Satyam Found To Be Swimming Naked
Famous quotes is that "It's only when the tide goes out that you learn who's been swimming naked." Over the past few months, the tide has been going out with a vengeance, and we're certainly discovering plenty of folks swimming naked. The latest, of course, is Satyam, the Indian tech company whose CEO admitted that he basically has been making up the company’s financial reports for years. It turns out that about $1 billion in cash the company claimed it had... don't actually exist. That's a pretty big problem, because that $1 billion represented about 94% of all the cash the company claimed to have. Oops. It makes you wonder what, exactly; Satyam's auditors have been up to the past few years.
"If you're an auditing company and your client says they have $1 billion in cash, you do check with the bank,” while auditors were dependent on information from a company's management, "they do have to verify that information."
Pricewaterhouse audited Satyam, which is based in Hyderabad, for at least eight years and signed off on its filings with securities regulators in the United States, Europe and India. The company has drawn criticism from Indian officials.
Pricewaterhouse said Thursday that it had applied appropriate accounting standards to Satyam's books and would cooperate with regulators.
We have also surprised that the Satyam had not yet talked with Pricewaterhouse about why it might not have caught the financial misstatements.
Taking the accounting firm to court may be investors' only chance to recoup losses. Satyam, which serves as the back office for hundreds of corporations, providing services like billing and technology support, is virtually out of cash and is expected to be sold, whole or in parts.
This might explain why the company attempted to do a highly controversial merger deal last month, where Satyam tried to buy construction firms Maytas (Satyam backwards), owned by the sons of Satyam's founders. The deal between companies in two obviously unrelated industries seemed like a pretty clear cash grab for the family -- except most people didn't realize that the cash grab was actually to cover up all the lies on the financial statements.
Of course, there are some amusing side notes to this whole thing. Just a few months ago, for example, Satyam was awarded the "prestigious" GOLDEN PEACOCK AWARD for (of all things) corporate governance. That award is now being STRIPPED AWAY, but it seems a little late for that. Then, of course, there was the stock analyst who claimed that Satyam was an obvious buy just after the original merger deal fell apart. Considering that the stock dropped 90% today that seems like an awfully bad call.
Anyway, as with any downturn, it's no surprise that some of the scammers are being outed. It certainly doesn't mean that all companies are scamming, but it is a reminder that unless you're personally involved, it's pretty tough to take a company's word on what it's actually been doing with its money.
The company's physical assets, like computer networks and desks, are tied to the companies that Satyam serves and would be worth little on the open market. And its work force of more than 50,000 could scatter.
Enron and other financial frauds relied on dizzying arrays of off-balance-sheet partnerships and complicated circular trades with willing outside institutions to deceive investors. But the Satyam fraud was absurdly simple: The Company said it had about $1.1 billion in cash and bank balances. But, in fact, it had less than $100 million.
With Regards,
Binod Kr. Sinha
CAclubindia
