Fraud By Accretion

Author:
Publish date:
Updated on

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]

Related