Indian Outsourcing Giant Admits Fraud
Thursday, January 8, 2009
NEW DELHI, Jan. 7 -- 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.