satyam case study questions and answers

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Scandal at Satyam: Truth, Lies and Corporate Governance

January 9, 2009 • 18 min read.

When terrorists attacked Mumbai last November, the media called it "India's 9/11." That tragedy has been succeeded by another that has been dubbed "India's Enron." In one of the biggest frauds in India's corporate history, B. Ramalinga Raju, founder and CEO of Satyam Computers, India's fourth-largest IT services firm, announced on January 7 that his company had been falsifying its accounts for years, overstating revenues and inflating profits by $1 billion. According to experts from Wharton and elsewhere, the Satyam debacle will have an enormous impact on India's business scene over the coming months. The most significant questions, however, will be asked about corporate governance in India, and whether other companies could follow Satyam's Raju in revealing skeletons in their own closets.

• Finance & Accounting

When terrorists attacked Mumbai last November, the media called it “India’s 9/11.” That tragedy has been succeeded by another that has been dubbed “India’s Enron.” In one of the the biggest frauds in India’s corporate history, B. Ramalinga Raju, founder and CEO of Satyam Computers, India’s fourth-largest IT services firm, announced on January 7 that his company had been falsifying its accounts for years, overstating revenues and inflating profits by $1 billion. Ironically, Satyam means “truth” in Sanskrit, but Raju’s admission — accompanied by his resignation — shows the company had been feeding investors, shareholders, clients and employees a steady diet of asatyam (or untruth), at least regarding its financial performance. ( Editor’s note : Satyam is a corporate sponsor of India Knolwedge@Wharton.)

Raju’s departure was followed by the resignation of Srinivas Vadlamani, Satyam’s chief financial officer, and the appointment of Ram Mynampati as the interim CEO. In a press conference held in Hyderabad on January 8, Mynampati told reporters that the company’s cash position was “not encouraging” and that “our only aim at this time is to ensure that the business continues.” A day later, media reports noted that Raju and his brother Rama (also a Satyam co-founder) had been arrested — and the government of India disbanded Satyam’s board. Though control of the company will pass into the hands of a new board, the government stopped short of a bailout — it has not offered Satyam any funds. Meanwhile, a team of auditors from the Securities and Exchange Board of India (SEBI), which regulates Indian public companies, has begun an investigation into the fraud. Since Satyam’s stocks or American Depository Receipts (ADRs) are listed on the Bombay Stock Exchange as well as the New York Stock Exchange, international regulators could swing into action if they believe U.S. laws have been broken. At least two U.S. law firms have filed class-action lawsuits against Satyam, but given the company’s precarious finances, it is unclear how much money investors will be able to recover.

According to experts from Wharton and elsewhere, the Satyam debacle will have an enormous impact on India’s business scene over the coming months. The possible disappearance of a top IT services and outsourcing giant will reshape India’s IT landscape. Satyam could possibly be sold — in fact, it had engaged Merrill Lynch to explore “strategic options,” but the investment bank has withdrawn following the disclosure about the fraud. It is widely believed that rivals such as HCL, Wipro and TCS could cherry pick the best clients and employees, effectively hollowing out Satyam. Another possible impact could be on the trend of outsourcing to India, since India’s IT firms handle sensitive financial information for some of the world’s largest enterprises. The most significant questions, however, will be asked about corporate governance in India, and whether other companies could follow Satyam’s Raju in revealing skeletons in their own closets.

‘Riding a Tiger’

Raju was compelled to admit to the fraud following an aborted attempt to have Satyam invest $1.6 billion in Maytas Properties and Maytas Infrastructure (“Maytas” is Satyam spelled backwards) — two firms promoted and controlled by his family members. On December 16, Satyam’s board cleared the investment, sparking a negative reaction by investors, who pummeled its stock on the New York Stock Exchange and Nasdaq. The board hurriedly reconvened the same day and called off the proposed investment.

The matter didn’t die there, as Raju may have hoped. In the next 48 hours, resignations streamed in from Satyam’s non-executive director and Harvard professor of business administration Krishna Palepu and three independent directors — Mangalam Srinivasan, a management consultant and advisor to Harvard’s Kennedy School of Government; Vinod Dham, called the “father of the Pentium chip” and now executive managing director of NEA Indo-US Ventures in Santa Clara, Calif.; and M. Rammohan Rao, the dean of the Indian School of Business in Hyderabad (ISB). Rao had chaired both December 16 board meetings. On January 8, he resigned his position as the ISB dean. In a letter to the ISB community, he explained: “Unfortunately, yesterday’s shocking revelations, of which I had absolutely no prior knowledge, mean that we are far from seeing the end of the controversy surrounding Satyam Computers. My continued concern and preoccupation with the evolving situation are impacting my role as dean of ISB at a critical time for the school. Given that my term with ISB anyway ends in a few months, I think that this is an appropriate time for me to step down.”

Resigning as Satyam’s chairman and CEO, Raju said in a letter addressed to his board, the stock exchanges and the market regulator Securities & Exchange Board of India (SEBI) that Satyam’s profits were inflated over several years to “unmanageable proportions” and that it was forced to carry more assets and resources than its real operations justified. He took sole responsibility for those acts. “It was like riding a tiger, not knowing how to get off without being eaten,” he said. “The aborted Maytas acquisition was the last attempt to fill the fictitious assets with real ones.”

Specifically, Raju acknowledged that Satyam’s balance sheet included Rs. 7,136 crore (nearly $1.5 billion) in non-existent cash and bank balances, accrued interest and misstatements. It had also inflated its 2008 second quarter revenues by Rs. 588 crore ($122 million) to Rs. 2,700 crore ($563 million), and actual operating margins were less than a tenth of the stated Rs. 649 crore ($135 million).

Satyam’s auditor PricewaterhouseCoopers issued a terse statement: “Over the last two days, there have been media reports with regard to alleged irregularities in the accounts of Satyam…. Price Waterhouse are the statutory auditors of Satyam. The audits were conducted by Price Waterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence. Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities. Price Waterhouse will fully meet its obligations to cooperate with the regulators and others.”

Impact on ‘Brand India’

The outrage over Raju’s admission of systematic accounting fraud has broadened to wider concern about the potential damage to India’s appeal for foreign investors and the IT services industry in particular. Immediately following Raju’s confession, Satyam’s shareholders took a direct hit as the company’s share price crashed 77% to Rs. 30 (approximately 60 cents), a far cry from its 52-week high of Rs. 544 ($11.35) last May.

“If there were one or two more such accounting scandals in the next six months, it would make international investors more wary,” says Wharton management professor Michael Useem . “One example would put people on guard; several examples would be enough to tell big investment money managers that they have to be especially careful working in that environment.”

Jitendra Singh , a Wharton management professor who is currently dean of the Nanyang Business School in Singapore, believes Satyam is an “outlier” and that there is no reason to think that “problems of this kind may be much more extensive than one company or a handful of companies.” However, he adds, “foreign investors will look a little more askance at accounting data from India. And that may not be a bad thing.”

Useem also warns against overreacting. “Don’t assume other firms are guilty,” he says. But he considers the situation to be an “alerting call” for investors to check where their money is, and for auditors and independent directors in all major firms to take a look at the books.

Corporate India has tried to contain the damage so far. Rajeev Chandrasekhar, president of the Federation of Indian Chambers of Commerce and Industry, called upon regulators “to move quickly to demonstrate that this is an exceptional case among corporations, and that investors need not worry about Indian corporate governance and accounting standards.” Suresh Surana, founder of RSM Astute Consulting Group, said in a statement that the Satyam development is “a major eye opener and will bring into renewed and critical focus the role of independent directors, auditors, company management, [the] CFO and other key persons involved.”

“When you have companies that are ostensibly growing their top lines at 30%, 40% or 50%, it is possible to paper over things,” Singh says. “Satyam was doing it by boosting sales and profits; Bernie Madoff was doing it by boosting rates of return. When growth rates slow down, you are unable to hide the financial reality of how much cash you actually have. It is possible that during this slowdown period, more scandals will come to light.” (U.S. financier Madoff last month admitted to running a $50 billion Ponzi scheme to keep his hedge fund afloat.)

Singh adds that companies with “the bluest of blue-chip reputations [such as] Infosys and TCS” could actually gain in the current environment, because of a potential “flight to quality” among client companies. “The third-tier and weaker companies will probably undergo a lot more scrutiny,” he says.

According to Ravi Aron , senior fellow at the Mack Center for Technological Innovation at Wharton, the Satyam fallout could affect India’s IT offshoring and outsourcing firms in several ways. An immediate impact could be skepticism on the part of clients about whether Indian IT firms can be entrusted with sensitive financial information. “Clients could begin to ask, ‘How much do I know about this IT company and its governance?'” says Aron. “Is the IT service provider doing anything that could jeopardize the client’s compliance with FASB, Sarbanes Oxley, Basel II or other financial regulations?”

Aron recommends that before other IT companies get blackballed because of Satyam’s problems, “they should act swiftly to demonstrate that their own operations are squeaky clean.” Indian IT companies have always had exceptionally high standards of accounting, and they should ensure that they do not face any spillover effect, he adds. This has already begun to happen. On the day that Raju came clean, N. R. Narayana Murthy, chief mentor at Infosys, was on Indian television — distancing Infosys and the rest of the IT industry from Satyam’s practices. Similarly, Vineet Nayar, CEO of HCL, e-mailed a personal letter to the company’s clients and associates. Describing Satyam’s disclosures as “unfortunate,” the letter added that Nayar would “reaffirm our commitment that we [will] focus on creating value for our customers with the same passion that we have demonstrated in the past while maintaining the highest ethical and governance standards.”

Mauro Guillen , a Wharton management professor who has studied corporate governance in emerging economies, believes that Indian business has an advantage in arguing that the problem is limited to Satyam and is not systemic. “India is not perceived like Russia — it is neither everyone’s darling nor the plague,” he says. “This works to the country’s advantage because it deflects the blame of such occurrences to the way governance works in emerging economies rather than to India. What regulators in India need to do in response to Satyam is to find out quickly if other companies have been doing similar things. The proper response is to deal with and defuse the problem as soon as possible.”

Guillen notes that what makes Satyam’s case unusual is that it had listed its ADRs on the NYSE. “Companies in emerging economies have trouble raising capital at low costs. The literature shows that is the reason they want to list in the U.S., where they accept a higher level of governance in order to raise capital at a lower cost. The fact that Satyam listed its ADRs in the U.S. but still had such serious governance problems makes this case particularly disturbing.”

Guillen adds, though, that India has several well-regarded IT companies. “If one or two of them don’t make the grade, it should not shake investor confidence. It shows that investing in emerging markets is risky. Investors always balance risks and rewards. If the IT sector in India continues to remain competitive, the Satyam episode will just be a footnote in India’s business story. If the sector becomes uncompetitive, then that would create a serious problem.”

Saikat Chaudhuri , a management professor at Wharton, believes the Satyam episode reveals that the pressure on companies to maintain their financial performance is immense. “Satyam always wanted to keep up with the Big Three of Indian IT companies — TCS, Infosys and Wipro,” he notes. “At a time when the IT industry was booming and companies were growing rapidly, it was easy for Satyam to argue that the company was doing well and that it had good governance.” The involvement of the board, Chaudhuri adds, was at the “strategic level; in companies like Satyam, it is the owner/promoter/founder who runs the show. It has to do with the ownership structure.” In Chaudhuri’s view, auditors such as PricewaterhouseCoopers, who signed off on the bogus accounts at Satyam, have a lot more to answer for than the board of directors. “This is a serious lapse on their part. They should have probed.”

Chaudhuri’s advice to other Indian IT firms is to distance themselves from the Satyam fallout through prompt action. “Honesty and transparency will alleviate investor concerns,” he says. “I don’t believe the sector will come crashing down. Perhaps Indian IT companies will face more scrutiny in the coming months; they may have to answer a few more questions, but India Inc. will pull through.” NASSCOM, the National Association of Software and Services Companies, could play a role in helping communicate that “the Satyam episode, though it shocked everyone, is an isolated instance,” he adds. 

WorldCom and Tyco, Again

Useem says that if one were to take an inference from recent high-profile scandals outside of India, “there would be a redoubled effort [in India] on the part of investors and independent directors at other companies to ensure that nothing like what happened at Satyam happens under their noses.”

Useem draws a parallel between what occurred at Satyam with the scandals at WorldCom and Tyco, rather than at Enron. “At WorldCom, the CFO and the CEO were knowingly misstating the accounting and financials of the firm; at Tyco, the CEO and the CFO were knowingly taking money from the company for personal purposes,” he says. “Satyam’s disaster has a parallel to these acts of malfeasance.”

Useem recalls the CEO and promoter of a Chinese solar panel company who “wanted his company to be extremely well governed” and therefore listed it on the New York Stock Exchange. “He wanted a great board of directors and thus listed the company fully on the NYSE — not as an ADR — for the sole purpose … of forcing himself to be disciplined in the governance policies his company pursues.”

If it survives, Satyam may be able to redeem itself with new management and governance codes, Useem says. He recalls working as a consultant a couple of years ago with Tyco, where the company’s new CEO Ed Breen systematically went about cleaning up after the departure of disgraced CEO Dennis Kozlowski, instituting strong corporate governance practices. Tyco is one of the best examples of a corporate governance turnaround, Useem notes.

Singh adds that the Satyam scandal doesn’t necessarily warrant more regulation. “There is no need to strengthen corporate governance regulations [in India],” he says. “The issue is really more one of leadership at the board level. The tone gets set by the chairman of the board; it’s much more a matter of culture within the board room, of the group dynamics within the board.”

Truth in Numbers

Notwithstanding Raju’s confession, the Satyam episode has brought into sharp relief the role and efficacy of independent directors. SEBI requires Indian publicly held companies to ensure that independent directors make up at least half their board strength.

The knowledge available to independent directors and even audit committee members is inherently limited to prevent willful withholding of crucial information, Singh notes. “The reality is, at the end of the day, even as an audit committee member or as an independent director, I would have to rely on what the management was presenting to me,” he says, drawing upon his experience as an independent director and audit committee member at Fedders, a publicly held company in the U.S. that filed for bankruptcy last year. “It is the auditors’ job to see if the numbers presented are accurate.”

Singh says he drew “a level of confidence” from the accounting rigor and governance mechanisms at Infosys, where he was an independent director from 2000 to 2003. He recalls how T.V. Mohandas Pai, the company’s then-chief financial officer (now a director overseeing human resources) “would take so much time going into accounting details.”

Even if outside directors were unaware of the true state of Satyam’s finances, some red flags should have been obvious. According to Aron, Satyam is one of the world’s largest implementers of SAP systems. In an effort to compete against Satyam, HCL recently acquired Axon, an SAP consulting firm, at a cost of $800 million. ( Editor’s note : See interview with HCL CEO Vineet Nayar .) Aron notes that any Satyam director should have been puzzled that the company was proposing to invest $1.6 billion in real estate at a time when a competitor as formidable as HCL was gunning for one of its most lucrative markets. “IT is a highly capital-intensive business, especially in India,” says Aron. “What on earth would compel Satyam to invest $1.6 billion in real estate at a time when competition with HCL was about to grow more intense? That is what the directors should have been asking.” Instead, he adds, like the dog that didn’t bark in the Sherlock Holmes story, the matter was allowed to slide.

How effective independent directors can be is mainly a factor of the “dynamics inside the board room once the doors are closed,” according to Singh. “There is an attitude in some Indian companies that the board members actually work for the people who have brought them onto the board. This is a completely misguided attitude. It looks like this may have been a problem at Satyam…. The real strength of a healthy board is when a consensus gets overturned by a dissenting view.”

Even if the proposed investment in the two Maytas firms appeared to be ethical on first sight, Singh notes that he would have expected the independent directors to be extra careful. “Given the fact that there is a family connection involved, as an independent board member I would be looking very hard at whether this is the right decision for the company,” he says. “Also, quite aside from issues of governance, everything we know about unrelated diversification [deals] from management literature is that, as a general matter, they are not a good idea; they don’t seem to make strategic sense.”

Independent Defectors

Useem wonders if the Satyam directors who resigned actually did the right thing. “The leadership dictum is that you need to stay the course, stay in the game, face the problem and solve the problem,” he says. “Did the four directors who resigned have an option of banding together, staying on the board and changing governance?” Useem adds that “it is often very hard to stay the course. I am empathetic with people who have difficulty [making that decision].”

Media reports quoted former independent director Srinivasan as saying she accepted “moral responsibility” for failing to cast a dissenting vote on the Maytas proposal. Some of the other directors who resigned have cited difficulties in attending frequent board meetings. Useem says it can indeed prove challenging for independent directors to go through reams of documents and attend frequent board meetings that companies in distress typically have.

In a written response to Knowledge at Wharton, Palepu, Satyam’s former non-executive director, stated that he was not present at the board meetings where the Maytas investment proposals were discussed. “As a result, under Indian law, I was not eligible to vote on the proposals,” he said. Palepu earned nearly Rs. 1 crore (about $200,000) from Satyam in 2007, according to regulatory filings, most of it for rendering “professional services.” He declined comment, but those services were essentially leadership development and consulting for Satyam’s top management, according to Archana Muthappa, the company’s head of media relations.

SEBI and India’s registrar of companies have launched an investigation into Satyam. Citing the Indian Securities Contract Regulation Act of 1956, a report in The Economic Times says SEBI is empowered to award penalties of up to Rs. 25 crore and imprisonment of up to 10 years to directors and management executives “for violating the listing agreement by making false and inaccurate disclosures in the company’s quarterly and annual results.”

Singh says it is important to remember who the ultimate victims are in cases like Satyam. “This is a real tragedy; the people who will be left holding the bag will be the shareholders.”

Even as Raju is widely blamed for unleashing “India’s Enron,” Chaudhuri points to a major difference between Enron and Satyam. “At Enron, the CEO stonewalled, while whistle-blowers came out with the truth,” he says. “At Satyam, there were no whistle-blowers. The CEO blew the whistle on himself.” In that sense, Raju did — ultimately — tell the truth and perhaps live up to the “Satyam” name. Unfortunately for him, the company, and India’s IT industry, by then it was much too late.

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Revisiting the Satyam Fraud: A Lesson in Corporate Governance

• By: Mark E. Lokanan & Rebecca Wilson-Mah
• Publisher: SAGE Publications: SAGE Business Cases Originals
• Series: Accounting
• Publication year: 2023
• Online pub date: January 02, 2023
• Discipline: Accounting (general) , Forensic Accounting , Corporate Governance
• DOI: https:// doi. org/10.4135/9781529618976
• Keywords: corporate governance , directors , fraud , governance , India , Securities and Exchange Commission , security , shareholders , students , World Bank Show all Show less
• Contains: Teaching Notes Region: Southern Asia Industry: Financial and insurance activities | Financial service activities, except insurance and pension funding Organization: Satyam Organization Size: Large info Online ISBN: 9781529618976 Copyright: © Mark Eshwar, and Rebecca Wilson-Mah More information Less information

Teaching Notes

This case provides a detailed description of India’s largest-ever corporate accounting fraud, which occurred in 2009 at Satyam Computer Services Ltd (“Satyam”), India’s fourth-largest IT company. The case highlights the ambiguity surrounding corporate governance listing standards and how senior officials working in unison with senior management can circumvent regulations to engage in illegal conduct. Drawing on data sources from public information/records, the case provides a detailed review of the corporate governance structures that were in place at Satyam prior to the resignation of the company’s Chairman and CEO Ramalinga Raju and his admission of financial statement fraud in January 2009. Due to deteriorating business conditions and allegations of corruption, Satyam experienced a sharp decline in its profit position. To keep Satyam’s assets, Mr. Raju proposed an acquisition, which would have eaten up Satyam’s entire core cash, with two companies controlled by himself and his family members—Maytas Properties and Maytas Infrastructure. Satyam’s shareholders reacted negatively to the deal, which resulted in a significant drop in the company’s share price. To increase shareholders’ confidence in Satyam and keep the company afloat, Mr. Raju knowingly and intentionally overstated its revenues and understated its financial position between 2004 and 2008. The case highlights that the dominant conceptualization of corporate governance best practices is losing its legitimacy and authority and challenges students to think of approaches that will address the concerns raised by Mr. Raju’s action at Satyam. The case is helpful to evaluate more effective corporate governance approaches in detecting and preventing financial statement fraud.

Learning Outcomes

By the end of this case study, students should be able to:

• 1. identify the problems with corporate governance and the regulatory apparatus in place to detect and prevent fraud;
• 2. differentiate between fraud committed by the lone wolf predatory offender and fraud that involves collusive behavior (i.e., collective actions);
• 3. make a list of the necessary corporate governance best practices and board of directors’ mechanisms to detect and prevent fraud;
• 4. in the context of current international best practices, discuss recommendations for future changes to corporate governance practices;
• 5. discuss ways in which corporations can implement preventive measures to detect red flags of fraud.

Introduction

In 2009, at its collapse, Satyam Computer Services Ltd (“Satyam”) was India’s fourth-largest IT company. Corporate accounting fraud at Satyam raised serious questions about corporate governance and the role of regulators and watchdogs to safeguard the capital markets and the public interest. Some of the questions the Satyam fraud raised included: why was corporate governance best practice not followed? Despite having regulators and other gatekeepers on board, why had Mr. Raju so easily misrepresented the company’s financial position? How could Mr. Raju run such a large-scale fraud for over five years while under regulatory scrutiny? Was it because of corporate governance failure? Was it because of the inability of watchdogs to provide adequate oversights? Or was it a combination of both?

Company Background

Founded by Ohio University graduate Ramalinga Raju in 1987, Satyam had its principal executive offices in Hyderabad, India. In 1987, Satyam grew from its humble beginnings to become a large software company and information technology (IT) services provider. In 2008, Satyam had offices in more than thirty countries and employed more than 50,000 employees. When Satyam started, founders Ramalinga Raju and Rama Raju had a simple mission—to provide software services to corporations in India. Building on its success in India in the 1990s, Satyam expanded to the United States, Canada, Europe, and Asia. In 2008, when Satyam was at its zenith of operation, the company served 654 active customers, including 185 Fortune Global 500 companies and about 80 companies that generated more than USD 5 million in revenues ( Securities and Exchange Commission, 2008 , Securities and Exchange Commission, 2015 ). At the time of its collapse, Satyam stocks were traded on the Bombay Stock Exchange, the National Stock Exchange of India, and had American Depository Shares (ADS) on the New York Stock Exchange (NYSE).

Data 1. Satyam Daily Stock Close, 2001–2012

Expansion and manipulation.

With Satyam’s expansion and trading on international stock exchanges, there were expectations from shareholders to maximize their investments. Analysts also had pressure to meet financial targets, and Satyam was under severe financial pressure to remain competitive and maximize shareholders’ wealth with these expectations.

In 2009, Mr. Ramalinga Raju, in a letter to the Securities and Exchange Board of India (SEBI), admitted to knowingly and intentionally falsifying the company’s reported revenue by manipulating and producing fake invoices from made-up vendors for services that were never provided ( Securities and Exchange Commission, 2015 ). Satyam’s books were manipulated for every quarter over five years, starting in 2003 and ending in September 2008. The accounting scam, which was dubbed the “Enron of India,” was worth USD 1.1 billion—in total, 94% of the cash on Satyam’s books came from fictitious revenues ( Balachandran, 2015 ). After the scam unfolded, Satyam shares fell from a high of about USD 275 per share in 2008 to a low of about USD 35 per share in 2009. Investors lost as much as USD 2.3 billion from the decrease in Satyam’s share price ( Balachandran, 2015 ). With its low share value and imminent signs of financial collapse, Satyam was a shadow of its past and was left gasping for life. Satyam’s decline presented an opportunity for other IT giants to enter the field. In 2009, after Satyam collapsed, it found a new knight in shining armor, Tech Mahindra (TechMa), which outbid other competitors for ownership of the beleaguered software company.

Mr. Ramalinga Raju: Promoter and Chair

The fraud at Satyam raised serious questions about the modus operandi of Mr. Ramalinga Raju, the key decision-maker in the criminogenic conduct of Satyam’s senior management who orchestrated and carried out the fraud. Fraud is a multifaceted problem, and surrounding stimuli can aid fraudulent conduct ( Lokanan, 2018 ). Satyam was facing financial strains and pressure to meet analysts’ expectations from all accounts. The perceived need to appear financially stable and maintain investors’ confidence may have contributed to Satyam’s fraud. Satyam’s fraud also put the role of the auditors under the scanner. Satyam’s balance sheets were distorted and misrepresented over five years; it was not a one-time incident. The fact that the fraud went on for five years signifies that there were no independent verifications and that the process was rationalized over time to justify the fraudulent behaviour and the negativity that comes with violating ethical norms. The fact that no one could detect the fraud over five years further signifies that there were weak or non-existent internal controls. Overall, limited oversights, including the absence of auditor verifications, regulatory scrutiny, and lack of internal controls, contributed to Satyam’s fraud. It was all too easy for Satyam’s senior management to follow the direction of Mr. Raju to manipulate the books of a company that was listed in some of the most respected exchanges around the world and monitored by watchdogs such as the United States Securities and Exchange Commission (SEC), the SEBI, and PricewaterhouseCoopers (PwC).

Satyam Corporate Governance Framework

A. independent directors.

According to the SEC’s Standards for Listed Companies, most of the board members must consist of outside or independent directors. In its filing regarding the company directors, Satyam indicated that five of its nine directors were independent , “namely Dr. Mangalam Srinivasan (a retired professor), Mr. Vinod Dham (a venture capitalist popularly known as the ‘father of Pentium’ microprocessor of Intel), Prof. M Rammohan Rao (former Dean of Indian School of Business), Mr. T R Prasad (former union cabinet secretary), and Prof. V S Raju (former director of the Institute of Technology, Delhi) are independent within the meaning of the NYSE standards” ( SEC, 2008 ).

This appeared to be a distinctive list of corporate directors on the surface, and it was also a highly homogeneous group of directors. While Harvard Business School professor Krishna Palepu was listed as one of Satyam’s independent directors, he was not included in Satyam’s corporate governance report submitted to the SEC in 2007. Palepu received approximately USD 125,000 from Satyam in consultancy fees, and the other directors received about USD 19,000 for around 100 hours of work annually ( Bhattacharyya, 2013 ). Most notable in Satyam’s corporate governance make-up was the presence of Mr. Raju and his brother Mr. Rama Raju. Mr. Rama Raju and Mr. Ramalinga Raju served as Chairman and CEO of Satyam, respectively ( Figure 1 ). Both brothers had significant interests in the company and were key decision-makers in its daily affairs ( Shivanna, 2010 ).

Data shown in the structure are listed as follows.

• Ram Mynapati (Executive Director)
• Dr. M Srinivasan ( retired professor)
• Mr. Vinod Dham (Venture Capitalist)
• Prof. Rammohan Rao (Dean Indian School of Business)
• Mr. T. R Prasad (Former Union Cabinet Secretary)
• Prof. V. S. Raju (Director I I T, Delhi)
• Prof. Krishna Palepu (Not included in Corporate Governance Report)
• Srinivas Vadlamani (C F O)

Figure 1. Satyam Corporate Governance Structure at the Time of the Fraud

Source : Authors.

On the surface, Mr. Raju presided over a governance structure that appeared to follow corporate governance best practices. Upon closer scrutiny, Mr. Raju presided over an independent directorship cadre that exercised minimal due diligence in verifying the company’s records. This was supported by the fraud that was found to have continued for approximately five years. During this period, the independent directorship that was in place to safeguard Satyam’s assets and protect minority rights could not detect that Mr. Raju was cooking the books. Satyam’s independent board consisted of six directors, four of whom were academics and one a former high-level government official. Mr. Vinod Dham was the only independent director with business experience who served as an executive of Intel Corp ( Bhattacharyya, 2013 ).

b. Audit Committee

Satyam’s Form 20-F filing to the SEC stated that the company “has an audit committee that meets all of Rule 10A-3” under the U.S. Securities Exchange Act ( SEC, 2008, p. 69 ). On the same form, Satyam noted that its “audit committee consists of four members and all the members are independent under the NYSE’s rules” (p. 69). Satyam’s own 2008 Form 20-F filing with the SEC revealed serious corporate governance problems:

We do not have an individual serving on our Audit Committee as an ‘Audit Committee Financial Expert’ as defined in applicable rules of the Securities & Exchange Commission. This is because our board of directors has determined that no individual audit committee member possesses all the attributes required by the definition ‘Audit Committee Financial Expert’ ( SEC, 2008, p. 74 ).

Satyam’s Audit Committee did not include a member with financial expertise. The fraud investigation found that Mr. Raju would have been able to conduct fraudulent transactions without detection. Alternatively, if the members of the Audit Committee had a certain degree of financial expertise, he would have been able to work in unison with them to manipulate and distort the company’s financials. This governance setup signals that it was Mr. Raju, as owner/promoter/founder of Satyam, who was strategically running the company’s affairs ( Knowledge at Wharton, 2009 ).

c. Compensation Committee

Satyam’s Form 20-F filing for 2008 noted that it had a compensation committee composed of four members. The form also stated that each compensation committee member was an independent director within the meaning of the NYSE’s listing standards. The Committee met three times in 2008 ( SEC, 2008 ). The Committee did not appear to bear the cost associated with subsequent monitoring of the CEO’s compensation. For the fiscal year ended March 2008, all of Satyam’s directors received about USD 26 million as salary, commissions, sitting fees, professional fees, and other receivables, while the package for Ramalinga Raju was about USD 6.04 million and Rama Raju about USD 4.4 million ( The Economic Times, 2019 ). The Committee considered performance measures to address the pay-performance sensitivity of Satyam’s senior management and Mr. Raju’s contract. It was unclear if they had a role in overseeing the reporting process. Performance-based pay schemes served as an inducement for Mr. Raju to falsify the books to maximize his compensation.

Nominating/Corporate Governance Committee

Explicitly stated in Satyam’s 2008 Form 20-F filing to the SEC was the fact that the company did not “have a nominating/corporate governance committee” ( SEC, 2008 ) in place and therefore did not comply with the stipulation that “[l]listed companies must have a nominating/corporate governance committee composed entirely of independent board members” ( SEC, 2008, p. 74 ). As a substitute for the corporate governance committee, Satyam had an “Investors’ Grievance Committee,” which had many grievances before and after the fraud was made public.

Ramalinga Raju’s Conduct

It was uncertain whether Mr. Ramalinga Raju, as Promotor and Chair, wanted to follow the Listing Standards in spirit or was more inclined to comply with the Standards by implementing ad hoc committees to achieve particular objectives. Mr. Raju, by not addressing the corporate governance concerns, engaged in unethical and criminogenic conduct, while other board members either turned a blind eye to his actions or were aware of the company’s fraudulent transactions and true position and instead chose not to act in the company’s interests. In the end, the unfolding of events placed the entire corporate governance framework at Satyam under scrutiny. The silence of the independent directors and the audit and compensation committees to Mr. Raju’s criminogenic conduct in the fraud was described as “callous negligence” and borderline “collusion” ( Singh et al., 2010, p. 33 ). The fact that Mr. Raju fabricated and manipulated the books of Satyam for more than five years and yet none of the independent directors or PwC auditors had recorded evidence of his actions was enough to conclude that he was an unscrupulous operator who influenced the company’s governance framework and control mechanisms (p. 33)

Ramalinga Raju the Decision-Maker

Mr. Ramalinga Raju’s problem started long before his ill-fated letter to Satyam’s Board of Directors (BOD) and the SEBI in January 2009. One of Satyam’s larger contracts was to provide IT security to the World Bank. Satyam was declared a “strategic partner” with the World Bank in 2002 ( Russell, 2015 ) and has conducted hundreds of millions of dollars in business with the Bank since the partnership was announced. However, in 2008, the World Bank suffered a series of cyber intrusions that compromised sensitive data. Upon further investigation, the Bank’s anti-corruption unit revealed improper financial dealings between Satyam and a top World Bank officer, which compromised sensitive data. Consequently, Satyam was suspended from procuring future World Bank contracts. Satyam was also debarred for eight years from conducting business with the World Bank. The loss of business was a severe hit to Satyam’s bottom line. Shortly after Satyam was suspended from the World Bank, the United Nations (an inter-governmental organization that works closely with the Bank) contracted Mr. Raju for Satyam to provide staffing/talent management software and training services to the tune of USD 6 million. However, revelations of corruption at Satyam led to the company being suspended from the United Nations’ vendor database. Sources revealed that the income from Satyam’s business engagements that was supposed to be used to pay a fictitious 10,000 employees was not deposited into their accounts. These accounts never existed, and instead, through a series of complex transactions, the funds were deposited into Mr. Raju’s related bank accounts.

Maytas Properties and Maytas Infrastructure

Satyam had been in the doldrums long before Mr. Raju, as the Chairman and CEO of the company, was aware of the competition from other IT companies in India and around the globe. Cognizant of the charges of corruption and loss of income from the suspended contracts, Mr. Raju had to find other ways to salvage and keep the retained earnings of Satyam from being diluted. One way he accomplished this task was by promoting the investment in two firms: Maytas Properties and Maytas Infrastructure (“Maytas” is “Satyam” spelled backward).

On December 8, 2008, Mr. Raju met with Satyam’s Board to decide on a proposed investment in Maytas Properties and Maytas Infrastructure. Both Maytas Properties and Maytas Infrastructure were under Mr. Raju’s control. They were engaged in real estate development, a completely different sector than the IT business in which Satyam engaged. On December 16, 2008, Satyam’s Board cleared the investment, which sparked an adverse reaction by investors and led to a decrease in the company’s stock on the NYSE and NASDAQ ( Knowledge at Wharton, 2009 , para. 4). As the news of investors’ adverse reaction reached Satyam, its BOD reconvened later that day and called off the proposed investment (para. 4).

As a last-ditch effort to save Satyam, Mr. Raju moved swiftly on the Maytas Properties and Maytas Infrastructure acquisition for two reasons. First, the money made from this acquisition would have transferred funds from Satyam to Mr. Raju, his family, and his friends, who supported the deal because it was not a new initial public offering (IPO). Upon further reviews of the proposed deal, Mr. Raju (acting on behalf of the Satyam Board) agreed to acquire a 100% stake in Maytas Properties for USD 1.3 billion and a 51% stake in Maytas Infrastructure (which was going to be a publicly listed firm) for USD 300 million ( Chanchani, 2008 , para. 3). The entire deal of USD 1.6 billion would have wiped out the surplus cash on Satyam’s balance sheet, which was estimated to be USD 1.6 billion (para. 3). Second, the deal required Satyam to assume the debt and liabilities of the acquired firms, which would have decreased Satyam’s tax burden and allowed Mr. Raju to divert the excess funds to the two branches of Maytas.

Mr. Raju never bothered to inform Satyam’s shareholders about the deal. Satyam’s shareholders were not consulted nor was approval for the deal that would have eaten up Satyam’s entire core cash sought from its shareholders. In its litigation release, the SEC noted that Satyam’s shareholders had severe concerns over the proposal and voted against the acquisition ( Securities and Exchange Commission, 2015 ). The shareholders’ main problem was that Mr. Raju’s deal valued the company lower than the cash on the balance sheet and the board of directors were urged to cancel the acquisition. As news of the deal became public, Satyam’s “American Depository Receipts (ADR) fell by more than 54% on the early trade, [and wiped out] more than $2 billion of its market capitalization”( Chanchani, 2008 para. 4). Immediately after the shares crashed, Mr. Raju aborted the decision to acquire Maytas Properties and Maytas Infrastructure and offered the following explanation for this decision:

We have been surprised by the market reaction to this decision even though we were quite positive about the merits of the acquisition. However, in deference to the views expressed by many investors, we have decided to call off these acquisitions ( Chanchani, 2008 , para. 1).

Following the decision to abort the deal, Mr. Raju was compelled to reveal the fraud. In January 2009, Mr. Raju wrote a letter to Satyam’s BOD and copied it to the exchanges where the company was listed and the chairman of SEBI. In the letter, he admitted to a billion-dollar accounting fraud that involved reporting materially false revenue and the falsification of accounts.

To present a rosy picture of the company’s financial health, Mr. Raju, for the most part, manipulated Satyam’s books so that the company appeared to be more profitable than it was. To accomplish this objective, from 2003 to September 2008 Mr. Raju, working in unison with Satyam’s senior management, “sewed up deals with fictitious clients, had large teams working on [his] pet ‘projects’… and introduced over 7,000 fake invoices into the company’s computer systems to record sales that simply didn’t exist” ( Krishnan, 2014 , paras, 4). At the direction of Mr. Raju, Satyam’s employees “generated on average 100 to 200 fake invoices per month in Satyam’s invoice managing system” ( Securities and Exchange Commission, 2015 ). As if these manipulations were not enough, “profits too were padded up to show healthy margins” ( Krishnan, 2014 , para. 4). The fictitious clients “never paid their bills, leading to a big hole in Satyam’s balance sheet” (para. 5). Mr. Raju also had concerns that the gap in the balance sheet could be exposed by promoters who had shares in the company. In his letter to the BOD, Mr. Raju noted that the company “promoters held a small percentage of equity” and that he had concerns “that poor performance would result in a takeover, thereby exposing the gap” (Bombay Security Exchange, and Security and Exchange Board of India, available at www.sebi.gov.in ). To fill this gap and present a healthy cash position and bank balance for Satyam, Mr. Raju inflated the debtors’ due from fictitious clients on the balance sheet.

Between 2004 and 2008, Mr. Raju and Satyam’s senior management knowingly, intentionally, and materially overstated the company’s revenues and understated its financial position. In his letter, Mr. Raju noted that as of September 30, 2008, Satyam’s balance sheet reflected over USD 1 billion in fictitious cash and bank balances when the actual amounts were USD 66 million ( Securities and Exchange Commission, 2015 ). Mr. Raju stated that Satyam’s revenue and operating margin for the quarter were each overstated by about USD 125 million (p. 6). These figures inflated the profit position at Satyam and sent misleading signals to the company’s investors. To provide explanations for the manipulation of Satyam’s books, Mr. Raju noted in his letter that “[t]the gap in the Balance Sheet has arisen purely on account of inflated profits over last several years.” In his letter to the BOD, Mr. Raju showed “markers of this pathology” ( Balachandran, 2009 , para. 8). Mr. Raju wrote that “[w]hat started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years.” Regarding the manipulations of Satyam’s books Raju wrote,

[We] attained unmanageable proportions as the size of the company operations grew significantly... The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations thereby significantly increasing the costs…Every attempt made to eliminate the gap failed ( Bombay Security Exchange, and Security and Exchange Board of India, n.d. ).

Later on, in the letter, Mr. Raju described the process as “like riding a tiger, not knowing how to get off without being eaten” ( Bombay Security Exchange, and Security and Exchange Board of India, n.d. ). He further wrote that

the aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But that was not to be ( Bombay Security Exchange, and Security and Exchange Board of India, n.d. ).

Mr. Raju’s criminogenic conduct in Satyam’s fraud illustrated the problems in building a corporate governance framework to prevent financial scams. Raju’s action presented an opportunity to consider all the breakdowns and gaps in oversight that enabled the fraud. Considering these breakdowns and gaps presented many opportunities to develop corporate governance best practices to detect and prevent accounting fraud in organizations.

Discussion Questions

• 1. Was corporate governance best practice followed at Satyam?
• 2. Mr. Raju certainly did not act as a lone wolf offender. Why were others complicit in the fraud? Was it because of pressure to meet analysts’ expectations?
• 3. Is current corporate governance best suited to detect fraud stemming from collusive behavior?
• 4. Satyam operated under the web of securities law in both the United States and India. How then was it possible for regulators from both countries to miss the red flags of fraud in Satyam?
• 5. How can corporations create and implement preventive measures that will help investors, regulators, and gatekeepers detect fraud’s red flags?
• 6. How can managers and regulators work to create, direct, and change companies’ cultures to reduce fraud risks and fraud?

Further Reading

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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