Sathyam scam (2009)

AN OVERVIEW OF THE
LARGEST ACCOUNTING
FRAUD IN INDIA
 Introduction

 What is Satyam Scam?

 The Satyam Scam, also known as the Satyam
Computers Services Ltd. fraud, was one of the
largest corporate scandals in India, which shocked
the business world in 2009.
 Company Overview:
 Satyam Computers, founded in 1987 by B.
Ramalinga Raju, was one of India’s leading IT
outsourcing companies and a major player in the
global IT services sector.
 Scale of fraud

 Financial Manipulation: The fraud involved the inflation of

revenue, profits, and assets for several years.
 Falsified Accounts: B. Ramalinga Raju, the chairman, admitted

to inflating the company's balance sheet by ₹7,136 crore (approx.

$1.5 billion USD).
 Fake Cash Balances: Satyam’s financial reports showed non-

existent cash balances and understated liabilities.

 Overstated Revenues: The company was reporting much higher

revenues and profits than it actually earned.

 Fictitious Employees and Receivables: Employee and

receivable figures were manipulated, showing numbers that

didn’t exist.
 Duration of the Fraud: The fraud went on for several years,
dating back to at least 2000. The manipulation was carried out
through false accounting practices, fake invoices, and
misrepresentation of financial statements.
 Significance of the fraud

 Global Loss of Trust

Shattered investor confidence in Indian IT companies and
global outsourcing.
 Corporate Governance Reforms
Led to stricter auditing standards and regulatory oversight
(SEBI reforms).
 Severe Financial Losses
Stock price collapsed by 78%, wiping out billions in market
value and affecting employees.
 Legal Consequences
Key executives, including B. Ramalinga Raju, were arrested
and convicted, setting legal precedents.
 Impact on India’s IT Sector
Tarnished the reputation of India’s IT industry and
temporarily damaged global client trust.
 Company background

 Founded: 1987 by B. Ramalinga Raju in Hyderabad, India.

 Core Business: IT services, consulting, and business solutions,
specializing in software development, outsourcing, and
consulting.

Key Facts and Figures (Before the Scam)

 Revenue: ₹8,000 crore (approx. $2 billion USD) annually by
2008.
 Global Presence: Operations in over 60 countries and a
broad range of industries, including finance, healthcare, and
telecommunications.
 Employees: More than 53,000 employees worldwide.
 Stock Listings: Listed on the Bombay Stock Exchange

(BSE) and New York Stock Exchange (NYSE).

Importance of Satyam in the Indian IT Sector
(before scam )
 Pioneering Role in IT Outsourcing
One of the top IT outsourcing companies in India,
playing a crucial role in establishing India as a global IT hub.
 Global Recognition
Served major international clients, cementing India’s
reputation for providing high-quality, cost-effective
outsourcing solutions.
 Key Player in India’s IT Boom
Satyam was a flagship company in India’s IT
revolution during the 2000s, contributing significantly to the
sector’s growth and India's economic transformation.
 The fraud

Falsified Accounts
1. Revenue and Profit Overstatement: The company inflated its
revenues and profits by creating false entries in its books. These
figures were reported in quarterly and annual financial statements
to appear profitable to investors and stakeholders.
2. Fake Bank Balances
Non-Existent Cash: Satyam’s balance sheets showed inflated cash
balances. These "cash reserves" did not exist in the bank accounts,
and the company created fake documents to back up these figures.
3. Inflated Receivables
Accounts Receivable Manipulation: The company reported
fictitious accounts receivables (money owed by clients), making it
seem like clients were paying on time when, in fact, they had not.
These inflated receivables boosted the company’s perceived
financial health.
 The fraud

 Magnitude of the Fraud

Total Falsified Amount: The manipulation amounted to ₹7,136
crores (around $1.5 billion USD) in fraudulent financial reporting.
 Key Elements of the Scale
1. Revenue Inflation: The company exaggerated revenues by inflating
the figures for several years.
2. Faked Profits: Profits were overstated, making Satyam appear to be a
high-growth, profitable company.
3. Cash Overstatement: Falsified cash balances were reported, leading
investors and auditors to believe Satyam had more liquid assets than
it actually had.
 Duration of the Fraud
The fraud took place over a period of several years, starting as early as
2000, and continued until it was discovered in 2009. It was carefully
hidden through complex accounting techniques and false
documentation.
 Impact of scam

1. Financial Losses
 Investor Losses: The fraud led to a 78% drop in Satyam's stock price in a
matter of days, erasing billions in shareholder value.
 Market Value: Satyam’s market capitalization plummeted from over
₹14,000 crores to a fraction of its original value.
2. Loss of Reputation
 Global Trust Erosion: The scandal damaged the trust in Indian corporate
governance and shook investor confidence in India’s IT sector.
 Impact on Clients: Major international clients began questioning the
reliability of Indian IT companies, leading to a temporary decline in
outsourcing contracts.
3. Legal and Regulatory Repercussions
 Arrests and Convictions: Key executives, including founder B. Ramalinga
Raju, were arrested and convicted for fraud and other crimes.
 Stricter Regulations: The scam led to stronger regulations by SEBI and an
overhaul of auditing standards to ensure greater transparency and corporate
accountability in India.
 Impact of scam

4. Impact on Employees
 Job Insecurity: Thousands of employees faced job uncertainty as
Satyam’s credibility and stability were severely compromised.
Many were reassigned after Tech Mahindra’s takeover.
5. Indian IT Sector Reputational Damage
 Tarnished Industry Image: As one of India's leading IT firms,
Satyam’s downfall tarnished the reputation of India’s IT
outsourcing sector, raising concerns about other companies'
financial practices.
6. Acquisition by Tech Mahindra
 Rescue Operation: Tech Mahindra took over Satyam, saving it
from complete collapse but highlighting the risks of weak
governance.
 Rebranding: Satyam was rebranded as Mahindra Susten, and its
operations were integrated into the Mahindra Group.
 Legal and Ethical Consequences

1.Legal Action Against Executives

 B. Ramalinga Raju (Founder & Chairman) and other executives were arrested
and charged with fraud, conspiracy, and falsifying financial statements.
 Sentences: In 2015, Raju was sentenced to 7 years in prison, along with other
key executives facing similar charges.
2. SEBI & Regulatory Oversight
 Increased Scrutiny: The scam led to a crackdown by the Securities and
Exchange Board of India (SEBI), which imposed stricter regulations and
enhanced corporate governance standards.
 Tighter Auditing Standards: External auditors, like Price Waterhouse, were
scrutinized for their failure to detect the fraud. This resulted in changes to
auditing and reporting standards in India.
3. Impact on Corporate Ethics
 Corporate Governance Reforms: The scandal underscored the need for strong
corporate governance practices, leading to reforms in transparency, financial
disclosures, and accountability.
 Ethical Shift: The scam highlighted the importance of ethical leadership and
the role of boards in monitoring and ensuring accurate financial reporting.
 Takeover by mahindra

 1. Crisis & Need for Intervention

After the Satyam scam in 2009, the company faced financial instability
and a loss of credibility, risking collapse.
 2. Tech Mahindra’s Acquisition
In April 2009, Tech Mahindra, part of the Mahindra Group, acquired
a controlling stake in Satyam through a government-led initiative.
 3. Rebranding & Restructuring
Satyam was rebranded as Mahindra Susten, and its operations were
integrated with Tech Mahindra, focusing on improving governance and
financial practices.
 4. Positive Impact
The takeover saved thousands of jobs, restored trust in the IT sector,
and helped stabilize the company.
 5. Long-Term Growth
Tech Mahindra successfully integrated Satyam, contributing to the
growth of the combined entity as a leading IT service provider.
 Impact of the Satyam Scam on the Companies
Act, 2013

1. Strengthening Corporate Governance

Independent Directors: Greater accountability for board members,
especially independent directors in ensuring transparency in financial
reporting.
Audit Committees: Mandatory audit committees with independent
members to oversee financial statements and prevent fraud.
2. Enhanced Auditor Responsibility
Mandatory Auditor Rotation: Auditors must rotate every 5
years to reduce conflicts of interest.
Increased Scrutiny: Auditors are now liable for failing to detect
fraud, increasing the responsibility to scrutinize financial records closely.
3. Stricter Financial Reporting & Transparency
More Detailed Disclosures: Companies must provide detailed
financial reports, including related-party transactions, executive
compensation, and risks.
Internal Audit Requirement: Larger companies must maintain
internal audits to ensure accurate financial reporting and early detection
of discrepancies.
Impact of the Satyam Scam on the Companies Act, 2013

4. Increased Penalties for Corporate Fraud

Stricter Penalties: Heavy fines and criminal imprisonment for
directors involved in fraud or financial misreporting.
Corporate Fraud Definition: Clear definition and penalties for
corporate fraud, including falsifying financial records.
5. Protection for Whistleblowers
Whistleblower Policies: Companies must establish
whistleblower policies to encourage reporting of unethical
behavior without fear of retaliation.
Whistleblower Protection: Ensures individuals reporting
financial irregularities are protected from backlash.
6. Strengthened Role of Regulatory Bodies (SEBI)
Enhanced SEBI Oversight: SEBI has greater powers to enforce
compliance with corporate governance norms, ensuring more
robust regulatory monitoring.
 Conclusion

 The Satyam scam was one of the most significant corporate frauds
in India, highlighting the critical need for strong corporate
governance, financial transparency, and ethical business
practices. The fraud not only impacted investors and employees
but also tarnished the reputation of India's thriving IT sector.
 However, the crisis prompted key reforms in the Companies Act,
2013, aimed at preventing similar frauds in the future, such as
stricter auditing standards, enhanced board responsibilities, and
greater regulatory oversight.
 The intervention by Tech Mahindra, which acquired Satyam,
helped stabilize the company, protect jobs, and restore confidence
in India’s IT industry. Despite the devastating impact, the Satyam
case became a turning point in corporate regulation and
governance in India, leading to stronger safeguards and more
robust corporate structures to ensure long-term sustainability.