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CA. Amit Daga (Finance Controller CA. CS. CFA. CIFRS. M.COM. )     08 January 2009

Letter of Raju (To Satyam Board, SEBI & SE)

Dear Board Members,

It is with deep regret and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The Balance Sheet carries as of September 30, 2008,
a) Inflated (non-existent) cash and bank balances of
Rs 5,040 crore (as against Rs 5,361 crore reflected in the books);
b) An accrued interest of Rs 376 crore, which is non-existent
c) An understated liability of Rs 1,230 crore on account of funds arranged by me;
d) An overstated debtors' position of Rs 490 crore (as against Rs 2,651 reflected in the books);

2. For the September quarter(Q2) we reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore(24 per cent of revenue) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone.

The gap in the balance sheet has arisen purely on account of inflated profits over several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of the company operations grew significantly (annualised revenue run rate of Rs 11,276 crore in the September quarter, 2008, and official reserves of Rs 8,392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify a higher level of operations thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in the takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas' investors were convinced that this is a good divestment opportunity and a strategic fit. One Satyam's problem was solved, it was hoped that Maytas' payments can be delayed. But that was not to be. What followed in the last several days is common knowledge.

I would like the board to know:


  1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years - excepting for a small proportion declared and sold for philanthropic purposes.
  2. That in the last two years a net amount of Rs 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (statement enclosed only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged shares by the lenders on account of margin triggers.
  3. That neither me nor the managing director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results.
  4. 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, such as, Ram Mynampati, Subu D, T R Anand, Keshab Panda, Virender Agarwal, A S Murthy, Hari T, S V Krishnan, Vijay Prasad, Manish Mehta, Murli V, Shriram Papani, Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or managing directors' immediate or extended family members has any idea about these issues.

Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps:

  1. A task force has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam: Subu D, T.R. Anand, Keshab Panda and Virendra Agarwal, representing business functions, and A S Murthy, Hari T and Murali V representing support functions. I suggest that Ram Mynampati be made the chairman of this Task Force to immediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board.
  2. Merrill Lynch can be entrusted with the task of quickly exploring some merger opportunities.
  3. You may have a 'restatement of accounts' prepared by the auditors in light of the facts that I have placed before you.

I have promoted and have been associated with Satyam for well over 20 years now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent leadership and competency base at all levels. I sincerely apologise to all Satyamites and stakeholders, who have made Satyam a special organisation, for the current situation. I am confident they will stand by the company in this hour of crisis.

In light of the above, I fervently appeal to the board to hold together to take some important steps. TR Prasad is well placed to mobilise a support from the government at this crucial time.

With the hope that members of the Task Force and the financial advisor, Merrill Lynch (now Bank of America), will stand by the company at this crucial hour, I am marking copies of the statement to them as well.

Under the circumstances, I am tendering the resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible.

I am now prepared to subject myself to the laws of the land and face the consequences thereof.

(B Ramalinga Raju)

Copies marked to:
1. Chairman SEBI
2. Stock Exchanges....

 1 Replies

shailesh agarwal

shailesh agarwal (professional accountant)     09 January 2009


 A lot has been happening in the previous few days. The SATYAM mayhem followed by the investors fury and coupled by the regulators outrage. I have been into the audit industry for close to 3 years now and can’t help but wonder what the auditors were doing (assuming they weren’t hand in glove with the CEO himself).

Let’s start the analysis with a prelim on the books of account and the role of the auditors. Every company has transactions. They buy, sell, trade, fund. All these transactions are to be recorded in the books of account to enable the management to arrive at the profits earned/loss suffered. With regard to this, all company’s books of accounts are required to be audited by Chartered Accountants. The role of the auditors is limited to reporting the “truth and fairness” of the Financial statements (summarized from the books of account). In other words, the auditors report, that the books of account significantly represent the transactions of the company and the financial statements are true and fair with respect to these transactions. Auditors are not responsible for unearthing a fraud.

Having said that, let us come to the case in question. Raju in his famous confession has highlighted four Major issues. (I use the word ‘major’ because I find it difficult to comprehend that those are the only discrepencies)

1. Rs. 5,040 crore inflated cash balance.

2. Fictitious accrued interest of Rs. 376 Crore.

3. Unaccounted liability (himself being the creditor) of Rs. 1,230 Crore.

4. Overstated debtors of Rs. 490 Crores.

He further goes on to state that in the September quarter itself the revenue was inflated by close to 540 Crores.

Lets see how the above could be affected…

Mr. Raju in his mail mentions, the same was due to a gap between the actual and the book profits which escalated over the years. Profits can be inflated by either showing revenue to be higher than it actually is, or by showing expenses lesser than they actually are. As Satyam has been showing increasing revenue on a consistent basis, it would be fair to assume that Mr. Raju resorted to the former method. Inflating revenue and showing higher revenue than the actual.

Revenue can be inflated in the books of account by way of the following:

1. Recording the succeeding year sales in the current financial year. The same paves the way to the recording of higher revenue in an accounting year. Of course the subsequent year will then show lower sales. But the same won’t happen if u follow what you did in the first year. Auditors, use sales cut off to see that the same is not done. By sales cut off, I mean the auditors verify that only the sales which pertain to the current financial year are accounted in that year. This can be done by verifying invoices and comparing the same with the status of the job work.

2. Passing fictitious sales entries in the books of account. In other words simply passing an entry of sale where there is no sale. In this case even the debtors get inflated. The same can be detected by auditors by reconciling the sales and debtor balances. Obtaining balance confirmations from the debtors (on a sample basis). Following up long outstanding debtors. All a piece of cake considering the amount in question.

3. Booking higher sales in a particular year and following it up by sales returns in the subsequent year. Satyam, being an IT industry, the same is ruled out. As service rendered and charged, cannot be returned back.

4. Deflating expenses. Booking lesser expenses in the books. I don’t think this is probable. As then Satyam would have long outstanding creditors nagging them for repayment of their balances.

Strictly speaking following the above procedures would result in a gap between the actual profits of the company and the profits as depicted in the books of account. The above entries in the books do not affect the Bank Balance in anyway but only results in long outstanding debtors. Which is tested by the auditors on a regular basis by way of an ageing analysis (you can google the term!)

What I think is Mr. Raju went a step ahead. To avoid the long outstanding debtors he transferred the debtor balance to cash and bank i.e. passing an entry for realization of cash from the debtors. The debtors come back to their original figure and cash and bank balance gets inflated by fictitious amounts.

Here is where I feel the auditors blundered. Every audit requires the auditors to obtain confirmations from the bank regarding the balance of the company with them. The same is to be taken by the auditors directly from the BANK and not through the client. Further, the kind of entry (transfer of debtors to bank) would result in a reconciling item in the BRS (Bank Reconciliation statement). A simple review of the BRS would reveal that everything is not alright.

Thus far things go great. Increase in revenue -- > Fictitious Debtors -- > Fictitious Bank Balance.

But here’s the catch. Satyam did not really have a revenue base as per the books. Which implies no real profits which further imples increasing costs but no correlated increase in revenue. So, what does Raju do?

He pledged his shares, to get funds, and pumped the same into the company to meet the growing costs. The funds, of course, were outside the books of account. And pertain to the unaccounted liability of Rs. 1230 Crores mentioned by Mr. Raju.

He Pledged shares worth (say for example) Rs. 5000 Crores (market value) and borrowed funds of Rs. 4000 Crores. Things went great till the stock markets rocked. And the rest, as they say, is history!

What lies ahead?

1. Role of auditors in the fraud. Were they active participants? Or mere onlookers. If found guilty, PWC could be debarred from practicing in India.

2. If they were mere onlookers to the whole thing. Their role as auditors, that of exercising due diligence in conducting an audit is liable to be scrutinized. If found liable, legal actions under the companies act and not to mention the wrath of ICAI. (PWC is already guilty of professional negligence in the conduct of the audit of Global Trust Bank. It failed to recognize the mountain of Non-performing assets imminent in the books! There is another case pending involving lovelock and lewis, an entity of PWC!)

As for Satyam ..

1. New management to take over from the existing one.

2. Merger seems the most likely option as the promoters are no longer the promoters. The shares pledged with the institutional investors, the investors can choose to continue the company or liquidate it. Not really known, I guess the picture will be clear only when the accounts are restated to the actual figures.




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