The CEO of Satyam Computer Services Limited (SAY) has acknowledged that the accounting books for the entire company was a complete sham for several years. The tide has gone out and caught Satyam with its pants down. Actually, Satyam hasn’t been wearing any pants for many years.
Pre-market, the shares are down over 90% with bankruptcy certainly to follow.
“Mr Raju admitted that the September quarter accounts for last year included a non-existent cash and bank balances of Rs50.40bn ($1bn), non-existent accrued interest of Rs3.76bn and other irregularities.
In the September quarter alone, the operating margin was shown as 24 per cent of revenue compared with an actual operating margin of 3 per cent, due to inflated revenue and profit figures.” - FT.com
The full 4 and a half page letter he wrote is quite interesting to read. The full letter in pdf form is here.
Since I have been looking into accounting to better understand a company, I thought it would be interesting to see whether I could detect the fraud in the statements. Disappointingly, I couldn’t see much wrong with the numbers. Maybe it’s because I still have a lot to learn, but the numbers look real, the % differences between each item and the relation to each other over the years are very consistent. Maybe the clue was that it was TOO consistent.
What’s even more boggling is that the statements of cash flows seems to be clean as well. This obviously means that not only was the income inflated, but the cash numbers were massaged by a master masseur.
No wonder people are calling this India’s Enron. The auditing company surely must have been part of this or the CEO is truly a smart guy.
A final interesting point I want to bring up is that the CEO tried to cover up the fraud by chasing acquisitions in order to delay the payments of the acquired company. This now adds to why I dislike companies that seek to grow through acquisitions. So many things can be hidden and a good company can suddenly go from transparent to hazy (just like BAC).
Satyam is certainly a company worth investigating further as a case study and one that will surely be a topic of many business classes in the future.
Disclosure : No position at time of writing.
Technorati Tags: satyam, accounting, scandal, enron
Even Warren Buffett says it’s nearly impossible to catch a company that cooks its books. Unfortunately its not even the auditors responsibility to catch fraud, only merely to test the company’s internal controls.
I would like to take a look to its financial statements. How can I get a copy?
Just Click here for the quarterly report. Has the full financial statement.
[...] Satyam Accounting Fraud Exposed at Old School Value Jae Jun tries to detect the accounting fraud after the fact. As I understand it from separate sources, this fraud would have been nearly impossible to detect from the financial statements. Creative accounting is one thing; making up numbers with a comatose auditor is another altogether. Stocks: SAY [...]