It remains to be seen how PWC will weasel its way out of this one, when it has certified Satyam's annual reports not just in India, but in the Europe and the US for several years.

The statutory auditors have failed, and very badly, this time, in the case of Satyam. At least in the case of Enron, it involved US based audit firms that had expanded into practice areas (such as consulting) that carry the risk of conflicting with the disinterest that an auditor and the process itself requires. There was even a harebrained request that audit firms take up legal representation as well, by merging with law firms, thankfully that did not happen, because of the experience of Enron. In India the audit profession is very tightly regulated, and rules that may seem archaic, such as the prohibition on marketing, limits on the number of partners per firm, limits on partners holding of directorships, and such like, should have worked some way or the other. That PWC did not qualify the accounts of Satyam even once, usually the indication of a storm to come, reflects very poorly on PWC. It is also interesting that a scam of this sort had to happen in a new-economy company run by a 1st generation business family. There have been times before when the auditor has qualified the accounts and resigned [not offering themselves for reappointment] rather than ignore the managing family's scams. The case of Raymond Woollen Mills Ltd. and their auditors S.B. Billimoria & Co., in 1984 created a furore that continued even after SBB quit and an "international firm" took its place!

What is mind boggling for me as well is the role of PWC, cash is the first thing to be verified by auditors during an annual audit, with detailed confirmations sent out for all major bank account and physical count of cash on premises. I can’t seem to get my head around the fact how more than 90% of cash and equivalents don’t exist. With regards to board independence, it is a myth, I believe there are committees of the board like compensation and audit here in the US, that have stricter independence requirements.
I really don’t think it is an India specific problem, as the oversight by SEBI and other agencies is anything but lax. Partners at PWC India have a lot to answer for as their role definitely doesn’t pass the smell test.

Jyotsana,

Excellent points, qualified audit opinions are routinely never issued, most issues in my experience are almost always dropped at partner/cfo level discussions, that being said, this is is far too blatant.

I have a PDF of Raju's letter but am not sure how to attach it here, any ideas?

Indian version of Enron and Madoff scandal...Crony capitalism or corruption ?

Umber desi, you can anonymously post files like PDFs on sites like SendSpace.com. I'm sure readers would be curious to see the letter.

if you're an investor, here's your problem:

Distressingly, PriceWaterhouse Coopers, the accounting firm that signed off on Satyam’s accounting practices for years, never detected the fraud.

However, that said, while I feel very bad for people who don't have very much and are losing money now, including employees of Satyam, that international / Indian investors were defrauded instead of untitled agricultural labourers is the only thing that puts this in the news. what would be more interesting to know is why this was revealed now, as opposed to earlier or later.

I can't access the site at work, hopefully this works.

I think it was disclosed now as it became too big to conceal, same logic as why the Madoff scandal got blown up now. The reason why he wanted to acquire the two real estate companies was to make up for some of the gaps on the Balance Sheet. Most investors will not be able to detect something like this and I don't think there are any regulatory audits for such companies unlike banks and most people rely on audited financial statements.

what would be more interesting to know is why this was revealed now, as opposed to earlier or later.

As I understand it, what started the collapse was the company's attempt, last fall, to invest in the real estate company owned by members of Raju's family. Investors rebelled against the investment, but so did some independent board members. Those events, which were highly publicized, led people to start asking hard questions about what the company was doing.

The reason why he wanted to acquire the two real estate companies was to make up for some of the gaps on the Balance Sheet

This is another face of the same Madoff's Ponzi scheme. The proxy voting in board meetings is also causing rumblings with more corporate regulations in the cards

For heaven's sake, can someone please run to the nearest kachery and get this Satyam guy an attorney. I pity his criminal defense team. His incriminating statements will kill him in any trial.

Satyam had also received a Golden Peacock award for excellence in corporate governance in 2008.

As in other countries, some Indian companies have boards made up of friends, if not the family, of the entrepreneur who started the firm. Often, senior management positions are also held by members of the family. Transactions between related parties are not at all rare, and when they occur, the information is not disclosed clearly

Look at the parallels...Dubious way to enter Madoff's inner circle though they were not relatives or friends. -

Membership Has Its Penalties

Of course, it turns out that many of Madoff's victims were paying fees—just not to Madoff. Eager investors were routinely turned down when they asked Madoff to let them into his gilded circle. But a host of intermediaries around the world—Austrian banks, funds of funds in New York—who had connections charged investors to help get them past the velvet ropes. Like the island of Palm Beach itself, Madoff's funds weren't open to the masses. You had to know somebody to get in

Jeff,

I saw that the award was taken away, my question is how they got it in the first place.

Bridget,

Madoff was not regulated, I think only his broker dealer arm was. Satyam has been audited by PWC for a number of years and regulated by SEBI in addition I believe they also had to comply with SEC requirements as its ADR trades here.

I thinks more than Satyam, PWC got some 'splainin' to do. However terrible Raju's lies you can at least chalk it up to the profit motive. How does $1,000,000,000 fall through the cracks for an auditing firm though? That's scary. Kinda subverts the purpose behind the entire system of auditing.

I'm not an expert on accounting, but I know enough to say that it's not an exact science. There are all kinds of 'judgment calls' and 'rules of thumb' and 'when you recognize something' and 'is it marked to market or book value' and 'what discounting rate do you use' and 'how much goodwill do you estimate' and 'what is the estimated recoverable amount from your debtors' and so on and so forth. So the question of how $1 B can fall through the cracks is, that's how.

It's not a question of rules and regulations, because they can always be subverted. It's a question of ethics, from one end to the other. Enron also had its books audited. How did their stuff happen? If I remember right, it's auditor lost all its credibility, and had to sink with it, and reopened under a new name.

PriceWaterhouse Coopers, the accounting firm that signed off on Satyam’s accounting practices for years, never detected the fraud.

The problem with traditional financial audits is that they were never meant to be broad enough in scope to provide any sort of assurance against management fraud. The standard unqualified audit report has all kinds of provisions abdicating the auditors of any responsibility.

Auditors do provide some level assurance against unintentional deviations from accepted practices, and against very simple frauds like Ponzi schemes.

Due to legal and economic disincentives against innovation in the audit industry over the past 50 years auditors have failed to incorporate techniques that can detect misinformation resulting from ' earnings management' (which the vast majority of public companies practice to some extent). One side benefit of the credit crunch is that the resulting insolvency will force a lot of these people out of the woodwork.

Auditing firms today are largely in the business of selling the illusion of secutriy.

Notanacctgpro,

There are clear rules on which assets have to be carried on the balance sheet and what values, trading securities are required to be marked to market. Property etc, is carried at book value less accumulated depreciation. Debtors and cash balances are usually pretty straightforward to verify, Major debtors like major bank account are sent confirmation letter directly from auditors to verify balances as of a particular date and cash in hand has to be physically counted. Debtors in doubt are reserved against.

The question is how PWC didn't catch any of these items that are straight forward, so how all this fell through cracks is muddier than it seems.

Auditor In Enron's case, Arthur Andersen ceased to exist, its business was acquired by other audit firms, I believe it was KPMG that took over most of its business in India.

Former PWC auditor,

That is why there is a management rep letter post SOX that is mandatory in the US, that shifts the responsibility from the auditor to the management. I think in this case, PWC didn't do what they were supposed to.

you know what i thought was cute in this whole unsavory business? "maytas," the real esate firm acquisition that rocked the boat is the "satyam" spelled backwards. the truth inverted. it seems like a nice little word trick tucked in an overwrought desi novel.

In the case of Raymonds, 25 years ago, it being a manufacturing company, there were tangible assets such as inventories to be verified, where even if valuation of closing stock is a matter of "opinion" absence wasn't an option. In the case of Satyam, it is receivables - possibly from inflated revenue recognition that seems to be the problem. But converting the same receivables into cash is trickier. The Maytas acquisition would have helped Satyam "adjust" its cash balances and convert them to fixed assets. But that would led to another problem, because if acquired for cash and not consideration other than cash, Maytas would still be due for an audit of its cash holdings prior to merger. As it happens Raju & Co., were merely putting off the problem, and exchanging a slipped disc for a migraine.

The case of Bernie Madoff is more serious. It is wholesale fudging of every transaction - the statements sent to clients had no relation to what was being bought and sold. The Unit Trust of India in the pre-SEBI days was not very different. It had a bunch of funds whose NAV was for all purposes notional. But in the meanwhile, money was being raised for new funds all the time. But in that case the GoI knew what was happening and controlled the entire movement of funds, and that too conservatively. The older "popular funds" notably Units-64 and ULIP paid out the best though not sky-high returns and for many years were used as a year end tax shelter by corporates - assuring predictable cash flows. There isn't anything wrong with a Ponzi scheme as long as your prediction of cash flows is correct. Governments can do that, private entities cannot.

Amardeep wrote: "and the whole, now deeply tarnished “India Shining” mythology."

What has this got to do with anything? Scandals were a dime a dozen in the socialist days of yore. Sucheta Dalal waged a lone battle in the 1990s against the lack of transparency of government institutions such as the Unit Trust of India. If you think the private sector in India is bad, the public sector is a disaster.

Even in non-financial govt institutions, cronyism is rampant. In fact, in the 1980s, there was a cover story in the Illustrated Weekly of India on the Indian intelligence agency Research & Analysis Wing (RAW). They had named it the 'Relatives and Associates Wing". :-)

Folks who request more regulation have no clue on how such things work in India. Additional regulations only end up lining the pockets of the regulators. They do not yield better governance.

The irony of the Satyam scandal is that the system worked. Back in the 70s and 80s, such scandals in family owned companies (especially the infamous marwari companies like the Birlas, Dalmias, Firodias, Bajaj et al) would have never have been uncovered.

Look on the bright side. People with last names that should be first names are known to do a a lot worse. James Earl Ray, Lee Harvey Oswald, Sirhan Sirhan, Anand
Jon Alexander. What I'm really saying is someone better keep an eye on Elton John.

We will probably find out more about how this fraud was perpetuated in the coming weeks,

Just went back and reread the post. Not to correct Amardeep the English Prof, but didn't you mean 'perpetrated'? Or did you actually mean perpetuated, in asking how it lasted so long? Your post gives the impression that the fraud was over a three month period, but I thought it went on for longer, more like three years, based on a cursory reading of Raju's letter.

Satyam, one of India’s largest consulting and IT companies, has admitted it claimed $1 billion in assets that simply did not exist for just one three month period in 2008.

24 · settuponnu said

you know what i thought was cute in this whole unsavory business? "maytas," the real esate firm acquisition that rocked the boat is the "satyam" spelled backwards. the truth inverted. it seems like a nice little word trick tucked in an overwrought desi novel.

wasn't it owned my family members? it sounds like a financial arrangement to have separate entitites for some reason rather than anything else. or maybe a shared commitment to the satyam family / business.

Quizman,

You are absolutely right, this has nothing to do with India and happens all the time. Look at this list of scandals here between 2000-2002. There was a year when didn't pay any taxes due to differences in tax and statutory accounting.

That is why there is a management rep letter post SOX that is mandatory in the US, that shifts the responsibility from the auditor to the management. I think in this case, PWC didn't do what they were supposed to.

SOX and similar legistlation in other countries doesn't solve the problem. Signing off on statements just means that management is responsible for management fraud. But doesn't mean that external auditing firms are going to be better able to detect problems, especially when management is dishonest.

I find it ironic that the audting industry was finacially rewarded for its failures after Enron et al, as the costs of SOX implementation significantly increased the demand for their services.

Former Auditor,

never contended sox is a means to solve the problem, just trying to illustrate how there are means to shift the responsibility from the auditors to the management.

Debashis Basu co-wrote a terrific book on the Harshad Mehta scandal. He has a nice post about the Satyam scandal.

Read somewhere (Times of India?) that the revenue and profit inflation that Raju confesses to in his letter could actually be a cover up of something even worse. The 3% profits that he says was the true figure is too low for an IT co., according to IT experts and even Satyam employees.

I wonder how Reliance would stand up to close scrutiny?

31 should read, there was a year when reliance didn't pay any taxes.

Glass house both reliance factions have friends in high places, Mukesh is close to the Gandhis and Anil to Mulayam and Amar Singh.

People often forget that in socialist India, the govt of India was often the majority shareholder in large companies. e.g. TISCO. They had a vested interest in keeping things under wraps.

Uber: Reliance is a strong case in point. For years, they not only managed to get over the regulatory framework, but also influenced policy making. This was during the license-raj era, wherein they gained traction with policies favoring them. You would have some inane line item in the budget about tax incentives provided for exporting (or setting up plants) of some arcane petrochemical. It was so blatant.

"tax incentives provided for exporting (or setting up plants) of some arcane petrochemical"

Often that 'petrochemical' never existed or was perhaps an empty warehouse.

Ramalinga Raju Arrested (or he 'surrendered' to the DGP Andhra)

Raju was booked under various sections of Indian Penal Code, including 120-B, 409, 420, 468 and 471, additional director general CB-CID, Shiv Narayan said. These sections pertain to criminal conspiracy, criminal breach of trust, cheating, forgery and using forged documents as genuine. Under these sections, he can face imprisonment up to 10 years and fine.

the company welcomed the Centre's move to appoint 10 nominees at directors.

Looks like they're effectively going to nationalize Satyam. Or it's going to get 'bailed out. 53,000 employees. Too Big to Fail. National Reputation. Not too different from what happens in the US!

Amardeep,

Thanks for posting about this topic. Many points to make, I'll try to be breif:

1. When I read RR's confession, sent to SEBI and the BSE, I was shocked at the level of detailed knowledge that he had about the B/S. To me, this indicates that there are a second set of books. These cannot be maintained with a significant amount of collusion.

2.External audits are not designed to identify misstatements where collusion is in place. I predict PWC will be exhonerated.

3.Many people external people have known about this. It just that enough people were benefitting, that they kept quiet.

4.Re: 3% profit in Satyam, once you bid on the contract at a competitive rate, and then hand out kickbacks to all of the people who got you in in the first place, there is no room left for profit. It's a tough business. Also, Satyam's "hosptality" doesn't come free.

5. I'm sad for all of the 53,000 employees and thier families, thier maidservant's, drivers, gardeners, nannies, and all of the other dependants who will be out of work, due to one man's lack of courage and greed.

6. I'm sad for the people of Hyd and AP who used the example of RR as someone who had "made" it. It gave them the courage and confidence to think that they could too.

Umber desi, jyotsana, and Former PWC auditor, thanks for your comments. It's increased my understanding of the scope, breadth, and magnitude of this scandal.

Oh yes one more thing:

7. Isn't Satyam subject to all of the disclosure and attestation requirements of SOX since it is traded on the NYSE?

scandalwatcher,

With regards to you point number 2, I agree but in this case based on the facts contained in Mr. Raju's letter, I can't understand how an auditor can miss such obvious indicators.

I believe foreign private issuers are required to file forms 20-f and 6-k with the SEC and have to comply with with some governance requirements of the stock exchange. Here is what I found on Satyam's website where it compares the NYSE governance requirements to practices in place.

Truth is all profits of SATYAM were directed to MAYTAS in past 5-7 years..and MAYTAS is owned by Raju's son..they own real estate etc.. now Satyam is going down... with all profits and assets... so is MAYTAS....but MAYTAS will still survive as it is separate entity... SEBI as well as Government will do the inquiry... But Raju is a smart guy ... he has already planned everything...he already knew worst come worst he will go to jail as he already said in his letter only him and MD of company knew everything so rest of the family don't have to face any criminal charges .. and SATYAM will be bankrupt but his family members will laugh there way to home... only employees will suffer.

Latest form 20-f

#44 has it right. This story is as much about India's real estate bubble as it is about accounting scandal. Perhaps satyam is lying again. Satyam siphoned off money from the company and invested in Maytas. There is no way Satyam would have 3% operating margin. With RE bust, the merger is an attempt at keeping the game going.

Maytas infra is a publicly listed company with seprate auditors one of the firms is Billimoria, which is large local firm with accounts including Tatas so for something like 44 to work, there have to be collusion amongst various levels.

sorry the auditors for maytas infra are batliboi and company.

not just this, satyam was recently dropped as a contractor by the world bank because their employees installed viruses and trojans on world bank computers during a project.

seems like a lovely company all around. as umber desi said, after enron, dynegy etc., cash flow auditing became much stricter, so it is really concerning that pwc let this slide and signed off on their earnings for many years, all over the world.

44 · Abhi (not the SM one) said

Truth is all profits of SATYAM were directed to MAYTAS in past 5-7 years..and MAYTAS is owned by Raju's son..they own real estate etc.. now Satyam is going down... with all profits and assets... so is MAYTAS....but MAYTAS will still survive as it is separate entity...

Great I am having getting lessons on financial wizardy-101...This above trick seems to be called feeder profits to divert your money just as feeder funds below...

While many other boutique brokerage firms sold out to larger firms, Madoff Securities stayed a family business. Madoff for years ran the firm with his brother Peter. More recently, much of the market-making division was headed by Madoff's two sons, Andrew and Mark. In the 1990s, Madoff used his success as a market maker to help launch an asset-management firm. Madoff raised money for his fund by exploiting his social network, often courting investors at country clubs where he or family members belonged

27 · quizman said

The irony of the Satyam scandal is that the system worked. Back in the 70s and 80s, such scandals in family owned companies (especially the infamous marwari companies like the Birlas, Dalmias, Firodias, Bajaj et al) would have never have been uncovered.

yes, there is still the gaping hole of sahara, which came out of mysterious origins, and it seems equally mysterious what that group's earnings are. and after a few flashy years with those amazingly grand weddings, subroto roy is much more reclusive these days - with some rumors of terminal illness, but that group seems like some sort of shell too.

53 · Jef Costello said

And why was this firm named Satyam?

irony.

Did someone say Billimoria? SB Billimoria & Co., is India's oldest indigenous accounting firm, and celebrated its 100th anniversary last year. It is a very difficult firm to work with and believes that it owes its clients nothing more than a timely audit report. The firm has a long record of qualifying accounts and walking away from clients with questionable practices. Debashis Basu is a Chartered Accountant himself and has spent almost his entire career as a business journalist. Also note the scandalous preferential allotment that Satyam made in 2000 to a member of the family when it acquired a group company. This too has a shady precedent, when during Narasimha Rao's premiership, his finance minister, one Manmohan Singh, did nothing when a number of foreign owned companies made a preferential allotment to their foriegn principals. Then, the government repealed a 1977 law termed the FERA, that limited foreign ownership in public listed companies to 40%. Following the repeal of FERA foreign principals scrambled to increase their stake in their Indian subsidiaries, and finding the shares valued too high, made preferential allotments at throw away prices. After a lot of noise nothing much happened. And then promptly a number of Indian promoters followed suit!

53 · Jef Costello said

I am puzzled by the presence of people like
Raju mentions "philanthropic purposes" in his letter. Anyone know what he's referring to?
And why was this firm named Satyam? Is Raju a devotee of the Sai Baba?

I think he refers to the family's philanthropic foundation: http://www.byrrajufoundation.org/

I had an opportunity to visit the sprawling and very impressive foundation last summer - a real tragedy if all that has to be wrapped up.

Jyotsana,

The firm that audits maytas is Batliboi not Billimoria, that was a mistake

30 · Dr Amonymous said

wasn't it owned my family members? it sounds like a financial arrangement to have separate entitites for some reason rather than anything else. or maybe a shared commitment to the satyam family / business.

Indeed. There is a theory doing the rounds in some blogs that there hasn't been any long ongoing cooking of books, but rather a garden variety theft of public company assets by the founding family, which happened rather recently. The attempt to take over maytas was, according to this theory, an attempt to paper over this gap (ie, post acquisition, satyam would announce a loss in the maytas division, of a magnitude similar to the amount stolen). Under this theory, the admission by mr raju is a way to protect other family properties/members.

All in all, quite a depressing story.

58 · Corporate Serf said

There is a theory doing the rounds in some blogs that there hasn't been any long ongoing cooking of books, but rather a garden variety theft of public company assets by the founding family, which happened rather recently.

Interesting. I think the rumblings about Satyam started sometime around last summer, if I recall correctly, and I guess that the version of events you allude to, if true, will exculpate PWC. That said, given the pretty significant scandal with World Bank too, something does seem to be rotten pretty deep inside Satyam.

Please do not use the handle "Abhi." There can be only one.
Thanks

with last names that should be first names are known to do a a lot worse

Exactly. Not to mention the divine penile reference. Just look at Dick Fold and Mr. Lay. After decades of name calling, something's got to give.

I am not sure if this is OK here, but I have a friend who got discriminated at JPM. Check this out.
http://victimofprejudice.blogspot.com/

Questions:

1) How independent is India's judiciary system when it comes to dealing with white collar crimes such as these?

2)Are other large outsourcing companies like WIPRO and Infosys now coming under scrutiny? I always wondered how WIPRO, a former peanut company was able to grow into one the largest outsourcing companies in the world in such a short time.

I personally have never had a good experience with Indian customer service agents and have always wondered how, (with such poor service) many of these Indian companies were continually able to attract u.s. businesses. Are the engineers who don't answer phones better than the customer service agents? Or is India just a cheaper destination that happens to have a lot of English speakers?

Also, why do you people still refer to maids as "servants"?

Jef @ 53 Satyam was named after RR's father. B Satyanarayana Raju

Corporate Serf @ 58 That's quite wicked. I hadn't thought along those lines.

Also, why do you people still refer to maids as "servants"?

What, you prefer some euphemism to cover up their real role? How about, "friends of the family?"

on the role of Pwc.. very clearly its lack of application from their end.. the partner might lose his CA registration but the ICAI has no leeway to ban PwC.. interesting to note though that this is not the first time that Pwc has been accused of irregularity.. they were the auditors for GTB ( global trust bank) which went down ( accouting irregularities and management fraud) some years back.. if memory serves me right, SEBI at that point, had barred Pwc from takin on banking audits for some time..

speaking of GTB, krishna palepu was a board member there too !!

> All in all, quite a depressing story

I would take a different stand. Indian corporates with newly minted wealth are just growing up to be like American corporates ( e.g. Broadcom chairman - Henry .T Nicholas ). We should welcome India to the club. But unfortunately there will be so many poor Indian Dick and Janes. So I would say a mixed feeling story.

I don't buy the family business angle. Scandals of this kind occur in all sorts of business environments,
even in companies in the U.S. like Enron. The reason this is so shocking is that this is the first
significant scandal in an Indian industry that until now was regarded as professional and above all this.
There is a case to be made that publicly run companies are run even more incompetently and with less
accountability than private, family run concerns. (The guys running a public company have no real incentive
to be competent at their jobs).

I think unless a systematic statistical comparison is made between public, and private family run companies
is made, such conclusions are questionable.

Satyam is not a financial/services company so its actions do not affect its customers, only its shareholders and possibly creditors. Unlike a financial company where the customer at times is also a creditor - as in the case of depositors - Satym's customers aren't. Satyam from all accounts has delivered value to its customers or else it would have never grown this big. I wouldn't lend any credence to the World Bank's allegations of corruption on Satyam's part, not when the World Bank is a paragon of malfeasance, misappropriation, and mismanagement. And what is this nonsense about blacklisting Satyam. The last I heard, Siemens and ABB - two companies that have made a name for themselves from the actions of their corrupt top management haven't been banned by the World Bank ever. And are there any investment bankers who have been barred from working with World Bank entities? Sanctimony is a tricky thing.

NM, you sound like Rip Van Winkle!

69 · jyotsana said

The last I heard, Siemens and ABB - two companies that have made a name for themselves from the actions of their corrupt top management haven't been banned by the World Bank ever.

Not according to the World Bank. They denied the hacking allegation, claimed it was because Satyam bribed management and embezzled money.

To nm,

1) How independent is India's judiciary system when it comes to dealing with white collar crimes such as these?

Just as independent as the US judicial system was in dealing with the sub-prime mortgage mess and crooks like Bernie Madoff.

2) Are other large outsourcing companies like WIPRO and Infosys now coming under scrutiny? I always wondered how WIPRO, a former peanut company was able to grow into one the largest outsourcing companies in the world in such a short time.

Just like how Wal-mart grew from a mom-and-pop grocery store to a $100 billion company in a decade.

3) I personally have never had a good experience with Indian customer service agents and have always wondered how, (with such poor service) many of these Indian companies were continually able to attract u.s. businesses. Are the engineers who don't answer phones better than the customer service agents? Or is India just a cheaper destination that happens to have a lot of English speakers?

I never had any better experience with US customer service agents, either. Most of them simply "put me on hold briefly" for 30-45 minutes and their attitude was horrible. It took 3-4 calls to set right a simple problem.Maybe if you removed the blinkers from your eyes, you can see why India attracts US businesses. If the quality is going to be $hitty, I might as well pay less for it.

Also, why do you people still refer to maids as "servants"?

Sorry from now on, we will refer to them as Macacas, to satisfy the PC-Americans. Happy?

i love how the nm's of the world come out of the woodwork with news like this.

To the New York Slimes,

Maybe if you would STFU about Indian business practices and concentrate on your own in-the-gutter stock price and your impending bankruptcy, you would do far better. This is rich, a failed newspaper with a lower trust rating than John Edwards lecturing India on its business practices. But of course in non-clannish US, businesses are run so much better, a scandal like Satyam could never happen in the US. Enron, WorldCom, Tyco and Citicorp? Naaaah, that was done by an evil Caucasian clone of Ramalinga Raju, the clannish evil corrupt Indian business leader.

72 · bytewords said

i love how the nm's of the world come out of the woodwork with news like this.

nm is clearly some pg style mutant, ignore.

sorry, 74's handle was supposed to be "nm or pg"

72 · bytewords said

i love how the nm's of the world come out of the woodwork with news like this.

i think nm is prema.

73 · DesiDude said

Maybe if you would STFU about Indian business practices and concentrate on your own in-the-gutter stock price and your impending bankruptcy, you would do far better.

heh. i especially love it when the nytimes editorializes against nepotism.

61 · dipanjan said

Exactly. Not to mention the divine penile reference. Just look at Dick Fold and Mr. Lay. After decades of name calling, something's got to give

i hate to be rubin it in, but these guys madoff with so much that i doubt they'll be able to rangel out of an extensive sentance. if they're not be milken it they better be watching their fannie.

Two points:
1. india shining etc. How this might affect that perception is because, the scandals in India in the past were all local, news did nt travel outside the country too much. In this case, SAY is a NYSE listed company with a multimillion dollar market cap in late October (before the Maytas take over was announced). So the loss in share value/business value affects a lot of international investors directly.

2. Did anyone read the audacity of RR in writing analogies while confessing to the crime?

He has himself given suggestions towards the kind of punishment that may be meted out to him. Get a tiger (man-eating or non man-eating, Indian or Siberian), find a forest and then set him on the tiger and of course, track him with a webcam attached to a bird.

(1) CITU statement.
New Delhi, January 8: Centre of Indian Trade Unions (CITU) reiterates that the Satyam Computer Services Ltd. fraud has once again exposed the hollowness of the much-hyped corporate governance in a free market economy. CITU demands that Government should take punitive action immediately against the corporate scam-star, the Board of Directors, the so-called Independent Directors, and the Auditors, who are responsible for the trauma, being faced by 53000 workers and a huge number of small retail investors.

CITU points out that the Satyam fraud is not an isolated case in an inadequate regulatory mechanism but highlights the collusive mismanagement of public fund by the nexus of Private Corporates, Auditors and independent directors backed by the Government. M/s Price Water House & Cooper (PWC), the auditor of Satyam was also the auditor of Global Trust Bank, which collapsed in 2004 and then bailed out by a PSU bank. CITU strongly apprehends than an independent scrutiny of the balance sheets of the companies which are being audited by M/s PWC and other trans-national audit firms, would bring out skeletons in the cup board of corporate misgovernance of similar fraudulent nature. Keeping in view PWC’s client list of 50 Corporate bigwigs in India, including number of top IT companies, GMR, LANCO, United Breweries (UB), Reliance Power, Simplex, Max India etc., CITU demands that the monopoly of PWC and other trans-national auditors should be immediately curbed and PWC be blacklisted.

Along with other corrective as well as preventive regulatory measures to protect the interest of million of workers, employees, retail investors and public money, CITU demands that the Government should take immediate steps to constitute a National Audit Board to regulate and scan the audit of the listed private companies. The Audit Board should have similar power and duties that the C&AG have for the audits of PSUs.

(2) CPIM statement.
The Central Committee of the Communist Party of India (Marxist) now in session at Kochi has issued the following statement on the Satyam Fraud issue.

The shocking revelation of an over Rs. 7000 crore fraud by the promoters of Satyam Computers has shown that Indian big business has started emulating the worst corrupt practices of their counterparts in the advanced capitalist countries, especially the US. It is indeed outrageous that Satyam was given the “Golden Peacock Global Award� for Excellence in Corporate Governance! The Satyam Chairman B. Ramalinga Raju has admitted that the company has been manipulating its balance sheets for years to show inflated profits and under reporting liabilities.

Such fraudulent corporate behaviour, as the Enron scandal in the US in 2001 had shown, is motivated by the greed to increase the share prices and market capitalization of the company. A former Enron CEO is currently serving a 24 years prison term and Enron’s accounting firm Arthur Andersen had to be dissolved for being complicit in the scam. The urge to quickly become rich, motivated fraudulent reporting of profits by the top Enron management, since higher profits led to higher share prices and resulted in higher individual net worth for the managers. Such corporate frauds have been encouraged by the process of deregulation and financial liberalization, which has made company managements obsessed with their stock market valuations. The UPA Government must learn the proper lessons from this episode and desist from further emulating the failed system of the US. Corporate regulations need an overhaul in India in order to discipline big business.

The CPI (M) demands that the Government take suo motu cognizance of the admission of guilt by the Satyam Chairman and immediately proceed against him. The concerned Directors in the Satyam Board and the audit firm Pricewaterhouse Coopers (PwC) must also be held accountable for the gigantic fraud, and strict penal action should be initiated against them. It is noteworthy that PwC partners were earlier indicted for fraudulent accounting after the collapse of the Global Trust Bank.

The CPI (M) calls upon the UPA Government to take immediate steps to safeguard the interests of the 53000 employees of Satyam Computers. Several departments and agencies including the Ministry of Corporate Affairs, SEBI, Andhra Pradesh Government and Mumbai Police have initiated probe into the Satyam affair. It is important to ensure proper coordination between the separate investigations and monitoring by a single Department of the Union Government. The entire fraud should be thoroughly and speedily investigated and all the beneficiaries of the scam brought to book.

Some thoughts:

1.Satyam's clan-like management - This is not strange at all in Indian industry, especially in Indian IT industry.In fact, Satyam is actually much better than a firm like TCS (almost all senior mgmt is Tam-Bram and related to each other, with the exception of one Parsi EVP, who doesn't seem to have any real power).Infy's situation is almost similar to that of Satyam.

2.Irregularities in governance - what can you expect of the IT industry in India when half the CVs are fake/doctored, over 95% projects fail to deliver on time and with the required quality, billing 'mistakes' abound, and the focus is exclusively on offshore leverage (from both clients and vendors)? And yet, the IT biggies in India get Good Governance Awards, and Chief Mentors of some companies lecture other industries on Governance?

3. The huge land bank built up by Infy, Satyam and Wipro is currently unused, and will be brought into commercial market in future, by bribing Govt officials and politicians.These thousands of acres have been obtained at throwaway prices by the IT companies.Whose land? Who is asking any of these questions?

4.Tax holiday for Indian IT majors - you may not believe it but since inception, the Infys, Wipros and Satyams of India are enjoying a tax holiday, unprecedented for any industry.I can understand a tax holiday during the initial years, but not now, when the top 4 cumulatively generate around $12 billion USD revenues; in contrast, a small business IT provider focused on domestic Indian industry gets taxed like hell.How can the Narayana Murthys of this world occupy a holier-than-thou position?

5.Take the case of a simple labor law requirement in India; as per law, any establishment that employs more than 20 women, should arrange for day care/creche facilities at/near its premises.How many Indian IT firms do this at all their campuses?How many even have humane employment practices that consider the special needs of employees?

But I still don't think that what has happened in Satyam is an indicator of the rot in India; it indicates the rot that was always there, and will always be there in big business.I mean, why only talk of Enron? What about GE?

I am afraid that the Left in India will talk up this scandal and press for more Govt control, arguing that lack of such control has led to Satyam and other companies following the lead of big, bad, american firms.I hate myself for saying this, but I think this is the one time they may be right.

Satyam can still probably be turned around, because most of the current global big businesses have all faced such scandals, and succeeded in re-creating trust in their brands.

80 · satyamshivamsundaram said

The CPI (M) calls upon the UPA Government to take immediate steps to safeguard the interests of the 53000 employees of Satyam Computers.

Kumar_N Satyam's clan-like management - This is not strange at all in Indian industry, especially in Indian IT industry.In fact, Satyam is actually much better than a firm like TCS (almost all senior mgmt is Tam-Bram and related to each other, with the exception of one Parsi EVP, who doesn't seem to have any real power).Infy's situation is almost similar to that of Satyam. The huge land bank built up by Infy, Satyam and Wipro is currently unused, and will be brought into commercial market in future, by bribing Govt officials and politicians.These thousands of acres have been obtained at throwaway prices by the IT companies.Whose land? Who is asking any of these questions?

Another holy-roller! TCS is a Tata company, and contrary to what people think, the Tata family has always exercised control subtly over its group companies for over 8 decades now, spring cleaning the deadwood twice; first when JRD became the capo di tutti capi in the late 1940s and for the second time, when Ratan Tata took over after 20 years of his induction in 1972; elbowing out all capos such as Russi Mody, Darbari Seth, and Kerkar - one by one. All TCS top head hinchos have risen from the ranks, and in many cases began their careers with the Tata Administrative Service. The Tatas too have had recent brushes with dishonest managers, and have moved quickly to take corrective action. As for WIPRO and Infosys, (the latter is derisively referred to as Murthy Angadi in Mysore) the allegations fly thick and fast in Bangalore's older pubs, and interestingly the ones hurling them are Kan(nnada)-Brahms! But since Azim Premji has a habit of flying coach/economy, lunching his team out to Noodles & Company, and he and Narayanamurthy have both turned down Z-Category security despite receiving threats via email everyday, their credibility is still intact. Anyone who wants to pull them up in the court of public opinion should have a go at them, rather than hurl allegatations on SM.

"the allegations fly thick and fast in Bangalore's older pubs, and interestingly the ones hurling them are Kan(nnada)-Brahms"

Where are these 'Bangalore's older pubs' where 'Kannada Brahmins' hurl allegations at Narayana Murthy?

About land (at subsidized rates etc.) and Infosys: http://in.rediff.com/money/2006/jul/25infy.htm

And Deve Gowda's (note Gowda not a kannada brahmin) allegations - http://churumuri.wordpress.com/2008/03/09/wipro-takes-50-acres-why-does-infy-need-2000

On Azim Premji's frugality etc. - talk to some Wipro insider about how this is a carefully maintained PR stunt. Or observe any Wipro engineer on an H-1b visa in the US and see how the employees are treated/underpaid/overworked (often against US immigration and labor laws). The CEO flying economy does not cover up for underhand practices.

And you could read Kumar's comment again and verify with people who have work for these companies at higher levels to get a better understanding of the irregularities in governance, land grab at subsidized rates, permanent tax holidays that are part and parcel of Indian outsourcing shops which base their profits primarily on labor arbitrage.

You are free to do your own research before hurling your own allegations on other anonymous posters' allegations.

Corporate governance, which seems to be the buzzword here, should have different objectives in India and the West. The aim in the West is to protect shareholders from Imperial CEOs, who have very little stake in the company in the form of Share-ownership. In India most, not all, listed companies are still controlled by the founding family and hence the aim has to be to protect the minority shareholders from the owner - managers ie the majority or controlling share holder.

Also those comparing it with Bernie Maddof are way off the mark, that was a private investment firm with no oversight, running a ponzi scheme. Enron, Worldcom or Waste Management are better comparisons but the Satyam case the fraud was really ordinary. Cash and Cash Equivalents are the easiest to verify, there is no ambiguity on how they can be valued or marked to market. Raju claims to be the sole perpetrator but that seems extremely unlikely, I doubt the Chairman was passing journal entries.

A few questions need to be asked

Satyam's claim of a 3% margin sound bogus, it is true for the fresh grocery section for a large retailer, certainly not for a Software firm. It is possible that the founding family has siphoned money away ?

Did the banks or financial institutions collude and issue fake bank statement? I know for a fact that this is possible in India where a branch manager can issue a statement with false balances just to keep their biggest clients happy.

What are the protections for Whistle-blowers in India? In this case there were none? It was the alleged perpetrator who blew the whistle.

Samir (#84): "What are the protections for Whistle-blowers in India?"

The protection per law or real protection? You know India is weak on social justice as compared to say the US. The law may provide ample protection but that does not mean much when laws are not respected or enforced, especially when the wronged party is weak as compared to the wrong-doer.

A simple scenario: Someone encroaches your land and you file a case against him in court. After years of legal battles (based on the patience and contacts of the encroacher) you win the case. Will the court order automatically give you possession of land? In most places in India not, you would then have to use money, contacts and 'influence' to get the real job done - using the authorities (i.e. police) or hired muscle power to kick the encroacher out. What the movie 'khosla ka ghosla' for a funny but sadly realistic take on this.

So you can imagine how alone a whistle-blower would be unless backed by some strong political or criminal force. And if she/he takes the help of authorities for protection, it is a simple matter of bribes/pressure to get enough information about the whereabouts of the whistle blower and extract revenge.

83 · Charvaka said

"the allegations...interestingly the ones hurling them are Kan(nnada)-Brahms"

Where are these 'Bangalore's older pubs' where 'Kannada Brahmins' hurl allegations at Narayana Murthy?

About land (at subsidized rates etc.) and Infosys:

And Deve Gowda's...

On Azim Premji's frugality etc. - talk to some Wipro insider about how this is a carefully maintained PR stunt....
And you could read Kumar's comment again and verify with people who have work for these companies...

You are free to do your own research before hurling your own allegations on other anonymous posters' allegations.

The plural of anecdote is anecdotes. As for the older pubs, I am not talking of even Mobo's or Victoria (both no more and built over) but of speakeasies, where you sip a beer standing at the booze shop counter itself...But obviously you aren't a Bangalore insider. Deve Gowda's allegations are worth about 2 paise...no one takes him seriously given his only intreest in the state - carving out a fiefdom for his children, and obstructing any civic improvement project. I know plenty of Wipro insiders, including US citizens who have quit the likes SAIC, EDS, and IBM to work for Wipro, and don't ever plan to work for an American consulting firm ever. True, the plural of anecdote is anecdotes, but I have one too many for your allegations to matter.

"But obviously you aren't a Bangalore insider."

Are you? Insider andhre yennu? Neevu Bengaluralli yesthu dinagallindha iddhira :)

am a former student of MR Rao - one of the erstwhile independent directors of Satyam. Highly unlikely that he did not know about the fraud being perpetrated - far too smart!!
And krishna palepu (HBS professor) who holds himself to be an expert on corporate governance earned over a million dollars per annum from consulting engagements from Satyam and related entities. Not only is a blatant violation of basic corporate governance but did Palepu declare all of this income in his tax return.
GTB - Palepu -PWC
Satyam - Palepu - PWC.

Palepu and PWC seem to be the common denominator in the major frauds in India.

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Being a US listed entity wasn't Satyam required to comply with Sarbanes-Oxley also? Which makes me wonder whether all that documentation and testing on controls over financial reporting can actually throw out such irregularities? If it can't, as seems to be abundantly evident in this case combined with the alleged lackadaisical conduct of PwC then SOX too seems to ahve failed....what next then?

92 · Kavita

Being a US listed entity wasn't Satyam required to comply with Sarbanes-Oxley also? Which makes me wonder whether all that documentation and testing on controls over financial reporting can actually throw out such irregularities? If it can't, as seems to be abundantly evident in this case combined with the alleged lackadaisical conduct of PwC then SOX too seems to ahve failed....what next then?

Well, too huge of a topic for a blog-comment, but keep in mind, the optimal amount of fraud > 0 (as is the optimal # of murders, lest we all be tied to our beds)!

76 · Manju said

72 · bytewords said

i love how the nm's of the world come out of the woodwork with news like this.

i think nm is prema.

I was just asking questions guys. Why so sensitive?

I"ve used software engineers from india before and they are cheap and good. So, don't go accusing me of being some ignorant, racist, american, which I am not.

you guys need to more opent to non-indians like me who are just using this blog to learn more about your country and who are asking questions in good faith.

I haven't had a good experience with indian customer service agents. What's wrong with saying that? I think the filipino's are much more friendly and maybe that's where the competition might come from -- places like the phillipines and parts of English speaking Africa.

I had another question about shabana azmi, but now i'm afraid to even ask it.

is the clannishness of Indian business culture any worse than the cliqueishness (read old boy networks) of the American business culture. Nepotism is replaced here in the US by an insider sentiment. Correct me if I am wrong here.

Kavitha@92,

I don't think SOX really helps to reduce the likelihood of fraud. Sec. 404 is a controls attestation. And any control can be circumvented in the presense of collusion. Sec 302 is a management attestation, that is really only worth the paper on which it's written. In the case of Satyam, it's clear that if controls were in place, they were circumvented, and the management attestations were false.

I haven\'t had a good experience with indian customer service agents. What\'s wrong with saying that? I think the filipino\'s are much more friendly and maybe that\'s where the competition might come from -- places like the phillipines and parts of English speaking Africa.

Can you imagine where India, Phillipines and english speaking Africa would be today without the enormous advantages the english language bequeaths them?

the whole, now deeply tarnished “India Shining” mythology.

If you think that \"India Shining\" was a myth then why worry about the lie being tarnished?

98 · voiceofreason said

is the clannishness of Indian business culture any worse than the cliqueishness (read old boy networks) of the American business culture. Nepotism is replaced here in the US by an insider sentiment. Correct me if I am wrong here.

Could it be worse because of the caste system?

The old boy network in America is slowly being diminished (I think).

The president is an African-American who pulled himself up from the bootstraps.
The head of Citibank is an Indian
The head of Pepsi is an Indian woman
The incoming surgeon general will be an Indian

I think America may be much more open to diversity and is in some ways a more meritocratic society.

Can someone please delete Ramesh's comment, it is wrong on so many levels.

Ramesh,

I never use such language here but you are an idiot, I went to school with plenty of people from Hyderabad and must say you are way off base.

Could it be worse because of the caste system?

Just like the old-boy (read white male) prejudice is made worse, by the residual effects slavery, Jim Crow, segregation etc..etc. In fact there was Harvard University on the effect of "ethnic" names on employment chances, and the one with the "real,American" names got selected before
the "ethnic" ones, for the same university.

The old boy network in America is slowly being diminished (I think).

Sure, LOL, For example there are just 2 black head coaches in college football. ESPN did a piece on that.
http://sports.espn.go.com/ncf/news/story?id=2783335.
In the Fortune 500 CEO list only four are black
http://www.msnbc.msn.com/id/21644144/
Yeah the old boy network is being dismantled (in your dreams that is).

The president is an African-American who pulled himself up from the bootstraps.

The president is WAS an African-American who pulled himself up from the bootstraps.

The head of Citibank is an Indian

The head of Wipro is a Muslim

The head of Pepsi is an Indian woman

The head of Biocon is an Indian woman.

The incoming surgeon general will be an Indian

The head of the Congress Party is a white Italian immigrant

I think America may be much more open to diversity and is in some ways a more meritocratic society.

Yeah, Tom Tancredo and Lou "damn job-stealing furriners" Dobbs might have something to say on that

Contrary to what Kumar N. says Infosys is very differently run than Satyam. And about Tam Brams in top management - it is similar to Tam Brams dominating IIT and research faculties and has nothing to do with 'family ties'. Anybody who has actually worked in Indian IT will know the respect Infy commands as an industry leaders. For the rest - steady your opinions before expressing them. You can't compare a company like Infy founded on ethical Brahminical principles by the frugal 3-BHK dweller Narayana Murthy with a jugaad dhandaa like Satyam.

ramalinga raju on vir sanghvi's show

http://www.youtube.com/watch?v=jgNrM-3EKl4