Satyam the Story Untold

We hereby try to bring the Good and Bad of the story which has send thundering shivers to the Corporate India and the Image of Indian Corporate World.

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I got this mail which gives us an idea of how Satyam might have conducted this fraud.Satyam Computer used a simple but clever modus operandi to window dress its performance. Its auditors & analysts failed to see through it. Here is what we think Satyam did (assumption):

1. Overstated Revenues (E.g by Rs.588 cr in QE Sep08, Rs.2700 cr instead of Rs.2112 cr)

2. This led to an increase in profit by same amount. (Rs.588 cr in qe sep08)

3. As a result of overstated revenues, normally debtors would also be higher by same amount (i.e.Rs.588 cr in Qe sep08). This is what many companies do to dress up their accounts. However, discerning analysts can find this out from cash flow analysis.

4. Satyam went a step further. To prevent discerning eyes from finding this dress up, it showed "cheques received but not cleared" on balance sheet date. As a result, debtors converted to "Cash in bank" and even the cash flow analysis would not reveal the fraud.

5. That is why Satyam had huge cash balance in current bank account. Its bank statement will not show such a huge amount. The current account balance in balalnce sheet has been arrived at through bank reconciliation statement by adding "cheques received but not cleared" to the acutal bank balance. This is where auditors failed. It did not suspect why huge amounts of cheques are continuously been shown in reconciliation as "received but not cleared" especially when the amount has been rising every quarter. A check to see whether cheques shown in reconciliation last quarter/year were cleared & credited would have been enough to find out the fraud. This is a standard audit practice (SAP) and it appears that it has not been followed.

6. Could analysts have found it out? Had they questioned large & rising amount of cash lying in bank current account, the truth would have been unearthed. Some people did, though very lately, raise suspicion over this. Why would anyone keep Rs.5000 cr in current account that does not earn any interest. Normally, corporates keep these kind of surplus funds in liquid funds or bank term deposits.