Satyam: India Inc.'s rude wake-up call

In Sanskrit, Satyam means truth. But what we saw today was quite the contrary. We saw how one lie led to another, resulting in one of the biggest scams in corporate India, and coming at probably the worst of times.

Satyam chairman B. Ramalinga Raju's admission to financial fraud in a letter to the board of directors of Satyam Computer Services could serve a huge blow to India Inc. It shows the extent to which a company can go in order to camouflage its poor financial performance.

In his letter, Raju said: "It was like riding a tiger, not knowing how to get off without being eaten." The numbers were forged so often (year after year) that the promoters had no idea how to fill up the gap. Therefore, in mid-December, Raju decided to acquire real-estate and infrastructure companies--Maytas Properties and Maytas Infra-–managed and controlled by his sons. This was Raju's last attempt to fill up the gap between the "fictitious" assets and the real ones. The deal faced a backlash from investors and within a few hours it was called off. Had the deal gone through, it would have consumed all the "surplus" (read: fictitious) cash on the books of Satyam.

"The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years," Raju said in the letter. "It had attained unmanageable propositions as the size of the company operations grew significantly."

One lie in the balance sheet led to another. As a result, the company's balance sheet (as of Sep. 30, 2008) carried an inflated and non-existent cash and bank balances of US$1.04 billion or INR50.4 billion (as against US$1.1 billion or INR53.6 billion reflected in the books). In other words, the cash and bank balances with Satyam Computer Services were only to the tune of US$66 million (INR3.21 billion) but was reported to be of the order of US$1.1 billion. Similarly, it posted a (non-existent) accrued interest of US$78 million (INR3.78 billion). The company also understated liability and overstated debtors position.

It might be a bold admission on part of the Satyam CEO, but Raju's letter to the board was likely also filled with lies. For instance, Raju said: "None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company are unaware of the real situation as against the books of accounts." How is this possible? How can a US$1.4 billion (INR70 billion) fraud take place without the knowledge of the senior executives of the company?

The Satyam saga also raises questions about the sanctity of the auditors. The auditors for Satyam Computer, PricewaterhouseCoopers (PwC), have so far not commented on the issue. It's difficult to believe that auditors were not aware of financial irregularities of such magnitude. This is what PwC said in a statement: "We have learnt of the disclosure made by the chairman of Satyam Computer Services and are currently examining the contents of the statement. We are not commenting further on this subject due to issues of client confidentiality."

I'm guessing the coming days will likely unearth more lies and frauds in the Satyam case.

Did Satyam's woes begin with the onset of the financial meltdown in the U.S.? As head of India's fourth largest IT company, Raju perhaps felt "compelled" to show that Satyam was faring well (especially in light of the fact that the promoter family had only an 8 percent stake in the company). If that, indeed, is true, my other bigger worry is that there may be more IT companies and BPO (business process outsourcing) companies out there who could be concocting financials to portray the hunky-dory India growth story. God forbid, if that is the case, then we could have a meltdown of a different order back here in India.

It's high time the Indian regulatory authorities punished the guilty and enforced much stricter corporate governance norms in the country. Because it's not just the future of 53,000 Satyam employees, but the future of millions of employees working in India's IT and BPO companies (as also India Inc's reputation) that is at stake.