True lies

Please pardon the language, lack of proper flow etc..I wanted to just put all my thoughts down and hopefully will edit the piece out later.

The name Maytas was derived by distortion of the word Satyam. Ironically that’s what happened in reality. The complete distortion of truth and in all probability it was Maytas and murky real estate deals that led to the whole ground giving way.With Ramalinga Raju sending shockwaves in the financial circles on Wednesday, the already beleaguered markets had one more issue to add to its cup of woes. The scale of the disclosures made was so huge that the first reaction of most people was that something like this cannot really be happening.

Cash of Rs 5,000 crores was there in one instant and wished away in another. Margins of Rs 649 crores were in reality just Rs 61 crores. The other disclosures pale in comparison to these numbers. Here is a NYSE listed company, audited by a top audit firm, promoted by a respected man. How could this even be true? It is being called India’s Enron. What has been missed by analysts all over was that Enron was well, before Enron! The Enron issue saw a whole host of regulation coming in place, strengthened accounting standards, the Sarbanes Oxley Act, heightened disclosure, higher risk mitigating procedures at audit firms. The ghost of Enron still hangs around the atmosphere in audit firms. All these regulations were being put in place just to prevent another Enron from taking place. But here we have another scam, albeit not the scale and perhaps complexity of Enron, but possibly more brazen given its simplicity.

As to how the fraud took place, it is too early to tell, given that everyone is characteristically running around in circles. Either the auditors were in collusion with the Management or the Management created a whole host of false evidence that they showed the auditors and consistently pulled wool over their eyes for some six odd years. Audit procedures to ensure cash balances are in order involve typically obtaining confirmations from banks. Bank confirmations are supposed to be called for by the auditor from the banks directly. Now two things could have happened here, one the bank managers could have been on the take and provided confirmation of incorrect balances or Satyam could have doctored the confirmations. How difficult is it to replicate a bank’s letterhead / seal etc? I really do not believe that the auditors did not bother to get the confirmations at all but they could be in trouble if they had not directly obtained the confirmations themselves. But there again some one has been involved in forging the documents so blame will not rest entirely with them.

Second scope for manipulation here is the bank reconciliation statements (BRS). Now typically the bank balances as per the books of account and the bank statements will not tie in. This is because of legitimate reasons such as the lead time of cheques deposited but not realized or cheques issued but not encashed by the third parties etc. This is why the reconciliation statements are prepared and the auditors again examine these statements to check for any irregularities. Here again the Management could have very easily put in bogus cheques and inflate the bank balances. Auditors normally check for subsequent clearance of cheques mentioned in the BRS, however given that results are declared within first 10 days of the new quarter it is a very logical explanation that cheques have not been cleared in that period and you let it go!

A Management that is intentionally committing fraud, can consistently lie to an auditor, revenues can be fudged by creating contracts that do not exist, obtaining “client sign offs” on projects that never really took place. Evidence can very simply be manufactured if someone wants to commit a fraud. I’m not trying to defend the auditors here at all, it was their duty to look at the accounts with a microscope and negligence is a very possible reality in this case. However a determined Management can succeed in taking the auditors for a big ride. When you have the same audit team going in quarter after quarter there is a level of comfort you have as well with the finance team and you tend to take it easy a bit. Plus bulk of the team that actually executes the work, looking for audit evidence etc is young and inexperienced CA students, who are in awe of the situation they’re in and the sudden power their fresh out of school / college selves have been vested with! Time is again a very important factor – top listed companies declare results as soon as the quarter is over leaving auditors very little time to actually go about their jobs.

Another thing I find very puzzling is the issue of the margins. How can a software giant have such low margins? Surely that is not an industry norm, so either the company was not getting any new contracts or they had severely undercut competition and were paying the price. Or there was a massive amount of siphoning off of funds that was happening and the margins were not actually so low. This is a possibility given the Maytas angle to the story. Where was the Raju family getting so much money to buy up vast parcels of land?

It is also a joke that Mr Raju expects the world to believe that only he and the CFO were on the know. If indeed all that evidence had been manufactured, he for sure had to have had at least 5-6 people involved, plus all those people who passed those entries and approved them in the system. I’m really surprised there was no whistle blower in all these years.

Around 50,000 people face uncertainties in their lives. People who had once looked up to Mr Raju and been in awe of the large empire he had created. As late as November 2008, Mr Raju had given an interview where he explained the origins of the name of the company. It was named after his father Satyanarayana Raju and because of the profound meaning of the word Satyam. I wonder what profound meaning he saw in the simple word. I wonder how he was able to sleep at nights.

Related reading: Do read Conspiracy of Fools on the Enron scam

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11 Responses

  1. Yes, apalling turn of events . But it’s weird how it all came crashing like a house of cards with the Maytas fiasco, World Bank ban and now this admission of fraud by Raju. It reeks of something else. Guess we’ll never know.

    Hey Minka. I know, one minute you’re getting Golden Peacock awards for corporate governance (hah!) and the next everything unravels. The irony is that if investor outrage had not prevented the Maytas deal from going through, all of this would not have come out. The World Bank crisis would have blown over..its scary, but I’m glad that at least some check does seem to exist..albeit a few years late. The thing is if the Maytas trick had been tried in the boom time, no one would have said a thing.

  2. I agree with all that you have said here, GDS. Infact I had the same questions…the BRS, the people involved, the low margins…having worked in a similar IT giant earlier. It is surprising that NOTHING came out all these 21 yrs which in itself is very confusing to me!

    Forget 21…these things happen when you’re a small privately held firm. But an NYSE listed company! I mean the regulations are so so strict and if followed to the letter, such a thing could not have happened. The picture will become clearer soon and then we will know. Do read Conspiracy of Fools if possible..its longer than Suitable Boy even, but extremely rivetting…then you will know that anything is possible! More exciting than a spy novel!

  3. Bloody hell!!

    I actually UNDERSTOOD all that!! That’s what about a year into auditing (albeit not the true financial auditing but still) gets you!!

    Even us IT auditors know that bank confirmations from the bank directly is absolutely necessary.

    I agress with you there – there definitely would have been others mired in the debacle….guess we’ll never know…

    Yeah and these companies would have complicated accounting systems, running on SAP or Oracle or whatever. Its a joke if he expects us to believe that he, the MD and the CFO sat and manufactured bank confirmations, contracts, client correspondences, passed all the entries in the books all by themselves. I mean clearly he thought that people were fools while committing all the fraud..but this is hilarious.

  4. Shit…I just realised who the auditing firm was. Dammit…this ain’t gonna be good for us.

    My gut is that PwC will survive this..the partners and senior managers on the audit team will take the hit. They may be barred from auditing listed companies in India, but my sense is that they will not go the Anderson way. I really don’t believe they were on the fraud too..negligence yes..but as I’ve said a big conspiracy on the part of the management can fool an auditor..they will pay for sure..but I don’t think they will go belly up. And how much ever people curse the Big 4, the fact is that no one else has the resources and the bandwidth to handle big audits. There really is no choice..Sad truth.

  5. From what I read, and I can’t remember where I read it, it seems like PWC may be off the hook – looks like the auditors were fed some very different info. As for the margins, I think 3% is about right – Satyam had undercut their competitors…plus, I hear margins have been that low for a while.

    M

    Yeah I agree with you. I don’t believe they were part of the fraud (like in Anderson’s case). They may have taken some aggressive calls but ultimately they can take shelter under the fact that this was a clearly orchestrated fraud at the highest levels. Reminds me of that corny quote we had to study..Auditors are watch dogs not blood hounds! Will blow over for PwC..wish I could say the same for those poor investors and the employees.

  6. I am so glad I read this, I mean I have no time, and I wanted to know what this whole satyam thing is, now I understand. All I can say is I am shocked and amused(!!). Thank you for posting this. 🙂

    Glad to have been of service! Though I wish I could share your amusement..my feeling is that I really wish all this can be wished away as a bad dream..

  7. very interesting. tried to comment yesterday, but it didn’t work. am still t ying to wrap my head around this.

    I know its all so intriguing…unearthing the facts, the anatomy of the fraud, trying to understand why anyone would do something like this..I had a job offer from SEBI, a couple of years back, really wish I could have that now and get on the investigation team..they pay peanuts though!

  8. This’s been an enlightening post, GDS.

    Oh a lot more enlightment is needed!!

  9. This really was an informative post… I was quite unclear about the issue… glad to have read your analysis.

    I don’t quite remember delurking earlier… but Hello! again 🙂

    Hello! Seen you around and love your name!

  10. hmm the grill has begun.. lets wait and watch.

    What grill?! SEBI hasnt had the chance to speak to the brothers yet!

  11. interesting post,

    i’d like to add you to my blogroll,

    hopeyou don’t mind

    here’s mine:

    http://www.funnyaccountant.wordpress.com

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