How Did Satyam Get Away with It?

How Did Satyam Fool The Auditors?

One would think that with the number of business frauds, Ponzi schemes and other financial deceptions exposed over the last decade that auditors would have a more skeptical and cautious attitude.

The Satyam (SAY) case is particularly perplexing when considering one of the major fraud aspects of the case. Satyam reported cash balances of approximately $1.11 billion when in fact they had 94% less, or only around $66.6 million.

What makes this fraudulent reporting of cash balances so strange is how the auditors could possibly miss over a billion dollars. Verifying cash balances is a routine step in the audit process. In addition, routine "topside" analytical procedures are usually employed to verify that a large number on the balance sheet makes sense.

For example, if a company reports a cash balance of $1 billion dollars, does that cash balance look reasonable compared to the interest income reported? A quick check on what rate of interest the company was earning should have resulted in determining if the interest income the company reported from its cash holdings was reasonable. Perhaps Satyam fraudulently inflated the income earned on their phantom cash as well, in which case this procedure may not have led to suspicion. A routine financial audit is not conducted with the intention of discovering management fraud.

Verifying cash balances, however, is an entirely different matter. Cash balances are easily verified by sending a balance confirmation request directly to the banking institutions in which the cash is held. Cash confirmations are a simple and routine audit procedure. A company holding over $1 billion in cash and conducting business worldwide would have accounts with many different banks. The odds of having someone at many different banks intercept and falsify a bank confirmation is highly unlikely; so how did the auditors miss $1 billion?

The most plausible explanation is that the auditors did not comply with standard audit procedures. Once the bank confirmations are prepared by the auditors, procedure requires that they be taken directly to the postal service by the auditors. Instead, I suspect that a very cooperative and friendly staff at Satyam offered to take care of mailing the bank confirmations, thereby saving the auditor the extra effort of independently mailing the confirms. This breakdown in a routine audit procedure most likely resulted in the bank confirms never being mailed to the banks. The confirmations were retained and fraudulently completed by Satyam, and then mailed back to the unsuspecting auditor. The doctored confirmations examined by the auditors matched what the company said they had in cash and everyone was satisfied.

Result: simple audit rule violated and huge fraud goes undetected.

Disclosure: no positions

Comments

[User 335775:]

you looks like have no idea what happening to satyam. This ramalingaraju. had used the money earned by satyam (remember if satyam did not earn then its top competitors also most probably would not have earned such profits at same time) was diverted to buy huge chunks of real estate lands under the cover of another company floated by same ramalingaraju. This another company is also owned by same ramalingaraju. family and this company name is "maytas" (this name is reverse of "satyam"). This ramalingaraju had bought huge chunks of land (6500 acres) in different parts of the state and country during the real estte boom using satyam money, thinking that after selling the land immediately, he can put the profit in his own pocket and then backfill the satyam money in to its coffers. But due to the bust in real estate worldwide and in Hyderabad(satyam headquarters location), this guy could not backfill the money since no one bought the lands that maytas company held. Hence this guy coocked the books saying that I falsly bloated the earnings of satyam. At the end, this guy will get released after serving some namesake sentence in jail and then when he comes out, he will enjoy the real estate holdings of maytas company, since real estate will at one time or the other will have to rise again in future. This guys real estate holdings right now is valued at around 3 or 4 billion dollars (or rupees 15000 crores). Also, maytas company holds huge infrastructure and other projects in the state of Andhra Pradesh (this is te state for which Hyderabad is the capital and this capital is headquarters of Satyam). Search in google news for the strings satyam maytas hyderabad and you will get lot of news related to this scam.

Jan 12 11:58 AM

[pundu@opton...:]

As a chartered Accountant, I am appaled at the lax standards of the accounting firm that audited satyam.Many indian firms and their promoters have so many intercompany transactions that cannot be verified independently.In addition there is so much hero worship at companies like satyam. Their founders are so revered that no auditors will challenge them.Satyam has prostituted the sanskrit word satyam and put a permanent blot on Indian companys and Indian Accounting standards.The Indian government had better get its act together and sort this mess.

Jan 12 12:25 PM

[levin70:]

Our guess here at our firm is the same dupe employed over at Parmalat.

Create a ficticous bank statement using photoshop. Tell your auditors the bank is in a bank haven jurisdiction way out of the way from civilization (on one of the british or dutch virgin islands perhaps) and when the confirm is never returned, because there is no bank there, then give the auditors the photoshopped bank statement. Now see how easy that was.

And to your question on the interest income - they created a ficticous interest receivable for I believe i heard 72 million USD to cover that. The age of the receivable would have been a major tell, but they may have covered up, not sure.

Kind regards

Jan 12 05:35 PM

[Adukes:]

Ctrip International did the same thing as Satyam. They borrowed money from other companies or related companies. After the confirmation letter is sent. Money is returned!!!

Ctrip's accounts receivable, investment are all inflated!!!!

Jan 12 08:34 PM

[Adukes:]

Ctrip is facing the same situation! It has inflated revenue/earnings for several years! Ctrip balance sheet has a huge hole. Ctrip's cash, investments are all fictitous numbers!!!! Watch out! PricewaterhouseCoopers...

Jan 12 08:37 PM

[linax:]

Cautious word for all. The author is using an assumption in the last para and is not a fact.

A word for author:- A factual information provides more credibility then an assumption. Only purpose an assumption serves is to mislead the audience.

Jan 13 12:40 PM

[notsosmart:]

as an old geezer i seemto remember an american express situation that counted empty oil tanks as full.anybody remember that scam?

Jan 13 04:26 PM

[bozzy:]

spot on commentary - plus ça change - plus c'est la même chose. It really is so very easy to hoodwink those who try to earn a fee rather than discover fraud - the test of a reasonable auditor etc.

Tell me - does Satyam by any chance have an autocratic md?

Jan 13 06:57 PM

[Brian Fox, CPA:]

I've now worked with and spoken to hundreds of CPA firms and in almost all cases, firms are failing to perform the confirmation process correctly. We used to think that "Controlling" the confirmation process as SAS 67 and ISA 505 require meant that we needed to put the confirmations in the blue mailboxes ourselves and that the responses must come back to our offices and not the client's. In truth, we lost control of the confirmation process when we relied on and took the address of where to send the confirmations from either (1) the client or material in the client's posession, or (2) last year's workpapers where at some point someone simply asked the client for the mailing address/fax number/email for where to send the confirmation or took that information off of client provided material. The client's laughed at us as we trodded down to the blue mailbox to mail the confirmation because the client, not the auditor, was in full control of the confirmation process. Some firms think that receiving an unopened bank statement provides some form of authenticity to the statement. That assertion is false. A client can simply mail themselves the fake bank statement and give the auditor an unopened statement to fool the auditor.

I would submit, that the audit standards are actually well written and what is needed is not more standards, but instead auditors need to understand how confirmation fraud happens and update their confirmation processes to limit the risk of confirmation fraud. If auditors would actually validate where they are sending the confirmations and authenticate the authorization and identity of the person who responded to the confirmation, or use a service like Confirmation.com which does that for them, then we as a profession can reduce our exposure to frauds involving fake confirmations. Otherwise frauds involving fake confirmations - like Parmalat, Satyam, Ahold, Take-Two Interactive, Just-for-Feet, CF Foods, ZZZZ Best and others - will continue to happen.

Brian Fox, CPA
confirmation.com

May 19 10:53 AM