Ernst & Young did Maytas Properties Valuation of Rs 6523 crs in just one Day !?

Just read a very interesting update on Maytas Properties in todays’ edition of Financial Express

Maytas Properties is facing the prospects of the Government taking it over the Board,just as they did for Satyam

The matter was being heard by the Company Law Board (CLB) and the company’s counsel suggested that the Government could appoint an observer or a Director on the Board…This was opposed by the Deputy Director,who represented the Government…He wants the Government to take over the Whole Board and thus the Company itself.

The Deputy Director made some interesting arguments on the Ernst & Young (E & Y) Valuation of Rs 6523 crs of Maytas Properties

  • There was a clear nexus between Father,Ramalinga Raju of Satyam, and Son,B Rama Raju,of Maytas Properties as they had relied on the E & Y Valuation to justify Satyam’s Proposal to takeover Maytas
  • This Valuation is Hollow as Maytas,as per government knowledge, has no land bank and has just a turnover of Rs 22 crs but the valuation was done at Rs 6523 crs
  • Government Alleges Fraud in the Valuation….E & Y has said in it’s Valuation report that they have valued all Maytas’s 31 projects in Chennai     ,Hyderabad,Bangalore and Nagpur and except for the Electronic City Project in Bangalore,land has been acquired
  • The fact is that Maytas Properties does not have any land.Some of it’s subsidiary companies have Development Rights,not lands….so the only asset the subsidiaries have are these rights
  • CLB Chairman,S Balasubramanian enquired whether E & Y did the Valuation in a Week..to which the Deputy Director replied ” No,the Valuation was done in a day only.”

So we have Two of the Big Four Accounting Firms facing bigtime flak in this sordid Satyam Saga…Price Waterhouse as Satyam auditors and Ernst & Young as Maytas Properties Valuers

What’s going to come out next !   

Possible Nature of Phantom and Fictitious Accounting Entries in SATYAM

Disgraced and jailed Promoter Chairman,Ramalinga Raju, of Satyam,confessed on January 7, 2009 that there is a huge cash hole of Rs 5040 crs in the Balance Sheet of Satyam as on September 30, 2008 and that for years he has been resorting to Inflating Revenues

So what could be the Nature, Form, Impact and Effect of the Phantom and Fictitious Accounting Entries that Ramalinga Raju and his accomplices must have passed in the Real Books of Satyam ?…. or did they keep a seperate Phantom Set of Accounting Books, possibly off the physical premises of Satyam Offices, which they presented to the auditors, Price Waterhouse

Especially for those not conversant with Finance and Accounts I have tried to present the nature of Phantom and Fictitious Accounting Entries that must have been created by Ramalinga Raju and his accomplices to create such a Huge and Increasing Cash Hole over the Years

 

Nature of Phantom & Fictitious Accounting Entries in the Books of Satyam 

Objective

Accounting Entry

Reflected in

Effect

 

I

 

Inflated Sales

of Rs 100

Dr

Rs 100

Client Debtors

Balance Sheet under Debtors in Current Assets

Inflates Assets and therefore Networth and Book Value 

Cr

 Rs 100

Sales

 Profit & Loss Account

under Sales

 Inflates Revenues and therefore Profits that get transferred to Reserves at Year end,thus inflating Networth 

 

II

 Against Sales in I above,showing Cost of Sales through Cost Entry for Salaries

at an assumed amount of Rs 75, less than Sales as passed above

 Dr

 Rs 75

Personnel Expenses

 Profit & Loss A/c

 under Expenditure

 as Personnel Expenses

Increases Expenditure and therefore Cost of Sales and reduces Profit…also creates ‘Benami’ Employees that don’t exist 

Cr

Rs 75

Bank

Reduces the Bank Balance in the Balance Sheet under Bank in Current Assets

Reduces Bank Balance in the Books

 III

  

Showing Fictitious Receipt of Rs 100 from   Client Debtors for the Fictitious Sales in I above

 Dr

 Rs 100

Bank

 Increases Bank Balance by Rs 100 in the Balance Sheet under Bank in Current Assets

 

 

Cr

Rs 100

Debtors

Cancels out Dr in Client Debtors by Rs 100 being Amount earlier shown in the Balance Sheet by the Inflated  Sales as in I

 

At Year end the above gets reflected as below in Accounts

 In the     Profit and Loss A/c

 

Sales of  Rs 100 Less Expenditure of Personnel Expenses Rs 75 = Profit of Rs 25

 

In the     Balance Sheet

 

Liabilities : Rs 25 in Reserves being Profit Transferred at Year end from P & L A/c

 

Assets : Rs 25 in  ‘Bank’ in Current Assets being the Profit reflected as received

 

So this is How Sales ,Profits and Bank Balance is fictitiously Inflated in the Books of Account

 

The Problem occurs when Liabilities and  Assets in the Balance Sheet are rolled over to the next year

 

Thus Bank Balance keeps getting inflated with Increasing Quantum of Fictitious Inflated Sales and Personnel Expenses Entries ,with the cycle being completed by showing Fictitious Receipts from the Debtors

 

Ramalinga Raju, do you realise that although, if one has to believe you, that your intentions were to prop up Revenue and Profit and margins growths over the years to attract more Business,your Diabolical and Disastrous Creative Accounting created a Frankistien which went out of control and fed on itself

Was it your conscience,Ramalinga Raju,as you say,that led to your courageous confession or was it that you were facing a Hobson’s Choice and were cornered so bad that you had no real option but to make this Confession?… I really don’t know !… But you are a ‘Guru’ ! Man !… How did you have the B____  to do all this…for years…on such a huge scale… and not get caught ! ?…how did you manage to hoodwink your auditors, Price Waterhouse, bankers and tax authorities ! for years?

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Was this how Ramalinga Raju of Satyam hoodwinked the Auditing Firm of Price Waterhouse for Years?

I am truly intrigued…sure all of you too are…. as to how Ramalinga Raju of Satyam got past the auditors,Price Waterhouse (PW)

So when PW disclosed a few days ago that they had appropriate evidence to support the Satyam audit,it really got me thinking

It would thus seem that PW must have seen the Bank’s Fixed Deposit Receipts which supported their Values in the Satyam Balance Sheet…We know now that these deposits were largely fictitious…so either PW was shown forged bank deposit receipts (possibly,but not necessarily, in collusion with Bank Employees) or Genuine bank deposit receipts but no longer valid

If it was a case of forgery,then it is self explanatory how this fraud happened

But what if the origin of these receipts was genuine ?

Years ago when I was doing articles,I came across several fraudulent situations….Same Inventories were shifted from one Godown to another to show that they represented and reflected two different Closing Stock Entries in Two different Group Companies….In another case,this was long before Demat,a promoter of a large Industrial Group reported his Physical Share Holdings in his flagship as lost to his own company.The company re-issued the shares as duplicate shares….The Promoter  who had pledged his holdings for a Loan and had not really lost the shares, was now able to pledge the duplicate shares with another Bank to raise another loan !…Remember How Harshad Mehta used the Bank Receipts (BR) route where on one set of Bonds against which a BR was issued in ready forward deals,he created  several leverages on just that one BR with different banks !   

 So what if the Game plan of Ramalinga Raju was like this

  • Bank Deposits were actually created and Receipts obtained
  • Later the banks were intimated that Satyam had lost the original receipts and could the Bank issue Duplicate Ones…Banks may have Obliged as Satyam was a Top Customer
  • Using these Duplicate Receipts, Ramalinga Raju prematurely redeemed the Deposits and created fresh deposits in new banks and played out the same game again and again
  • However the Auditors,Price Waterhouse, must have been shown all the original Bank Deposit Receipts to back up the Balance Sheet Amounts…They accepted these for years without investigating the Interest element or verifying the existence of the Deposits independently and directly with banks…Even assuming that PW may have done this and Bank Employees may have colluded with Ramalinga Raju and provided the deposit confirmations even though no Deposits existed,then auditing the Interest Accrued Entries would have exposed all of this…as these remained unpaid quarter after quarter,auditor antennas should have been raised….there is no question of TDS unless interest was paid.

So Hypothetically,as Ramalinga Raju confesses the Cash Hole is Rs 5040 crs,PW must have been shown original Bank Deposit Receipts of around this amount

To illustrate,an original Rs 500 crores must have been rolled over as fresh deposit in newer banks after being prematurely redeemed after obtaining Duplicate Receipt on claiming the Original receipt was Lost or Misplaced…This routine was replayed in different banks and would have equipped Ramalinga Raju with Several Original Bank Deposit Receipts to show to the auditors,PW

It is simply a one Hour job to confirm all of this….Just take the copies of the Original Bank Deposit Receipts which PW must have as evidence in their Files and verify each with the concerned banks…The banks will confirm that they had issued such Receipts,but on them being reported lost ,duplicate receipts were issued and against which the deposits were prematurely broken.Thus the Original Receipts,which were reported as lost,were no longer Valid…..Of course PW should have also confirmed and verified the Bank F D Statements which would have also carried Interest paid and accrued entries.Mere bank receipt or FD Certificate should not have been accepted as evidence. 

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Auditors Price Waterhouse….You are sealing your own Fate in this Satyam fraud!

The battered auditors of Satyam,Price Waterhouse,have just issued a letter dated January 13,2009 addressed to their Client,Satyam Computer Services Ltd and marked for the attention of the three New Directors in the New Board and the Company Secretary….This Letter is also been cced to SEBI,RBI,BSE,NSE,New York Stock Exchange,ROC,Hyderabad and the Central Board of Direct Taxes

The Letter reads like a Confession of sorts.First a gist of Some important extracts and then later my observations are as below

  • The letter is signed by a Partner (Name Not Given) on behalf of Price Waterhouse.It is not signed by PWC India Chairman,Ramesh Rajan,who ,a few days ago, sent an email to all employees intimating them that they have begun a comprehensive internal review and requesting them not to discuss the Satyam Issue or offer any comments to the Press or external Sources
  • It refers to the Audit Period from Quarter ending June 30,2000 to Quarter ending September 30,2008…that’s Eight and a Half Years that included 34 quarters
  • PW planned and performed the required audit procedures on the Financial Statements Prepared by Management,examined the books and records produced by the Management and relied on Management for Controls over Financial Reporting,Information and Explanations and Verbal and Written Representations
  • In light of the Confession of Fraud by the ex-chairman and promoter of Satyam,Ramalinga Raju,PW warns that their opinions on the financial statements may be rendered inaccurate and unreliable
  • In accordance with the Guidance Note of January 2003 of the ICAI for Revision of the Audit Report and which prescribes steps the auditor must follow to prevent reliance on audit reports under such circumstances,PW has stated that their audit reports and opinions in respect of the Financial Statements for the Audit Period should no longer be relied on
  • In USA,Under GAAP too such a requirement as above is prescribed…Under Sec10A of the US Securities and Exchange Act of 1934,the Information contained in the Chairman’s Letter indicates that an illegal act could have occured.PW advises the Board of Directors to conduct an independent investigation under this US Law section to unearth this illegal act. 

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Satyam is actually “Saat-Yama” !

Today the Media has been airing, what they attribute to sources,that the jailed and disgraced Promoter Chairman of Satyam,Ramalinga Raju,has disclosed on interrogation that he has been fudging the Books of satyam for the last Seven Years !

So we are talking about “Saat-Yama” !…That’s Seven Years which heralded the Beginning of the End with the God of Death,Yama, Dancing around in the Accounts ! 

So this would mean that the Re-statement of Account has to be atleast from the Financial Year 2000-2001

The Government has stepped in and constituted a New Satyam Board that begins with three  Members, Deepak Parekh,Karnik and C Achuthan…The New Board appeared before the Media this evening and it was conveyed that an Independent Firm of Auditors will be appointed in the next 48 hours to get working on restating the Accounts 

This has to be the Priority,as No urgent funding can be obtained unless the Accounts reflect the true state of Affairs…Banks will not lend

My advice is to begin with the Accounts of FY 2000-2001 as this would then include investigation of the  hyped Indiaworld Deal between Sify and Rajesh Jain for US $ 116 Million

Read Ramalinga Raju’s Chairman Statement in the Annual Report of FY 2007-8…Incredulous !….This man knew he was lying,as he had been cooking the Books for Seven Years and yet he had the Boldness & Brashness to boast of Satyam Success

Methinks he would make an interesting case Study for Psychiatrists…this guy had to be psychotic as he lost contact with external reality….what was he thinking !? to have persevered with Seven Years of Creative Accounting and not be found !…..and perhaps the Auditors too would make an Interesting Case study for how they failed to Detect such Creative Accounting !  

Interestingly,the jailed CFO,V Srinivas too has confessed that he was completely in the dark on what Ramalinga Raju did…he was only concerned with quarterly results and never looked at the Balance Sheet.He was only instructed by Ramalinga Raju and his Brother,to manage payments with Operational cash and when some Payments got delayed,he suspected something was wrong !…This is realy difficult to swallow ! As CFO for years he had to be privy to what was happening…he did say that the Fixed Deposits were fictitious !….Also he was invited to and attended every Audit Committee Meeting that also included four Independent and Non Executive Directors as Members and both the Auditors,Internal and Statutory as Invitees

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SATYAM : Seems Sunk and looks difficult to Save and Salvage as too many Contingencies scaring off potential Buyers

On Paper, as of September 30,2008 the Assets of Satyam were Rs 8300 crs…after adjusting for the overstated assets and understated liabilities as confessed by the now disgraced Promoter Chairman,Ramalinga Raju the networth of Satyam drops to @ Rs 1200 crs….With 67 crore shares of Face Value Rs 2 in existence,the book valueper share would get restated to around Rs 20…Satyam’s Share Price has dropped from yesterday’s closing of Rs 40 to Rs 20 this morning reflecting this

But will Satyam’s Share Price drop to Zero or move up from here !? Will Trading be stopped in it ?

The Andhra Pradesh Chief Minister has written to the Prime Minister to form a Committee of I T Stalwarts,Narayan Murthy from Infosys,Azim Premji from Wipro and Ramodarai of TCS to salvage Satyam and save the jobs of over the claimed 50000 Satyam Employees 

However,as I look at it right Now even this restated networth of Rs 1200 crs of Satyam looks suspect and will be under threat on two accounts

  • Ramalinga Raju has confessed that for years he inflated Revenues and Profits in Satyam ..It has to be investigated as to when did he start doing so and what is the quantum of inflated revenues and profits…If he inflated Revenues,then it would mean perhaps that the Debtors have been overstated and further adjustment may not be required here…but Profits may convert to losses and therefore Reserves may need further adjustment to reflect the quantum of overstated profits…This would reduce the Networth further and posssibly make it Negative…This would mean the Book Value of Rs20 too would appear overstated
  • Law Suits have already been filed in USA on behalf of ADR Shareholders and law suits will surely follow in India too….Claims in such suits runs into Hundreds of Millions of Dollars…Satyam may not be solvent enough to tackle such Claims…Right Now such Claims are Contingent

There are some other tainted issues too…like the Real Number of Satyam Employees…Management claims 53000 employees….It is suspected that this figure is grossly overstated…Also there is strong views on the Credibility of Satyam Managers…Most IT Companies are smply in no hurry to absorb them…In fact Infosys has categorically said it will not touch tainted Satyam and has also instructed it’s HR Dept not to entertain Satyam Employee Resumes

It is difficult for any Potential Buyer to only absorb the Operating Business of Satyam without exposing themselves to the sword of growing Contingent Liabilities

As a seperate Legal Entity,Satyam is toxic to touch right now…However what will happen is that It’s Lifeline,it’s Clients will review their relationship with Satyam and in all probability migrate to other IT Companies as the risk of staying with Satyam may be too high…Satyam resources may be directed towards fighting for survival rather than Client Servicing…To maintain some level of Continuity,what is possible is that Satyam Teams working on Genuine Client Business may also migrate to the Clients directly or to the IT Company that has taken over from Satyam to serve the Client

The Nightmare for Satyam has only just begun…..difficult to see any potential Buyer taking the risk to buyout Satyam,given the growing contingent liabilities…therefore cannot advice to buy into Satyam at Rs 20

Remember the risk that some crazy NSE Member took when he bought Millions of Shares of the tainted Global Trust Bank at Rs 9 to Rs 11 a few years ago in the wrong belief that a white knight or the Government will bail it out

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