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Creative Accounting

Satyam Scam Analysis Group # 7


AMOL THAKAR (211017)

B.V.V SAGAR (211037) DARPAN GOEL (211039) ISHA PAROHA (211058)

ANKITA AGARWAL (211020)


ATUL KR. UMAR (211035)

CREATIVE ACCOUNTING
Systematic misrepresentation of the true financial figures of a company with the intent to influence readers towards interpretations desired by the authors. It is the manipulation of financial numbers, usually within the framework of the law and accounting standards but very much against their spirit and certainly not providing the true and fair view of a company that accounts are supposed to. It exploits the loopholes in the accounting standards. Famous cases Enron, Worldcom, Satyam, Tyco, etc.

TECHNIQUES OF CREATIVE ACCOUNTING


Some of the popular techniques used in creative accounting are:-

BIG BATH CHARGES COOKIE JAR RESERVES MATERIALITY REVENUE RECOGNITION REVERSAL OF ACTUAL EXPENSES

Purpose
To magnify profits For higher EPS To impress investors Bonus and salary hikes For tax benefits To hide problems

SATYAM
Established in 1987 by R. Raju Indias 4th fastest growing IT company 53000 employees First Indian company to be listed in NYSE, DOW and Euronext First Indian IT company to be certified ISO 9001:2000 Won many awards

Fall of Satyam
Dec 16, 2008 : Satyam decided to buy stake in MAYTAS Infrastructure and MAYTAS properties, a company owned by promoter family for Rs. 8000 crores. Dec 17, 2008 : Satyam exits the deal due to investor protest. Its shares plunged. Dec 20, 2008 : British mobile solution provider Upaid files a law suit against Satyam in US court over Maytas deal. Dec 23, 2008 : World bank bans Satyam for 8 years for installing spy systems on its computers stealing assets from the world bank. Dec 28, 2009 : 4 independent directors resigned from Satyam Board.

Dec 29 : Satyam hired DSP Merill Lynch to advise it on the ways to increase the shareholder value. Jan 3 : Promoters stake became less than 5%. Jan 6 : DSP Merill Lynch found irregularities in accounts, withdrew itself and approached SEBI to further look into the matter. Jan 7 : R. Raju resigned and confessed all the financial irregularities carried out by him over the last seven years.

Details of the scam


Manipulated figures

Take fake FD receipts The money has already vanished Tell the bank the receipt is lost

HOW TO CREATE FAKE FDS


Show the original receipt Ask for duplicate receipt

Deposite cash in other bank

Use duplicate for withdrawal

Non existent interest Rs 376Cr

Overstated Cash & debtors Rs 5,040 Cr + Rs 490 Cr

Understated Liabilities Rs 1,230 Cr

A difference of Rs 7,136 Cr

Extract from Rajus letter

It is easy to start a fraud but nearly impossible to end it without being caught.
This is what Raju meant to say by It was like riding a tiger, not knowing how to get off without being eaten.

More Details..

!!!!!! SMARTER THAN ME !!!!

Mr. Raju also revealed that he created 13,000 fake salary accounts over the past few years. Created fake overseas clients and contracts which resulted in overstated revenues. Siphoning off funds from Satyam into Maytas Infra and Maytas Properties. Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over, thereby exposing the gap. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyams problem was solved, it was hoped that Maytas payments can be delayed.

Why the scam took place?


Growing competition and threat of being over-taken Over confidence on his abilities To enhance the companys image To help Maytas as well

To increase shareholders value


To meet the expectations of analysts

Who all were mainly responsible?


B. Ramalinga Raju
Promoter & Chairman Satyam Computers

B. Rama Raju
Promoter & CEO Satyam Compuetrs

Srinivas Vadlamani
Chief Financial Officer Satyam Computers

Talluri Srinivas
Auditor PricewaterhouseCoopers

S. Gopalakrishnan
Auditor PricewaterhouseCoopers

Role of PriceWaterhouse Coopers (PWC)


The auditing firm had no clue that the books were being fudged.

Allegations of negligence and collusion were put .


Auditor has the right to call for information and explanations by the company.

Their job involves verification of the financial statements.


They were negligent as they didnt go to every bank to check that the cash deposits as shown in the books really existed.

They relied on the documents provided by the company to do the audit.


There was evidence of negligence because of which it was fined but no evidence was found on collusion or criminal conspiracy.

AFTERMATH
The Indian stock market fell drastically upon disclosure of the scandal It had a negative impact on the Indian IT industry Bad effects on the Foreign currency inflows Satyam stock lost 82% and SENSEX index closed down 7.3% Investigation, Criminal and Civil charges against the members involved Careers of 50,000 employees was at stack

Government set up a new board to save the company


World Bank barred Wipro, Megasoft and 3 other IT companies

Restructuring of Satyam
Indian Govt. provided liquidity support. Govt. set up a new board to save the company. Existing board was barred. Govt. appointed noted banker Deepak Parekh, former NASSCOM chief Kiran Karnik and former SEBI member C. Achuthan to Satyams board. R. Mynampati was elected as interim CEO. New CEO was A.S Murthy. Tech Mahindra acquired Satyam on 13th April, 2009 Homi. K and P. Dutta were appointed as special advisors.

New Rules and Regulations


SEBI proposed creating a law that provides whistleblowers with protection for reporting fraudulent activity. Finally, the SEBI revised takeover regulations to increase disclosure in takeovers. Two weeks after Satyam's collapse, the SEBI made it mandatory for controlling shareholders to disclose any share pledges. The SEBI also proposed requiring companies to disclose their balance sheet positions twice a year, which was earlier only once a year. Satyam strengthened India's commitment for adopting International Financial Reporting Standards ("IFRS") by 2011. The Ministry of corporate Affairs recently proposed a new law that would make it easier for Indian investors to form class action lawsuits against fraudulent actors in company.

Raju , Raju sat on the wall, Raju , Raju had a great fall, Balance sheet died , Shareholders cried, Raju Raju made a fraud.
Raju Raju Yes Baba Cheating us ? No Baba Telling Lies? No Baba Open the Balance sheet HA!! HA!! HA!!