Fraud By Accretion

Posted by Equity Private, Jan 07, 2009, 12:04pm

Eye popping frauds don't become so overnight typically. Rather, they likely build year after year, starting, perhaps, with a bit of cookie jar revenue to smooth results, and progressing until things are out of hand. Most of the big frauds seem to follow this pattern including Enron, Phar-mor (anyone remember the World Basketball League?), and now Satyam. Consider this quote from Chairman B. Ramalinga Raju:

"The gap in the balance sheet has arisen purely on account of inflated profits over a period of last 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...."

This is one reason these are so difficult to detect. Small, incremental fraud built on at least some foundation of actual returns, actual revenues, actual profits, blends in. Likely the Made-off scam began with a bit of results smoothing. (Several bloggers have hinted that the dot-com bubble bursting is where Bernie may have made the transition from smoothing to outright fraud).

In any case, it doesn't look very good for Satyam, given that almost all their cash appears to be illusory. What this means for various subsidiaries (like Bridge Strategy Group, for instance) also remains to be seen.

Satyam shares crash 77% after overstatement [Marketwatch]

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Tags: Satyam

Comments

1

Posted by guest, Jan 07, 2009 12:09PM

My heart bleeds.

2

Posted by guest, Jan 07, 2009 12:21PM

The dot com bubble? What about the crash in 1987? I think it may have started back then. No one seems to talk about how he got through those periods.

3

Posted by guest, Jan 07, 2009 1:18PM

MUST READ : http://satyamisbankrupt.blogspot.com

Satyam’s operating profit margins, too, were the lowest among the top firms. But Wednesday’s revelation that margins are actually at 3% and not the reported level of over 20% is a complete shocker. Even the smallest of IT firms have better margins in India and Satyam boasts of much larger clientele and would certainly bill these clients at higher rates compared to tier-II and tier-III firms. The assertion that the company’s cost structure is disproportionately large too doesn’t make sense. Firms such as HCL Technologies Ltdthat have a comparable size have an operating margin of 20% or more. An IT analyst with a domestic firm is in complete disbelief about the statement that the company has a profit margin of 3%.
This statement about low operating margin doesn’t quite seem to add up. Perhaps Raju is lying again—if he has been doing it for so many years, there’s no reason why we should accept his entire confessional statement as gospel truth. There is much more clarity that is needed, but meanwhile one of the theories that’s doing the rounds of the market is that Satyam indeed generated significant cash, which has been siphoned off to fund the promoter’s other business interests. Instead of disclosing this, Raju now says the cash was never there. There’s certainly much more to the Satyam saga that will unravel in the days to come.

4

Posted by guest, Jan 07, 2009 1:39PM

Never trust a chairman named Ramalinga.

Sounds too much like:


"Oo ee, oo ah ah, ting tang, walla walla bing bang."

5

Posted by guest, Jan 07, 2009 3:23PM

I'd hate to be the auditor of Satyam right now....

6

Posted by Anal_yst, Jan 07, 2009 3:34PM

This brings into question the concept of "materiality" in the audit process...Often times a million here or there is effectively "overlooked"; of course the specifics are more complicated, the the general idea may have played a role in how he gamed the system. I'm sure re:theauditors will have something about this soon.

7

Posted by guest, Jan 07, 2009 4:08PM

PwC (India) is the auditor. I have little exposure to Indian law, but from what I have seen, shareholders will have a long and difficult road ahead to recover any investment losses. As to those who invested in US ADRs, good luck. US securities laws prevent shareholders from going after aiders and abettors. So PwC has minimal exposure. If the company goes under, who can you sue?

8

Posted by guest, Jan 07, 2009 4:36PM

@7. They have limited exposure to lawsuits, but their reputation will take a big hit from this (and the business they'll lose from it).

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