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India’s Satyam Computer Services, an internationally renowned IT firm, had its chief, Ramalinga Raju, confess to have been cooking the company’s books and a Rs-7000 crore fraud on January 7, 2009.

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He brought to light the fact that he had been inflating the company’s profit numbers for several years and also said that no board member was aware of what had happened.

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The news sent the company’s shares almost 80 per cent down.

Satyam’s revenue and profits figures were inflated for several years, as Raju admitted. The company reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore (24 per cent of revenue) for the quarter ending September 2008.But the actual revenue was Rs 2,112 crore and operating profit was Rs 61 crore (3 per cent of revenue).

Raju said, “The gap in the balance sheet has arisen purely on account of inflated profits over several years. What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of the company operations grew significantly.” [Analysis of Satyam Scam. Retrieved February 27, 2009]

Satyam is clearly a case of fraudulent financial reporting, lack of corporate governance, inefficient management and information asymmetry.

It also reflects that it is not a one man’s job. Either the auditors or the banks might have been Raju’s accomplice in the fraud. It also relates to the issue of the information being relevance or reliable.

The company inflated its profits so as to attract its investors and the management did even know about the books being cooked!

Moreover, the fact that the company’s share fell almost 80 per cent, also reflects shareholder activism.

However, now Satyam asked the Company Law Board (CLB) to allow it “to devise a plan which provides for transparent, open and competitive process for continued operation” of the company so that the investors and shareholders have adequate and reliable information. Also the new board of the IT company has asked the CLB the authority to increase its authorised share capital so that it could issue preferential shares to any investor. [India’s fraud-hit Satyam seeks nod to find buyer: report. Retrieved Feb 18, 2009]

Reference Citations

  1. India’s fraud-hit Satyam seeks nod to find buyer: report. Retrieved Feb 18, 2009 from http://www.google.com/hostednews/afp/article/ALeqM5ir1UZvqOfbJcQb0qZFI4aY3dbxLg
  1. Analysis of Satyam Scam. 2009. Retrieved February 27, 2009 from

http://www.deccanherald.com/Content/Jan122009/business20090111111992.asp

 

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