To: Mr. Humphrey, The Financial Officer
From: Vanessa Taylor
Date: 9th Nov 2018
Re: SATYAM FINANCIAL SCANDAL
In 2009 Satyam, an Indian IT services and back-office accounting company was involved in an accounting scandal because it inflated its revenue by about 1.5 billion dollars (Ahmad et al. 2009). This was one of the major accounting scandals globally.
Allegedly, Satyam’s chairman had given wrong information about revenues, cash balances and margins. The company was sued for breaching trust, fraud, giving false information, and conspiracy.
Illustration of correct and incorrect reporting
The founders and former members conducted an accounting scam worth about $1.1 billion. The chairman had manipulated the firm’s earnings, exaggerating the earnings by about $1 billion which is 94% of the cash. The company’s balance sheet included about $1.2 billion in non-existent cash and bank balances, accrued interests and misstatements. In 2008’s second quarter, revenues had been inflated by $9.6 million to about $442 million, and the real operating margins were 1/10 lower than the stated $106 million (Ramachadran, 2009).
Satyam’s fixed account documents were also forgeries, diverting $205 million at the rate of $3.3 million per month over many years. The company also held more than 400 Benami land transactions for thousands of acres. The company had also documented that it had 53,000 employees while they were just 40,000.
Fabricated balance sheet
items actual reported difference
cash and bank balances 321 5361 5040
accrued interests on bank fixed deposits 0 376.5 376.5
understated liability 1230 0 -1230
overstated debtors 2161 2651 490
total 0 0 7136
revenues 2112 2700 588
operating profits 61 649 588
promoters shareholder pattern
Impact of the incorrect reporting
A lot happened after the scandal. Awards that had been won by Satyam were stripped off.
Investors lost about $2.2 billion which they had bought as shares in the company; the company’s shares fell to 11.50 rupees the lowest they had ever been since 1998. As a result of this scandal, India’s government tightened policies on financial reporting to curb a similar incident to happen. The public lost its trust in the company, and also the chairman and other founders were arrested. An Indian accounting firm was fined $7.5 million as a result of this fraud (Norris, 2011).
Reasoning by managers to support the incorrect reporting
Raju, the company’s manager, said that they had reported the earnings incorrectly to avoid being taken over, since as promoters they had a small percentage of equity which would have led to a takeover due to poor performance by the company (Ramachadran, 2009). He also said that they had started as a marginal gap between the actual operating profit and what had been recorded in the accounts book which continued to increase as the years went by. The proportions, therefore, became unmanageable since the company’s operations continued to grow significantly.
Potential private motivations for managers to adopt incorrect reporting
The managers were motivated by the fact that they wanted to impress the investors so that they would trust the company and invest in it. The managers had succeeded in this temporarily, since investors came but at the end of the scandal, the company lost much money since the shares had dropped drastically in value. Another motivation is that the managers wanted to meet the analysts’ estimates so that they would continue operating; they had achieved this until the scandal was discovered.