Crikey

India now has a corporate scandal to compare with America’s Enron or Bernie Madoff, after the chairman of one of the world’s largest IT companies admitted to multi-billion dollar fraud.

Late yesterday, Satyam Computer Services chairman Ramalinga Raju issued a full, frank and strangely moving statement declaring that he and his brother, B. Rama Raju, the managing director, had inflated assets of approximately 50.4 billion rupees ($A1.46 billion) and a fudged a further 20.96 billion rupees ($A612 million) worth of figures.

But what makes this different to any other common or garden case of corporate fraud is Raju’s mea culpa. Jobless employees and impoverished investors may feel differently, but Raju’s statement is positively Shakespearean, especially when compared with the smarmy excuses of Bernie Madoff or Enron’s Kenneth Lay and Jeffrey Skilling (not to mention the pleas of home-grown villains Skase, Bond and Adler). His letter begins:

Dear Board Members,

It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The balance sheet carries of September 30, 2008 a. Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books) b. An accrued interest of Rs 376 crore which is non-existent c. An understated liability of Rs 1,230 crore on account of funds arranged by me. d. An overstated debtors position of Rs 490 crore (as against Rs 2,651 reflected in the books)
2. For the September quarter (Q2) we reported a revenue of Rs 2,700 crore and an operating margin of Rs 649 crore (24 per cent of revenues) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenues). This has resulted in artificial cash and bank balances going up by Rs 588 crore in Q2 alone.

And a jury will  — for better or worse —  be somewhat more lenient on a man who signs off: “I am now prepared to subject myself to the laws of the land and face the consequences thereof.”

In the extraordinary letter, Raju admitted that he had been falsifying accounts for years but that now the scale of deception had grown too great to hide. An abortive acquisition for Indian property group Maytas was the last attempt to keep the wheel spinning: “It was like riding a tiger, not knowing how to get off without being eaten,” he wrote.

He did however say that neither he nor his brother gained from the fraud:

I would like the Board to know:

1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years — excepting for a small proportion declared and sold for philanthropic purposes.
2. That in the last two years a net amount of Rs 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (statement enclosed, only to the members of the board), Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt pa yment of salaries to the associates. The last straw was the selling of most of the pledged share by the lenders on account of margin triggers.
3. That neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results.

But the question remains, how does one hide over $US1 billion? Clearly the board — who according to Raju knew nothing — will be investigated, as will the company’s auditors PricewaterhouseCoopers. The PwC lead auditor has reportedly been taken in for questioning by the police.

At the heart of the Enron scandal, and a whole host of other corporate collapses, was the auditor’s role. With the accounting profession’s reputation already in disrepute after the financial crisis of the past year it hardly needs this latest scandal. Whether PwC’s audit division was complicit with Raju’s fraud, or merely incompetent, remains to be seen.

Satyam, which ironically means “truth” in Sanskrit, has already been suspended from the New York Stock Exchange, and the Bombay bourse is taking it off the index. The Hyderabad-based company, one of the world’s leading business process outsourcing and IT services firms, employs 53,000 people across six continents, servicing 185 Fortune 500 companies. It was the winner of India’s Golden Peacock Award for Corporate Governance in 2008 and, perhaps tellingly, Raju was once named Entrepreneur of the Year … by chartered accountants Ernst & Young.

Yet another massive fraud has been added to the global economy’s decade of excess, but a higher benchmark for how to fess up has been set. Australian directors should take note.