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Are you sure it is Rs 1 billion (= Rs 100 crores) of Ramalinga Raju's personal money or it is actually Rs 10 billion (Rs 1000 crores) that you are referring to in the point No.2 to the question Question 1. you have posed and answered as ? You had already mentioned that it is Rs 1000 crores in a paragraph earlier in the article.
Similarly should it it be Rs 3.7 billion (= Rs 373 crore) of accrued interest that you have mentioned in the same point.
It would be interesting to see your comment on Satyam's balance sheet which shows an increase of short term investments from US $ 27.6 million as on Sep 2007 to US $ 717 million as on Sep 2008. On the other hand long term investments have decreased from US $ 845 million in Sep 2007 to US $ 3.9 million in Sep 2008. (Refer Google Finance data on Satyam's financials)
Regards
A Rajasekaran
Welcome to my blog.
Thanks for correcting me. I lost count of the numbers :)
It is Rs.10 billion and Rs.50 billion (for the bank balance overstatement)
Thanks again. I have corrected the error and republished it.
I will be sure looking into their balance sheet and will make a follow-up post, provided I have stuff to write after all the electronic media finishes off Satyam once for all.
Welcome to my blog.
I have corrected the error. Thanks for pointing out. I forgot to separate the two questions which I had put as one. :)
Lets just talk about the last quarter OPM....how can it be as low as 61 crores (3% margins) ?
Lets just talk about the last quarter OPM….how can it be as low as 61 crores (3% margins) ?
Its hard to believe that SATYAM has such low profits.
I think there is something amiss here.
Also I was talking to a head of a Infra major and he mentioned that MAYTAS is a huge fraud as well. The HYD Rail project bidding..check out the winner and the one who came next.. (l2-l1 is 46K Crore). There is something amiss there as well.
Also do correct my understanding on the inflated bank balances..
If someone pleadges his personal shares (not sell it in the market) with the bank and route the cash into Bank Accounts and show that Bank Balance to auditors during Fiscal Year end or what so ever..
So the Investment firms / Banks, that gave Loan to Raju based on the Satyam's Share Value, wouldn't they analysed the actual share value / worth of the company before giving the Loan...Were they dumb enough to take such a huge risk
Regards
;)
Thank you.
Keep coming here.
When they had a easy route to cook profits, why would they have bothered to make real profits? So, as long as the show went, they ran it. They wanted to dig a hole and bury this thru the Maytas deal but it was not possible. People actually thought they were siphoning out Rs.80 billion from the Company by that deal. Now we know that there was nothing to siphon.
The deal was off and they needed a grand canyon like hole to bury the fraud.
After reading through your detailed description of what might have transpired, I can understand the extent of conspiracy.
However, I would like to mention couple of my observations based on your message.
- Presuming what you mentioned really happened, Mr. Raju is no novice to expect that he can collect the 10 billion of unaccounted liability by just reiterating time again about this. As I am aware, no court of law would permit him to take the 10 billion from Satyam. I am sure he must have consulted his team of confidants before confessing.
- If the fact that the pledged money really was in the account of Satyam, then I think they have salvaged the damage to some extent.
- As for the auditors, I am looking forward to the comments from PWC.
Great insight, would come back again as the issue unfolds.
To Sams point, you are right in that the law/Court would not allow him to take back his money...
but that he must have already thought of ways to get it back (post confession too unlike of
Maytas deal way prior to confession)
Again, if anyone questions: Why he wud even put his money into the company?
That should be obviously to keep up his JOB!
Probably he knew he couldn't continue as CEO if the Board gets to know about companies real performance... & so it was a choice between as CEO - manipulating and still earning salary
or just getting fired by the Board which will also hit headlines.
If we were given a choice to lose salary for 1 yr but with guaranteed position & respect for life there after or to just resign the job today! we are in for life... we might want to lose salary for 1 yr rite, if we can just live that year with the exisiting savings and esply if we also know we cannot anyway get a job outside if we resign rite...
It is the same way Raju has thought about. As better to lose a part of own money than to lose
the position and respect! However, circumstances lead him to worser situation than he thought
he could manage and ultimately he had to confess.
And now of course the shares are worth very little. So sad.
I said to myself after the Madoff gig,'There's never just one cockroach...'
I hope he didnt borrow from the mob. At least one banker seems to be in hiding.
“With Russian oligarchs as clients,” said a Viennese banker who knew Mrs. Kohn and her husband socially, “she might have reason to be afraid.”
http://www.nytimes.com/2009/01/07/business/07me...
Thanks,
Tejas
Good one! But I believe there is something wrong with PWC. There is no explanation from their side so far.Are you leaning towards your audit community? :)
It is BS if some one says that only Raju is the culprit and the auditors/accountants are innocent. The biggest crooks are the auditors/accountants in this case (No offence!).
>> They wanted to dig a hole and bury this thru the Maytas deal but it was not possible. >>
If Maytas was a do or die deal why did he not go ahead despite shareholder protests. He had the unanimous board approval. Did he require any other approval at the AGM, which he feared he would not get ?
It is also hard to believe their profits were so low in reality. There is not much to distinguish Satyam from the others when it comes to capabilities, service offerings, number of H1B visas on hand etc.
I also think a really nosey and persistent auditor might have been the immediate provocation for the fax.
A minor discussion point however. You mention that fake book entries may be detected as follows:
(The auditors can detect this by matching the dates of invoices, shipment advises, gate passes, delivery receipts., physical stock verification reports, debtors confirmation etc.)
The Software services industry the world over does not have shipment advices, gate passes, delivery receipts, physical stock verification reports etc in the traditional manner.. This is due to the nature of the business.
Sarbanes Oxley Act (SOX) imposes a commonly acceptable accounting standard on companies in response to various scandals of recent years. It is however necessary to remember that SOX was inspired by collapse of or by accounting scandals in product companies and not service companies.
In addition, protection of public interest and preservation of investor confidence rests on the twin pillars of SOX and a framework for Corporate Governance. One without the other is not sufficient. Compliance audit for distributed companies - clearly Satyam has presence in 5 continents - is necessarily more complex. It is not clear altogether how the quarterly audits were conducted.
This episode, regrettable as it is, is fraught with implications for the accounting profession in India.
Just thought of looking more of Satyam Scam and found yours a perfect fit to diagonise the reality. I think this confession came after a pressure on him, otherwise, there is no one in the world to worry about the numbers. But in news papers, different numbers are pubished as to the fraud, some one simply says Rs.7000 crores and Raju said about Rs.5000+ crores. What is correct will be known only after a review & certification of past accounts by some genuine auditors.
One thing I find curious is that in his letter to the board he had mentioned multiple times that he alone is responsible and no one else. So from reading your detailed explanation it looks like there has to be a huge amount of paper work and manual clerical (but meticulous) work that had to be done to keep it all in sync and I cannot imagine a CEO with all his other busy duties scooping down to do all that work. Or are other people's work covered ? Or maybe they were all kept in the dark in such a way that no one got enough grudge work to put the pieces together ?
Welcome to my blog.
My pleasure. Kindly try to give a link back.
Welcome to my blog.
It is impossible for the CEO to carry out all this alone. It is 100% sure that more people are involved. Mr. Raju has tried to save his colleagues who acted on his instructions. But, all of them will be soon in the media glare.
Welcome to my blog.
The fraud mentioned as Rs.5,000 crore (Rs.50 Billion) only talks about the "cash hole". The total fraud is Rs.7000 crore (Rs.70 billion). I think the confession came now because he is no longer able to manage the hole, especially after the Maytas fiasco. He might have also been stripped of some independence within the company (even before resignation) in the day to day management toward the end of December 2008 quarter.
With the December 2008 quarter already passed and the hole not plugged, he might have know the inevitable and so came out in the open. So the pressure is because he could not find ways to do the cover-up for this quarter.
Welcome to my blog.
Mr. Raju, no doubt, had the approval of Board for the Maytas deal, but for winning at the AGM he needed shareholder support. He was not having the majority stake to influence the outcome at the AGM. So, when the institutions and funds holding stakes didn't like the deal, he had to backtrack.
I do not think he would have been prompted by the Auditors for the confession. It should be due his inability to plug the hole for December 2008 quarter, most likely due to reduced freedom at Satyam. (http://www.sathyamurthy.com/wp-admin/edit-comme...)
Very nice posting. Though assumptions prevailing through out the posting, I could see that those all are logical and will only be surprised if anything changes from the actual reports.
I think you have gone the NDTV way of presentation. May be unintentional but real simple one.
I have been thinking on different lines in the same matter but I see somewhere at the end we meet.
From a CA angle your assumption might fall more inline with the actuals while mine can be seen in more practical real life way.
I will post my thoughts too shortly here.
Thanks for the good simple post once again.
Vijayasarathy R
Excellent analysis. But this could have been easily detected if the auditors just followed normal auditing practices. Confirmation of balances which auditors send directly to the crs and drs could have easily nailed the scam. But its still too early to comment as the we don't have the full details as of now.
Thank you for this analysis.
Best Wishes
Welcome to my blog and thanks for the feedback.
I am sure Auditors would have gone through the process of asking and taking confirmations from the bankers directly. However, when you deal with banks abroad, it is quite possible that cooked confirmations were provided. We will know only after PWC comes out with their side of the story. But, they are in a precarious position right now.
Welcome to my blog and thanks.
First of all, congrats on a great post. I just wanted to add a couple of thoughts which you could include maybe in this or the next post.
On the matter of the low profit margins, I think the one thing that explains this is a statement in the letter
where Raju claimed that they were running operations to look like their inflated revenues, and therefore the profit margins were even more squeezed. So for example, in a sense, they had people and costs associated with that 2700 cr revenue figure, which if it had been true, would have 24% profit. In reality, they have much less revenue (2112 cr) and the costs associated with the 2700 crores. Thats why the margin is 3% for this quarter. If the costs are rationalized, they should be comparable margins with anyone else.
Second - a very interesting article in the Economic Times (Page 10 in Delhi edition) has an explanation for the need for fraud. Mr. Raju and his family (personally and through Maytas) are apparently one of India's largest landowners. This land was all bought by the the shares used as collateral and therefore needed to be propped up. Since all major land deals in India are politically rigged, Mr. Raju needed to pay huge bribes. He had been paying bribes in form of land and not cash, but now since the elections are approaching, the politicians began demanding cash. This 'confession' has probably come under pressure to stop a major investigation of all this land-political tieup.
You are welcome to add your 2 cents using this comment window :-)
It is always nice to hear new view points.
//The Software services industry the world over does not have shipment advices, gate passes, delivery receipts, physical stock verification reports etc in the traditional manner.. This is due to the nature of the business.//
I agree with you. I attempted to give an idea of how auditors generally verify a sale transaction.
In the case of software services, it would follow the path of, verifying the contract, billing terms (for BPO it should be transaction based charged also taking into account degree of complexity handled), billing cycle, customer acceptance of the invoice raised, logs of the transaction tracking software, serial number of the customer query handled (think of the last reply you received from a bank or insurance company for a online query made by you, didn't it have a serial number?) etc.
I will be writing my next post on Corporate Governance. That is a phrase widely used right now.
Welcome to my blog. Interesting thoughts.
One cannot also rule out possibilities of inflated expenses and siphoning of money out!
Question is, can CFO, other signing authorities and auditors get away from this fraud. Its quite unbelievable that Mr. Raju singularly did all this without anyone's help.
Though I'm not an expert in accounting, do the basics - dont these guys do interim internal checks - dont department heads own up to the revenues generated - how is that no one noticed this gap all these yrs.
As I keep saying to my self, its utterly unbelievable that insiders wouldnt have noticed these gaps.
Well - technicality apart, these guys are answerable to all the stakeholders and their peers in the industry to have brought this shame.
Most companies will also have authority limits for transactions that can be approved in the system.
It is possible that, for these bogus transactions, these control chains might have been not followed or the internal checks circumvented.
to my mind this scam could not have happened as 'one person'. visible or not, there would have been at least two or more people in this, because like a don in a hindi movie, he certainly would have sidekicks who knew what/how/when it happened. with accounting procedures itself systematized, the fraud was probably played out in full public view all along by a set of people. Brazen it out, as they say. for all you know, the end game could well have been done to shield another half a dozen unnamed people. for jeopardising 50,000 careers at the drop of a hat [letter!], and at least 200,000 dependent people's lives, there can be no qualms in the harshest legal action.
Welcome to my blog.
Yes it appears like an action film. Telugu one ;-)
As I was watching the Press Con given by Mr. Mynampati and party, I could see that most of your analysis is matching. I will be surprised if the final chit writes off Mr. Mynampati not being in the party by M. Raju.
For no valid reasons Mr. Mynampati was discarding all the questions from the reporters with simple answers like "We have to ascertain the actual", "I do not know where Raju is", "We have not spoken to him after the mail from him (This is more surprising since no Board would have ignored the letter and not bothered to speak to the accused)", "It is too early to comment on PWC". He is very much there in the list. We surely will not be getting the actual list of group as it may include few local and central politicians.
There are rumours that the employees of Satyam asking/protesting to sack Mr. Mynampati from the Organisation.
They are not even able to give a clear number of the employees as on date. In a company like Satyam there must definitely be a HRMS system which can provide the as on date details. Why the so-called talented team has not taken it before getting into Press Conference?
Coming to my view on the topic:
By the time Mr. Raju decided to go public, he would have easily secured few thousands of crores under his belly. If he had not come public, as you said the matter would have come out automatically and Mr. Raju will be accused and imprisoned. To avoid such bad scenarios and knowing how Indian Law and Indian Corporate Governance deals and the time frame it takes, he can always resort for some other arrangement.
Having secured huge amount of money, Mr. Raju should have thought of entering into a different line of business under some of his (Not known to public) relations. His interest towards construction business should be noted here.
Also the current market trend will go on for another 6 to 8 months. In this case to manage and run operations as it is would have been a herculean task considering there is no actual Cash/Bank balance left.
From one of the replies I notice that there might be a retrenchment of 10000 employees. Mr. Raju and team has not taken money but also made these employees life hanging. Thinking off the cost of living and job market today, I wish and pray good for all the Satyam employees to get a better & faster change.
Ultimately whether this was done for self benefits or retaining the company's position at the top, the main factor involved here is Vitamin "M (Money)".
I found the body language of Mr. Mynampati positive. However, I did find two contradictions in his address.
1. He first said the CFO is not coming to the office citing personal reasons but will be in next week. After few minutes, he said CFO has resigned and his resignation was not yet accepted by the Board. When a reporter countered him with this contradiction, he first camouflaged his reply and when another reporter once again repeated it, he cleverly wriggled out saying the CFO also has to serve a notice period and that is why he had stated that CFO will come to work next week. :)
2. He feigned ignorance about the net margins of Satyam, despite being a director on the Board. It is ok if that was said about the rest of the "leadership team". But, he cannot say that he doesn't know about the net margins, especially when he should be completely aware of the net margins from the group he was heading besides being a director. In addition, for a big company like Satyam, I would imagine that an exhaustive presentation will be made to the Board as part of a MIS dosier which should certainly include a complete drill down of margins from various business segments both at gross and at net levels. So, he could have spotted if his division margins were shown lower or higher than what he expected to see.
3. He told in the press conference that he received the mail from Mr. Raju and within 30 minutes of getting that letter all the leadership team had a conference call with Mr. Raju. Why did not ask Mr. Raju more details about the contents of the letter in that conference call? Why did not he ask Mr. Raju where he can contact Mr. Raju in case of need? How he fathomed that he might not any more need the inputs of Mr. Raju to run the business within 24 hours of Mr. Raju quitting? Why he said he didn't know the whereabouts of Mr. Raju when he had had a conference call with Mr. Raju and most likely asked Mr. Raju how to get in touch him in case of need?
Welcome to my blog.
Are you by any chance brother in law of Mr. T P Anand?
Regards
R Sathyamurthy
There is a whistle blower website, www.SYSTEMSURGERY.com
One can also ensure action by using the RTI Act effectively; I have referred one such action tip in my post http://www.sathyamurthy.com/2009/01/10/satyam-c...
In the same post there is a reference to my post on the RTI Act.
Nice explanation.
There is a possibility that govt might bail out SATYAM by providing Monetary Help ?
How far is this justified ?
There are so many people on Satyam payroll, who are getting Lavish salary. Is it justified to give the poor man's Tax money for the employees, who spend most of it on Luxury life, pubs, bars etc.....
Sunil
Welcome to my blog.
Yes. I also think that it is not right for the government to give financial package to Satyam. If that is so, what is the relief given to all those companies that run their business honestly?
Its a nice analysis . But here what do i think is that there must some involvement by the third parties for sure. Which helped the Company in recording bogus sales and then later Raju would have paid them by illegal route then takes back the sane from them as sales collections. But here the biggest questions lies is how come he has shown 3300 crore as a FD..There must some mystery behind this and I am sure going forward we will know these details...