The Satyam scandal: Impact on economy

What is the Satyam scam precisely about?  It is about corporate governance and fraudulent auditing practices allegedly in connivance with auditors and chartered accountants. The company misrepresented its accounts both to its board, stock exchanges, regulators, investors and all other stakeholders.
Is this accounting fraud, a market manipulation/fraud or both?  It is a fraud, which misled the market and other stakeholders by lying about the company's financial health. Even basic facts such as revenues, operating profits, interest liabilities and cash balances were grossly inflated to show the company in good health
 The promoters are obviously the primary culprits, although it is almost impossible to misrepresent such facts without the connivance of the auditors and some executive board members. Independent directors, it seems, were kept in the dark about the actual books of accounts.
What about long-term auditor PriceWaterhouseCoopers? The role of external third-party auditors, who were tasked to ensure that no financial bungling is undertaken to carry out promoters' interest or hide facts, have also been brought to question.
FRAUDULENT TECHNIQUES APPLIED: Raju maintained thorough details of the Satyam's accounts and minutes of meetings since 2002. Raju stored records of accounts for the latest year (2008-09) in a computer server called "My Home Hub." Details of accounts from 2002 until January 07, 2009- the day Raju came out with his dramatic, five-page confession-were stored in two separate Internet Protocol (IP) addresses.
 Fake invoices and bills were created using software applications such as 'Ontime' that was used for calculating hours put in by an employee. A secret programme was allegedly planted in the source code of the official invoice management system creating a user id 'Super User' with the power to hide or show the invoices in the system. A web of 356 investment companies was used to allegedly divert funds from Satyam. These companies had several transactions in the form of inter-corporate investments, advances and loans within and among them.
The cash so raised was used to purchase several thousands of acres of land across Andhra Pradesh to ride a booming realty market. It presented a growing problem as facts had to be doctored to keep showing healthy profits for Satyam that was growing in size and scale. Every attempt made to eliminate the gap failed. As Raju put it, "it was like riding a tiger, not knowing how to get off without being eaten." Cashing out by selling Maytas Infrastructure and Maytas Properties to Satyam for an estimated Rs 78 billion was the last straw. The attempt failed and Raju made the stunning confessions three weeks later.
  Following the recent issues regarding Satyam's financial irregularities, India's IT-BPO services industry finds itself under increased financial scrutiny from Wall Street analysts and corporate clients. However, while Satyam has a major challenge ahead to maintain its market position, and is a likely takeover target, we do not believe this fiasco will have longer-term ramifications for the Indian services sector as long as Satyam's creative accounting turns out to be an isolated incident and not a more pervasive problem across the sector.  Satyam's existing customers will ask questions, but are unlikely to switch suppliers, unless Satyam loses a large number of crucial operational staff in the coming weeks. However, Satyam is now at a disadvantage in winning new business in the short-term as it struggles to shake off the current controversy. Plus, some customers renewing existing agreements will be evaluating alternative service provider options, in the wake of the uncertainty surrounding Satyam's future. Its new leadership needs to move fast to right the ship and placate corporate accounts, and likely prepare the firm for an imminent takeover - the firm's stock just hit a new all-time low.
 With Satyam's strength across software service areas, particularly high-margin enterprise application services - we believe potential suitors include HP, Wipro, IBM, and possibly Genpact, whose major investor, general Atlantic Partners, may want to marry Satyam's IT services strength with Genpact's BPO offerings. Satyam also has a growing BPO competency, largely centred on procurement and supply chain support functions, which increases its potential attraction to some acquisitive competitors, as few large service providers today have a strong supply chain outsourcing portfolio.  Regarding India's outsourcing scene, while customers from the US and Europe will (and should!) ask questions about the health of specific IT-BPO service providers headquartered in India, this current predicament is Satyam's alone. While other Indian-HQed suppliers need to be prepared to answer tough questions from clients and Wall Street as scrutiny on the sector heats up, we do not expect this to be a sustained issue in the medium-long term.
Jamaluddin Ahmed PhD FCA is former President, Institute of Chartered Accountants of Bangladesh (2010) and General Secretary, Bangladesh Economic Association.
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