The most dreadful news is out and people all around world are analysing the cause and effect of this on different stakeholders. While Mr. Raju has accepted his responsibility, there seems to be accountability of other CXO’s, Board of Directors, Auditors and regulatory authorities.
The Rise…
The fourth largest provider of Information Technology services in India, Satyam Computers Services Limited (SCSL) was incorporated in the year 1987 as a private limited company at Andra Pradesh. Later at 1991 it was recognized as a public limited company. In the year 1995, company was awarded ISO 9001 certification. The operation was soon expanded to China, Singapore, Malaysia, Canada and Australia.
In the fiscal of 2006 Satyam received the CNBC best performing stock of the year and Excellence in cost management from the Institute of cost and works accountants of India.
Satyam has been ranked the No.1 ITO: Global Process Consulting vendor by the 2007 Black Book of Outsourcing.
It won the Asian Corporate Social Responsibility Award under the poverty alleviation category
As on 2008 Satyam Computer Services Ltd became the first Indian company to list its American Depository Shares (ADS) on Euronext in Amsterdam.
…and the fall
The World Bank awarded the Outsourcing contract to Satyam Computer Services worth of $10 -$15 million in 2003. This lucrative five-year contract to design, write and maintain all of the World Bank's information systems came into news with a ban in Oct, 2008 from doing any off-shore work with the World Bank after forensic experts and bank investigators discovered that spy software was covertly installed on workstations inside the bank's Washington headquarters, allegedly by one or more contractors from Satyam Computer Services. The contract, which began at $10 million, had grown to over $100 million by 2007, but it was not renewed further.
Again in the 3rd week of Dec, 2008 Satyam was in all wrong news for a different reason, Ramalinga Raju the Satyam promoter tried to buy son owned properties firm-Maytas properties, Satyam being a listed company approved the process through its so called independent board, when the takeover news came out the institutional investors cried foul and Satyam backed of from the deal.
And at this stage Satyam got another blow from World Bank making it public that it had banned Satyam from all business at the bank for a period of eight years - and that the ban started in September on the account of bribing some bank officials to get the contract and data-theft.
Reasoning
Was that one Man show?
The $60-billion IT & ITES industry, had maintained is rapid growth with an average of more than 20% for quite a long period on the back of outsourcing demand from Western firms. With 6 consecutive years of boom, top software firms Tata Consultancy Services, Infosys Technologies and Wipro consistently reported annual 50-per cent increases in profits every quarter.
With a very small equity stake of promoters, any drop in share price could have resulted in take-over. That made necessary for the fourth largest domestic IT firm-Satyam to maintain this pace of growth, please investors and shareholders and justify inflated P/E multiples during a six-year bull run. The firm tried every possible way of getting business that even opted for unethical measures of bribing data-theft etc. It started putting minimum possible bid for projects but this did not help the firm much as the margin was as low as 3% in these projects as compared to 20-30% of its’ competitors. The margin was inflated with a marginal gap from the actual profit. The firm had to maintain the growth with higher level of operation and that led to further requirement of additional resources and increase in the gap. Around 94% of the total cash of the firm was fictitious. To cover this increasing gap solely out of inflated non-existent cash, Mr. Raju decided to fill the fictitious asset with the real ones. While the world was wondering about the decision of Satyam going for INR 7680 Crore ( $1.6 billion) investment in Maytas infra and Maytas properties, this was taken as last resort. Maytas payment was planned to be delayed till Satyam conditions improves giving the firm enough time to dress-up its balance-sheet. But large institutional investors found no reason behind use of cash for acquiring Maytas when many undervalued real estate properties were out in market. And soon the whole scandal got exposed. Though Mr. Raju has taken responsibility of the whole fraud, it is impossible for one man alone to carry such big manipulation. CFO, COO and other executive could equally be responsible.
Issue with Corporate Governance
Lack of proper Corporate Governance was blamed right from the day Satyam decided to go for Maytas acquisition without taking view of its major investors. But there are deep routed causes of such ignorance by the board of directors. As an independent board of director, one is expected to work for the increase in share-holders value and at the same time makes sure that management does not take any decision which could impact the image of the firm. Satyam had requisite number of independent directors with excellent credentials, including a Harvard business school professor and a former Federal cabinet secretary.
But, the non-executive directors are generally invited by the management and often due to prior friendship. These directors are preoccupied with their own assignments (Professor M. Rammohan Rao , member of board of directors, Satyam resigned today from the post Dean, ISB as he was not able to spend enough time on Satyam responsibility). They monetary incentive is too less to spend enough time and effort to analyse each and every decision of the management. Last but not the least, the Indian culture of not saying no or question one’s proposal is also matter of concern.
Auditors
The March, 2008 auditors report for Year 2008 states – “In our opinion and to the best of our information and according to the explanations given to us, the said financial statements together with the notes thereon and attached thereto give in the prescribed manner the information required by the Act and give a true and fair view in conformity with the accounting principles generally accepted in India:” - Hyderabad Price Waterhouse
Though, the Institute of Chartered Accountants of India (ICAI) says it cannot direct the auditors to explain themselves on the basis of the famous five pages letter sent by Mr. Raju, it is evident the the audit overlooked the significant manipulation in the financial statements. Price Waterhouse might not get impacted much as ICAI cannot take action against a firm, but only against individuals. But the firm certainly has gone wrong in its credibility of fair audit.
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