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(A)Sathyam Fiasco: Ramalinga Raju is More Efficient than the Lakshar-e-Taiba

Discussion in 'Wednesdays with Varalotti' started by varalotti, Jan 8, 2009.

  1. varalotti

    varalotti IL Hall of Fame

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    Few of us could afford to remain insensitive to the Sathyam Fiasco which shook the Indian corporate world yesterday.

    And the grand fiasco made Your Varalotti break his three-year vow not to write about anything connected with stocks, finance, markets and accounts in IL.

    In a fiasco like this we have more at stake than merely money and what has come down is not just the share prices.
    In a few seconds from now I am going to talk about 5000 crores, 7000 crores, fudging the figures, messing up with the accounts and the total failure of the system.


    But before doing that my heart bleeds for the 53000 plus employees of Sathyam, more than 99.9% of them are absolutely innocent of this unprecedented scam.

    Sathyam might not be closed down, that is for sure. Some other company might take over. Such take-over would be nothing more than share-exchange ratios and company law approvals for the investors.

    But for the employees …

    first, it might mean a drastic relocation ‘You are now in our San Jose, California. Effective 20<sup>th</sup> January you will report for duty at our Tahiti facility’

    The techie might be a woman whose kids are in day-care and whose husband is working for Google, Calif. How will she relocate? And if she decides not to go and loses her job, how the family is going to fund the mortgage and the accumulated credit-card debts?

    Second, there is likely to be a pay-reduction. ‘We are fitting you in to our company’s Assistant Manager grade with all the attendant perks and benefits’ might be words in bold letters in the appointment order.

    But the information in fine-print would talk about withdrawal of benefits efffectively bringing down the compensation by a whopping 40%. How can a man with a family consisting of a loving wife and lovely kids manage to live with that kind of a cut?

    And finally the most unkindest blow – ‘We are sorry we can’t accommodate you for the time being. We however assure you that should a need arise in future… blah blah blah..’

    The minds of those fifty thousand plus “techies” will be boiling with one question – why should a crook’s action destroy our lives when we have been sincerely working for 14 hours a day all along?

    To many analysts these employees are mere numbers to be manipulated. For me they are members, and especially in this case, young fathers, mothers, sons and daughters who have suddenly lost the radar in their ships.

    Direct all your prayers to these people during the next few days. They are the only set of people in this event who deserve our sympathy and our prayers.

    What happened, Varalotti?


     
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  2. varalotti

    varalotti IL Hall of Fame

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    What happened in Bombay on 26/11 happened on 7/1/2009 – this time at the economical level.
    <u1:p></u1:p>
    In fact in terms of the carnage Sathyam Fiasco is at least as bad as the Mumbai terrorists attack.

    In fact one financial daily went to the extent of saying that Ramalinga Raju is more efficient than Pakistan’s terrorist outfit Lakshar-e-Taiba.

    By a series of bomb blasts and shoot-outs the terrorists wanted to damage the confidence of international investors in India. Well, Sathyam’s Chief Ramalinga Raju did it more efficiently and without any bloodshed.
    <u1:p></u1:p>
    I will spare you all the professional jargon and the most unfriendly reporting language behind which we accountants always hide in times of crisis.
    <u1:p></u1:p>
    Raju wrote a letter to his Board of Directors which was published yesterday. An analyst called the letter ‘a sucide note’. In that note Raju confesses that the cash and bank balances of Sathyam are overstated – not by a few thousands or even a few lakhs, not even a couple of crores but a mind-boggling Rs.5040 crores – a little more than US $ 1 billion.

    And the accrued interest and debtors (money receivable from the company’s customers) had been overstated by a cool Rs.2000 crores, about US $ 450 millions.

    What is this ‘overstatement?’ It’s just a polite euphemism for the words: ‘We lied. We exaggerated. When there was nothing in the bank we told the world that we had 5000 crores.’
    <u1:p></u1:p>
    And the worst part of the suicide note is that this is not something that Raju did day before yesterday which he is telling us today. This has been happening for ‘years’. They have just professionalised and institutionalised lying and debauchery in a scale unheard of in the past.
    <u1:p></u1:p>
    ‘Agreed, Raju is a fraud. But what about the auditors who signed the balance sheet?’ That is the next question. There are only four big audit firms in the world called the Big Four.

    There used to be five big firms earlier called the Big Five. But when the Enron debacle surfaced in the US one of the audit firms (Arthur and Anderson) folded leaving the field to the four remaining big firms. Sathyam is audited by no less than PWC PricewaterhouseCoopers.

    (Readers of A Love Story would recall that after all Vidya, the heroine worked for PWC . I had been to PWC's gigantic Singapore office and was impressed by their size then.)
    <u1:p></u1:p>
    I will now tell you why I think that the auditors, PWC, should not be shown any mercy. I have been in this field for more than 25 years. One of the most basic auditing techniques followed when a company has money in a bank, is to call for bank statements and confirmation of balances.

    When the figures reported by the company are different from the figures appearing in the bank statements, auditors insist on “reconciling” the balances. Bank reconciliation is something a CA apprentice does in his first year of apprenticeship. (I did that)

    <u1:p></u1:p>Some audit firms are even more cautious in this critical aspect. For example the auditors of Infosys M/s BSR & Co write to the banks directly and get the statements and certificates directly from them. So what prevented PWC from doing that?
     
    Last edited: Jan 10, 2009
  3. varalotti

    varalotti IL Hall of Fame

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    This, dear ladies, is not just the proverbial ‘million dollar question’ but literally a billion dollar question today.

    Some analysts think that it is too early to say that the audit firm colluded with Raju. But that the firm is guilty of gross professional negligence seems to be the consensus.

    <?xml:namespace prefix = u1 /><u1:p></u1:p>


    Long, long ago there was an English case in which an auditor was charge-sheeted for a fraud committed by the company which he could not detect.


    The auditor’s lawyer did his job well which made the Judge to comment, ‘An auditor is a watch dog and not a bloodhound.’ Meaning that he could not be held responsible for all the frauds committed by the company management.

    When the same English case was quoted by another auditor's lawyer in India when Palai Central bank went into liquidation some forty years ago, the Judge pooh-poohed the words of the English judge.
    <u1:p></u1:p>

    ‘Agreed that the auditor is only a watch dog and not a blood hound. But even the tamest of watch dogs could not be permitted to have connivance with the thief.’
    <u1:p></u1:p>

    What happened in Sathyam now shows that PWC was after all a crook's lap-dog and not the watch dog for the real stakeholders, the shareholders, the employees and the Government.
    <u1:p></u1:p>

    Sathyam’s and Raju’s credentials are impressive. Facts about Sathyam will sit nicely on a multi-colour brochure. Dubbed as “AP’s pride” by the political leaders, it’s what a fast growing software company ought to be.
    <u1:p></u1:p>

    Business Line lists Sathyam’s achievements.
    <u1:p></u1:p>
    It is amongst the top four IT exporters from India, it is a $2-billion blue-chip company listed on the New York Stock Exchange, it operates in 66 countries worldwide and counts 185 of the Fortune 500 companies among its clients, it employs 53,000 people, it is audited by a Big Four audit firm, PricewaterhouseCoopers; it was awarded the Golden Peacock Award for Excellence in Corporate Governance in 2008 by the World Council for Corporate Governance and, finally, Mr Raju himself was chosen the Ernst & Young Entrepreneur of the Year 2007 by a jury headed by no less than Mr K.V. Kamath, Managing Director, ICICI.

    <u1:p></u1:p>If there is a scam like this in such a company what about the other 'ordinary mortals' of the IT industry?

    What will be the fall-out? Confidence in the Indian IT companies will be shaken. But as many of the software clients are from the US, it is likely that this scam may be disregarded by the US market with an understanding ‘been there, done that’ smile.

    Of course Americans are the pioneers in accounting scams. Enron and Worldcom have today become basic accounting lessons all over the world.
    <u1:p></u1:p>

    The average Indian investor would be shaken. Many Indian investors now slowly coming into the sharemarket may make a hasty retreat and go to conventional land, gold and other “safe, scam-free” avenues. It may take a while before we can clean the blood from the Indian market.
    <u1:p></u1:p>

    Global Trust Bank promoted by Ramesh Gelli another young, ambitious man like Ramalinga Raju was caught in a loan scam involving Khetan Parekh got merged with Oriental Bank of Commerce.

    Now very few people remember Global Trust Bank. In the same way Sathyam might be sliced up into smaller units and absorbed by other software giants.

    Ten years down the line the then young techies might not even know that a company by this name existed.
    <u1:p></u1:p>

    Serious action might be taken against PWC. Already companies have started disassociating with the audit firm. The Government might constitute some high level committee which may increase the paper work for small firms like ours.

    There might be a hundred page Auditing Standard on how to verify bank balances which may become part of the prescribed syllabus in the CA examinations. Compliance costs might go up.
    <u1:p></u1:p>

    I want our software guys and girls to learn one fundamental lesson from this debacle as well as from the recent US meltdown. Please do not consider your entire salary as your disposable income.

    Only forty percent of it is your real income. The rest is a kind of windfall which you get because of the unusual demand for software services.

    That 60% might vanish any time. (And if you happen to work for a company like Sathyam the entire 100% might vanish). So try to define your life-style with 40% of your income while investing the rest in gold, bank deposits or reliable mutual funds (oh, not in the shares of your company please.. that is putting all the eggs as well as the chicken in the same basket).

    If you have this spending/investing policy the US meltdown or the Sathyam fiasco cannot hurt you much.
    <u1:p></u1:p>
    <u1:p></u1:p>I will sign off this post with a heavy heart paraphrasing the words of the late lamented jurist Palkhivala,
    <u1:p></u1:p>

    “The problem with us is that we are overly concerned with the value without bothering about the values.”
    <u1:p></u1:p>
     
    Last edited: Jan 8, 2009
  4. sudhavnarasimhan

    sudhavnarasimhan Silver IL'ite

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    Dear Sridhar,

    Good that you wrote about this grand scale fiasco! my heart too goes to the employees and their families and their dreams! I know of a couple of them working for Sathyam.....poor souls, dont know what hit them!

    And this side of it about the auditors not having been Watchdogs , is so disheartening!
    What were the directors planning....they must have known such large scale frauds can never be hidden ...they must have known one day it will ahve this climax! HOW come they never thought of their own families.....IS Money and Wealth and short term success so IMPORTANT! And has so much value?
    Your last line was apt!!...."Concerned with the value without bothering about the values.”
     
  5. Gowri66

    Gowri66 Gold IL'ite

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    Very pathetic situation of the employees, their mental turmoil...... and the consequences.

    Meaning of "Satyam" is lost !!

    Was reading this article on the same :
    Satyam may layoff 10,000: Headhunters - Economy and Politics - livemint.com

    Palkiwala's words - “The problem with us is that we are overly concerned with the value without bothering about the values.” - Simply apt
     
  6. Kamla

    Kamla IL Hall of Fame

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    Dear Sridhar,

    Thank you for this write up.

    I try not to dwell on the financial state of the world today. Being retired and trying to keep up with a certain standard of living is hard enough. Such financial depressions leave a a real bad taste in the mouth. For people like us, there is no chance to make up when the invested moneys are lost.

    In the US, everyone is really concerned about their jobs, their savings and their 401s. So many big stores and companies are closing down and freezing the job markets.

    I read Kamalji's take on this yesterday and gave my fb and I am tempted to repeat the same words and concerns here too. The rich will somehow have their little pockets of security. What about the millions of middle classes and like you say, what about the hard working people who have given their sweat and invested in houses and shares. My heart does ache for them.

    We say money is not everything. But without money, nothing much moves today.

    Your views on this was even more interesting as you gave your insight from the other side being a CA. It is shocking to note how the very big financial companies have remained silent knowing the big fraud that was being carried out in the name of excellency.

    I worry more for my children and the young generation growing up with dreams and hopes.

    L, Kamla
     
  7. brindhak

    brindhak Gold IL'ite

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    Dear Sridhar,

    Yesterday this was the topic of my home, Its really an diaster and a aching issue that too for the present scenario.. India is already admist of many finacial crisis, layoff's this had poured oil to the burning problems.....

    Oh My God! what will these 53plus innocent employees do...??????????? Where are we goingg???????????????


    Raju has said about the OVER statement... ,Why can't this OS be the fact that happened , and he would have hided all the money ,Now conveying public that we gave exxaturated accounts....but really we dont have money.....

    Hope i have asked my Ques' correctly..:hide:
     
    Last edited: Jan 9, 2009
  8. Mythraeyi

    Mythraeyi Silver IL'ite

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    Dear Sridhar,

    An apt account of the happenings at Satyam and with the perspective of a CA. It is really frustrating when a few people manage to game the system and get away with defrauding thousands of others. My heart does go out to the employees and families - the ground has been pulled out beneath them and they suddenly find themselves adrift for no fault of theirs.
    Day by day these scandals are appaling. The CEO's and concerned executives should be thrown into jail and not allowed to see the light of day. I completely agree that PWC and other senior executives should be held responsible. It is not possible for just one person to orchestrate a fraud of this scale.
    My prayers and wishes are with the employees and their families (a few IL members too may have been affected.... )
     
  9. AbhiSing

    AbhiSing Gold IL'ite

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    Dear Sridhar Sir

    First accept my thanks for breaking the news in simple layman terms for people like me, who skip the numbers and accountancy/economy jargons while reading news papers. :hide:

    And my heart goes with the employees. As Singapore is dependent on Global economy the hit is harder here. I see many of the Small and Medium Enterprises going down every week and each time I see the "Final Closing Down Sale" board, my heart goes with the employees there.

    I want our software guys and girls to learn one fundamental lesson from this debacle as well as from the recent US meltdown. Please do not consider your entire salary as your disposable income.
    Only forty percent of it is your real income. The rest is a kind of windfall which you get because of the unusual demand for software services.
    That 60% might vanish any time.


    Thanks for the above and how true your words are!
     
  10. Oviya

    Oviya Silver IL'ite

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    My Dear Sripa,

    An excellent article, focusing on the real issues behind the drama.

    Many of our friends from AP were expecting a Satyam fiasco for a long time. But, the actual magnitude must have shocked even Raju's worst enemy.

    I remember a discussion in one of the 'parties' that we attended a couple of years ago. Our friends from AP were saying so many things about Raju. How he got his deals and favours from the Govt., from his clients and the officials. Obviously those comments did not put him on a high pedestal. But, at the same time, they were all saying that the Satyam stock was a good buy, because of the industry, employees, its money and political clout etc.

    DH asked them, how any body who denounced Raju for his easy virtues, could trust his numbers and suggest others to buy his company. No convincing answers came. And they also felt that someday the company would be exposed. So, I think, for most people it is not the act that is a surprise but the magnitude of the losses that has stolen the ground under the company's feet. And that too in a supposedly highly profitable industry.

    A Buffett's line (often quoted by my DH), " A company that chooses accounting appearance over economic substance will have little of either", is so prophetic. Once again.

    Very sad. Very sad. One man's act of keeping-up-with-the-joneses is costing a nation and its citizens - directly and indirectly - name, fame and enormous fortune.

    It was a suicide note, alright. But Raju was a Suicide Bomber. He took down many with himself.


    Love,
    Your Dear DD.
     
    Last edited: Jan 9, 2009

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