The Satyam Fraud: A Reporter's Near-Miss

When Ramalinga Raju struggled to maintain eye contact while defending Satyam Computer Services' improbable earnings in late 2008, I dismissed my unease as overthinking. Two months later, India's fourth-largest software company admitted to one of Asia's biggest accounting frauds.

After nearly five years, a court in India allowed Netflix to stream the episode about Raju as part of its investigative docuseries "Bad Boy Billionaires: India." Raju had sought a stay on the release after Netflix announced the series in 2020. The episode revives memories of a story I almost broke--and the warning signs the industry missed.

Too good to be true

I was covering telecommunications and technology for the Indian affiliate of CNBC in 2008. I had interviewed Raju over the years, but this time something felt off.

In the wake of the global financial crisis, India's outsourcing industry was facing the repercussions of budget cuts from clients around the world, primarily in the U.S. Bellwethers such as Infosys and Tata Consultancy Services along with Wipro were reporting headwinds and muted growth.

Satyam was different.

Not only did the company report double-digit revenue growth, it also guided for a strong year ahead. Before Raju confessed on Jan. 7, 2009, to overstating profits and revenue, Satyam reported a 43% year-over-year growth in consolidated revenue at US$637.3 million for the first quarter of fiscal 2009 that ended June 30, 2008. Reported net profits were up 45%.

For the quarter that ended Sept. 30, 2008--the final reported earnings before the confession--Satyam beat estimates to report a 39% year-over-year growth to US$652.2 million, up 7.6% from the previous quarter. Reported net profits were up 42% and 6.1% sequentially. The company revised its guidance to a fiscal 2009 revenue growth of 19% to 21%.

It was for these results that Raju arrived in person to speak to journalists at the auditorium of the National Stock Exchange of India in Bandra Kurla Complex, Mumbai's central business district.

I asked Raju if the earnings and the upbeat guidance, in contrast to the industry, were realistic. He repeated the standard boilerplate answer: the outperformance was due to 4% volume growth and rupee depreciation against the U.S. dollar, while efficient cost management would improve annual margins.

When I pressed, Raju was visibly uncomfortable and didn't maintain eye contact. I found that behavior odd, though I gave him the benefit of the doubt and explained it away as his typically shy demeanor. Even then, I had no clue about what was going to unfold.

The canary in the mine

In my reporting, I discreetly asked industry sources what they thought of Satyam's earnings. While most hinted that its performance and guidance were unduly optimistic, no one suggested fraud. At best, Satyam was known to undercut its competition and could have benefited from clients' desire to cut costs in the wake of the financial crisis.

The first time I started seriously investigating Satyam was when the company reported a strange development on Dec. 16, 2008. Satyam's board approved a US$1.6 billion proposal to acquire Maytas Infrastructure and Maytas Properties, both founded by Raju's family, primarily his sons. The backlash from investors, particularly foreign ones, was immediate. The company's shares were listed in the U.S. Within 24 hours, the deal was scrapped, triggering lawsuits and regulatory scrutiny from U.S. regulators.

After the fiasco, Satyam postponed a scheduled board meeting and appointed DSP Merrill Lynch as financial adviser to explore options to preserve or enhance shareholder value. But DSP Merrill Lynch unexpectedly terminated its mandate with Satyam, citing material accounting discrepancies it found during the engagement.

It was then that I reached out to a financial industry professional who had quietly distanced himself from the troubles at Satyam. Known for his integrity, eyebrows were raised when he unexpectedly refused to work on the Satyam-Maytas merger. It took time for him to talk. But he finally opened up when Raju confessed to cooking the books on Jan. 7, 2009.

I had started my career at Reuters, where two sources, independent of each other, were de rigueur for a source-based story. Although, CNBC-TV18 didn’t have the same standards at the time, I was unsure about bringing a story of such consequence without adequate sourcing. 

I had been raising queries with Satyam Computer and incessantly calling its executives to dig more. But those efforts were in vain. In hindsight I can understand why there was a wall of silence ahead of a shock announcement that would make corporate history.

To give credit where it is due, Indian financial newspaper, The Business Standard, was the first to report on concerns raised by sector analyst Kawaljeet Saluja from Kotak Securities. 

In October 2008, during an analyst conference call after Satyam's Q2 earnings, Saluja questioned why US$550 million was parked in a non-interest-bearing current account instead of deposits. He followed up by noting that deposit accounts remained flat over four quarters while incremental cash went to current accounts, a trend persisting for several quarters.

At the time, chief financial officer, Srinivas Vadlamani explained the funds were temporary, from various countries, and would move to deposits soon, with yields expected to improve. Management cited yields around 8%, despite industry rates of 9% to 10%, but Saluja's probing highlighted inconsistencies later tied to the fraud.

When the failsafes fail

The Satyam fraud exposed how many checks and balances failed to prevent disaster. The collapse destroyed wealth, careers and reputations across the industry.

PricewaterhouseCoopers, which was the statutory auditor throughout this period, did not resign at the time of the Maytas proposal. Instead, it issued a brief statement defending the conduct of its audits and later came under investigation and sanctions.

Writing in the International Journal of Business and Social Research, Madan Lal Bhasin, a professor of accountancy, wrote that between 2004 and 2008, PwC's audit fees rose nearly six-fold, even as the company's total income grew 2.5 times.

Satyam also paid PwC twice what other firms would charge for the audit, Bhasin wrote. For the financial year that ended in 2008, PwC received an annual fee that was almost twice what its peers--TCS, Infosys and Wipro--paid on average to their auditors. "PwC audited the company for nearly nine years and did not uncover the fraud, whereas Merrill Lynch discovered accounting discrepancies as part of its due diligence in merely 10 days."

The governance failures extended beyond the auditor. In 2008, Satyam was awarded the Golden Peacock Award for corporate governance excellence from the London-based World Council for Corporate Governance, less than five months before the fraud confession.

Spare the rod, spoil the country

For what was one of India's biggest accounting scandals, Raju spent limited time behind bars. For destroying close to US$3 billion in investor wealth, Raju was sentenced to seven years in prison, minus the six years spent during the trial. On May 11, 2015, the sessions court in Hyderabad suspended the seven-year sentences and granted bail pending appeal, with Raju and others released from Cherlapally Prison on May 12, 2015.

But here is the thing--Raju spent most of that time “behind bars” in a plush hospital suite in Hyderabad. Rumor has it that his family and he are one of the southern Indian city’s biggest landowners, making them one of India’s richest families. 

The case remains a reminder of the cost of failing to verify what appears too good to be true.

When numbers diverge sharply from industry trends without clear explanation, when management grows defensive under questioning, and when related-party transactions emerge without warning--these are not just red flags. They are flashing warning lights that investors, auditors and journalists ignore at their peril.

Along with air that you cannot breathe, water that you cannot drink, food that you cannot trust, pavements that you cannot walk on, roads that you cannot travel on, hospitals that you cannot be admitted to, doctors in emergency rooms without a medical degree, India needs to make sure accountability is center-stage in any discussion, political or otherwise. 

To rub salt into an Indian’s wounds, it’s just been days since Lalit Modi, a persona non grata in India, joked about another of the Netflix series’ subjects--Vijay Mallya about the two being the “biggest fugitives” of the country. 

They were partying at Mallya’s 70th birthday celebrations in London.

References and links to further reading below:

Banerjee, R. (2015). Who cheats now: Scams, frauds and the dark side of the corporate world. New York, NY: SAGE Publications.

Basilico, E., Grove, H., & Patelli, L. (2012). Asia’s Enron: Satyam. Journal of Forensic & Investigative Accounting, 4(2), 142-160.

Bhandari, B. (2009). The Satyam saga. New York, NY: Business Standard Books.

Bhasin, M. (2016). Creative accounting practices at Satyam computers limited: A case study of India’s Enron. International Journal of Business and Social Research 6(6), 24-48.

Bhasin, M. L. (2013). Corporate accounting fraud: A case study of Satyam computers limited. Open Journal of Accounting, 2, 26-38.

Brooks, L. J., & Dunn, P. (2014). Business & professional ethics. New York, NY: Cengage Learning.

Caliyurt, K. T., & Idowu, S. O. (2012). Emerging fraud: Fraud cases from emerging economies. New York, NY: Springer Science & Business Media.

Jones, M. J. (2011). Creative accounting, fraud and international accounting standards. New York, NY: John Wiley & Sons.

Nag, K. (2013). The double life of Ramalinga Raju: The story of India’s biggest corporate fraud. New York, NY: HarperCollins Publishers.

Niazi, A., & Ali, M. (2015). The debacle of Satyam computers Ltd: A case study from management’s perspective. Universal Journal of Industrial and Business Management, 3(2), 58-65.

Knowledge@Wharton, Wharton School of the University of Pennsylvania. Scandal at Satyam: Truth, lies and corporate governance (2009)

Knowledge@Wharton, Wharton School of the University of Pennsylvania. Paying the Price: Satyam’s Auditors Face Plenty of Questions (2009)

The author covered technology and telecommunications for CNBC India during the period of the Satyam fraud.