For the last 48 hours, everything about an
inappropriately named company called Satyam involves
incredulity, indignation and schadenfreude.
Incredulity by all: How could the promoter B.
Ramalinga Raju cook the books by a staggering
Rs.7,000 without the management and the statutory
auditors being in the know? Indignation by corporate
India and the press: the former for Satyam having
tarnished its name, and the latter against those who
were sleeping on the bridge. And schadenfreude
(malicious enjoyment of another’s misfortune) is
from the press: glee at a fat cat drowning, a
big-four accounting firm running for cover, and
exalted independent directors caught in flagrante.
I empathise with all three emotions, though the
schadenfreude is a bit over the top. Satyam’s
fudging of accounts is not something to be gleeful
about. It has tarnished the image of corporate India
at an especially difficult time. Also, none can
claim, “I told you so”. Until Satyam’s tried to
purchase Maytas, nobody criticised the performance
and corporate governance of the company. Raju was a
voice of the new India. Let’s humbly admit that we
were all duped by the man — hugely and
The size of Raju’s scam is humongous. Focusing on
the major swindle is enough to understand what he
was trying to do. That has to do with Satyam’s cash
and bank balance which was inflated by Rs.5,040
crore as on 30 September 2008.
In Satyam’s 30 September balance sheet, the cash and
bank balance was Rs.5,361 crore. Subtract the
Rs.5,040 crore fudge, and you get just Rs.321 crore.
Recall that Satyam had proposed to buy Maytas for
$1.6 billion (or Rs.7,700 crore), financed out of
its cash. But it didn’t have the money. So, what was
the play? Get the Maytas assets into Satyam, delay
paying cash to Maytas and, in the meanwhile, shore
up Satyam’s balance sheet with valuable
infrastructure assets. In Raju’s pathetic
confession, “The aborted Maytas acquisition deal was
the last attempt to fill the fictitious assets with
real ones” [emphasis mine].
The game was up once the institutional investors
thumbed down the acquisition. Raju desperately
needed suitors to purchase Satyam to fill the gap
between real and fictitious money which had
“attained unmanageable proportions”. It appointed
DSP Merrill Lynch to do match-making. And Merrill’s
team found these discrepancies, forcing Raju to
Raju couldn’t have rigged the books on his own. You
can’t overstate cash and bank balance by Rs.5,040
crore, or quarterly revenues by Rs.588 crore without
participation of the CFO and, at the very least,
negligence of the CEO. If you were the CEO of a
company whose revenues shot up by an unanticipated
Rs.588 crore, wouldn’t you ask, “Where did that come
from?” And if you didn’t, what should I infer?
The most amazing aspect of the case is PwC, the dog
that didn’t bark. Like Andersen in Enron, PwC failed
as a statutory auditor whose task is to certify that
the accounts are ‘true and fair’. The cash and bank
balance scam is damning. From the article-ship days,
auditors swear by the need to verify a company’s
cash and bank balance. How could this be inflated by
Rs.5,040 crore leaving PwC clueless? When DSP
Merrill Lynch figured it out in a trice? Clearly,
either the CFO fabricated documents on banks’
letterheads, or rigged the company’s enterprise
reporting software, or PwC didn’t dig deep enough.
PwC’s apparent errors in omission are too glaring to
Here’s my initial take on the post-debacle scenario.
First, Satyam as we know it is history. It will be
well nigh impossible for Ram Mynampati, who has
taken over, to steer the company to a safe harbour.
And it will be a while before anyone shows an active
interest in buying a company riddled with falsified
accounts. That’s a shame for which Raju is entirely
to blame. His hubris made him the terrible destroyer
of all that he created and grew. To think of the
fate of 53,000 lost souls who struggled day and
night for a company whose promoter cheated them so
outrageously brings rage and tears in equal measure.
Second, PwC’s goose is cooked. US shareholders will
slam class action suits, and the Securities and
Exchange Commission will pitch in. If it is very
lucky, PwC will be severely fined, lose many
clients, have its Satyam audit partners punished,
and become a shadow of its former self. Otherwise,
it may fold like Andersen. Not by actions in India,
but in the US.
Third, I fear that like the post-Enron era, this can
prompt a rash of new directives and rules from the
SEBI and the Ministry of Company Affairs (MCA). I
hope not. India’s problem is not of inadequate laws;
it is of grossly inadequate enforcement. Let’s not
have more over-regulation and under-enforcement.
Fourth, I pray that SEBI and the MCA will
collaborate to take swift action and confer
exemplary and punitive punishment on the guilty.
India needs to see show the world that it can punish
the high and mighty, and do so quickly.
Finally, while I recognise that independent external
directors can’t do much if the internal or statutory
auditors don’t blow the whistle, the Satyam episode
is a wake up call to all of us who serve on boards.
Independent directors must focus more on their
companies — be more diligent, deeply question
proposals, speak their mind and take outside
counsel. Understand the management’s perspective, by
all means. But never forget that you are a fiduciary
of the shareholders.
Published: Times of India, January 2009