Satyam Inflates Profits, Indian Market Plunges
Wow, is the bad news starting to come out in droves these days. The big news of the last couple of days, finally, isn’t an American story, and yet it’s affected American businesses as well as businesses around the world. Satyam Computer Services, one of the largest outsourcing companies in the world, had its CEO, Ramalinga Raju, come forth and admit that he and his company have falsely inflated its profits for years. He admitted that about $1 billion dollars of the cash they stated they had was false, and that figure accounts for 94% of the actual cash on hand, or around $60 million dollars.
In a day, the stock price of Satyam dropped about 80%, and the entire Indian index fell 7.3%, as the value of the rupee also fell. Some began calling this India’s version of Enron; we all remember what happened there.
Of course, for a “mental genius”, the way Raju tried to solve the issue seems even more idiotic. His company came under scrutiny when they tried to buy two construction companies and, in the process of checking into their finances, found that things didn’t quite make sense, and of course the purchases were canceled. A quote written in a letter by Raju was “”It was like riding a tiger, not knowing how to get off without being eaten.”
In a twist of irony, just a few months ago Satyam received an award from a group of Indian directors for excellence in corporate governance. It reminded me of Bernard Madoff, who had also received an award of excellence just months before being found out.
Some U.S. companies have already filed class action suits in the US on behalf of those who purchased American Depository Receipts (ADRs) of the company; they certainly didn’t waste any time, did they? Of course, they could have, since it was a national holiday in India on Thursday, so no action could be taken to begin with.
It begs a couple of questions. One, once again, where was the oversight? It’s hard to believe that auditors wouldn’t have picked this up on their own, unless they knew what was happening. Two, who else knew? Raju’s brother, who also worked for the company, has resigned, although there’s no proof that he had any idea of what was going on. Three, it wasn’t even the Indian Securities Commission that outed Satyam; it was the World Bank. And four, what happens to Satyam now? Enron obviously didn’t survive, but they were an auditing company, and who would hire an auditing company that did what they did? Satyam supposedly delivers very adequate goods and services, and is a software company. They’ve already changed CEOs, as Raju waits to see what his ultimate fate might be. Will Satyam possibly lose customers who’ve enjoyed their services because of this admission, or will they feel that justice has been served in some capacity and keep working with Satyam? For that matter, will the Indian government allow Satyam to stay in business?
The odd thing is that it shows that it’s not just American businesses whose business practices needed to come under scrutiny. Unfortunately, we all know this isn’t the last story of this type we’re going to hear about either.