Unlike Agatha Christie novels, financial crimes in India seldom have a satisfying denouement. Perpetrators often manage to evade the long arm of the law. Where they are brought to book, the actual details of the crime get lost in legal technicalities. And untangling the mess usually takes such a long time that, by the time the wrongdoer is hauled up, most people have forgotten what the crime was all about.

It is good to see that the Satyam case is different at least in one respect — we now have all the details about the modus operandi of the fraud. In its recent indictment of the former promoters and top managers of Satyam, the Securities and Exchange Board of India has provided minute and fascinating details about how India’s largest corporate scam was committed. But SEBI’s account also reveals how stupendously easy it is to pull off financial fraud on a grand scale, even in publicly listed companies. So here are simple answers to the questions that have been bothering us ever since Ramalinga Raju wrote that fateful letter on January 7, 2009.

So what was the Satyam fraud all about?

As financial frauds go, the one perpetrated by Raju & Co was quite uncomplicated. Satyam’s top management simply cooked the company’s books by overstating its revenues, profit margins and profits for every single quarter over a period of five years, from 2003 to 2008. Not for them complex methods like derivatives accounting or off-balance sheet transactions that were used by Enron’s executives.

Keen to project a perpetually rosy picture of the company to investors, employees and analysts, the Rajus manipulated Satyam’s books so that it appeared to be a far bigger enterprise than it actually was. To achieve this, they sewed up deals with fictitious clients, had large teams working on these pet ‘projects’ of the chairman, and introduced over 7,000 fake invoices into the company’s computer systems to record sales that simply didn’t exist. For good measure, profits too were padded up to show healthy margins.

Over the years, these ghostly clients understandably never paid their bills, leading to a big hole in Satyam’s balance sheet. The hole was plugged by inflating the debtors (dues from clients) in the balance sheet and forging bank statements to show a mountain of cash and bank balances.

After several years of such manipulation, Satyam was reporting sales of over ₹5200 crore in 2008-09, when it was in reality making about ₹4100 crore. Its operating profit margins were shown at 24 per cent when they were actually at 3 per cent and its handsome profits on paper covered up for real-life losses. It was when the company ran out of cash (of the real variety) to pay salaries that Ramalinga Raju decided that he couldn’t ride the tiger any longer and made his confession.

How did such a big fraud escape detection?

Didn’t someone in the management notice that a good chunk of the company’s clients, projects and bank balances were actually err… missing? Good question. SEBI’s investigations show that many of them did. But they either helpfully supported the cover-up or turned a blind eye, deferring to ‘instructions from the Chairman’s office’.

Asked how he could have had no clue about something as basic as Satyam’s bank balances, the company’s ex-CFO, Vadlamani Srinivas, claimed that it was the company’s chairman and managing director who made decisions on investing all surplus cash. They also chose to safe-keep all the bank statements in their office, making them available only when the accounts were prepared.

But didn’t the CFO notice the yawning gap between the bank balances in the accounting system and the ones provided by the chairman’s office? He was too busy with ‘investor relations work’ to look into accounting issues, was his reply. Now we know what CFOs of large corporations do!

But can you bamboozle those watchdogs, the auditors?

You can, SEBI’s investigations show. The errors in Satyam’s financial statements were certainly not small, rounding-off errors. And they had been a part of the published financial statements for five to eight years. Yet both Satyam’s internal as well as statutory auditors didn’t bring it to anyone’s notice.

Well, the internal auditor hauled up by SEBI has frankly admitted that he did notice differences in the amounts billed to big clients such as Citigroup and Agilent when he scoured Satyam’s computerised accounts. But when he flagged this with Satyam’s finance team, he was fobbed off with the assurance that the accounts would be ‘reconciled’. Later, he was ‘assured’ that the problems had been fixed.

As to the external auditors who are supposed to look out for investors, they seem to have been quite a trusting lot. While verifying bank balances, they relied wholly on the (forged) fixed deposit receipts and bank statements provided by the ‘Chairman’s office’. The forensic audit reveals differences running into hundreds of crores between the fake and real statements as captured by the computerised accounting systems. But for some strange reason, everyone, from the internal auditor to the statutory auditors, chose to place their faith in the ‘Chairman’s office’ rather than the company’s information systems.

Did Ramalinga Raju not take ‘even a rupee’?

In his confessional letter, Ramalinga Raju has claimed that while he inflated numbers to present a rosy picture to outsiders, neither he nor the managing director sold any shares nor took ‘even a rupee/dollar’ from the company.

But SEBI’s investigations have clearly led it to conclude otherwise. In its order last week, it makes the point that the Rajus, by consistently inflating Satyam’s growth rates and profits, duped millions of investors who invested in its stock on the strength of its published financials.

What is more, while being fully aware of the fictitious financials, the Rajus transferred 1.57 crore of their own shares to related entities through off-market transactions. SEBI alleges that these shares, valued at over ₹543 crore, were in turn sold in the stock market, netting a neat profit. The promoters also pledged another 6.2 crore shares to raise loans and cash amounting to ₹1253 crore. Top managers such as Vadlamani Srinivas (CFO), G Ramakrishna (VP-Finance) and VS Prabhakara Gupta (Head-Internal Audit) also sold shares valued at ₹4.5 crore between 2003 and 2008.

Finding these top managers guilty of unfair manipulation of stock prices and insider trading, SEBI has asked them to deposit their ‘unlawful gains’ of ₹1850 crore, with 12 per cent interest, with the regulator within 45 days. They have also been barred from associating with the securities markets in any manner, for the next 14 years.

So, will Satyam’s investors get back their money?

Ha, well, there’s the catch. They probably won’t. To start with, one needs to watch if Raju & Co do indeed comply with SEBI’s order, instead of making interminable appeals to the Securities Appellate Tribunal and the courts. But even if they do, SEBI may have a difficult time finding the millions of investors who were at the receiving end of the Satyam scam.

After all, hundreds of investors are bound to have transacted on the Satyam stock between 2003 and 2008 believing its financials to be rock-solid. In retrospect, they were all victims of this fraud.

But even if you narrow the universe of victims to investors who actually held the Satyam stock when the scam broke, they are likely to have either sold their shares at severely depressed prices or swapped their shares when Satyam was bought over and then merged into Tech Mahindra.

Therefore, all they can have now is the satisfaction of knowing that the investigators have, Hercule Poirot-style, delivered a grand expose of the villains and why they did it. Meanwhile, Ramalinga Raju is awaiting trial for criminal breach of trust alleged by the CBI in a special court.

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