The document discusses the Satyam financial fraud case in India. It provides background on the increasing number of financial statement frauds globally and their large costs. It describes how Satyam's chairman confessed to a $1 billion fraud by inflating revenues, profits and cash balances. This led to investigations, management changes, and a bidding process to select a new strategic investor. The document examines the modus operandi of the fraud and lessons for stronger corporate governance, auditing, transparency and ethical values.

1. FINANCIAL STATEMENT FRAUD
& CORPORATE GOVERNANCE
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THE SATYAM CASE
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T.N.Manoharan
Dean’s Distinguished Visitor, USQ

2. CHALLENGING TIMES
• Number of financial statement frauds on increase
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• Frauds against organizations are increasing
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• Some recent frauds involve multiple individuals
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colluding to defraud
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• Many investors have lost confidence
• More interest in fraud than ever before ‐now a
course on many university campuses
• Forensic accounting and auditing/ IT Systems Audit
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‐ Security/Controls/risks assessment
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3. Fraud is a Costly Proposition
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• Fraud Losses Reduce • Fraud Robs Income
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Net Income $ for $
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• If Profit Margin is 10%,
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Revenues $100 100%
Expenses 90 90%
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Revenues Must
Net Income $ 10 10%
Increase by 10 times Fraud 1
Losses to Recover Effect Remaining $ 9
on Net Income To restore income to $10, need
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– Losses……. $1 Million $10 more dollars of revenue to
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generate $1 more dollar of
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– Revenue….$1 Billion
income.

4. Impact of Fraud ‐Two Examples
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• General Motors • Bank
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– $100 Million Fraud
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– $436 Million Fraud
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– Profit Margin = 10% – Profit Margin = 10 %
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– $4.36 Billion in Revenues – $1 Billion in Revenues
Needed Needed
– At $20,000 per Car, – At $100 per year per
218,000 Cars Checking Account, 10
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Million New Accounts
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5. Fraud leads to Stock value crash
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• Financial statement fraud causes a decrease in
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market value of stock of approximately 300 to
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1,000 times the amount of the fraud.
_ $2 billion drop in
$7 million fraud
stock value
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6. Types of Fraud
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• Fraudulent Financial
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The common element
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Statements is deceit or trickery!
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• Employee Fraud
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• Vendor Fraud
• Customer Fraud
• Investment Scams
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• Bankruptcy Frauds
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• Miscellaneous

7. Financial Statement Frauds
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Satyam
First in India
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_ • Madoff
• Many others
(Cendant,
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Lincoln Savings, ESM, Anicom,
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Waste Management,
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Sunbeam, etc.)

8. Satyam Case‐ Basic Facts
• Fourth largest Indian IT Company listed in India & US
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• Over US $ 2 billion annual revenue size Co
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Established in mid 1980s, grown to 53,000 employees;
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• 600 plus customers including 185 fortune 500 Cos
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• Operations in 66 countries across the globe
• Financial advisor: Merrill Lynch (now Bank of America)
• Auditors: Price Water House Coopers
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• Bankers: Citi bank; BNP Paribas, HSBC & HDFC
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9. Confession – January 7th , 2009
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10. Chairman Raju’s Version
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• Inflated billing to customers
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• Non‐existent cash & bank balances $ I bn
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• Overstated Debtors $ 100 million
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• Operating margin shown high at 24% in Q2 (Sept 2008)
as against 3% real profit margin
• Such manipulation done in earlier years( 6 yrs‐$ 1.2
Bn)
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• Increased costs to justify higher level of operations
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• Attempt to merge Son’s Company ‘Maytas’ with huge
land Bank to bridge the gap failed

11. Why Confession ?
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• Recession drained the liquidity to run the show
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• Out standings were piling up
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• Since listed in US, SEC rigors would take over
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• Unmanageable gap between actual and book profit
• “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 a take‐over,
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thereby exposing the gap. It was like riding a tiger, not
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knowing how to get off without being eaten”.

12. Consequences of confession
• Investors‐ Panicked as Stock plummeted &
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Class action suits filed in US
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• Employees‐ stranded in many ways‐ morally, financially,
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legally and socially
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• Customers‐ shocked and worried about the project
continuity, confidentiality and cost over run
• Bankers ‐ concerned about recovery of financial and non‐
financial exposure and recalled facilities
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• Government‐ worried about image of the Nation & IT
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Sector affecting faith to invest or to do business

13. Action after Confession
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• Chairman, MD and CEO, CFO, Chief accountant and two
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of his associates arrested
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• Two Partners of PW (Audit Firm) were also arrested
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• Options before Government: i. Allow market forces to
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decide; ii. Announce bail out plan; iii. Think out of the box
• Government dissolved existing Board &
nominated 6 of us
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• Gave us complete freedom
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14. Prioritized Plan of Action
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Restore cash flow to secure Financial Stability
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•
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• Customer retention and infuse confidence to continue
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• Employee motivation and Management restructure
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• Legal advisors‐ In India and USA appointed
• Internal audit entrusted to an external firm
• Management Consultants and Board Advisors appointed
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• Forensic investigation to facilitate restatement of
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accounts initiated
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15. SWOT Analysis
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WEAKNESS
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• World class infrastructure • Tainted image
• Leadership and talent pool • Class action suits
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• Premium Customers • Silos in management structure
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• Low debts • Third party claims
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OPPORTUNITIES
• Investigating agencies • Pledge assets to raise funds from
• Media Banks
• Revenue Department • Persuade clients to pay up
• New tendering-BGs, Solvency • Create charge on receivables to
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certificate, Audited statements continue existing debts
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For about 15 weeks there was no owner in control

16. Modus Operandi
• Held weekly Board meetings‐TN was
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stationed at Satyam round the clock
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• Raised $135 million from 2 banks to
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supplement internal accruals
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• Cleared all statutory dues; Paid global salary including
insurance and taxes; Released payments to other dues
• Kept meeting, talking to and reaching out to employees
and customers
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• Video clippings; teleconference calls; personal meetings;
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E‐News letter & Weekly Bulletin

17. Two critical options
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• Continue to run the Business, clean up and restate the
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accounts, re‐audit, enable valuation, due‐diligence and
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offer for take over; or
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• Immediately identify a strategic investor who will infuse
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capital and take over control & management
• Chose the second option after due deliberation
• Investment Bankers appointed, Bidding process set in
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motion with Former Chief Justice of India as Observer
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• SEBI and CLB were moved for appropriate relaxations

18. Bidding Process
• Press release on 9th March inviting registration
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• RFP was sent to 141 registered‐ only 10 submitted EOI
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• Out of 10, 7 met the criteria and were sent documents
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for execution
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• 5 submitted documents but later 2 withdrew for want
of internal approvals leaving 3 in race
• Thus, WL Ross; L&T and Tech Mahindra competed
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• Information had to be given to Bidders to facilitate
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quoting price per share for preferential allotment
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19. Strategic Investor Selection
• Virtual and Physical data room created
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& access provided
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• Site inspection of 2 main campuses arranged
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• Management presentation made for each bidder
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exclusively show casing the facts and potentials;
• Conference call slots were given to clarify on legal
matters and again on financials separately
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• One meeting between each of the bidders and the
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Government nominated board on 3rd April
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• Technical and Financial bids received on 13th April and
highest bidder Tech Mahindra selected

20. Prime Minister’s Appreciation
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21. Factors that contribute to Fraud
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• Greed‐Ethical values given a go by
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• Executive incentives
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• Stock market expectations
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• Nature of accounting rules
• Audit failures‐ Internal & External
• Aggressiveness of investment banks, commercial banks,
Rating agencies & investors
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• Weak Independent directors and Audit committee
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• Whistle blower policy not being effective

22. How did Satyam scam happen?
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• Ambitious growth drive
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• Audit failure‐ example., External confirmations of Bank
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balances not properly done
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• Deceptive reporting practices—lack of transparency
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• ESOPs issued to those who prepared fake bills
• Excessive interest in maintaining stock prices
• High risk deals that went sour
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• Above all, greed and lack of ethical values.
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23. R
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ROAD AHEAD
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24. Corporate Lessons to be learnt
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• Rotation of audit firm vs rotation of audit partner
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• Strengthening of Quality review (Peer review)
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• Joint Auditors to audit companies beyond a size
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• Internal audit of Financials by an external firm
with undiminished scope
• Composition of Board and quality & qualification
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of Independent Directors
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25. Corporate Lessons to be …
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• Audit Committee meetings‐adequacy of
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notice and adequacy of duration
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• Criteria for remuneration to Key Personnel
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• Effective ‘whistle blower policy’ in place
• Focus on ‘Intangibles’ & ‘Tangibles’ follow
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• Education on Ethical values
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26. Moral Lessons for recapitulation
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• Humility helps while Ego hurts
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• Think of a Rainy day, always
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• Distinguish between opportunities
and temptations
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• Build quality teams and enable succession
• Adapt with technology/knowledge changes but
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stay static on fundamentals
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• Listen to your head in complying with law and to
your heart in dealing with people

27. Moral Lessons for …
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• Many good things done get washed away in one
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bad conduct
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• To live beyond your age ‐ Love people and use
wealth
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• Ability may take you to the top
but it takes Character to stay there
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• Nothing is impossible, if attempted with nobility
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28. R
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