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“In India, companies may fall sick, but promoters rarely do!”

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January 15, 2009

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deposit receipts (possibly,but not necessarily, in collusion with Bank Employees) or Genuine bank deposit receipts but no longer valid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

Sad that in a Country of 1.2 Billion People we have just 1 or 2….or 3 Business Role Models

Ratan Tata,Narayan Murthy and Deepak Parekh….Just Three Business Role Models who score top percentage on Personal and Business Ethics and Integrity and sense of Fairplay

What about all the rest in Business !?…Yes,we are patriotic,yes we are sensitive and self righteous…..but many in Business may succumb to the adage ” What’s Integrity to Opportunity !”

Something is adulterating our Value Systems…a lot of nexus in both public and private domains…. and scaringly it’s deep rooted…and worryingly the coalition era will continue even in the upcoming general elections…so governance constraints will continue too….so if you see our PM with his hands behind,he’s aware but can’t act as his hands appear tied…and if his hands are in front with fingers entwined,it’s like he’s standing humbly and helpless before a Judge!   

Maybe Corruption and Capitalism go together !

Thankfully in other disciplines than Business we have world icons and role models…be it in Sports,in the Fine Arts or in Science among others…the Genius of A R Rahman has just been globally recognised by a Golden Globe Award for his score in Slumdog Millionaire

I had warned you on December 17,2008 to SELL SATYAM AND MAYTAS as they would sink further !

I confess,I did not anticipate this bombshell confession of Satyam Promoter,Ramalinga Raju on January 7,2009 which saw the Satyam price Collapsing from Rs 175 to Rs 40 on the same day

However,after Ramalinga Raju,had announced on December 16,2008,the now infamous Satyam’s Proposal to take over Maytas Companies,I had blogged on December 17,2008 to SELL SATYAM AND MAYTAS as they would sink further

The Blog was titled

Satyam becomes Asatyam as Founder Ramalinga becomes Ravana !

Click on for full earlier blog,of which some relevant extracts are as below

Shareholders should get out of both,Satyam and Maytas Infrastructure …Both will sink further as it becomes clear and is established that this was not just a Diversification planned by Satyam,but it was a blatant bailout attempt by a Father of His Sons 

Mr B Ramalinga Raju, you’re a Goner !

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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