By Ramki

FraudssmallandBIG!
Therearenosmallfrauds,onlyfraudsthathavenot existedlongenoughtobecomebig! JosephT.Wells

FounderandFormerChairmanACFE

Whitecollarcrimeincreasing!
Whitecollarcrime,definedbycriminologistEdwin Sutherlandas "committedbyapersonofrespectabilityandhigh socialstatusinthecourseofhisoccupation.

Isincreasing! Inscopeandnumbers!

Whatdoweknow?
Noreportsbutbitsandpiecesofinfo.FromCBIandSFIOreportswhichwerepublished SFIOreportsubmittedbutnotavailable: 12,000pagesin30volumes CBIreportsubmittedbutnotavailable: 1532documents Statementsof433witnesses Paperspackedin:25trunks Chargesheetlength:300pages Annexures:65000pages Investigationteamsize:16 Scamsize:Rs7,800crcouldbeRs10,000Cr Frontcos.UsedbyRaju:327 RestatementofaccountsbyKPMG(Deloittegotout)pending(givenpermissiontillMar

10) ProbebyICAIisprogressing interimreportsubmitted? ProbebyEnforcementdirectoratepending BOBNYinvestigationispending 32violationsofCo.lawfound

Soinformationisincompleteasofdateandwedonotstillhave thetotalpicture

WhatdidRajudo?birdseyeview
Employeesonbenchshownasworking Forsuchworkingemployees ,Fictitiousbills raised

ForsuchFictitiousbills ,moneyshownasifreceived ForMoniesshownasifreceived,fakebankstatements were created WithFakebankstatements afakereconciliation wasdone Moneyshownasifreceived shownasDepositswhichdid notexist ForDepositswhichdidnotexist ,fakebankdeposit receiptsandconfirmations werecreated ForDepositswhichdidnotexist,interestshownas received; Forinterestshownasreceived ,TDS shownasdone!

Loadingfactor
Satyampublishedafalsifiedloadingfactor(utilisationofstaff) Betweenthesecondquarterof200607andthatof200809,the

averageoffshorecategory(thoseworkinginIndia)loadingfactorwas shownas74.88percent,whereastheactualheadcountloadingfactor wasonly62.02percent. Similarly,thecompanywasdeclaringaloadfactorof96.71percentfor theonsitecategory(thoseworkingincustomerpremisesabroad), whileitwasactually94.86percent. SatyamspayrollwashandledbyitsAccountsdept.TheHRdeptfed dataonnewjoineesandpeoplewhoresignedetc. Theaccountsdeptinflatedsalesbygeneratingfakeinvoicesinthe invoicemanagementsystemforpeoplewhowereonbench SAPSHINEwasusedbyHRbutnotbyaccounts sotherewasagap Ifdetailsofemployeeswhoquitweredeletedfrompayrollorusedto generatecashnotclear

Modusoperandiforbilling
Companysstandardbillingsystemssubvertedtogenerate falseinvoicestoshowinflatedsales 7,561invoicesfoundhiddenintheinvoicemanagement system,worthRs51billion(US$1.01billion). Concernedbusinesscircleswouldnotbeawareofthe invoices,whichwere'alsonotdispatchedtothe customers'. AlltheinvoicesthatwerehiddenusingtheSuperUserID intheIMSserverwerefoundtobefalseandfabricated. Thevalueofthesefakeinvoiceswereshownasreceivables inthebooksofaccountsof[Satyam]therebydishonestly inflatingtherevenuesofthecompany.

Theelaboratetechnologysetup
Severalsecurenetworkswithinthecompanysofficecomputers

wereinaccessibletoallbutahandfulofRajuscloseassociates. MrRajuandhiscohortshadsetupspecialpasswordprotected adminloginid andsuperloginid,whichwereusedtocreate dodgyrecordsofthecompanythatcouldonlybeaccessedand modifiedbythem Loopholesinitsaccountingsoftwareleftpasswordsunsecuredto facilitatefraud;softwaresystemformanagingcompanysfinancial accountingfunctionswasdeliberatelymadeverycomplexfor inflatingprofits;differentdepartmentsofthecompanywerenot integratedelectronically; TheinvoicemanagementsystemofSatyamhadaweakpassword protection,makingthesystemvulnerabletomisuse. Therefore,fakeinvoicescouldbecreatedbyunauthorisedusers.

Howbogusbillingwasdone?
VarioussystemsSatyamhad: RegularSatyambillscreatedbyacomputerapplication calledOperationalRealTimeManagement(OPTIMA), whichcreatedandmaintainedinformationoncompany projects. TheSatyamProjectRepository(SRP) systemthengenerated projectIDs; AnOntime applicationforenteringthehoursworkedby Satyamemployees; AProjectBillManagementSystem(PBMS) forbilling. AnInvoiceManagementSystem(IMS) generatedthefinal invoices.

Howbogusbillingwasdone?
Thissystemstructurebypassedbytheabuseofanemergency ExcelPorting system,whichallowed'invoices[to]be generateddirectlyinIMSbyportingthedataintotheIMS.' ThissystemwassubvertedbythecreationofauserIDcalled SuperUser with'thepowertohide/unhidetheinvoices generatedinIMS'. By'logginginaSuperUser,theaccusedwerehidingsomeofthe invoicesthatweregeneratedthroughExcelPorting. Onceaninvoiceishiddenthesamewillnotbevisibletothe otherdivisionswithinthecompanybutwillonlybevisibleto thecompanysfinancedivisionsalesteam Someofthe600oddcustomers salesweredoubledandshown.

Whodidit?
33yearoldassistantmanager(finance)Srisailam"got createdthe7561falsifiedsalesinvoices..(and)hid themfrombusinessdivisions..gotthedatafed intothesystems." Theseinvoiceswere"exportedtoOracleFinancials fromwhereannualfinancialstatementswere generated."

Collectionofthesefakeinvoices!
Inordertobalancethecollectionsagainstthesefictitiousinvoices,theywere

firstshownasreceipts inthecurrentaccountmaintainedwiththeBankof Baroda,NewYorkBranchandsubsequentlytheywereshowntobe transferredtootherbankaccountsasfixeddeposits Theymadefalsebankstatementstoshowreceiptsofthesefakeinvoices Nowthebankstatementhadtobereconciled! VenkatapathiRaju,seniormanager(finance)ofSatyam,handedover forgedmonthlystatementofbanks(thathereceivedfrombosses) to SrisailamformakingreconciliationandentriesintoOracleFinancials. Alsoteemingandladingwasdone V.RajuwasresponsibleforhandlingthechequesofSatyamComputers."He receivedchequestotallingRs1,425croresduring200608from37 companiesanddepositedthemintheaccountsofSatyambutfailedto reflectthesameinthebooksofaccountsofthecompany. Insteadhegotthemreflectedwronglyasifthesemonieswerereceived throughsalesproceedsfromBankofBaroda,NewYorkbranch."

Fakedepositreceipts
Investmentsshownasfixeddepositreceipts(FDRs)worth croresofrupeeswerefakeandprintedfromRamalingaRajus personaldevice RamalingaRajuregularlygeneratedfakequarterlybalance confirmationlettersshowingtheamountsoffixeddepositsand theinterestaccruedonthem. ThefakeFDRsshowedhugeamounts,andtheinterestonthese depositswasprojectedtobeoverRs375crore,asagainstthe actualinterestincomeofRs7.42lakhonly. VPfinanceRamakrishnaoversawtheprocessofperpetrationof

fraudandwascustodianofforgedFDreceipts.

Destroyingofrecords
Ramakrishnagothislaptopreformattedoneday beforetheconfessionbyRamalingaRajuand instructedjuniorstodeleterecordsfromthe computers. HealsogottheforgedFDreceiptsdestroyed. FurtherSrisailam inthewakeoftheabortedSatyam Maytasdeal alsogotelectronicrecordsdeleted andreversedcertainentriesintheOracle Financials Soiftheauditordoesnothavecopiesinhisfiles therecordswontbefoundanywhere!

Sharesaleproceedsmissing
Rs760croreraisedbyscamtaintedSatyamComputerthrough sharesalesin2001intheUSreferredbySFIOtothe EnforcementDirectorateforfurtherinquiry,aftertheyfailedto tracetheamount. Satyampromotershaveshowedthatthemoneywasparked withCitibank,butnosuchaccountswerefoundwiththesaid bank Unansweredquestions: Howcouldsuchahugesumjustvanish? HowcanCitibankshowtheirinabilitytoprovidethisinformation onthepleathatallsuchtransfersareroutedthroughCitibank's systemaccountNo.10996665Citibank,N.A.Bahrain." WhatisspecialaboutBahrainthatCitiitselfdoesnotknowwhat happenedafterBahrain? Howdidcompanydiscloseutilisationofproceeds?

?????!!!!

BOBNYbranch
TheSFIOhasrecommendedaninvestigationintoBankof BarodasroleintheSatyamscam. Satyamaccount,numbered120559,inNewYorkwasused bythecompanytocamouflagefictitiouscollections whenthecashdidnotexist andthattheaccount statementswerefalsifiedandsowasthequarterlybalance sheet withregardtothisaccount. Satyamwouldshowthefictitiousbalanceintheaccount andwouldlatershowthemoneybeingdivertedandbeing shownasfixeddepositswithotherbanks. SFIOsaysprimafacieevidencesuggestsinvolvementof someofthebankofficialsandhasrecommendedan enquiryonthepartoftheMinistryofCorporateAffairs

Fraud/forgeryisnotnewatSatyam
ASatyamsubsidiaryhadworkedondevelopingsoftware formobileprepaidtechnologyforUpaid. Toobtainthepatent,Upaidrequiredthesignatureof20 SatyamemployeesandUpaidreceivedthesignaturesfrom Satyamandthepatentinduecourse. UpaidthensuedVerizonandQualcomforusingpatented technology;andUpaidgotarudeshock. AnexSatyamemployee,whohadworkedontheprepaid mobiletechnology,nowaVerizonemployee,pointedout thathissignaturewhichwasonthepatentapplication, wasforged. UpaidthensuedSatyamfor$1billion.

Otheranglestoinvestigation
EDlookingafreshintoinvolvementofSatyaminKetanParekh

securitiesscam CBIapproachingUS,MauritiusandEuropeancountriestoseek detailsofbankaccountsincl.BankofBaroda'sNewYorkbranch CBIhaslocatedsuspiciousforeignbanka/csinUSAheldinthe nameofnonIndians Rs60crchannelledintothesea/cs.Asthese areforeignbanksa/csCBIhastorelyonInterpoltounravelthe details CBIlookingatexpensestoseeiftherehavebeenmisappropriation offunds TheUnionhomeministry'sGovernmentExaminerofQuestioned Documents(GEQD)hasconfirmedtheforgerycommittedbyRaju

Otheranglesofinvestigation
TheCBI,whichsuspectsthatlandwasboughtwithmoneysiphoned

awayfromSatyam,hasnowsentspecialteamstoidentifyandfreeze alltheselandassets. "WearenowpreparingadossieronwhatcanbecalledtheSatyam Rajulandbank.MostofthepiecesoflandinthecontrolofRajuare inthesizesoffivetosixacreploteach." TheCAGhasmentionedinthereport,20092010,thatSatyam ComputerServicesLtd,inHyderabadIICommissionerate,engagedin renderingofconsultingengineersservices,manpowerrecruitment agencyservices,etc,tookwrongcreditofRs4.15croreduringthe periodbetweenFebruary2006andJuly2007,oftheservicetaxpaidon healthinsuranceservicesobtainedfrominsurancecompaniesforthe welfareoftheiremployees

Otheranglestoinvestigation
TheUnitedStatesSecuritiesandExchangeCommission(SEC),the

federalagencytoregulatethesecuritiesindustryintheUnites States, hassoughtIndia'spermissiontoprobetheSatyamfraudcase AhighlyplacedsourceintheCBIconfirmedthehawalatrailofmoney fromSatyamComputerstracedbytheagency.

TheaccusedpersonsinthemulticrorescamallegedlyroutedsomeRs12 croreeverymonththroughhawalachannelsoutsideIndiasince2002till thescamwasunearthed.Themoneywasillegallysentoutofthecountry everymonthleadingtothelossofsomeRs1,008croressince2002till 2008.

CBIcounselBallaRavindranatharguedthattheaccountsofRajus in

HDFCBankweresuspectedtocontainfundsdivertedbySatyam.

Moneyslent
RamalingaRaju'sbrotherSuryanarayanaRajuhas stakedaclaimtoRs1230crore ThereisnoevidencethatRajulentRs1230crto Satyamashehadclaimed. RecentlyMaytashasmadeademandforRs600crores saidtohavebeenpaidtoSatyam(Rs380crinone companyandRs220crinanotherasICDs) WhichpromptlyhasbeendeniedbyMahindraSatyam

Restatementwilltaketime
Therestatementofaccountswilltakealongtimeas theyhavetogobacktosixyears. Manydocumentsarenotavailableinthecompany, manyhavebeentornormisplacedandsome confiscatedbyinvestigatingauthorities. DeepakParekh ExpectedinMar2010

ChargesagainstPW
135controldeficiencies identifiedintheintegratedauditconducted

inaccordancewiththestandardsofthePublicCompanyAccounting OversightBoard.Auditorsdidnotbringthesecontrolleddeficiencies tothenoticeofauditcommitteeandthereby,facilitatedthe continuanceofthefraudulentpracticesunabated.

Informationtechnologyreportstated:ITsystemsinSatyamweresubjectto

manipulation.Itwasalsosuggestedthat,giventhesedeficiencies,substantialand elaborateexaminationoffinancialsshouldbedone. Auditorsdeliberatelydidnotmakeanyextensivechangesintheauditplan,which clearlyestablisheshismotivesandintentionsinallowingthefraudulentpractices tocontinue. AuditorsreceivedcertificatesofdepositfromSatyamsbanksthatwereingreat variancewiththefiguresprovidedbythecompanysmanagement butsignedoff thefudgedaccounts Auditorscompensatedthroughexorbitantauditfee ofRs3.67crorein200607 andRs3.73crorein200708.Incomparison,theauditfeepaidbyWiproand Infosysin200708wasRs1.1croreandRs83lakh,respectively

AnotherpossiblechargeagainstPWCglobal
WasPWCastrategicpartnerwithSatyam ablogsaysquotingaGartner

report: DidthestrategicimportanceofSatyamasasystemsintegrationpartner andtechnicalresourcecauseglobalPwCleadershiptooverlook,lookthe otherway,ornottakeactiononreportsofpoorqualityorlack of independencebyPriceWaterhouseIndiapartnersandothers? DidPwCleadership US,global,andIndian enableandperhaps promotecomplicityinthefraudcalled"India'sEnron"forthesakeoftheir consultingbusinessstrategy? PWCsays:WehavereadtheGartnerreportindetailandfindnojustification forthecommentthattheGartnerreportindicatesthatPwCwasinastrategic partnershipwithSatyam. InarejoinderRitwikMukherjeereplies:TheGartnerreportthat wequoted saidtheoppositeofwhatPriceWaterhousenowcontends!
Onlyaninvestigationwillrevealwhoisright.

SEBIonPW
Sebihasfoundgraveprofessionallapsesonthepartoftheauditors,whichare

directlytiedintoandinseparablyapartofthefraudperpetratedinthecapitalmarket

SatyamBSwasinfactauditedbyLovelockandLewesandnotPW(Thenhowdidtheysignas PW?) AuditfeesthoughdepositedinPWBangalorewastransferredtoLovelockandLewes! ItisfromL&LthatGopalakrishnanandTalluriwithdrewmoneys! ThepartnersofPWdeniedanyassociationwithPWBangalore GopalakrishnanandTalluriwerenotauthorizedtosignanyBSon behalfofPW! TheauditorswronglysignedasPWandoutsourcedworktoL&L EntireauditteamisfromL&L RajanwhoisalsoapartnerofPWBangaloresaidPWhadnomanpowerandaspartofinternal arrangementoutsourcesworktoL&L

Nextdaynews: SatyamComputerServiceswasauditedbyPriceWaterhouseBangalore, theglobal

auditingfirmPWCsaidinanemailtoPTI. Confusionprevailsherealso!

RecommendationsofSFIO
Auditorsberotatedeveryfiveyears, Auditors appointmentaswellasremunerationbehandled byanindependentagency Extendthescopeofpeerreviewtoincludeauditprocesses aswellasauditplans. Disciplinaryproceedingsagainststatutoryauditorsbe handledbyanindependentoversightboard Bankstatements "Allcredittransactionsintheaccounts(of banks)thataregeneratedthroughclearingmustrevealthe detailsofcreditasisdoneinthecaseofdebitclearing transactions.
Needtoadoptauniformpracticebyallthecommercialbanks/foreign

bankswhileissuingbalanceconfirmationcertificatestotheircustomers

Regulators

Bankingandmarketregulatorsareconsideringa proposalauthorisingauditorstodirectlyverifyfinancial informationoftheirclientswithbankswherethey

holdaccounts

Finmingoinghitechwillusecomputeraidedtoolsto detectfrauds.(CAIT);

ITdeptwilluseittoidentifyduplicatevalues,check sequencinganddetectgaps,summarisefieldsetc.Listof purchaserswhogivefictitiousentriesforotherstoinflate purchasesandtoolwillbeusedtodetectsuchpurchases basedonname,phno.VSTno.etcFirsttestingat Hyderabad

RegulatorsSEBI
TheSecuritiesandExchangeBoardofIndia(Sebi), whichisprobingtheaccountingscamatSatyam ComputerServicesLtd,seemstofavourprohibiting PriceWaterhouseanditsarrestedpartnersS. GopalakrishnanandSrinivasTallurifromauditing anylistedIndianfirmorintermediaryforacertain period

ICAI
TheFinancialReportingReviewBoardappointeda PanelofReviewerstoreviewfiveyears general purposefinancialstatementsofSatyamComputer ServicesLtd.ThePanelhasalreadyheldsixmeetings andispresentlyconsideringthegeneralpurpose financialstatementofthecompany. HighPoweredCommitteehassofarwrittenlettersto 94firmsofCharteredAccountants,whichareknown tohaveaffiliationwithinternationalentities

Backtobasicsaudit
EmileWoolf afamousauditingexpertsays:Getting backtobasicchecksmaybetheonlywayfor accountingfirmstoavoidflawedaudits UdayChitaleandMurtuzaVaijihipointoutinaBCAJ articlefromtheircasebook:..hadtheauditors merelyopenedthecompanysprivatecashbook,they wouldhaveseencolumnsblatantlyrecordingthe financedirectors(FD)substantialpersonal expenditureandillicitloanstofinancedept personnel.InsteadtheyreliedonhighlevelIT systemsreviews inwhichFDobliginglycollaborated.

Importanceofcomputersystems
Ernst&Youngsudyhassaidthatmorethanhalfofthecompanies

surveyeddonottakeintoaccountriskoffraudsintheirannual audit plans. Thoughmanycompanieshaveincreasedtheirinternalauditbudgets, thesurveysaidthat44percentcompaniesconfirmedthatfraud detectionproceduresarenotincludedintheworkplanformost audits,while36percentofthemsaidtheydonotaccountITrisk assessmentsintheirannualauditplans. ThoughITsystemsarebackboneofoperationsinmostcompanies,the IndiaInternalAuditSurvey2009showedthatthereisadearthofIT auditorsandalowpercentageoffirmsperformanITriskassessment beforefinalisingtheirinternalauditplans.

Couldithavebeenlocatedearlier?
Myirissays: Itisamazingthatthreekeyitems,GrossMargin, RevenueandCostofGoodsSold,eachhavethesame growthrateof13%in2005,18%in2006,24%in2007 and35%in2008! DoweneedbettertoolslikeBItolocatesuchthings andgiveusearlywarning?!

LivinginopulencethenandNOW!
Then:

TheofficesofMr.Rajuandhisbrothertodayareemptyonthetopfloorof thecompany'sHyderabadheadquarters. Thepenthousehasshowers,bedroomsandaJapanesegarden,(butan expertinvastu India'sversionoffengshui hasdeclareditsdesigna disaster!) Nowundertrialnumber882,ChanchalgudaCentralPrison,Hyderabad: separatekitchenandfreshcookedfood shuttlecourt cellphone/laptopusage mineralwaterandfruitjuicestodrink,acleanbed,anindependenttoilet, watercooler,radio,television,newspapersandmagazines(canitbetrue?!)

TheirconsultantVenkateshwaraRaoofKrishiCoopbankarrestedforRs40crbank fraud

N.B:TheseapplytoRajusandnottheauditorswhomustreallybeundergoing hell

ThedozenlessonsofSatyam
Thoushaltnot: Overlookcomputersystemweaknessesandcomplexsystems Overlooksuperuserids andloosepasswordcontrolsorfailtostudylogsforsuperuser ids AcceptconfirmationsprovidedbyCompany gothedirectroute Overlookdifferencesinconfirmations Overlooktheroachtheory iftherearesmalldifferences/errors/fraudsbiggerones couldbehiding Forgetthatanyoneofanystaturecouldactwithmonumentalrecklessness,selfishness andselfdestructivenessasRamalingaRajuhasproved thatalltheawardsmeannothing Failtorotatethekeystaffandpartnersinauditsfamiliaritybreedscomplacence Forgetthatanythingcanbefakedinthismoderntechnologyorientedworldor underestimatethefraudster Forgetthatthereisnothinglikegoodoldfashionedauditwhere onelooksatfiles,papers, checkbookentrieswithsourcedocumentsetc. Forgettobringtotheattentionofauditcommitteeallmaterial internalcontrol weaknessesesp.computersystemweaknesses Takefeeswhichareveryhighcomparedtopeergroupcompanyaudits AuditworkpapersmustbetakenandpreservedcarefullyasCompanycandestroyallits records itisouronlysaviour

Themostimportantlesson
Learntosayno whenyoushould ExCFOofHealthsouthwhonowrealises(toolate) thatheshouldhavesaidno. Henowmowslawnsforalivingandgiveslectureson hisstorytostudents!

Thelastword
DuetotheefficientmannerinwhichourMinistryof CorporateAffairs(MCA)functioned,notasingle stakeholdersuffered,andinquiteanunderstated way,inapublicprivatepartnershipinitiativewhich hadfewparallels,thecompanywasrescued. SudhakarV.Balachandran,anassistantprofessorof accountingatColumbiaBusinessSchool,saidthe UnitedStatescouldlearnalotfromIndiasrapid responsetoSatyam TheGovernmentdidaveryswiftandgoodjob Theworldacknowledgesthat!

Source
Variousnewspapers Variousjournals Variouswebsitesandblogs FromJan09toAug09