INDIA: Indian Outsourcing Giant Admits Fraud

Publisher Name: 
Washington Post

The leader of one of India's largest technology outsourcing companies, Satyam Computer Services,
on Wednesday admitted cooking its books and committing other grave
financial wrongdoing to inflate profits over several years. The
revelation shook India's stock market and sent shockwaves across the
country's booming software industry, while television commentators
quickly dubbed Satyam "India's Enron."

The
company, India's fourth-largest information technology firm, with more
than 53,000 employees, services several Fortune 500 companies,
including General Motors, General Electric and IBM.
The range of services includes application software development,
engineering design solutions and back-office customer services. The
investment firm DSP Merrill Lynch
immediately informed the Indian stock exchange that it has terminated
its engagement with the software giant, which is also registered on the
New York Stock Exchange.

Chairman and founder B. Ramalinga Raju
took responsibility for the fraud and resigned in a letter he submitted
to Satyam's board. The letter said the company lied about profit and
revenue for several years, inflating revenue by 33 percent and profits
more than tenfold in the third quarter.

Raju apologized to the
company's stakeholders and said that none of the other board members
had any knowledge of the financial fraud.

The beleaguered Raju,
who had been in the news recently for an acquisition fiasco, said that
every attempt to eliminate gaps in the balance sheet and fill the
"fictitious assets with real ones" and "non-existent cash" failed.

"It
was like riding a tiger, not knowing how to get off without being
eaten," he wrote in the letter. "I am now prepared to subject myself to
the laws of the land and face consequences thereof."

Satyam's auditor, PricewaterhouseCoopers,
said Wednesday that it was examining Raju's statement but declined to
comment further. Satyam had 631 clients at the end of June, and
U.S.-based companies make up an estimated 60 percent of its revenue.

Financial
observers expressed fears that other Indian technology companies might
be hiding accounting skeletons similar to those of Satyam, casting
doubt on the celebrated outsourcing industry and oversight of its
companies. Observers worried that the scandal could erode the
confidence of overseas clients.

The National Association of Software and Service Companies
in New Delhi issued a statement calling Satyam "a stand-alone case of
failure of corporate governance" that is not a "reflection on the
industry or corporate India."

Ironically, Raju received the
"entrepreneur of the year" award in 2007 from the consulting firm Ernst
& Young. The council of the Institute of Directors said it will be
withdrawing the Golden Peacock Global award for best corporate
governance that it gave Satyam in 2008.

The company's
headquarters in the southern city of Hyderabad was immediately cordoned
off by police, and Satyam shares nose-dived by almost 80 percent on
Mumbai's stock exchange. The exchange's benchmark Sensex index plunged
7 percent and the Indian rupee fell as the news of the scandal became
public.

India's market regulator, the Securities and Exchange Board of India, immediately announced an investigation.

"His
confession is an event of horrifying magnitude. We have to go beyond
this letter and find out what actually has happened," C.B. Bhave, the
chairman of SEBI, told reporters in Mumbai. "This is an issue which has
very serious implications. It also raises the issue of authenticity of
accounts that have been audited and certified by the auditors."

The
Indian minister of company affairs, Prem Chand Gupta, said that the
case was a "serious fraud" and that "there will be no leniency in
dealing" with it.

Raju said that the gaps in the company's books arose because of inflated profits recorded 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,"
he wrote. "It has attained unmanageable proportions as the size of the
company operations grew significantly."

However, Raju said, he
and the company's managing director did not take "even one rupee/dollar
from the company and have not benefited in financial terms on account
of the inflated results." The interim chief executive, Ram Mynampati,
wrote an open letter to his colleagues Wednesday: "What we are
confronted with is the challenge of continuing our business operations,
seamlessly. Rumors will abound and it would be fair to assume that
competition will try and leverage it to their advantage."

Mynampati
said a fully empowered team was formed to weather the crisis and
address issues such as maintaining delivery systems, customer
retention, pipeline management, cost controls and collections.

AMP Section Name:Globalization
  • 185 Corruption
  • 186 Financial Services, Insurance and Banking