to buy more properties in Hyderabad.

Whenever he found he was short of funds to buy more properties he would manipulate and falsify Satyam’s financial and accounts. This he did by showing false growth and revenue. For instance if Satyam had a revenue of 60 crores, he would manipulate it to 600 crores and he would even manipulate the share prices of Satyam. 

By this growth indicator Satyam share prices were always rising high. The share price of Satyam Computers was always inflated and attracted more and more investors buying in it. And soon when the share prices would go it’s high he would sell them to make profits and use those profits to buy properties in Hyderabad.

He along with his brother would also take loans on the rest of his shares. It was also said that he had knowledge of the proposed metro plan in Hyderabad and frequently bought properties near the proposed metro plan to make big profits. He started misleading the market and his shareholders by lying about the company’s financial health. Even basic facts such as revenues, operating profits, interest liabilities and cash balances were grossly inflated to show the company in good health.

Ramalinga Raju created almost 365 companies to buy properties, he even used his friends and family members’ names and made them the directors for those companies. He planned to use the profits earned through real estate to justify the falsified sales, growth and profits of Satyam Computers and easily fill the actual gap in the sales and profits.

He was even making fake sales invoices to show sales. The company made approximately 7500 fake sales invoices, and even manipulated the bank statements to justify the fake sales invoices. This he did to ensure that the money is in the bank and no one would ever doubt his activities. He did manipulation to show huge cash reserves which was not present actually.

He was doing this continuously to gain investors interest in the company, as the falsified growth, sales and profit attracted new investors and its share price would always be inflated to big heights. And he would thus make big profits by selling his own shares, and later use them to buy more properties.

The promoters of Satyam sold their shares to make profits but they never realized that they were in return reducing their own shareholding in the company. In 1999 the promoters of Satyam had a shareholding of 24% which later reduced to 2% in 2008.

The Big Expose & Confession of Fraud

Raju was continuously doing manipulations in his sales and profits figures. And this continued almost a decade till the gap between the actual profits and the profits shown in the books of the company started to differ. And the gap increased to a level that Raju could not fill them by just manipulations.

This situation led to another fraudulent idea in Raju’s mind, where he thought to buy 51% shares of Maytas Infra and 100% shares of Maytas Properties, both his own companies.

The 2008 saw a massive recession and economic slowdown and due to this the real estate sector also witnessed a huge drop in the prices. So this idea of buying these two companies started to take shape in his mind, as he thought this would become the further step to hide his fraudulent activities and also bridge the gap of the profits of Satyam and the actual profits in books.

This acquisition was not meant to be real though, as these were just to bluff the investors and shareholders. The transaction was planned in such a manner that the companies will be purchased only on papers but there will be no actual cash transaction and hence, this will balance the amounts already mentioned in the books of accounts.

On 16th December 2008, the board of directors of Satyam agreed and sanctioned the purchase of Maytas companies without prior approval of the shareholders. The problem started when the purchase made investors unhappy, especially their institutional investors and this resulted in a sudden decrease in the share prices of the company.

Even a foreign investor filed a lawsuit against Satyam which led to the fall of share prices by 55% on NYSE. Even the World Bank declared that Satyam has been banished from business with the World Bank for a long time for furnishing Bank staff with improper benefits and accused of information burglary and influencing the staff.

These manipulations were possible due to the customised ERP system which was their in-house development. Ramalinga Raju used his strength and developed his own customized ERP system for accounting purposes, with many loopholes, used for his profit. Hence, the addition and manipulation of fictitious invoices and fictitious bank statements was a child’s play for them. The projected fake bank statements held more money than the actual one. They simply converted this money into a fixed deposit account. The value of such fixed deposits was roughly around 5000 crores. The board of directors demanded to get those FD’s invested in some profitable avenues. That is when the Raju brothers decided to invest it in Matyas. 

However, the board did not like the decision. By this time many whistleblowers also popped out indicating fraud. This gave rise to a lot of problems which made the share prices fall drastically, and left Raju with no other option except to cancel the acquisition of Maytas. Soon after this incident, four independent directors of Satyam resigned and this also created havoc in the company and left Raju and his brother no other option to fill the inflated gap of profits. Surrounded by these issues and trouble, Ramalinga Raju had no other escape plans except to confess his fraud on 7th January 2009. 

Raju resigned from his position as a chairman and released a confession letter of 5 pages. In it, he admitted committing a fraud of 7000 crores. He later mentioned that “It was like riding a tiger, not knowing how to get off without being eaten.”

PWC’s Role in the Scam

It is always a big challenge to manage a mammoth company with more than 50,000 plus employees. But the question arises how can it be executed with so many policy and audit controls in place.

Price Waterhouse and Coopers, a well renowned audit agency was managing the audits for the company. And the fraud could not have been possible without the knowledge or involvement of a few big officials from PWC. 

The PWC, who were the auditors of the Satyam companies, failed in their job terribly. They did not properly verify the invoices or bank statements, even not through physical verification. Almost 7,561 fake bills were created and the auditors couldn’t spot it for about 7-8 years. It was their duty to examine the financial records and ensure that they were accurate. There could have been multiple levels of checks to ensure the company had no red flags.

A simple bank validation or a check would have revealed that the bills were not valid and cash balances were overstated. Secondly, any company with that big of cash reserves as Satyam would at least invest them in an interest yielding account. But that was not the case with Satyam.

These could have been clear indication of some fraudulent activities within the company, which they could not spot in 9 years time and which Merryll Lynch the newly appointed company discovered the fraud as a part of their due diligence within 10 days time. Suspicion increased towards PWC when it was found that it was paid twice the amount of the fees than the other auditing firms.

The Aftermath

The Satyam scandal was a Rs 7,000-crore corporate scandal in which chairman Ramalinga Raju confessed that the company’s accounts had been falsified and manipulated. On January 7, 2009, Ramalinga Raju sent off an email to SEBI and stock exchanges, wherein he admitted and confessed to inflating the cash and bank balances of the company. 

This incident led to the downfall of the company and the Citibank where Satyam maintained its bank accounts were all frozen. Several arrests were made including Mr. Raju and his brother. The Board of Directors was dispersed and the Central Government appointed 10 new directors. Satyam was removed from Sensex and Nifty. The CBI took over the investigation and filed three charge sheets. This confession also came as a shock to investors, shareholders and to everyone else.

The then Government immediately appointed a new board of directors for the company and ultimately 51% of Satyam Computers  shares were bought by Mahindra and it was then known as “Mahindra Satyam”. It merged with Mahindra group and now it is famously known as ‘Tech Mahindra’. 

Mr. Raju was granted bail on the ground that the limitation period of filing the charge sheet by the CBI had expired. Enforcement Directorate filed a criminal complaint against 47 persons and 166 corporate entities headed by Ramalinga Raju.

Finding PwC guilty in the Satyam scam, India’s capital markets regulator SEBI on 10 January 2018 barred its network entities from issuing audit certificates to any listed company in India for two years. SEBI has also ordered the disgorgement of over Rs 13 crore of wrongful gains from the auditing firm and its two partners who worked on the IT company’s accounts. 

Ramalinga Raju and nine others were sentenced to seven years rigorous imprisonment. The guilty of the case were B Ramalinga Raju, his brother and Satyam’s former managing director B Rama Raju, former chief financial officer Vadlamani Srinivas, former PwC auditors Subramani Gopalakrishnan and T Srinivas, Raju’s another brother B Suryanarayana Raju, former employees G Ramakrishna, D Venkatpathi Raju and Ch Srisailam, and Satyam’s former internal chief auditor V S Prabhakar Gupta. Ramalinga Raju and three others were given six months jail term by SFIO.

The accused were found guilty of bogus inflation of the company’s revenue, the accounts of the company were misrepresented and falsified, income tax returns were also falsified and the invoices of the transactions were fabricated.

To Conclude….

It could be said that all of Raju’s effort to hide his deeds and frauds ended in fiasco. But apart from all this mess in his business life, he continues to lead a decent time with his family. Ramalinga Raju, who is out on bail, continues to supervise his family’s business.

People who know him said that Raju guides his sons and other family members in their business. “Mr Raju is as occupied and busy as he was in his zenith, when he was heading the Satyam Computers”. He is even considered to be one of the richest men in Hyderabad where he along with his older son and daughter-in-law is running successful agriculture and healthcare businesses, respectively.

It’s high time that India should take stringent and strict measures to fill in the loopholes so that the economy of our country is saved by the greedy masterminds. Regulatory bodies should also follow stricts procedures and checks, to ensure fair and legal practices and thus forbid these types of big scandals. And it would be no wrong to say the famous line… 

Kill no more pigeons than you can eat – Benjamin Franklin..