Wednesday, January 7, 2009 5 comments ++[ CLICK TO COMMENT ]++

Satyam... Enron of India

Satyam (SAY), a large business process outsourcing company, just revealed that the company's books have been a huge fraud over the years.

Shares of Satyam Computer Services crashed 77% in Mumbai Wednesday, after the founder and chairman of India's fourth-largest software company resigned, saying the company had inflated its cash and bank balances on the balance sheet by more than $1 billion.

Chairman B. Ramalinga Raju said the balance sheet as of Sept. 30 had inflated non-existing cash and bank balances of 50.40 billion rupees ($1.04 billion), understated a liability of 12.3 billion rupees, and overstated debtors' position of 4.9 billion rupees.

In a letter to the board, made available to the stock exchange, Raju wrote that he was making the announcement "with deep regret, and tremendous burden that I am carrying on my conscience."

"The gap in the balance sheet has arisen purely on account of inflated profits over a period of last 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 said.

"I am now prepared to subject myself to the laws of the land and face consequences thereof," Raju added.

This looks very similar as any other scheme such as Enron or Madoff. A small lie keeps snowballing into a larger one, and before you know it, the perpetrators cannot keep a lid on it any longer.

Satyam was a very popular Indian stock on the NYSE. The stock seems to have been halted on the NYSE (either that or Yahoo! Finance isn't displaying quotes properly.) But Yahoo! Finance does show real-time quotes with the stock off 91%. Satyam was worth more than $10 billion early last year but is likely headed towards bankruptcy.

The interesting thing is that the executive tried to mask the losses with some questionable buyout of one of his private firms a few months ago. The market detected some concern of the shady deal and punished the stock. Well, it looks like the market was right in sensing some concern. That deal seems to have been proposed entirely to perpetrate the lies.

It also seems that management/insiders manipulated cash on the balance sheet. It's not easy to manipulate cash and I wonder if the accountants were culpuable in this somehow.

Not a pretty sight for any Satyam stockholder or the Indian markets in general. Investors will not view this favourably. This is very bad in the short term but it's good in the long run since it will clean up the system. I think it's about time everyone started discounting these emerging markets. Other countries need to be discounted more too. As I have remarked before, I think the market is overlooking the bad loans in the Chinese banking system as well (skeptic in me says that most of the Chinese banking system is insolvent--but I have no proof and the government is the majority shareholder in the banks so the losses will accrue to taxpayers.) Companies in Russia are also quite dubious, with a lot of shady dealings.


5 Response to Satyam... Enron of India

January 7, 2009 at 7:24 PM

Who the hell are their auditors? They should be roasted on a spit for missing this.

First Madoff and now this. The accounting profession is having an even better year then investors...

January 7, 2009 at 7:53 PM

There interesting thing is that Satyam would have been audited by Indian auditors, as well as American ones (since it's listed on NYSE.) So the criminals somehow got through both accountants, or, of course, the accountants were in the game as well...

I hate to say it but I think there will be a lot more of this that will come to light. Investors have enough problems with economic deterioration, and now we are getting hit with these frauds :(

January 8, 2009 at 2:47 PM

It appears PWC did the audits, both in India and the US it seems. Let's see if they go the way of Arthur Andersen. They certainly deserve to.

January 8, 2009 at 3:15 PM

ContrarianDutch: "It appears PWC did the audits, both in India and the US it seems. Let's see if they go the way of Arthur Andersen. They certainly deserve to."

Only if they colluded with the guilty parties. Otherwise they are not culpable... In the Enron case, the accountants were helping the executives (ironically, the US courts found not wrondoing well after Arthur Andersen collapsed)...

January 8, 2009 at 5:11 PM

The scale of this fraud is absolutely massive. According to the former CEO (but should we believe him now?) the bulk of reported profits for well over a year and a huge chunk of reported assets just never existed.

If PWC did not actively collude they are utterly inept and/or lazy and that is possibly worse then being frauds. It means books they check cannot be trusted. If they were totally incompetent here they may well be incompetent elsewhere. The only product of an accountancy firm is trust and PWC has demonstrated they cannot be trusted. That makes them worse then useless.

I can just imagine the conference call:

CFO: "our books are audited by PWC"

Analyst: " So, did you make up the numbers with dice or a dart board?"

Post a Comment