Question: Give a brief chronology of significant events leading to the downfall of Satyam and give a detailed account of the

role of the top management and their involvement in the scandal. Answer Ramalinga Raju, 56, chairman of Satyam Computer Services Ltd, originally known as a successful software entrepreneur, will be remembered in Indian business history as the Perpetrator of the countrys biggest corporate fraud, also referred to as the Enron of India. He was born into a farmers family and educated both in India and the USA. He returned to India in 1977 and after venturing into the textile and real estate industry, he started Satyam. His vision was to grow Satyam to be a Fortune 500 company. Satyam Computer Services, Ltd. was a rising star in the Indian outsourced IT services industry. The company was formed in 1987 in Hyderbad. The firm began with twenty employees and grew rapidly as a global business. It offers information technology (IT) and business process outsourcing (BPO) services spanning various sectors, including: aerospace and defense, banking and financial services, energy and utilities, life sciences and healthcare, manufacturing and diversified industrials, public services and education, retail, telecommunications and travel.

EVENTS LEADING TO THE FALL: 2008 December 16- Satyam Computer Services announces $1.6 billion acquisition of 100% stake in Maytas properties and 51% stake in Maytas Infra, both promoted by Ramalinga Raju and sons.

December 17-Satyam-Maytas deal is scrapped following investor-shareholders rebellion. Raju mulls on the share buyback. December 21-Government asks registrar of companies to submit the report with factual evidence on Satyam-Maytas deal. December 24-World Bank bars business with Satyam for 8 years starting September 2008. December 25- Academician and independent director Mangalam Srinivasan exits from Satyam on Christmas owning moral responsibility for not voting against it. December 28- Satyam Computer defers crucial board meet from December 28 to January 10. December 29- Satyam appoints DSP Merrill Lynch to review strategic option and assess implications of possible dilution of Ramalinga Raju`s stake; Non-executive director Krishna Palepu and in dependent director Vinod Dham resign from board. December 30- Satyam`s board nearly halved as Indian school of Business dean Rammohan Rao also quit. 2009 January 2- Satyam discloses to stock exchange that Raju and his family have pledged all their shares, held in a corporate entity SRSR limited, to institutional lenders. January 3-Ramalinga Raju`s stake in Satyam falls to 5.13% from 8.27% as lenders sell shares. January 6-Ramalingu Raju`s stake falls further to 3.6% from 5.13%. January 7- Chairman Ramalinga Raju and MD Rama Raju resign.

Ramalinga Raju and the Saytam Scandal The Satyam scandal is a classic case of negligence of fiduciary duties, total collapse of ethical standards, and a lack of corporate social responsibility. It is

human greed and desire that led to fraud. This type of behaviour can be traced to: greed overshadowing the responsibility to meet fiduciary duties; fierce competition and the need to impress stakeholders especially investors, analysts, shareholders, and the stock market; low ethical and moral standards by top management; and, greater emphasis on shortterm performance. Greed for money, power, competition, success and prestige compelled Mr. Raju to ride the tiger, which led to violation of all duties imposed on them as fiduciaries the duty of care, the duty of negligence, the duty of loyalty, the duty of disclosure towards the stakeholders. According to CBI, the Indian crime investigation agency, the fraud activity dates back from April 1999, when the company embarked on a road to doubledigit annual growth. As of December 2008, Satyam had a total market capitalization of $3.2 billion dollars. Satyam planned to acquire a fiftyone percent stake in Maytas Infrastructure, a leading Infrastructure Development, Construction and Project Management Company, for $300 million. The Rajuss had a 37% stake. The total turnover was $350 million and a net profit of $20 million. Rajus also had a 35% share in Maytas Properties, another real estate investment firm. Satyam revenues exceeded $1 billion in 2006. In April, 2008 Satyam became the first Indian company to publish IFRS audited financials. On December 16, 2008, the Satyam board, including its five independent directors had approved the founder's proposal to buy the stake in Maytas Infrastructure and all of Maytas Properties, which were owned by family members of Satyams Chairman, B Ramalinga Raju, as fully owned subsidiary for $1.6B. Without shareholder approval, the directors went ahead with the management's decision. The decision of acquisition was, however, reversed twelve hours after investors sold Satyam's stock and threatened action against the management. Four independent directors quit the Satyam board and SEBI ordered promoters to disclose pledged shares to stock exchange. On 7 January 2009, Saytams previous Chairman, Ramalinga Raju , resigned after notifying board members and the Securities and Exchange Board of India

(SEBI) that Satyam's accounts had been falsified. Raju confessed that Satyam's balance sheet of September 30, 2008, contained the following irregulars: Inflated figures for cash and bank balances of US$1.04 billion vs. US$1.1 billion reflected in the books; An accrued interest of US$77.46 million which was nonexistent; An understated liability of US$253.38 million on account of funds was arranged by himself; An overstated debtors' position of US$100.94 million vs. US$546.11 million in the books. Raju claimed in the same letter that neither he nor the managing director had benefited financially from the inflated revenues. He claimed that none of the board members had any knowledge of the situation in which the company was placed. The fraud took place to divert company funds into real estate investment, keep high earnings per share, raise executive compensation and make huge profits by selling stake at inflated price. MAGNITUDE OF FRAUD: The fudging of books of account by the promoters of Satyam is one biggest fraud that Indian corporate world has witnessed. Raju admitted the falsifying of the earning and asset in his letter to the SEBI chairman. He admitted of the following: 1. Inflated cash and bank balance of Rs 5040 crore. 2. Non-existence of accrued interest of Rs 376 crore. 3. Understated liabilities of Rs 1230 crore on account of funds arranged by Raju. 4. Overstated debtors position of Rs 490 crore. 5. Q2 2008-09 revenue was stated as Rs2700 crore as against Rs 2100 crore. 6. Operating profit margin was stated as 24% as against actual 3%. 7. Profit inflated over last several years attained unmanageable levels as company grew. 9. Aborted Maytas acquisition was a last an attempt to fill the fictitious asset with real ones. Victims of Fraud Employees of Satyam spent anxious moments and sleepless nights as they faced nonpayment

of salaries, project cancellations, layoffs and equally bleak prospects of outside employment. They were stranded in many ways morally, financially, legally, and socially.xli Clients of Satyam expressed loss of trust and reviewed their contracts preferring to go with other competitors. Cisco, Telstra and World Bank cancelled contracts with Satyam. Customers were shocked and worried about the project continuity, confidentiality, and cost overrun. Shareholders lost their valuable investments and there was doubt about revival of India as a preferred investment destination. The VC and MD of Mahindra, in a statement, said that the development had "resulted in incalculable and unjustifiable damage to Brand India and Brand It in particular." Bankers were concerned about recovery of financial and nonfinancial exposure and recalled facilities.xliii Indian Government was worried about its image of the Nation & IT Sector affecting faith to invest or to do business in the county. Conclusion
In this Satyam scandal, clearly there were financial and corporate governance red flags and issues. The key corrective strategy is to develop a strong corporate governance system thatneeds to be holistic, that is not only focused on shareholders but on all the stakeholders of the
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company: employees, customers, society (the public and the environment) and shareholders (Hilb 2005). As noted in Table 2, Raju admitted fraud and resigned as the Chairman of Satyam on January 7, 2009. On January 9, 2009, the Indian Company Law Board notified Satyam that it intended to appoint nominees to form the new Board at Satyam. By January 16, 2009, the Ministry of Corporate Affairs appointed the following six independent Board members:

Name

Background

Deepak Parekh Kiran Karnik C. Achutan TN Manoharan Tarun Das Balkrishna Mainak

Chairman of the Housing Development Finance Corporation Former President of NASSCOM Director of the National Stock Exchange Former President of Institute of Chartered Accountants of India Confederation of Indian Industry Life Insurance Corporation of India

While awaiting the appointment of a Chairman by the Company Law Board, there was a Rotating COB at the Satyam Board meetings. On January 24, the new Board appointed Deloitte and KPMG to restate the accounts of Satyam and decided to focus on business continuity by arranging funds for expenses and vendor payments. On February 5, the Board announced the appointment of a new CEO, AS Murthy, who was promoted from his previous role as Head of Satyams Leadership Development Group. During February 2009, the Indian government agency SEBI announced corporate governance changes to be implemented in India as follows: all listed companies need to obtain a peer audit in case of pledging of promoter shareholdings, this price sensitive information must be Made available to all other shareholders In summary, both financial statement red flags and non-financial red flags of corporate Governance should be monitored as a two-pronged risk management strategy for detecting fraudulent financial reporting. This dual approach would include the five financial fraud prediction models and ratios and the four principles of strong corporate governance. Such a strategy would also help meet the Board of Directors new responsibilities in risk oversight as required by the Securities and Exchange Commission (SEC). In March 2010, the SEC started requiring publicly traded companies to provide disclosures in their annual proxy statements that describe the Boards role in risk oversight.