Satyam crashes with $1 billion cash hole

Satyam crashes with $1 billion cash hole

Summary: In a shock announcement this morning, Satyam, India's fourth largest outsourcing companies reported that B Ramalinga Raju, founder and chairman has resigned following an admission that there is an estimated $1 billion cash hole in the company's balance sheet. The company's shares crashed 77% in the aftermath.

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In a shock announcement this morning, Satyam, India's fourth largest outsourcing companies reported that B Ramalinga Raju, founder and chairman has resigned following an admission that there is an estimated $1 billion cash hole in the company's balance sheet. The company's shares crashed 77% in the aftermath. According to Finextra:

In his resignation letter to the board, Raju says that the firm's balance sheet, as of 30 September 2008, has a hole of around $1 billion. The sheet of Rs5361 crore includes "non-existent" cash and bank balances of Rs5040 crore.

Revenue for the second quarter was actually Rs2112 crore, not as stated Rs2700 crore. Operating margin was just three per cent of revenue, not the reported 24%.

The gap in the balance sheet "has arisen purely on account of inflated profits over a period of last several years".

Raju says a minor gap between actual operating profits and those reflected in the company's accounts grew over the years before reaching "unmanageable proportions".

The company's recent aborted move to buy the Maytas construction firms - partly owned by Raju and his family - was the last attempt to fill the "fictitious assets" with real ones.

"It was like riding a tiger, not knowing how to get off without being eaten," says Raju.

Apart from regulatory issues, this latest scandal raises the specter of a possible customer mass exodus. In a conversation I had with compliance colleague Francine McKenna, she said: "Satyam already had credibility problems with the World Bank. If things are really as bad as they are claiming then the company's long term future is in serious doubt." Both of us are shocked at the scale of the problem because it seems inconceivable that PricewaterhouseCoopers, the company's auditors did not know what was going on.

In many of these kinds of fraud where assets are overstated, management hides the fact through inventories, receivables or, as was the case at Enron, through special purpose vehicles that have the effect of moving debt off the company's books. Cash balances are much harder to manipulate without deliberate deception. That usually involves the actions of high ranking employees who are able to persuade the auditors to rely on their word, rather than undertaking direct enquiries with the company's bankers.

At this early stage, it is not possible to say exactly how Satyam engineered the fraud but regardless, it draws into question the general viability of the Indian outsourcing market.

In a twist to the story, Satyam was also stripped of its Golden Peacock corporate governance award:

P N Bhagwati, chairman of Golden Peacock Awards, has sent a letter to G Jayaraman, global head- corp goverance and company secretary of Satyam, saying that the award "was obtained as a result of non-disclosure of material facts" and therefore, "Satyam does not deserve it."

And in a close of year blog post, Brian Sommer felt the company needed putting out of its misery. Today, that has become an imperative.

Topics: Outsourcing, Banking, CXO, Enterprise Software, Legal

Dennis Howlett

About Dennis Howlett

Dennis Howlett is a 40 year veteran in enterprise IT, working with companies large and small across many industries. He endeavors to inform buyers in a no-nonsense manner and spares no vendor that comes under his microscope.

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10 comments
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  • Are we living in a great world or what?

    Sure is an exciting time to be alive.

    Governments invading other countries just for sport.

    Folks walking off with billions of dollars of other people's money.

    Corporations raping customers...each other...governments, etc.

    Sure make one proud to be a member of the human race. :-(
    IT_Guy_z
    • LOL

      Well said... ]:)
      Linux User 147560
  • RE: Satyam crashes with $1 billion cash hole

    The shares of the Satyam computers in the Indian Stock market went down from $3.76 (Rs 177) to mind-boggling $0.70 (Rs 33).

    http://gadgetmix.com/index/?p=2434
    kdskamal
  • Another good example of mis-management

    This is the reason CEO's should be held criminally responsible for their actions. They cost people who have done nothing wrong, their jobs, banks money, goverments money, hardships for anyone they do business with and if that wasnt enough, they do irreputible harm to their customers.
    Been_Done_Before
    • customers

      Of course when you say "customers" you mean victims.
      TheMostToysWins
  • RE: Satyam crashes with $1 billion cash hole

    Goodnight scrappy Indian outsourcing firm!
    goingbust
  • Will code HTML for food....

    Bring the work back. These coding sweatshops are nothing more than a personal ATM for these criminals.
    TheMostToysWins
  • Anyone think that just Satyam was doing this?

    People think that post-Enron, post-Worldcom/MCI, that somehow corporations started behaving and that Sarbanes-Oxley cured everything. Nothing could be further from the truth.

    I've spent years sitting across the dinner table with Silicon Valley CFOs who boast about their off-balance sheet tricks and maneuvers. They take pride in their ability to hide things from the VC auditors and the stockholders, and how they can manipulate almost anything to get the least taxes and the most bonuses for the execs.

    And there are whole accounting and legal firms out here devoted to "wealth management" or how to shelter the ill-gotten gains if the house of cards collapses on the perpetrators. Sure there are a couple of people going to jail for token sentences, but when they get out, they still have hundreds of millions of dollars sitting offshore just waiting for them. Not a bad payoff!

    And of course, 98% never even get slap on the wrist in the first place ...
    terry flores
  • RE: Satyam crashes with $1 billion cash hole

    Unfortunately in this world we have created its very easy to steal and be forgiven by the people. Integrity? Gone with that first 6 figure bonus these crooks begin to collect. Look at Wall Street or your 401K managers. Market goes up they make money, market goes down they make money. We are all screwed.
    Williepr
  • RE: Satyam crashes with $1 billion cash hole

    We live in a world where we cannot be happy with what we have and falsly believe that if we stop getting more, more, more that we are failures; that the whole world will come crashing down upon us. This is sadly the human condition and a lesson that should (but won't) be learned by all.
    blundergod2112