Fraud at Satyam: Is this just the tip of an iceberg?

By: S Sivakumar
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Fraud at Satyam I

Bangalore: Mr Ramalinga Raju kept me awake and busy, for a significant portion of the holy night of Vaikunta Ekadasi which fell on Jan 7, where most people in the South keep awake and chant the name of the ever pervading Lord Vishnu. Of course, I was not chanting Lord Vishnu's name. I was rather trying to understand how all of this could have happened to a Company, which has been widely regarded as being well run for over a decade now. And, not to talk of the fact that Satyam represented the Andhra pride, considering the fact that its illustrious rivals like Infosys and Wipro are from Karnataka.

The details of Mr Raju's wrong doings, over the years, are available on all newspapers and websites, including our own TIOL. While one does not have to suspect the motives for this mother of all accounting scams in India, which could be India's Enron, I am totally amazed at the fact that that, till the infamous Mr Raju spilled the beans, there was no way a scam of this magnitude could have come to light. And, Mr Raju would have continued to fudge his accounts….Bear in mind…. this is fudging one quarter's results by a well known listed Company, quarter after quarter, year after year, aided and abetted by his finance team and perhaps, by PwC.

If a promoter Director, who along with his relatives, holding an insignificant portion of the equity (Raju's present holding is around 5%) could do this, with great success, hoodwinking anybody and everybody for several years, including the investor community comprising of LIC and the foreign shareholders, SEBI, Department of Company Affairs, Revenue Departments like the Income tax Department, foreign regulatory agencies like SEC, highly reputed and illustrious 'independent Directors' like Mr T R Prasad, an ex-Secretary with the Government of India and Dr Ram Mohan Rao who headed one of India's most prestigious business schools …….. what are we talking about?
Failure Of the Regulators?

Is this then, not a confirmation of the total failure of the regulators and other agencies of the country in terms of the corporate governance, or the total lack of it, in what was, one of India's most respected publicly traded Companies? And, where does the Institute of Chartered Accountants ('ICAI') stand in the whole episode, in the context of the fact that Satyam's published accounts had been certified to be true and fair, by PwC, one of the most respected accounting firms of the world, year after year and quarter after quarter (based on the limited review concept) for over eight years now.

As a Chartered Accountant, I cannot believe that it was possible for fudging the accounts to this extent for this duration spanning about ten years, and with a Big four Auditor around. What is amazing about the Satyam story is that, even bank balances have been fudged by thousands of crores of rupees. As auditors, we know that it is the balances as appearing in the books of accounts that gets reflected in the published accounts and there is always a Bank Reconciliation Statement that is faithfully done, to ensure that the balances as appearing in the accounts is reconciled with the actual bank balances, as appearing in the bank statements. I can understand sales getting inflated, receivables getting inflated, etc. But, how on earth, can bank balances be inflated to show balances which are just not available?

Boss… the Satyam scam is much worse than some of the accounting scams that I am aware of, including the Enron scam and the WorldCom scams. In these two scams, as far as I can remember, figures related to revenues were fudged to show income which was never there. I have not heard of anybody managing to fudge bank balances. Surely, Mr Raju, aided by his core team and perhaps, by his auditors, has been very ingenious, indeed.
Jokes apart….. here is my take on some of the issues related to the Satyam disaster….

1. How big is this fraud? Newspapers and television channels have been referring to this as a 7,000 Cr fraud. In my view, this fraud is of a much larger dimension. Based on Mr Raju's statement and based on Satyam's audited financials for 07-08 and 06-07, I've tried to evolve a simple format to understand Satyam's current assets and liabilities, as under: (all figures in Rs Crores)

Satyam's Current Assets & Liabilities  Q2 (08-09) Q2 (08-09)  07-08   06-07
   as reported  as restated  audited  audited
 Currrent Assets-        
 Sundry Debtor  2651.36  490.00  2223.41  1649.86
 Cash and bank balances  5312.62  272.62  4461.68  3959.82
 Interest Accrued on Fixed Deposits  376.34  -  272.45  64.83
 Loans and Advances  502.22  502.22  400.2  261.75
 Current Liabilities -        
 Liabilities  1669.26  2,899.26  890.72  597.17
 Provisions  496.79  496.79  550.28  420.45
 Total  2166.05  3396.05  1441.00  1017.62
 Net Current Assets  6676.49  -2131.21  5916.74  4918.64

The accountant in me clearly says that the overstatement in cash and bank balances just could not have occurred in 08-09 alone. On the other hand, there seems to have been a continuous effort in showing inflated cash and bank balances, over the years, as can be seen clearly from the table given above. This is a rather ingenious modus operandi, which Mr Raju and his finance team, should be credited with. How could bank balances be continuously inflated, year after year, beats me, with PwC around. There seems to be little doubt that most of the bank balances (which, we all felt, naively of course, were proof of Satyam's excellent profit margins) never existed in the first place. How else can one explain the situation that despite having so much of liquid funds, Satyam does not have cash to pay salaries for its staff for January 2009?

2. Taking this forward, as accountants, we all know that a software company's profits, especially, when seen on a year to year basis, should be reflected in its bank balances. If Satyam does not have the cash, that it claims, it always had, what has happened to its cash? There are two possibilities, on this count. Either, that amount of cash was never generated in the first place, or, it was that, the cash that was generated was taken out of the Company. As an analyst who has been tracking the performance of Satyam's peers, I would believe that it would have been impossible for Satyam to generate sub-optimal margins. This is just not possible, given the fact that, in the software space, Satyam competes with the likes of Infosys, Wipro, TCS and Cognizant.

I reiterate that it would be impossible that Satyam could have generated a margin of 3%, as claimed by Mr Raju for Q2 of 2008-09, as contrasted with the much higher margins generated by its peers (Satyam's peers generate anywhere between 20% and 30%). There have been no reports that Satyam's billing rates were much below its peers and if this indeed had been the case, most of Satyam's competitors would have gone out of business. Without a significantly lesser operating margin, there was no way Satyam could have been operating at losses, as Mr Raju has been claiming. This, then, leads us to the possibility of the of the funds having been taken off the Company.

There is no logical basis, in my view, for believing Mr Raju's statement that he was funding Satyam's losses by pumping in funds from his personal sources. A simple study of Satyam's financials, as given above, would indicate that the fact is exactly the opposite and that, Satyam's funds were being siphoned off and that, there is nothing wrong, per se, with Satyam's billing rates, etc.

3. Taking this further….. a major portion of Satyam's bank balances is accounted for, by 'Deposits with Banks'. As per its audited accounts, Satyam's deposits with banks stood at a very high figure of Rs 3,325 crores as of March 31, 2008 and at Rs 3,371 crores as of March 31, 2007. If we can look at this figure and consider the figures for interest accrued of Rs 272 crores for 07-08 and Rs 65 crores for 06-07, a part of the zigzaw puzzle could possible unravel.

Going by Mr Raju's statement that the interest accrued figure of Rs 376 crores for Q2 of 08-09 is just not there, it doesn't take much efforts to understand that the figures related to the deposits with banks, have been continuously and consistently fudged. This theory fits into a good logic, when one looks at the figures related to the bank deposits along with the figures for accrued interest. The major issue, then, relates to the bank deposits.

Considering the fact that there has not been much of a movement in this figure in 2007-08 as also in the current year, as we can see from the published figures, it is quite possible that this particular line entry has been consistently fudged. If we try and reconcile Mr Raju's statement that he has been funding Satyam's losses, this could have been possible, in terms of fictitious bank deposits.

4. While I find it very difficult to accept that Satyam could have posted operating losses or minimal profits, as aforesaid, the question arises as to what happened to its profits and the consequent cash inflows? After all, we have not seen any significant bad debts vis-À-vis Satyam and a default from any of Satyam's customers would have come to light, anyway. This is where, the investigators' role would come in, in establishing Mr Raju's modus operandi in terms of the funds taken out of Satyam. It is quite possible that Mr Raju & Co might have used the bank deposits route to take money out of Satyam, given the fact that, any large scale diversion of funds from Satyam's operating bank accounts would have raised a big alarm from its bankers.

5. There has also been an over-invoicing of sales and consequently, the receivables. To my mind, this might not have been to a large extent, as there are connected procedures related to submission of forms to the regulatory authorities like the STPI and the authorized dealers who monitor the inflows arising out of billings of software exporters. Nevertheless, this aspect would need to be probed, given the fact that Mr Raju had indeed admitted irregularities on this front.

6. More importantly, what could have been the modus operandi, in terms of the accounting treatment given in Satyam books, vis-À-vis these transactions? As accountants, we have been taught about the golden rules of accounting whereby, there has to be a debit for every credit and vice-versa. It does seems that these fundamental rules have been given a merry go by, by Satyam's accounting team and it would also seem that PwC has turned a blind eye to the accounting aspects.

Most of the transactions forming part of the accounting fraud would seem to have been made on single entry basis and outside of the regular accounting system. Perhaps, there were bank accounts of Satyam which were handled outside of the normal operational cycle and which, PwC didn't cover in its audit programme.

We can go on and on….. But one thing that clearly comes out of all this is that, the overall size of the fraud is much more than the Rs 7000 crores that Mr Raju claims. Mr Raju would seem to have selectively given out information in his confessional statement and the quantum of funds siphoned off is much more. For instance, the difference in the net current assets figure, as of September 30, 2008 is itself around Rs 8,800 crores.

                                                                        Part II - Why the fraud did not come out before

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