New economy Satyam admits to oldest con: 8000-cr fudge

The company’s auditor Price Waterhouse,an associate of PricewaterhouseCoopers,one of the Big Four global accounting and consulting firms,has certified Satyam’s accounts without any qualification.

Satyam,also listed in the New York Stock Exchange since 2001,serves 185 of the top Fortune 500 companies,has 53,000 people on rolls and operates in 66 countries.

Reacting to Raju’s statement,the auditor cited client confidentiality to say: “We are examining the contents of the statement.”

Securities and Exchange Board of India (Sebi) chairman C B Bhave said the case raises the issue of authenticity of accounts that have been audited. “It was most surprising that cash balance that was non-existent got certified,” he said. Institute of Chartered Accountants of India (ICAI) President Ved Jain too said it is definitely surprising the auditor did not detect the fraud given its scale.

The Rs 8,000-crore scandal that exposes the country’s lax regulatory framework,accounting practices and the gullibility of the so-called stock market experts has left ordinary investors battered. The Satyam stock took a major pounding today in what could be biggest single-day drop for any company. It plunged 75 per cent to close at Rs 40.25 today at the National Stock Exchange and pulled down the 30-scrip BSE Sensex 750 points to 9,587.

Corporate Affairs Minister Premchand Gupta said the case will be referred to the Serious Fraud Investigation Office (SFIO) and his ministry will not show any leniency towards those found guilty. He spoke of a coordinated action between Sebi,the Registrar of Companies and Company Law Board. Meanwhile,the ICAI,which regulates the chartered accountants and the profession,said its disciplinary committee has suo motu launched proceedings against Price Waterhouse. Jain said,it could be months before a penalty or punishment is meted out to the auditor. ICAI has powers to bar a partner from practicing,but can at best impose a penalty of Rs 5 lakh.

In his letter sent to Sebi and stock exchanges,Raju claimed that the actual revenue and operating profits for the second quarter ending September 30,2008 was Rs 2,112 crore and Rs 61 crore,respectively against the originally reported Rs 2,700 crore and Rs 649 crore. “This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone,” he said. He claimed that the gap in the balance sheet arose purely due to inflated profits over many 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…Every attempt made to eliminate the gap failed… It was like riding a tiger,not knowing how to get off without being eaten,” he said.

Even the abortive attempt to acquire sister real estate and infrastructure companies Maytas Properties and Maytas Infrastructure was an attempt to fill the fictitious assets of Satyam with real ones,Raju stated. In fact,the shareholder uproar over corporate governance following the proposed Maytas deal seems to have forced today’s disclosure. Raju’s claim that none including other directors and his senior management team were aware of the real situation as against the books of accounts is also hard to buy. While he said DSP Merrill Lynch can be entrusted with the task of exploring merger opportunities,the latter informed the stock exchanges today that it had terminated its advisory engagement with Satyam.