On 7 January 2009 at 10:53 am, a fax from B. Ramalinga Raju,
Chairman of Satyam Computer Services Limited to the board of
directors, the Chairman of the Securities and Exchange Board of
India (SEBI) and the stock exchanges was like a multi-megaton
bomb exploding in the face of corporate India. Raju admitted to
multiple misdeeds which were so huge in their scale, so long in
the making, so shocking in having escaped scrutiny and so
disgraceful in their intent that they prompted the strongest
possible comments from corporate czars.
The cooking of the books was staggering. Let me start with the
worst swindle involving Satyam’s cash and bank balance (C&BB)
which, as on 30 September 2008, was inflated by a colossal
Rs.5,040 crore. Let’s understand this.
According to the official balance sheet, Satyam’s C&BB was
Rs.5,361 crore. After subtracting the Rs.5,040 crore fudge, the
real (who knows what is real?) C&BB was just Rs.321 crore. So,
the $1.6 billion (Rs.7,700 crore) that Satyam proposed to pay
Maytas Properties and Maytas Infrastructure out of its cash was
a figment of imagination. The company just didn’t have the
dough! Which is why, in Raju’s words, “The aborted Maytas
acquisition deal was the last attempt to fill the fictitious
assets with real ones” [emphasis mine].
What a scandal! Satyam had no real cash. It wanted to acquire
Maytas which has real assets. Since it had no cash, it would
have shafted Maytas’ shareholders. In the meanwhile, Satyam
would have real assets (“fill the fictitious assets with the
real ones”). Through this acquisition, thankfully thumbed down
by all institutional investors, Raju was hoping to close
Satyam’s gap between real and fictitious money which had
“attained unmanageable proportions”. Raju felt that “Once
Satyam’s problem was solved, it was hoped Maytas’ payments can
be delayed. But that was not to be”.
Thus, a desperately cash strapped company was fudging its books
to show non-existent cash to make an acquisition that it was in
no position to pay for, for it to command valuable real estate
which it could then show as fungible assets on its balance
That wasn’t all. Satyam put in the books non-existent accrued
interest of Rs.376 crore and increased current assets by
overstating debtors dues by Rs.490 crore. For the quarterly
results 30 September 2008 alone, it overstated revenue, gross
margins and cash and bank balances by Rs.588 crore.
How could a scandal of this magnitude happen?
Whatever Raju says, there is no way that he could have done it
alone. Period. Modern corporations need to create documentation
to generate numbers. Fudges of this size need the connivance of
the CFO and his minions and, at the very least, a blind eye of
the CEO and the COO. Consider this: How could Satyam falsify
Rs.588 crore of revenue in one quarter without the CEO, COO and
CFO not being in the know? In my book, they are either culpable
or blind and dumb, or both — all good reasons for being
investigated and sacked.
This disgrace also raises serious questions about Price
Waterhouse Coopers (PwC), the statutory audit firm. The least
that any auditor will do — even an article clerk apprenticing
with an audit firm — is to actually verify a company’s cash and
bank balance. It’s a basic practice. How could the balance be
inflated by Rs.5,040 crore without PwC having a clue? And DSP
Merrill Lynch realising it in less than two weeks? There are two
possibilities: either the CFO’s office created false statements
on the letterheads of sundry banks, and PwC accepted these
without question; or that the audit team didn’t bother checking.
Both constitute serious neglect of fiduciary responsibilities
PwC which is supposed to certify to the shareholders that the
accounts are ‘true and fair’. Equally, how did an inflated
revenue of Rs.588 crore for the September 2008 quarter escape
PwC will get hauled over coal. US shareholders are preparing
class action suits against PwC and the directors. The Securities
and Exchange Commission will also pitch in. As will the US
Public Company Accounting Oversight Board (PCAOB), a statutory
body set up under the Sarbanes Oxley Act after the Enron and
Worldcom scams. If PwC is very lucky, it will be severely fined,
lose many f its clients, have its Satyam audit partners
punished, and become a shadow of its former self. Otherwise, it
may be ruined by class action suits, and go the Andersen way.
Now to the role of independent directors. Here, I have three
points to make. First, they erred grievously in agreeing to a
$1.6 billion related party transaction with Maytas, even if with
caveats. Second, contrary to what most journalists are writing,
I wouldn’t blame them for Satyam’s fudging of accounts.
Independent directors are not the management. At best, they
directly interface with a company for 15 days in a year. They
rely on both internal and statutory auditors, external news,
whistle-blowing and scuttlebutt to get a picture of the company.
When the statutory auditor presents a ‘true and fair’ view of
the company in audit committee and board meetings, there is not
much that independent directors can do, especially if they have
no prior suspicion about the shenanigans of the company. Third,
there is no doubt that independent directors should spend more
time with greater diligence on the affairs of their companies.
They have to be more questioning, more critical, more forthright
and less beholden to the management. These virtues have been in
relatively short supply — not just in India but everywhere. If
Satyam shakes all of us who serve on boards, and forces us to
pay more attention, it will have served at least one good
Finally, let’s admit that we were all wrong. Until the proposed
Maytas acquisition, nobody ever wrote ill of Satyam; or that
Raju was quietly fiddling the accounts. We accepted the numbers;
analysed them to death; and praised Raju to the skies. Raju
broke the Eleventh Commandment: “Though shall not get caught”.
We broke the Twelfth: “Thou shall have the brains to see what