Satyam Computer Services Fraud

As the weeks unfold, more news of fraud and inappropriate transactions come to light.

According to an article written by Heather Timmons, of the International Herald Tribune, Ramalinga Raju, of Satyam Computer Services (India), resigned on 1/6/09 because of account falsification.


"Addel Halim/Bloomberg News: "Ramalinga Raju, chairman of Satyam Computer Services, told the Bombay Stock Exchange that he did not profit from the accounting problems he disclosed on Wednesday."

"A huge chunk of the company's finances were fake. Of the 53.6 billion rupees in cash and bank balances that Satyam listed as assets at the end of its second quarter, 50.4 billion rupees, or about $1 billion, were nonexistent, Raju said in a letter to the Satyam board that was distributed by the Bombay Stock Exchange"

"Satyam serves as the back office for some of the world's largest banks, manufacturers, health care and media companies, handling everything from computer systems to customer service. Clients have included General Electric, General Motors, Nestlé, McGraw-Hill and the U.S. government. In some cases, Satyam is even responsible for finances and accounting for these clients."

Although many businesses are run with high levels of integrity, it seems that a few people have succumbed to greed and falsification. If the actions of these few people were limited only to a few others within their circle of business associates, this would not be quite a concern.

Much of the financial decisions made around the world by movers and shakers are based on data that is assumed to be true. We put our trust in our financial institutions and the business related to making our financial world hum.

What does it mean for the bigger picture when large companies willingly put money and sensitive financial/accounting data in the hands of people who falsify information or even intentionally conduct their business in a fraudulent manner?

Each time that I learn of another scandal or fraud related to finance/economics, I wonder how these things could go undetected for so long. I have a few thoughts about how this is perpetuated...

• Marketing tools for financial institutions and related business have become sophisticated over the years. For example, websites are designed so that customers have a feeling of confidence and trust, in order to complete on-line financial transactions. Trust is "earned" by the image that the institution projects via the look and feel of the company's website and the messages that are provided visually and through text.
  

On the Satyam website, the following messages provides the reader with a sense of trust, but as we now know, it is false trust.

"Success: It is about having your eye on the outcome all the time"

Stephen Ward on Compliance Management
"Compliance isn’t just about reporting, or data management, or training, or having the right technologies; it’s all of these together. The overarching intent of all of these compliance programs is to help enterprises address four key areas: information integrity, process integrity, controlled access to information, and secure information retention."

"Creating value for society is an integral part of our business. We believe that contributing to the well-being and development of society is an extension of everything we do....While we undertake urban transformation initiatives through Satyam Foundation, we touch rural transformation through Byrraju Foundation"

Another example of this is what Bernie Madoff's clients and potential clients read on his company's website:

"The Owner's Name is on the Door"

"In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door. Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."

"A Global Leader in Trading US Equities

"With more than $700 million in firm capital, Madoff currently ranks among the top 1% of US Securities firms. Our sophisticated proprietary automation and unparalleled client service delivers an enhanced execution that is virtually unmatched in our industry."

Who will be the next cockroaches we see scurrying around when the light shines?


RELATED

The Seeds of the Satyam Scandal (Elizabeth Corcoran, Forbes, 1/8/09)
"It was a horrifying turn for a man long considered one of India's self-made success stories--and active philanthropists. Other Indian executives are quick to contend this is an isolated case. Even so, a few quietly note that it's hard to imagine how a publicly traded company, which must comply with U.S. Sarbanes Oxley disclosure rules, could have been mislead for so long by one or even two individuals...Raju had been a one-of-a-kind man, deeply loyal to his family, patriarchal toward his employees, benevolent to the poor. And yet, suggest some who have known him, Raju grew up in an environment that enjoyed gambling and so ran his career with the bravado of a gambler."

Investors raise questions over PwC Satyam audit (Rhys Blakely, Times Online 1/8/09)
"It's hard to miss $1 billion of cash," Dennis Beresford, a former chairman of the Financial Accounting Standards Board, the US accounting watchdog, said...Satyam's bogus accounts had been audited by Price Waterhouse, the Indian-based auditor, which is a member firm of Price Waterhouse Cooper International, since the financial year 2000-2001... The company's balance sheet as of March 31, 2008 was signed off by Srinivas Talluri, a partner of Price Waterhouse in Hyderabad, the southern Indian city where Satyam is based."

Satyam scandal could be 'India's Enron' (Reuters/msnbc 1/7/09)
""If a company's chairman himself says they built fictitious assets, who do you believe here? This has put a question mark on the entire corporate governance system in India," said R.K. Gupta, managing director at Taurus Asset Management in New Delhi."
""It was like riding a tiger, not knowing how to get off without being eaten," Raju said in his letter, adding he was prepared to face up to the legal consequences."

Did we for get the lessons learned from Enron?

Did we forget the lessons from Enron?
There was quite a bit of publicly available information around related to the Enron fiasco in 2001. Available on-line is the Enron Explorer e-mail visualizer, which was created from the database of all of the email messages between Enron's senior management team as things were falling apart between 1999-2002.






visualcomplexity.com

The following NY Times article (February 2002) will refresh your memory: Enron's Many Strands: The Company Unravels; Enron Buffed Image to a Shine Even as it Rotted from Within

Punishment was not swift, as the trial ended in 2006:
Two Enron Chiefs are Convicted in Fraud and Conspiracy Trial (NY Times, 2006)

"... the executives had sanctioned or encouraged manipulative accounting practices and then crossed the line from cheerleading into outright misrepresentations of financial performance."

"Enron's fall had a far greater impact than on just the energy industry by heightening nervousness among average investors about the transparency of American companies. "The Enron case and all the other scandals and cases that trailed after it may have finally punctured that romance with Wall Street that has been true of American culture for a while now," said Steve Fraser, a historian and author of "Every Man a Speculator: A History of Wall Street in American Life."

KPMG, Enron Visualizations, Fannie Mae, and New Century Financial

Not long after the Enron scandal, questionable practices involving accounting irregularities were discovered at Freddie Mac in 2003, resulting in firing of David W. Glenn, the president, and forced resignations of Leeland C.Brendsel, the chairman and CEO, and Vaughn A. Clarke, the CFO. Initially, the executives were rewarded for bad decision making.

Leeland C. Brendsel's severance package was $24 million, which was eventually protested:
Freddie Mac Severance Pay is Protested
(Alex Berensen, NY Times, 6/13/2003)

" ...Standard & Poor's cut its stock rating on Freddie Mac to avoid from hold. ''We believe the company has been less than forthright in giving investors adequate information regarding recent investigations,'' Standard & Poor's said. ''We are concerned about the magnitude of the investigation and its potential political fallout.'' "

At the same time, Fannie Mae was in trouble. An article in the NY Times, written by Jennifer Lee in 2004, outlined the findings of Federal regulators regarding significant problems in the accounting practices used by Fannie Mae related to amortization and derivatives:

Overseer Says Fannie Mae Due for a Shake-Up

"The accounting techniques used by Fannie Mae effectively resulted in off-balance sheet reserves that were used to smooth earnings to meet the expectations of financial analysts, according to the report."

KPMG was the firm that certified Fannie Mae's books at the time. Fannie Mae fired KPMG, and later sued the company, according to a 2006 NY Times article.

KPMG also certified the books of New Century Financial, which failed in 2007:
Inquiry Assails Accounting Firm in Lender's Fall

"New Century Financial, whose failure just a year ago came at the start of the credit crisis, engaged in “significant improper and imprudent practices” that were condoned and enabled by auditors at the accounting firm KPMG, according to an independent report commissioned by the Justice Department...E-mail messages uncovered in the investigation showed that some KPMG auditors raised red flags about the accounting practices at New Century, but that the KPMG partners overseeing the audits rejected those concerns because they feared losing a client."

I wonder just what data was missing or mis-represented.