Satyam Scam: Know about India's Biggest Accounting Fraud
Created on 09 Apr 2020
Wraps up in 4 Min
Read by 45.6k people
Updated on 27 Aug 2022
“A lie keeps growing and growing, until it is clear”, Pinocchio. Every time we use lie as an instrument to win our way towards our goal, we fail to comprehend how it will hurt us in the long run. The Satyam fraud case is no exception to the quote. It unveiled the potholes that existed in the corporate governance of our country. The great stock market scandal which is known as the Indian version of Enron shook the entire country in 2009.
The then founders of Satyam were found guilty of committing fraud worth 7000 crores. They fooled the government, markets and customers by cooking up numbers in their financial statements. The Satyam scam shed light upon various errors that sustained in the Indian legal system.
But how did it all start? How were they able to commit fraud of such magnitude? Who was involved? And what was the result? Find out all the details of the great scam below.
The Satyam Scam: the beginning of the great fall
Satyam computer services ltd was started in 1987 at Hyderabad by the Raju brothers, Rama Raju and Ramalinga Raju. The company was quite successful. Hence, they went forward to get it listed. The company got listed in the Bombay stock exchange in 1991. At that time the shares of Satyam ltd were oversubscribed by 17 times. The company proved to be a master in its field and bagged multiple awards. Ramalinga Raju became the chairman in 2006 and got the award for the Ernest and Youngest Entrepreneur in 2007. Soon their annual revenue touched 1 billion and by the end of 2008, it crossed 2 billion. The company spread its wings to 20+ countries and the business bloomed day by day. Or, so it was believed.
Tensions started when the brothers decided to merge with the company called Matyas. Matyas was held and managed by Raju's family. The merger of the two companies gave rise to various legal issues leaving Raju brothers in trouble. Suddenly Raju resigned his position as a chairman and released a confession letter of 5 pages. In it, he admitted committing a fraud of 7000 crores.
Why and how did he do that?
The Raju brothers conspired such a huge scam to increase their revenue fictitiously. An increase in revenue projected a tremendous increase in profits. This attracted a lot of investors which in turn made the share price reach new heights. The Satyam brothers, who were the founders and promoters of Satyam companies used this opportunity and sold their holdings at a much higher price. They took a profit of 1200 crores through the sale.
The brothers did this by adjusting and modifying the books and bank statements to act in their favor. Most companies make use of ERP system for accounting. But the Raju brothers used their strength and developed their ERP system for accounting purposes. This system, unlike its counterparts, had numerous loopholes. Hence, the insertion of fictitious invoices and fictitious bank statements became a child’s play for the brothers. The projected fake bank statements held more money than the actual one. They simply converted this money into a fixed deposit account. The value of such fixed deposits was roughly around 5000 crores.
The PWC who were the auditors of the Satyam companies failed in their job terribly. They did not verify the invoices or bank statements. Physical verification wasn’t conducted as well. Nearly 7,561 fake bills were created and the auditors couldn’t spot it for about 7-8 years.
The board of directors demanded to get those FD’s invested in some profitable avenues. That is when the brothers decided to invest it in Matyas. However, the board did not like the decision. This gave rise to a lot of problems which made the share prices fall drastically. The company was subjected to answer numerous questions. The pressure started building up. Unable to find a new escape plan the brothers decided to confess the truth.
Government’s reaction to it
“It was like riding a tiger without knowing how to get down without being eaten”, Raju said in one of his confession letters. The CBI took charge of the case and started the investigation. The Raju brothers and the auditors were sentenced to prison and were charged a huge sum as a penalty. The company was taken over by Tech Mahindra. Following the scam, the Government and SEBI took various steps to tighten the grip on such perpetrators in the future. They brought several new regulations under the Companies Act of 2013. SEBI amended the "clause 49". Now companies are obliged to change their auditors every 10 years. Several safeguards and protective measures are brought into the picture.
India learned a lot from the Satyam fraud case. Indian laws are still developing. A fraud like that has a little probability to take place again. Now the big stock market scam is nothing but a story of what not to do.
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