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INDIA: Indian Outsourcing Giant Admits Fraud

by Rama LakshmiWashington Post
January 7th, 2009

The leader of one of India's largest technology outsourcing companies, Satyam Computer Services, on Wednesday admitted cooking its books and committing other grave financial wrongdoing to inflate profits over several years. The revelation shook India's stock market and sent shockwaves across the country's booming software industry, while television commentators quickly dubbed Satyam "India's Enron."

The company, India's fourth-largest information technology firm, with more than 53,000 employees, services several Fortune 500 companies, including General Motors, General Electric and IBM. The range of services includes application software development, engineering design solutions and back-office customer services. The investment firm DSP Merrill Lynch immediately informed the Indian stock exchange that it has terminated its engagement with the software giant, which is also registered on the New York Stock Exchange.

Chairman and founder B. Ramalinga Raju took responsibility for the fraud and resigned in a letter he submitted to Satyam's board. The letter said the company lied about profit and revenue for several years, inflating revenue by 33 percent and profits more than tenfold in the third quarter.

Raju apologized to the company's stakeholders and said that none of the other board members had any knowledge of the financial fraud.

The beleaguered Raju, who had been in the news recently for an acquisition fiasco, said that every attempt to eliminate gaps in the balance sheet and fill the "fictitious assets with real ones" and "non-existent cash" failed.

"It was like riding a tiger, not knowing how to get off without being eaten," he wrote in the letter. "I am now prepared to subject myself to the laws of the land and face consequences thereof."

Satyam's auditor, PricewaterhouseCoopers, said Wednesday that it was examining Raju's statement but declined to comment further. Satyam had 631 clients at the end of June, and U.S.-based companies make up an estimated 60 percent of its revenue.

Financial observers expressed fears that other Indian technology companies might be hiding accounting skeletons similar to those of Satyam, casting doubt on the celebrated outsourcing industry and oversight of its companies. Observers worried that the scandal could erode the confidence of overseas clients.

The National Association of Software and Service Companies in New Delhi issued a statement calling Satyam "a stand-alone case of failure of corporate governance" that is not a "reflection on the industry or corporate India."

Ironically, Raju received the "entrepreneur of the year" award in 2007 from the consulting firm Ernst & Young. The council of the Institute of Directors said it will be withdrawing the Golden Peacock Global award for best corporate governance that it gave Satyam in 2008.

The company's headquarters in the southern city of Hyderabad was immediately cordoned off by police, and Satyam shares nose-dived by almost 80 percent on Mumbai's stock exchange. The exchange's benchmark Sensex index plunged 7 percent and the Indian rupee fell as the news of the scandal became public.

India's market regulator, the Securities and Exchange Board of India, immediately announced an investigation.

"His confession is an event of horrifying magnitude. We have to go beyond this letter and find out what actually has happened," C.B. Bhave, the chairman of SEBI, told reporters in Mumbai. "This is an issue which has very serious implications. It also raises the issue of authenticity of accounts that have been audited and certified by the auditors."

The Indian minister of company affairs, Prem Chand Gupta, said that the case was a "serious fraud" and that "there will be no leniency in dealing" with it.

Raju said that the gaps in the company's books arose because of inflated profits recorded over several years.

"What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years," he wrote. "It has attained unmanageable proportions as the size of the company operations grew significantly."

However, Raju said, he and the company's managing director did not take "even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results." The interim chief executive, Ram Mynampati, wrote an open letter to his colleagues Wednesday: "What we are confronted with is the challenge of continuing our business operations, seamlessly. Rumors will abound and it would be fair to assume that competition will try and leverage it to their advantage."

Mynampati said a fully empowered team was formed to weather the crisis and address issues such as maintaining delivery systems, customer retention, pipeline management, cost controls and collections.





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