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deposit receipts (possibly,but not necessarily, in collusion with Bank Employees) or Genuine bank deposit receipts but no longer valid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. 

So what do all of you out there think…could this be the way !?..any holes in this !?

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

  1. Gaurav,

    Check out this link.

    http://www.sathyamurthy.com/2009/01/07/satyam-fraud-unravelling-the-mystery/

    Satyam had real revenues for the past 7 years.

    Inflation of revenues was probably made so that Raju could report clockwork like 35% Y-on-y and Q-on-Q growth in revenues. This in itself should have raised red flags in the minds of analysts following this sector.

    Once we assume that co. had revenues and assuming margins around 15-20% at minimum, the scale of the fraud emerges.

    The sheer amount of cash diverted by Raju and his senior management team is well over the 8000 crore figure bandied about !!

    Also, the real puzzling question is why Raju in his confession went out of his way to exonerate 10 of his seniormost managers. What did he expect them to do for him over the next few weeks? Did they systematically destroy evidence to cover their tracks?

    Also, have the investigators found the alternate set of books and records most likely kept off-premises.

  2. Hi Gaurav, this is very informative. I like to sound a note of caution. The exact nature of the fraud and as to who all must be accountable, and whether the auditing is as poor as it is made out to be, will become clear only after the veracity of Raju’s statements is independantly verified. As I have pointed out earlier there are other possibilities to his utterances which are waiting to be verified-the time period and the nature etc.-as of now it is conjecture.

  3. Of course my Blog on How Ramalinga Raju did what he did is only a conjecture and a hypothesis right now…seems plausible though…very soon,with a multitude of Investigations being launched by concerned authorities, the exact modus operandi of Ramalinga Raju will surface

    That Ramalinga Raju confessed actual inflated amounts as of September 30,2008 would point to his being fully aware of the exact status…ofcourse what he confessed yet has to be verified

    However,he could have made things a lot easier to include, how he actually did what he did, in his confession letter…the Accounting entries and the Manipulation of Documents and what was presented to the Auditors,which they accepted and therefore could not detect the fraud

    “Picture abhi baki hai mere dost !”

  4. Don’t Indian audit standards require cash balances to be externally confirmed? How can you have 5000 Crore of cash without external confirmation!?! One other possibility I can think of (though probably unlikely) is using the third type of cash confirmations where you send the balance to the bank and assume it is correct if you don’t get a response from the bank stating otherwise. It wouldn’t be surprising if the banks don’t respond even if the amounts are wrong but it would be surprising to use such confirmations for 5000 crore! I’ve also heard stories of staff auditors forging cash confirmations out of time pressure and not getting them from the bank on time but again that would be unlikely to happen year after year.

  5. Yes Arzan…You’re right…External and Independent Verification is required to be made by Auditors…Price Waterhouse had first stated that it has appopriate evidence to support their audit…then it issued a letter under Jan 2003 ICAI Guidelines for Revision of Audit Report and asked that It’s opinion for 34 quarters over Eight and a Half Years should not be relied on !…Investigations are on by many authorities…so let’s wait to see this nature of ‘appropriate evidence’ …check earlier blogs on this

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