Satyam Computer Scam and Corporate Governance Failure

This presentation analyzes the Satyam Computer Scandal, one of India's biggest corporate frauds, exposing financial manipulation, accounting irregularities, and governance failures. It covers the rise of Satyam, the fraudulent activities led by founder Ramalinga Raju, and the immediate impact on investors, employees, and India's IT sector. The slides detail regulatory actions, legal proceedings, and governance reforms introduced post-scandal. Key lessons on corporate transparency, ethical leadership, independent audits, and whistleblower policies are highlighted to prevent future financial misconduct.

1. Satyam Computer Scandal:
A Case Study in Corporate
Governance Failure
-Anuj Poudel

2. Introduction
The Unveiling
The Satyam Computer Scandal erupted in January 2009,
exposing one of India's largest financial frauds. The
scandal was brought to light when the founder and
chairman, Ramalinga Raju, confessed to manipulating
the company's accounts over several years. His
admission revealed a massive scheme of fraudulent
activities, including overstated revenues, inflated
profits, and the creation of fictitious employees.
The Magnitude
The extent of the fraud was staggering. The total
amount involved was estimated to be $1.47 billion,
encompassing overstated revenues and profits, insider
trading, and the diversion of funds to family-owned
companies. This scandal not only shook the Indian
business community but also had significant
repercussions for the global investment landscape.

3. Background of Satyam Computers
Global Presence
Established in 1987 by
Ramalinga Raju, Satyam
Computers had grown into a
global IT powerhouse, offering
diverse services including
consulting, software
development, and business
outsourcing. By 2008, the
company had expanded to 66
countries, employing over
53,000 individuals. The
company's success and global
reach had positioned it as a
leading player in the IT industry.
Industry Recognition
Satyam Computer's reputation
for providing innovative
solutions earned it recognition
as a leader in the IT sector. The
company was consistently
ranked among India's most
admired companies and was a
fixture on the Fortune India 500
list.
Key Clients
The company's client portfolio
included a diverse range of
organizations from various
industries, showcasing its
ability to deliver IT solutions
that addressed complex
business challenges. Their
reputation for delivering high-
quality services attracted a
global client base.

4. Founder Profile: Ramalinga Raju
Early Life and Career
Ramalinga Raju, born in 1954 in Andhra Pradesh, India,
had established himself as a respected figure in the
Indian IT industry. He was known for his visionary
leadership, strategic acumen, and ability to navigate the
complexities of the rapidly evolving IT landscape.
The Fall from Grace
The Satyam scandal revealed a darker side of Raju's
character. His ambition for growth, combined with a
disregard for ethical principles, ultimately led to the
unraveling of his company and his legacy. His confession
to falsifying accounts for several years shattered the
trust he had built over decades.

5. Key People Involved
Ramalinga Raju
The mastermind behind the scheme, Raju
orchestrated the fraud, manipulating financial
statements and diverting funds for personal gain. His
actions had a profound impact on the company, its
employees, and the investment community.
B. Rama Raju
Ramalinga Raju's brother, B. Rama Raju, served as
Managing Director of Satyam. He played a significant
role in facilitating the fraud and was complicit in the
manipulation of financial records.
V. Srinivas
As the Chief Financial Officer, V. Srinivas played a
pivotal role in implementing fraudulent accounting
practices. His actions, driven by greed and a lack of
ethical judgment, contributed significantly to the
scandal's magnitude.
Auditors
The auditors, S. Gopalakrishnan and Talluri Srinivas
from Price Waterhouse, failed to detect or report the
anomalies in the company's financial statements.
This lapse in judgment raised questions about the
effectiveness of auditing practices and the role of
auditors in safeguarding financial integrity.

6. The Fraudulent Activities
Overstated Revenue
and Profits
Satyam inflated its
revenue and profits
through a series of
fictitious transactions.
These transactions were
created to make the
company appear more
successful than it actually
was, misleading investors
and lenders.
Fake Employee Payroll
Satyam created a fictitious
payroll of 13,000
employees, diverting their
salaries to personal
accounts. This practice
concealed the true cost of
the company's operations,
providing further financial
manipulation.
Cash Falsification
The company's accounts
reported nonexistent cash
balances, creating an
illusion of financial
strength. This misleading
representation of cash
reserves was intended to
attract investors and
lenders.
Fund Diversion to
Family Businesses
Funds were diverted to
family businesses,
including Maytas Infra and
Maytas Properties,
through questionable
transactions. This practice
was an example of blatant
self-enrichment at the
expense of the company
and its stakeholders.

7. Timeline of Events Leading to the Scam
1
1987-2007
Satyam experienced rapid growth,
gaining recognition as a global IT leader.
The company secured major global
clients and expanded its operations,
setting the stage for its ambitious future.
2
October 2008
Financial analysts raised concerns about
Satyam's financial statements,
specifically regarding the unusually high
cash balances held in non-interest-
bearing accounts. These concerns
signaled the beginning of heightened
scrutiny of the company's operations.
3
December 2008
Satyam's proposed acquisition of Maytas
Infra and Maytas Properties, both owned
by the Raju family, sparked further
suspicions among investors. The
transactions raised questions about
possible conflicts of interest and
inappropriate use of company funds.
4
January 7, 2009
Ramalinga Raju, in a stunning admission,
confessed to manipulating the company's
accounts for several years. His
confession triggered a seismic shift in
the Indian corporate landscape and
exposed the devastating consequences
of corporate fraud.

8. Methods Used for Fraud
1
Accounting Manipulations
Satyam used a variety of accounting manipulations to inflate its assets and profits, exceeding the
company's true performance. These manipulations were designed to meet market expectations and
create an illusion of success.
2
Dummy Accounts
The company created dummy accounts for insider trading and falsifying financial reports. These
accounts allowed for the transfer of funds for personal gain, further masking the true financial condition
of Satyam.
3
Cash Falsification
Satyam's accounts reported cash reserves that did not exist. The company's financial statements
misrepresented the amount of cash on hand, painting a deceptive picture of financial strength and
stability.
4
Employee Fraud
The creation of fake employee records was a key element of the scam. These records allowed for the
diversion of salaries into personal accounts, enriching the perpetrators while masking the true costs of
the company's operations.

9. Circumstances under which the Scam Revealed
1
Global Recession
The global recession in 2008 increased scrutiny of corporate financials
2
Analyst Scrutiny
Amidst the global recession, analysts began to scrutinize
corporate financials more closely. Their focus on the financial
stability of companies led them to uncover irregularities in
Satyam's financial statements.
3
Merrill Lynch Disengages
Merrill Lynch, a prominent investment bank,
disengaged from advising Satyam, citing concerns
about accounting irregularities. Their withdrawal
signaled a loss of confidence in the company's financial
practices.

10. Immediate Impact
75%
Share Price Drop
Satyam's share price plummeted by 75% in a single day
following Raju's confession. On Jan 7th the stock was
trading between 180 to 200 then it fell to Rs 40. Further it
fell to Rs 6 per share
0.4%
GDP Decline
The scandal's impact on India's economy was significant,
with the GDP decreasing by 0.4%. This decline
highlighted the broader economic consequences of
corporate fraud and the erosion of trust in the corporate
sector.
50,000
Jobs at Risk
Over 50,000 employees faced uncertainty about their
futures following the scandal's revelation. The company's
financial woes led to job losses and a sense of anxiety for
those who had dedicated their careers to Satyam.
Global
Reputational Damage
The scandal damaged India's reputation in the global IT
sector. Investors and clients worldwide were concerned
about the integrity of Indian companies, impacting the
country's standing as a global technology leader.

11. Acquisition of Satyam by Mahindra Group
1
April 13, 2009
Tech Mahindra, a subsidiary of Mahindra
& Mahindra, acquires a 31% stake in
Satyam through a public auction.
2
July 2009
Satyam rebrands its services under the
new Mahindra management as "Mahindra
Satyam".
3
March 21, 2012
Tech Mahindra announces its merger
with Mahindra Satyam after the boards of
both companies approve the deal.
4
June 25, 2013
The merger between Tech Mahindra and
Mahindra Satyam is legally completed.

12. Aftermath : Regulatory Actions
1Appointment of a new Board of
Directors for Satyam.
2SEBI mandated stricter disclosure
norms and transparency in
financial reporting.
3The Ministry of Corporate Affairs
implemented a new corporate
code of conduct.
4Mandatory disclosure of pledged
securities and auditor rotation.

13. Aftermath: Legal Proceedings
Arrests
Ramalinga Raju, B. Rama
Raju, and CFO Srinivas
were detained
Charges
Breach of trust,
conspiracy, falsification
of records, and insider
trading.
Verdicts
Court sentences
included imprisonment
and significant financial
penalties.
Auditor
Auditors from Price
Waterhouse were barred
from practice for lapses
in oversight.

14. Corporate Governance Failures
Lack of Independent
Oversight
The Board of Directors
failed to provide sufficient
independent oversight,
allowing the fraud to
continue.
Collusion with
Auditors
Auditors and management
colluded to conceal the
fraud, allowing it to go
undetected for years.
Prioritized Family
Interests
Decision-making
prioritized the interests of
the Raju family, rather than
those of the company or
its stakeholders.
Lack of Checks and
Balances
Absent effective checks
and balances in financial
processes, the fraud was
able to occur and grow
unchecked.

15. Impact on Stakeholders
1
Employees
Job insecurity and reputational damage for IT
professionals.
2
Investors
Loss of billions in market capitalization and
trust.
3
Clients
International clients lost confidence in Indian
IT services.

16. Industry-Wide Implications
Tarnished Reputation
The scandal damaged the
reputation of Indian companies
globally, raising concerns about
corporate governance and
ethical practices.
Stricter Norms
The incident led to stricter
regulations and compliance
measures for corporate
governance, requiring increased
transparency and accountability.
Enhanced Due Diligence
International clients began
conducting more rigorous due
diligence before engaging in
outsourcing deals with Indian
companies.

17. Steps Taken Post-Scandal
1
Mandatory Disclosures
SEBI mandated disclosures of promoter share
pledges.
2
Mandatory Independent Audits
Independent audits became mandatory for
private entities.
3
Governance Improvement
Committees
Committees formed to recommend
governance improvements. 4
Auditor Rotation
Auditor rotation introduced to prevent
malpractice.

18. Key Takeaways
Transparency
Builds investor trust.
Accountability
Ensured by independent oversight.
Ethical Leadership
Prioritizes long-term sustainability.

19. Key Lessons for Corporate Governance
Independent Boards
Diverse and independent boards
are crucial for unbiased
decision-making and effective
oversight.
Audits
Regular internal and external
audits are essential to detect
irregularities and ensure
financial transparency.
Whistleblower Policies
Robust whistleblower policies
encourage reporting of unethical
practices and promote
accountability.

20. Thank You

21. References
Satyam Computer Services Limited - Wikipedia
The Satyam Scandal: A Case Study in Corporate Governance Failure - Harvard Business School
The Satyam Scandal: Lessons for Corporate Governance - The Economic Times
Satyam Computer Services Ltd: A Case Study in Corporate Governance - IIM Bangalore
Satyam Computer Services: A Case Study in Accounting Fraud - Investopedia