Satyam as a Case Study: The Numbers Were Too Consistent

The CEO of Satyam Computer Services Limited (SAY) has acknowledged that the accounting books for the entire company was a complete sham for several years. The tide has gone out and caught Satyam with its pants down. Actually, Satyam hasn’t been wearing any pants for many years.

Pre-market, the shares are down over 90% with bankruptcy certainly to follow.

Mr Raju admitted that the September quarter accounts for last year included a non-existent cash and bank balances of Rs50.40bn ($1bn), non-existent accrued interest of Rs3.76bn and other irregularities.

In the September quarter alone, the operating margin was shown as 24 per cent of revenue compared with an actual operating margin of 3 per cent, due to inflated revenue and profit figures. - FT.com

The full 4 and a half page letter he wrote is quite interesting to read. The full letter in pdf form is here.

Since I have been looking into accounting to better understand a company, I thought it would be interesting to see whether I could detect the fraud in the statements. Disappointingly, I couldn’t see much wrong with the numbers. Maybe it’s because I still have a lot to learn, but the numbers look real, the percentage differences between each item and the relation to each other over the years are very consistent. Maybe the clue was that it was TOO consistent.

What’s even more boggling is that the statements of cash flows seem to be clean as well. This obviously means that not only was the income inflated, but the cash numbers were massaged by a master masseur.

No wonder people are calling this India’s Enron. The auditing company surely must have been part of this or the CEO is truly a smart guy.

A final interesting point I want to bring up is that the CEO tried to cover up the fraud by chasing acquisitions in order to delay the payments of the acquired company. This now adds to why I dislike companies that seek to grow through acquisitions. So many things can be hidden and a good company can suddenly go from transparent to hazy (just like Bank of America (BAC)).

Satyam is certainly a company worth investigating further as a case study and one that will surely be a topic of many business classes in the future.

Disclosure : No position at time of writing.

Comments

[investor88:]

Incredible story. If only Satyam ceo could accept reality he would be better off.

Jan 08 08:41 AM

[MBA Student:]

There are some blatant question marks in the Satyam financials. From FY 07 to FY 08 the Cash Flow statement indicates an increase in cash of $138 Million US. However, the balance sheet shows cash increasing from FY07 to FY 08 by $1 Billion US. Where did the extra cash come from???

Jan 08 09:17 AM

[KFC007:]

Shows once again that Indians are not just the best software experts but also the best accountants though in this case the skills were used for fraud rather than genuine business

Jan 08 11:32 AM

[Jae Jun:]

I'm going to take a look at it and see what other question marks there are.
Thanks MBA Student.


On Jan 08 09:17 AM MBA Student wrote:

> There are some blatant question marks in the Satyam financials.
> From FY 07 to FY 08 the Cash Flow statement indicates an increase
> in cash of $138 Million US. However, the balance sheet shows cash
> increasing from FY07 to FY 08 by $1 Billion US. Where did the extra
> cash come from???

Jan 08 12:23 PM

[User 335985:]

Not familiar with IFRS rules, however, it looks like MBA student, you are combining Investment in bank deposits with Cash. They are separate on the balance sheet. However, on the cash flow statement, for FY07, it looks like they invested in bank deposits 745.6M yet showed zero on the balance sheet at year end. Then, magically, 895M in bank deposits shows up. This doesn't jump out as some elaborate kiting scheme, given the observation above, but just a flat out fraud due to a fictitious accounting entry.

Jan 12 04:31 PM