A special CBI court on Thursday sentenced B Ramalinga Raju, his two brothers and seven others to seven years in prison in the Satyam fraud case.
The court also imposed a fine of Rs 5 crore on Ramalinga Raju, the Satyam Computer Services Ltd's founder and former chairman, and his brother B Rama Raju and Rs 20-25 lakh each on the remaining accused.
HT presents a lowdown of the country's biggest-ever corporate accounting scandal .

What is the Satyam scam about?
It is about corporate governance and fraudulent auditing practices allegedly in connivance with auditors and chartered accountants. The company misrepresented its accounts both to its board, stock exchanges, regulators, investors and all other stakeholders.

Is this an accounting fraud, a market manipulation/fraud or both?
It is a fraud, which misled the market and other stakeholders by lying about the company’s financial health. Even basic facts such as revenues, operating profits, interest liabilities and cash balances were grossly inflated to show the company in good health.

Who is to blame here? The promoters?
The promoters are primary culprits, although it is almost impossible to misrepresent such facts without the connivance of the auditors and some executive board members. Independent directors, it seems, were kept in the dark about the actual books of accounts.

What about the auditors?
The role of external third party auditors, who were tasked to ensure that no financial bungling is undertaken to carry out promoters’ interest or hide facts, have also been brought to question.
Anatomy of a fraud

1. Maintaining records

· Raju maintained thorough details of the Satyam's accounts and minutes of meetings since 2002.

· Raju stored records of accounts for the latest year (2008-09) in a computer server called "My Home Hub."
2. Fake invoices and bills

· Details of accounts from 2002 till January 7, 2009 – the day Raju came out with his dramatic, five-page confession - were stored in two separate Internet Protocol (IP) addresses.
· Fake invoices and bills were created using software applications such as 'Ontime' that was used for calculating hours put in by an employee
· A secret programme was allegedly planted in the source code of the official invoice management system creating a user id 'Super User' with the power to hide or show the invoices in the system.
3. Web of companies

· A web of 356 investment companies was used to allegedly divert funds from Satyam.
· These companies had several transactions in the form of inter-corporate investments, advances and loans within and among them.
· One such company, with a paid up capital of Rs 5 lakh, had made an investment of Rs 90.25 crore and received unsecured loans of Rs 600 crore.
4. Why did he need the money

· The cash so raised was used to purchase several thousands of acres of land across Andhra Pradesh to ride a booming realty market.

· It presented a growing problem as facts had to be doctored to keep showing healthy profits for Satyam that was growing in size and scale.

· Every attempt made to eliminate the gap failed.

· As Raju put it, "it was like riding a tiger, not knowing how to get off without being eaten."

· Cashing out by selling Maytas Infrastructure and Maytas Properties to Satyam for an estimated Rs 7,800 crore was the last straw. The attempt failed and Raju made the stunning confessions three weeks later.
The Satyam scandal has shaken corporate India, and damaged its reputation with investors, domestic and foreign. It turns out that founder and CEO B. Ramalinga Raju invented $ 1 billion in cash, which never existed. How could the auditors miss this fraud?

Bernard Madoff relied on a classic Ponzi scheme, and the ability to hide from regulators. He could use a small, apparently renegade auditing firm, which had no reputational or ethical concerns, it seems. Madoff was called for suspicious reported actions and results, but the regulators chose to ignore these concerns. Madoff also benefited from operating in an industry where some degree of non-transparency is normal. Earlier, Enron used an incredibly elaborate scheme, with substantial off-balance sheet activities, to perpetrate its fraud. Its auditors bore some of the blame, and their firm also collapsed as a result.

The Satyam fraud is baffling because, unlike Madoff and Enron, it seems that it was so transparent it should have been spotted much earlier, before it grew to a point where it will likely bring down the firm. The auditors just have to be called to account, because checking on cash balances is both a simple and necessary part of their job. How could employees of one of the big four global accounting firms make such a mess of their assignment, year after year?

It’s true that the high profile board of directors and senior officers of the firm should also have smelled a rat. But in a large public corporation, where reputable auditors were certifying the financial statements, their laxness in monitoring might have been understandable. After all, Satyam’s performance (unlike Madoff’s) was not obviously “too good to be true” as measured by the benchmark of industry leaders. There is a lot of blame going around on poor corporate governance in India. In fact, though corporate governance in India is not great, the level of board inattention we saw here was not very different from most companies in the US.

Amazingly, one of Raju’s friends, who runs a non-profit funded by Raju, was quoted in the Wall Street Journal as blaming investors for the fraud, because of their short-termism and pressure for growth that they created for Raju. This is utter nonsense and one of the stupidest comments about this case. Investors, in fact, are the biggest victims, because they had no opportunity to independently verify the financials – they had to take the auditors’ word, and they were rational in having confidence in a publicly traded company with audited financial results.

The consequences of the Satyam scandal will depend partly on policy responses. The press is pointing out that many Indian companies could have similar hidden problems. If investors get suspicious, this could severely damage the corporate sector and the country’s chances of getting back to 9 percent growth. My guess is that Satyam itself will not survive. It already has liquidity problems. It has a large number of corporate customers, who are locked in to Satyam in the short run, but who will each be looking for an alternative: they cannot afford to rely on a firm that may not survive. The only exit strategy here is probably a buyout, which will allow a complete replacement of Satyam’s discredited senior management.

The government could play a role by facilitating some sort of acquisition of Satyam so that the company’s customers and service systems survive, but its failed financial systems and senior management are replaced. In fact, the latest news is that the government has superseded the interim management and will oversee constituting a new management and board of directors. The government’s main policy response should be to strengthen disclosure and monitoring requirements, especially making sure that auditing practice never again fails as blatantly and spectacularly as it did in this case.

Even though weak corporate governance is not the main culprit in the Satyam fiasco, the scandal is highlighting the poor state of India’s corporate governance, and provides a political opening to institute some reforms. Industry associations like the Confederation of Indian Industry should be proactive in this process, and work with the government in this reform process. Failing to strengthen corporate governance will hurt the entire economy. In particular, the structure and functioning of auditing committees is a central issue of concern. Here is a quote from the K.M. Birla Committee report of several years ago:

“9.3 A proper and well functioning system exists therefore, when the three main groups responsible for financial reporting – the board, the internal auditor and the outside auditors – form the three-legged stool that supports responsible financial disclosure and active and participatory oversight. The audit committee has an important role to play in this process, since the audit committee is a sub-group of the full board and hence the monitor of the process. Certainly, it is not the role of the audit committee to prepare financial statements or engage in the myriad of decisions relating to the preparation of those statements. The committee’s job is clearly one of oversight and monitoring and in carrying out this job it relies on senior financial management and the outside auditors. However it is important to ensure that the boards function efficiently for if the boards are dysfunctional, the audit committees will do no better. The Committee believes that the progressive standards of governance applicable to the full board should also be applicable to the audit committee.

9.4 The Committee therefore recommends that a qualified and independent audit committee should be set up by the board of a company. This would go a long way in enhancing the credibility of the financial disclosures of a company and promoting transparency.

This is a mandatory recommendation.”

Initial reports suggest that Satyam was violating such existing Indian guidelines, as well as those for US listed firms. This seems to be a common problem – the standards are already in place, but are just not being monitored or enforced. Negligence requires different policy responses than structural institutional deficiencies. Even though the external auditors are the primary defense against fraud, not instituting internal checks and balances as required by law only increases the probability of fraud.

It is impossible to know when a fish moving in water is drinking it’ Chanakya, prominent Indian economist, estimated to have lived from 340 BC to 293 BC raises the pertinent issues of ethics and governance in his book ‘Arthashastra’ (Science of material Gain).The issues are more relevant than ever before.

In January 2009, India’s own “Enron” unfolded in its backyard and shocked the conscience of the nation, particularly the corporate world. This is now popularly referred to as Satyam Scam. It is a saga of failed corporate governance and ethics in corporate world of India, with ramifications extending to the US. Finally the company (Satyam) has been sold out and acquired by Mahindra in an auction; its prestigious global clients cancelled their contract (Merrill Lynch, State Farm Insurance etc.) with Satyam; the Chairman and promoter B Ramalinga Raju, CFO Srinivas, the PwC auditors comprising in all 5 persons were put behind bars.

Raju’s concern was that poor performance would result in drop of market value of the firm thereby making it open to acquisition. The promoters (Raju & family) who held only a fraction of equity did not want to relinquish control. So in an alleged collusion with PwC (auditors) they continued to fudge accounts over several years. He overstated revenues and profits, overstated debtors’, understated liabilities and accrued interest was fictional, paid salaries to non-existent employees – 53,000 in place of actual 40,000. Once the scam broke, it was alleged that Raju & family had indulged in insider trading by selling shares before bringing the fraud to light. Raju rationalized his deeds by stating, “It was like riding a tiger, not knowing how to get off without being eaten.”

Finally, to wipe out all evidence of his misdeeds, Raju tried to acquire Maytas (opposite of Satyam, a company floated by the same promoter group) such that the fictitious assets may be filled with real ones. The proposal of acquisition fell through in the board. Raju’s last straw to whitewash all dark misdeeds sank, leaving him with no option but to come clean on manipulation of the books of account.

The consequences were serious for various stakeholders. Two days after his confession, Ramalinga Raju was arrested. The company stock prices collapsed at Bombay Stock Exchange and New York Stock Exchange. Both exchanges suspended trading. SEC (Securities and Exchange Commission) charged Satyam of committing fraud by overstating revenues by $1 billion and PW India (Subsidiary of PwC) had poor quality systems which were incapable of detecting frauds while giving clean chit to company accounts. Both the parties together have agreed to pay $ 17.5 million to settle the charges of fraud.

The episode raises several concerns regarding corporate governance and ethics. Business organizations are organs of society. Their role is to create value for all stakeholders in just and transparent manner and the laws of land are created to ensure this alignment. Yet cases such as Satyam raise serious questions regarding conflict of interest that arise when promoter families become executive directors; when audit firms which are tasked to uncover any wrong doing, end up certifying worthless accounts; when otherwise competent Independent Directors are unable to live up to the expectations of those investors whose interest they are mandated to represent.

Is introduction of increasingly watertight laws to control behavior of those who have discretionary authority the answer? How shall ethical governance of private businesses be ensured? How shall management of companies overcome the conflict of interest and truly fulfill their fiduciary responsibility towards the stockholder – once and for ever? These and many questions need urgent answers.

December 2009, India faced its biggest shakeup in the realm of corporate governance and ethics in the Satyam debacle. In the very same month, the curtains closed on Siemens AG’s bribery scandal with the corporation pleading guilty to the charges brought against it under forty counts of the US Foreign Corrupt Practices Act (FCPA) by settling at a record amount of $800 million towards fines, disgorgement of profits etc., Other than violation of books, records and internal control provisions, the charges of anti-bribery offences ranged across multiple continents, involving subsidiaries in Venezuela, Bangladesh and Iraq.

In cooperating with investigations in Germany and USA, overhauling its top leadership, centralising its compliance operations and revamping its anti-corruption controls and regime, Siemens compliance procedures are today a case study and role model. A review of the US Justice Departments Sentencing Memorandum is the best demonstration of mending ways from past mistakes, and how wrongs can be rigted by a change in mindset and behaviour.

Ultimately, as in the case of Satyam, the issue is not just of money but of business ethics. With opening of borders, liberalising global investments and trade have led to an incremental upswing in corrupt practices. Business development expenses is the password for a wide range of costs including kickbacks and bribes. From time to time, there have been international initiatives to devise anti-corruption strategies.

There are several major international conventions, the OECD Convention of December 1997 on Combating Bribery of Foreign Public Officials in International Business Transactions being the earliest. India is a signatory to the United Nations Convention Against Corruption (UCAC), established in 2005, but has yet to ratify it.

There are also various voluntary organisations such as Transparency International with powerful members, which have been party to anti-corruption instruments, and key tests, for distinguishing soft and hard corruption between bribes, gifts and consultancy payments, and acknowledging that in certain countries some of these are a must for basics. However, none of these have been effective, largely because they lack an effective enforcement mechanism.

Most conventions require each member nation to devise a code of conduct for public officials, complemented by preventive measures in order to ensure an ethical business environment in government offices and corporations, i.e. more of a watchdog attitude than that of a bloodhound.

India also has anti-corruption and anti-fraud laws, such as the Prevention of Corruption Act, the Prevention of Money Laundering Act and Rules thereunder, as well as various checks under the SEBI Prohibition of Fraudulent and Unfair Practices Regulations, 2003. Yet the Satyam fraud happened, and became public knowledge, not because of any stringent checks, but on the promoter’s confession.

The government stepped in and in exercise of its powers under the Companies Act, 1956 replaced the board with high profile independent professionals. Its another matter that even earlier there were reputed independent directors on the Board which did not prevent the downslide. The role of the new board was temporary and transitory, to facilitate a takeover in order that the company and its business could survive.

On date there is a new management and owner, but that does not obliterate the implications of the multicrore fraud being perpetrated, no less a serious white collar than bribes and kickbacks.

The Serious Fraud Investigation Office (SFIO) was recently set up under the Ministry of Corporate Affairs inter alia to look into cases of substantial involvement of public interest in terms of size of monetary misappropriation and persons affected. In implementation, this office appears to be a toothless tiger.

But to make the turnaround and reinforce faith in investors, both Indian and foreign, is in the hands of the acquirer. The acquirer has to put in place transparent mechanisms of business ethics and corporate governance on the lines of Siemens to proclaim to the world that Satyam has truly emerged from the fraud era to one which befits its name.

How did we get here?

I read couple of interesting posts in the net that the world is going through not just economic crisis but also ethical crisis with the mis-management of banks & financial institutions, Ponzi schemes, Corporate frauds, Bribes etc. This is very true. While we can have rules, compliance procedures, multiple levels of cross-checks etc, end of the day if someone wants to cheat he very well can find his way around the system. All our systems and processes are built on the basis of trust & ethics. When these fundamental qualities of an individual/organization fails the whole systems comes crashing down.

What happened in Satyam's case is precisely that. It was a breakdown of trust and ethics. Satyam was bound by SEC, GAAP, SOX regulations, they have independent third party audits etc and still managed to get away with their fraud that too for around 7+ yrs (This came from Raju's statements during enquiry). The current society is becoming more and more materialistic and power, greed, fame, market/peer pressure etc are taking over and some of the basic human values are forgotten. As history has shown us repeatedly those who don't operate in a moral and ethical manner will eventually fail as in the case of Satyam/Raju.

What can we do to prevent this?

In the near-term as an outcome from investigations/analysis Govt will come up with more rules, regulations and compliance procedures. These are more like patchwork and will address some of the outcomes of this fraud and add more overheads to the system (similar to SOX regulations in US where businesses spend millions/billions of $'s). However putting more regulations will not address the root-cause of this issue. This whole episode will keep repeating itself time and again till we reach a stage where our rules and regulations become more of an impediment to our businesses instead of enabling them and defining boundaries/acceptable norms. I'm not saying that we don't need rules & regulations just that rules and compliance alone can never be sufficient.

For us to fix this issue each of us need to look within and ask ourselves if we are doing the right thing. Just like there are rules & regulations for the society, each of us need to operate under the boundaries of personal ethics and values. We as a society need to encourage moral values like honesty, integrity, ethics etc and reward people who follow them. The value system needs to imbibed into the future generations through our education systems and by parents setting an example to their children. While this may sound very philosophical it is essential that we fix this as failure of personal ethics and values is root cause of this issue.

We as individuals need to take ownership and drive this change both in us and in our societies. Lets start with ourselves and kick-off this change one at a time!at