Downfall of Satyam: One of the Biggest IT Giants in India

Pages: 6 (1792 words) Published: June 22, 2013
Synopsis
This case illustrates the downfall of Satyam, one of the biggest IT giants in India, because of the fraudulent activities carried out by its founder Mr. Ramalinga Raju and his associates. Business world at that point had garnered immense respect for Satyam in terms of risk management and corporate governance practices and Satyam was ranked as the fourth largest IT Company in India. This was the case before December 16, 2008, when Satyam promoter Mr. Ramalinga Raju proposed his intent to acquire Matyas Infra and Matyas Properties. When this announcement of acquisition reached to the public, investors had a tremendously negative reaction towards Satyam’s decision. Satyam founder eventually admitted fraud in a financial statement revealing that he had been cooking the books of Satyam for quite some time. Raju and his team manipulated cash balance, bank balance, accrued interest figures, overstated debtors and understated liability in order to manipulate the share prices of the company in the market by misleading its investors and the public. After admission of fraud, share prices of Satyam sharply fell down and Satyam was eventually removed from the New York stock exchange and the Bombay stock exchange. The US investors initiated several class action suits against Satyam for its fraudulent activities and top executives of Satyam were charged with violation of federal securities laws by issuing false and misleading financial statements. The Satyam scandal has shaken the roots of the Indian financial market and has put a big question mark on corporate governance and how far corporations (people) can go to enhance their own personal benefits. Major Issues in the Case

Corporate governance
Satyam failed to follow the corporate governance practices that every firm was meant to follow, it looked for loop hopes that could be tweaked to enhance the company’s profit and hide liabilities from the investors as well as the general public. The Satyam Board was composed of ‘chairman-friendly’ directors who failed to question management's strategy. They were also extremely slow to act when it was known that the company was in financial distress. The Board ignored critical information related to financial wrongdoings before the company ultimately collapsed. Agency problems

The Chairman (Ramalinga Raju) and the CFO (Srinivas Vadlamani) worked together to defraud the stakeholders for their personal gain, while the investors thought that the company was generating revenues, and investing in different areas. Clearly, the Chairman and CFO had personal gain in mind rather than company benefit. There also seems to be conflicting interest of the management and the shareholders i.e. the management wanted to take over two construction companies Maytas properties and Maytas Infra which was against the interest of the shareholders. Arguments

It’s hard to imagine a leading company like Satyam manipulating its financial statements but in this highly competitive industry it is necessary to remain profitable in order to survive in the long-run. This is perhaps the reason why Satyam resorted to manipulating its financial statement. We can see that there were large amount of manipulation in the income statement as well as in the balance sheet of Satyam’s financial statements. Manipulation in the Income Statement

The income statement consisted of some inconsistencies that were made intentionally to maintain the level of profitability of the company. The amount of sales revenue has been overstated by Rs. 588 crore i.e. was recorded as Rs. 2700 crore instead of Rs. 2112 crore. The operating profit margin was recorded as Rs. 649 crore (i.e. 24 % of the sale revenue) when the actual operating profit margin was Rs. 61 crore (i.e. 3 % of the sales revenue). The number of employee was also manipulated i.e. it was recorded as 52000 employees when the actual number of employees was only 43622 employees. Manipulation in the Balance Sheet

The balance...

References: * Investopedia, Business Ethics. Retrieved from
http://www.investopedia.com/terms/b/business-ethics.asp (Accessed on 15th June 2013)
* Wikipedia, Principle-Agent Problem. Retrieved from
https://en.wikipedia.org/wiki/Principal_agent_problem (Accessed on 15th June 2013)
* Wikipedia, Corporate Governance, Retrieved from http://en.wikipedia.org/wiki/Corporate_governance (Accessed on 15th June 2013)
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