Why he couldn’t have acted alone
According to the Financial Times, former Satyam chairman Raju may have been quite busy in the deception he orchestrated. In this article, we learn that:
The former chairman of Satyam Computer Services inflated the size of the outsourcing company’s workforce by nearly one-quarter and siphoned off the wages of the fake employees, Indian authorities have claimed.
The article further states:
The public prosecutor of southern Andhra Pradesh state, Gangaraj Prasad, told the Financial Times: “The number of employees at Satyam Computer stands at 40,000 and not 53,000 as claimed by the company.”
Mr Prasad alleged the former Satyam founder had used the fictitious names to divert Rs200m ($4m) a month out of the company’s accounts “for his personal wealth”, but where exactly the money was invested was not yet known.
The BBC reported many of the same facts.
Wachovia Capital Markets, LLC reported in their Jan. 23, 2009 IT/BPO Services Weekly Report that:
Fictitious Headcount Investigation. SAY’s board disagreed with a government prosecutors' claim that the company made salary payments to 13,000 fictitious employees. It is conducting an independent investigation.
Ramalinda Raju, in his resignation letter, claimed that others did not know of the fraud and that he didn’t take any money out of the company. Apparently, the public prosecutor disagrees with this assessment.
Let’s look at these two points in turn.
Could others have known about this?
If your firm had 13,000 phantom employees (or approximately an additional 32.5% increase over the real firm headcount), would you or others noticed? Maybe. If you worked in your firm’s HR or Finance group, you certainly should have. Why? Who picked up all those paychecks? If these phantom employees used something like direct deposit, then why did all those direct deposits go to the same bank account?
I can’t imagine any one person, let alone the CEO of firm with a $2 billion annual revenue run rate, could create 13,000 non-existent employees. It’s a huge number of fictitious people to create and a super-human effort to keep all of these employee records from getting outdated or discovered.
Think about it:
- In a service firm, employees must get frequent performance reviews. Who would have documented all of these and put them in the appropriate files?
- Who hired and setup all 13,000 bogus employees? Who created all those fake transcripts, job applications and other documentation for their personnel files?
- Who setup all of the payroll and benefits elections for these 13,000 phantom employees?
- Who scheduled the training and orientation sessions these 13,000 employees should have attended?
- Who completed the time reports for these 13,000 non-existent people every single pay period?
I have real trouble thinking one man could do all of this. I can’t see how one person could do this unaided and do so while still completing other business and Chairman responsibilities. I just don’t think one person could do it.
Some might argue that:
Raju didn’t need to do all that. He just changed some figures before they were presented to analysts and investors. If that were the case, then:
- the HR Director would have seen that the headcount totals the company was reporting were inconsistent with what was being reported to third parties. A difference of this amount and for such a long time could not be explained
- the Training Director would see that the numbers of people taking training didn’t match the headcount or that large numbers of people were never being trained.
- The Treasurer would notice that the payroll of 13,000 people was going into one person’s bank account
The prosecutor on this case must likely conclude the following for now:
- the fraud either was known by and abetted by others in the company or it should have been detected years ago by executives
- the fraud likely required the assistance of others to remain in force. It was simply too big to be completed by one person
- the auditors apparently did not verify bank balances with the banks and they also might have forgotten to verify whether 32.5% of the workers even really existed
- if Raju pocketed the payroll of 13,000 phantom employees, did he pay the income and/or other taxes owed on these sums?
As before, there are a lot of particulars in the case that either don't make sense or require further investigation. Either way, this isn't a case study in best practice for service firms.
UPDATE Jan. 30, 2009
Wachovia Capital Markets, LLC reported today that:
Fictitious Headcount Investigation Appears Unfounded. The
board said internal and external checks have shown that there is
no inflation of employee numbers as alleged earlier by a
government prosecutors' claim that the company made salary
payments to 13,000 fictitious employees.
This may be correct as it would be tough to invent that many non-existent employees without others realizing it or abetting in the deception.