When terrorists attacked Mumbai last November, the media called it “India’s 9/11.” That tragedy has been succeeded by another that has been dubbed “India’s Enron.” In one of the the biggest frauds in India’s corporate history, B. Ramalinga Raju, founder and CEO of Satyam Computers, India’s fourth-largest IT services firm, announced on January 7 that his company had been falsifying its accounts for years, overstating revenues and inflating profits by $1 billion. Ironically, Satyam means “truth” in Sanskrit, but Raju’s admission — accompanied by his resignation — shows the company had been feeding investors, shareholders, clients and employees a steady diet of asatyam (or untruth), at least regarding its financial performance. ( Editor’s note: Satyam is a corporate sponsor of India Knolwedge@Wharton.)Raju’s departure was followed by the resignation of Srinivas Vadlamani, Satyam’s chief financial officer, and the appointment of Ram Mynampati as the interim CEO. In a press conference held in Hyderabad on January 8, Mynampati told reporters that the company’s cash position was “not encouraging” and that “our only aim at this time is to ensure that the business continues.” A day later, media reports noted that Raju and his brother Rama (also a Satyam co-founder) had been arrested — and the government of India disbanded Satyam’s board. Though control of the company will pass into the hands of a new board, the government stopped short of a bailout — it has not offered Satyam any funds. Meanwhile, a team of auditors from the Securities and Exchange Board of India (SEBI), which regulates Indian public companies, has begun an investigation into the fraud.

• Satyam Fraud Summary
• Satyam Scam Case Study

Since Satyam’s stocks or American Depository Receipts (ADRs) are listed on the Bombay Stock Exchange as well as the New York Stock Exchange, international regulators could swing into action if they believe U.S. Laws have been broken. At least two U.S. Law firms have filed class-action lawsuits against Satyam, but given the company’s precarious finances, it is unclear how much money investors will be able to recover. According to experts from Wharton and elsewhere, the Satyam debacle will have an enormous impact on India’s business scene over the coming months. The possible disappearance of a top IT services and outsourcing giant will reshape India’s IT landscape. Satyam could possibly be sold — in fact, it had engaged Merrill Lynch to explore “strategic options,” but the investment bank has withdrawn following the disclosure about the fraud.

Satyam Fraud Summary

It is widely believed that rivals such as HCL, Wipro and TCS could cherry pick the best clients and employees, effectively hollowing out Satyam. Another possible impact could be on the trend of outsourcing to India, since India’s IT firms handle sensitive financial information for some of the world’s largest enterprises. The most significant questions, however, will be asked about corporate governance in India, and whether other companies could follow Satyam’s Raju in revealing skeletons in their own closets.‘Riding a Tiger’Raju was compelled to admit to the fraud following an aborted attempt to have Satyam invest $1.6 billion in Maytas Properties and Maytas Infrastructure (“Maytas” is Satyam spelled backwards) — two firms promoted and controlled by his family members. On December 16, Satyam’s board cleared the investment, sparking a negative reaction by investors, who pummeled its stock on the New York Stock Exchange and Nasdaq.

The board hurriedly reconvened the same day and called off the proposed investment.The matter didn’t die there, as Raju may have hoped. In the next 48 hours, resignations streamed in from Satyam’s non-executive director and Harvard professor of business administration Krishna Palepu and three independent directors — Mangalam Srinivasan, a management consultant and advisor to Harvard’s Kennedy School of Government; Vinod Dham, called the “father of the Pentium chip” and now executive managing director of NEA Indo-US Ventures in Santa Clara, Calif.; and M. Rammohan Rao, the dean of the Indian School of Business in Hyderabad (ISB). Rao had chaired both December 16 board meetings. On January 8, he resigned his position as the ISB dean. In a letter to the ISB community, he explained: “Unfortunately, yesterday’s shocking revelations, of which I had absolutely no prior knowledge, mean that we are far from seeing the end of the controversy surrounding Satyam Computers. My continued concern and preoccupation with the evolving situation are impacting my role as dean of ISB at a critical time for the school.

Given that my term with ISB anyway ends in a few months, I think that this is an appropriate time for me to step down.”Resigning as Satyam’s chairman and CEO, Raju said in a letter addressed to his board, the stock exchanges and the market regulator Securities & Exchange Board of India (SEBI) that Satyam’s profits were inflated over several years to “unmanageable proportions” and that it was forced to carry more assets and resources than its real operations justified. He took sole responsibility for those acts. “It was like riding a tiger, not knowing how to get off without being eaten,” he said.

“The aborted Maytas acquisition was the last attempt to fill the fictitious assets with real ones.”Specifically, Raju acknowledged that Satyam’s balance sheet included Rs. 7,136 crore (nearly $1.5 billion) in non-existent cash and bank balances, accrued interest and misstatements. It had also inflated its 2008 second quarter revenues by Rs. 588 crore ($122 million) to Rs. 2,700 crore ($563 million), and actual operating margins were less than a tenth of the stated Rs. 649 crore ($135 million).Satyam’s auditor PricewaterhouseCoopers issued a terse statement: “Over the last two days, there have been media reports with regard to alleged irregularities in the accounts of Satyam. Price Waterhouse are the statutory auditors of Satyam.

The audits were conducted by Price Waterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence. Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities. Price Waterhouse will fully meet its obligations to cooperate with the regulators and others.”Impact on ‘Brand India’The outrage over Raju’s admission of systematic accounting fraud has broadened to wider concern about the potential damage to India’s appeal for foreign investors and the IT services industry in particular. Immediately following Raju’s confession, Satyam’s shareholders took a direct hit as the company’s share price crashed 77% to Rs. 30 (approximately 60 cents), a far cry from its 52-week high of Rs.

544 ($11.35) last May.“If there were one or two more such accounting scandals in the next six months, it would make international investors more wary,” says Wharton management professor. “One example would put people on guard; several examples would be enough to tell big investment money managers that they have to be especially careful working in that environment.”, a Wharton management professor who is currently dean of the Nanyang Business School in Singapore, believes Satyam is an “outlier” and that there is no reason to think that “problems of this kind may be much more extensive than one company or a handful of companies.” However, he adds, “foreign investors will look a little more askance at accounting data from India. And that may not be a bad thing.”Useem also warns against overreacting. “Don’t assume other firms are guilty,” he says.

But he considers the situation to be an “alerting call” for investors to check where their money is, and for auditors and independent directors in all major firms to take a look at the books. Corporate India has tried to contain the damage so far. For Personal use:Please use the following citations to quote for personal use:MLA'Scandal at Satyam: Truth, Lies and Corporate Governance.'

The Wharton School, University of Pennsylvania,09 January, 2009. 12 January, 2020 APAScandal at Satyam: Truth, Lies and Corporate Governance.Knowledge@Wharton(2009, January 09).Retrieved from at Satyam: Truth, Lies and Corporate Governance'Knowledge@Wharton, January 09, 2009,accessed January 12, 2020.Educational/Business use:Please contact us for repurposing articles, podcasts, or videos using our. Additional Reading. FinanceReduced central bank liquidity injections, higher asset prices and increased volatility are some of the risks investors face in the year ahead, according to Allianz’s Mohamed El-Erian and Wharton’s Jeremy Siegel. MarketingAs the global media landscape shifts, how will top brands succeed at attracting customers and keeping them engaged? Google’s Gopi Kallayil offers his insights in this opinion piece.

Satyam Scam Case Study

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