PC Gupta in an interview with Karan Thapar on CNBC confirmed that the CEO of Satyam has been appointed but refused to divulge details on the person excepting giving hints on the profile.
He hinted that the new CEO wasnt from an IT industry but belonged to an Indian Multinational.
Sources have indicated that Homi R. Khusrokhan (ED at Tata Chemicals) may be appointed the CEO of Satyam.
Mr. Khusrokhan has been Managing Director of Tata Chemicals Ltd. since October 16, 2006 and has served as Managing Director of Tata Tea Limited from 2001 to 2004, where he strived to build brands like Tata Tea, Agni and Tetley and played a key role in Tata Tea's growth, both in the domestic and international markets. Prior to the Tata clan, Mr. Khusrokhan was with Glaxo Laboratories (India) Limited for around 29 years and retired as Managing Director in 2000.
Mr. Khusrokhan is a Chartered Accountant (an ex articles of AF Ferguson & Co, Mumbai) with a Masters Degree in Economics from London School of Economics and Political Science.
With the FASB taking a lot of flak for its standard on FAS 157 and being forced to make some amendments, IASB in response also decided to make certain amendments to IFRS 7 and IAS 39.
The amendments to IAS 39 introduces the possibility of reclassification of investments from a "held for sale" assets classification to a "held to maturity." The switch eliminates the need to record the instruments at fair value (at market prices), and; instead allows companies to record these instruments at historical costs unless there is a permanent impairment. (explained with an example at the bottom of the blog).
Reclassifying the assets to held to maturity will be a big boost for banks, which now can continue to hold these investments at book value and only test for impairment rather than marking them to fair value prices in distressed market conditions.
The only glitch or rather advantage which firms applying IFRS will have over USGAAP, is that the reclassification can be done retroactively from July 1, 2008. This will give bank managements to essentially 'cherry-pick' which instruments to reclassify and, in some instances, avoid the recognition of markdowns on assets that declined in value since that date.
IAS 39 was deemed a stronger standard than FAS 115, for the fact it did not allow reclassification of investments. I feel that, the current move has given a silver lining to a lot of companies to reclassify those investments retroactively which have been worst hit in the financial turmoil (Q3) and will have a very minimal chance of their appreciation in the next year (even over their book value). This reclassification will enable companies to restate their Q3 earnings and boost Q4 earnings.
Accountants who have an eye on the stock markets and have a punting trait in them will be much in demand to cherry pick these investments to boost their companies growth.
• For instance, consider a bank has an equal portfolio mix of real estate investments and FMCG stocks, say $50M each and both were classified as held for sale.
• On July 1, 2008, the value of the real estate portfolio was $30M and FMCG stocks were $40M.
• Losses recorded on account of the fair valuations in the company are $30M ($50M-$30M for real estate) & ($50M-$40M) for FMCG.
• Your company's investment analyst has forecasted a bearish view on real estate stocks, while being bullish on the FMCG stocks for the next year
Given this view, accountants reclassify only real estate stocks from held for sale to held for maturity, thereby restating their values back to $50M and reversing the $20M loss in the books. Total revised losses on account of the reclassification are now $10M (on FMCG stocks). There is an earnings boost to the extent of $20M (real estate reclass) for the current quarter of reclassification.
If the FMCG stocks rebound in the next quarter, these losses will also reverse on the basis of their fair valuations. A smart accountant will retain the losses on the FMCG stocks as "rainfall provisions" to be utilised in the next quarter. In case the stock prices rebound, the losses reverse, if the economic crisis deepens, he still has the option to reclassify this investment to held for maturity and thereby giving his company an earnings boost in a deeper economic crisis. Ain't IFRS getting accountants to be more creative and albeit triggering a sense of punting in them.
The Institute of Chartered Accountants of India, enacted by an Act of Parliament in 1949, is a premier accounting body of the country. In its 60 years of existence, the Institute has come to occupy a pivotal position in the national economy as a trustee of good governance practices by prescribing standards of financial reporting and creating a sustainable institutional framework. It has more than 150,000 members who are in public practice of accountancy / employment and promote the virtues of excellence, independence and integrity across their professional sphere of work.
Apart from accomplishing its core objectives, the Institute is concerned about the social and general improvement of life in the country. As Mahatma Gandhi once said “The best way to find yourself is to loose yourself in the service of others”. India as a developing economy faces numerous social and environmental challenges. There is a need to address issues concerning health & hygiene, education, awareness of women & child welfare, community development, environment protection etc. “Besides lending our support in the core area of our competence, there is a need for CA fraternity to get closely associated with the society and contribute actively at the grassroot levels in the social welfare”, CA.Ved Jain, President, ICAI remarked.
The CA fraternity, realizing the need of the hour is determined to get associated with these issues and play a vital role in contributing towards them along with the Government. ICAI along with MCD is working on various projects.
1. Out of the chain of libraries being run by MCD all over the city, there is a proposal to initially undertake the maintenance and upkeep of 6 libraries. These libraries would be equipped with computers etc. to provide better facility to the students. In turn, MCD would help ICAI establish computer labs for the CA students.
2. Few parks in Delhi would be allotted by MCD to ICAI which would be maintained by ICAI on regular basis. There is a proposal to plant more than 60,000 saplings in and around Delhi itself as part of the Diamond Jubilee celebrations of the Institute.
3. ICAI has been associated with MCD on an Accounting project for last 6 years. Proper accounting ensures greater accountability and such associations ensure that various schemes run by MCD yield optimum benefit to the society.
As a part of this intitaive, MCD had entrusted ICAI with the upkeep and maintenance of the road stretch from Rajghat to Delhi Gate. The same has been constructed and maintained by ICAI. The same has been formalized by Hon’ble Mayor of Delhi, Ms. Aarti Mehra today on January 27, 2009.
Besides the above, ICAI looks forward to a closer association with MCD to make a difference in the lives of the present and future generations. As Mahatma Gandhi had once said that one should always keep social responsibility above all and not treat the periods of study as an opportunity for indulgence in intellectual luxury. There is a need to be aware and live up to the dreams of the father of our nation. There is a need to undertake such activities in an organized manner and therefore ICAI decided to launch a structured programme for the same.
The ICAI has today launched the ICAI National Service Scheme on the lines of National Service Scheme (NSS) programme of Ministry of Youth Affairs and Sports. Hon’ble Mayor of Delhi, Ms. Aarti Mehra today launched this project which will include organizing special camps for various developmental tasks of national importance such as mass literacy, environmental enrichment, health, family welfare, child welfare, slum development, welfare of the physically challenged, senior citizens welfare, disaster management, helping NGOs etc. ICAI- NSS will involve participation by members and students in various activities. President, ICAI, CA. Ved Jain added “Initially, it is recommended that each member and each student spends at least 20 hours every year for the ICAI National Service Scheme.” The message needs to get across that Chartered Accountants, as a professional class, are also contributing their mite to socially relevant areas and that areas of social concerns are their concerns too. This will help bring the profession much closer to the society.
The Internal Audit Standards Board under the aegis of the Council of the Institute of
Chartered Accountants of India recognizing the need of enterprise risk management in the complex and dynamic environment in which the modern day enterprises operate, has decided to launch Certificate Course on Enterprise Risk Management.
Objectives of the Course
The primary objective of this Course is to impart the necessary technical knowledge and
expertise and build upon the skill sets of the members of the Institute to play a leading and
value adding role in various aspects of Enterprise Risk Management and develop it as
another of their areas of core competence. The objectives of the Course therefore are:
Disseminating knowledge on the theory and practice of ERM.
Reflect current risk management thinking and practices and how they impact contemporary business enterprises.
Enhancing the role of chartered accountants in the area of ERM.
Building up ERM as a core competence area of chartered accountants.
Course Duration
The total duration of the course is 200 hours spread over 6 weekends, divided as follows:
Self study : 100 hours
Class room teaching : 50 hours
E-learning : 30 hours
Case study preparation
and presentation : 20 hours
Fees
Rs. 28,090/- (Including applicable service tax) per delegate only, payable at the time of
Registration.
Pilot Batch
The pilot batch of this Course is tentatively scheduled from the end of February 2009/
March 2009 at Delhi.
This Course is being launched on January 28, 2009. The registration for the course would
I use this a lot, especially when i have to do account reconciliations
Whenever you sort a list of numbers that includes both positive and negative amounts, assuming that you sort in descending order, the largest positive numbers go to the top and the largest negative numbers go to the bottom. On a short list, this may not be a problem, but on a long list your largest positive and negative numbers will be far apart.
You may find that sometimes you need your data sorted but you want to ignore the sign. For example, if you are working with variances, you may want to see all large variances grouped together, whether they are positive or negative.
You can accomplish this by using the ABS (Absolute) function.
1) In a blank cell, in the column immediately to the right of your data, enter the formula =ABS(D5); 2) Replace D5 with the reference to your first amount cell; 3) Copy that formula down the column to the bottom of your list; 4) Now sort your data in descending order based on this column.
You will now have your data sorted based on absolute values showing your most significant items (positive or negative) toward the top of your list. You can now clear or delete the column of ABS formulas.
Layoffs are unpleasant and every accountant would wish they are never exercised for in his Company.
At March 31, 20xx (year end), your company has approved a termination plan to exit a part of its operations. Under the plan, the Company will close 2 of its branches, which will result in 100 employees being terminated in the next 60 days.
Your Company has announced a VRS scheme of Rs. 10lakhs per employee , given to employees on a first come first basis. In case, less than 100 employees opt for theVRS, then the Company will involuntarily terminate the employment of the balance employees and give them Rs. 8lakhs each.
As the year end, what will be your accounting treatment....
will you accrue for the entire liability of Rs. 10 crores (ie. 100* 10 lakhs) and take a P&L hit
you will do nothing with it, the liabilty arises in the next year as employees will be terminated in the subsequent year
you will disclose the liabilty in the notes to the accounts
On the Indian GAAP front, there have been no clear guidance on accounting for involuntary terminations, while on voluntary terminations or more popularly known as VRS schemes, the cost of such terminations is recognized in the period in which the offer is accepted by the employee. So do we by the same principles account for costs on involuntary terminations, in the period in which the pink slip is handed over to the employee....
FAS 146 (earlier EITF 94-3) addresses this issue...
FAS 146 requires managements to record liabilities at fair value in the period in which it is incurred. The following events should have occurred to conclude that a liability should be recorded and recognized immediately
The board has approved the termination plan and has been adopted, in case shareholder approvals are required, then at the time of shareholder approval
The plan has identified the number of employees, their job classification, their functions, location and expected completion date
The termination benefits are clearly documented stating the quantum for everydesignation of employee
The plan is communicated to the employees (not necessarily naming them specifically)
It is highly unlikely that points 1 to 3 will be withdrawn or there will major changes in the plan
Once all the above factors, exist the management will be required to account for the liability of involuntary termination benefits at its fair value.
So going by the above guidance, our accounting treatment will be as under;
Take Rs.8 crores to P&L (i.e. 100 * Rs. 8 lakhs) being the value of termination benefits which the management has committed to as at March 31, 20xx
Account for the increment liability of Rs. 2 lakhs in case of VRS in the period in which the employee opts for the scheme
Disclose the facts in the notes to accounts.
Disclose the facts to the actuary, so that provisions can be trued up to make for leaveencashment and gratuity accruals more accurate
PS - In case a company knows that the profitability of the current accounting year is bad, and wishes to book a lot of expenses in the current year in order to make the next year look more profitable, all it needs to do, is to arrange for documentation, have a board resolution in hand and book the expense. All of this can be done in the last week prior to the year end.....
On the contrary, a Company may have announced this in the last week of the year end and may just chose not to account for it...... if numbers are big.....and your auditor doesn't catch it...just hope nobody else does...
Wish to read all our articles on matrix accounting, pls click here
Please feel free to give us your feedback / your opinions on our matrix series of accounting articles.
59th Annual Function of The Institute of Chartered Accountants of India will be held on 4th February, 2009 at Convention Hall, Hotel Ashok, Chanakya Puri, New Delhi
Chief Guest* Shri Pawan Kumar Bansal Hon’ble Union Minister of State for Finance
Members are requested to kindly make it convenient to participate.
The Institute of Chartered Accountants of India (ICAI) set-up by an Act of Parliament viz. The Chartered Accountant Act, 1949 to regulate the profession of Chartered Accountancy is one of the largest and prominent accounting bodies worldwide. It has been taking various proactive measures from time to time, aligned with the changing facets of the Indian economy, for continuously raising the standard of quality of accounting and financial reporting. The quality of education and the standards of examination of the Institute are acknowledged to be the best in the world.
The ICAI has been focusing on the qualification of ‘Chartered Accountant’, which is accorded after a rigorous curriculum involving theoretical education and practical training for a period of 3 ½ years. Considering the increasing number of Students opting for the Chartered Accountancy course as a result of its wide scope and acceptability , the Institute is committed to offer value added professional inputs to its members in general and students in particular, from time to time. With this objective of offering an additional dimension, ICAI has initiated and finalized MOUs with different Universities by offering value-added course curriculum, which has the recognition of the industry and has the requisite market orientation. This would enable and equip the members and students of ICAI to acquire the managerial skills and abilities in various fields.
The Institute today signed an MoU with Guru Jambheshwar University Of Science And Technology (GJUS&T), Hisar which is a State University (Established by State Legislature Act 17 of 1995) with a view to democratize education, disseminate knowledge through novel techniques and methodologies for the benefit of large sections of society, specially the weaker and disadvantaged groups of the society. The University offers a wide range of programmes. GJUS&T is the first Technical University of India which has earned ‘A’ grade from National Accredition & Assessment Council within a record short span of its existence.
This MOU would enable the CA students and members to get BBA, MBA and Ph.D degrees. The Syllabi of these courses has been specially designed jointly by the Institute and Guru Jambheshwar University Of Science And Technology (GJUS&T) keeping in view the current challenging professional scenario as a result of rampantly changing global situation. To facilitate the collaborative learning process, a student admitted in the first stage of chartered accountancy after passing 10+2 standard examination and entry level test of the Chartered Accountancy shall be admitted to special BBA degree Course. Also, a student admitted in the Final stage of chartered accountancy shall be admitted to special MBA degree Course provided such student is a graduate. To promote research in the area of Commerce and Management, a candidate who has passed Final examination of the Chartered Accountancy Course of ICAI shall be eligible to get registered for PhD course with the HSB, GJUS&T.
This is a unique and landmark achievement in the field of accounting and management in India. In times to come, Chartered Accountants will play a vital role in the industry whether in employment or in practice, and occupy prominent positions in every aspect of the economic life of the country.
Well one thing that didnt fail was the Company Secretary Department of Satyam, the minutes of the last board meeting of Satyam on Dec 16 relating to acquistion of Maytas have been documented in full detail including naming Ernst & Young and Luthra & Luthra
As the file is heavy, it may take a few minutes to load, if the file doesnt open, please cut paste this link in a new browser to open http://www.keepandshare.com/doc/view.php?id=1025349&da=y
Should asset retirement obligations or costs incurred by an entity at the time of retirementof a fixed asset in a lease be included in calculating the minimum lease payments...
Asset retirement obligations or ARO's are defined as legal obligations imposed on an entity to reimburse costs to a third party upon retirement of tangible long lived assets. The term retirement is defined as the other-than-temporary removal of long lived assets from service and includes sale, disposal of assets etc.
To illustrate this in simple terms
Assume a Chemical Company takes on lease a factory for a period of 10 years from the Govt, the Company has been obligated by the Govt to decommissions all hazardous machinery at factory at the end of the lease term. The costs which will be incurred to dispose of the hazardous machinery are commonly referred to as ARO's.
Accounting for the ARO's are primarily been zeroed in USGAAP'sFAS 143, wherein Companies are required to estimate the fair value of the ARO at the time of retirement and account them at their present values.
This issue of Substance over form looks at whether costs in an AROfor a leased property should be included while calculating the minimum lease payments for a lease classification there impacting lease accounting under FAS 13 under US GAAP or AS 19 underIGAAP.
Let us take two cases where there is a ARO involved
Case 1 - Company leases a fully furnished office (with carpets, cubicles, Air conditioning etc) and has been contractually obligated to remove the furnishings at the expiry of the lease
Case 2 - Company leases a raw office and furnishes the office, the Company is obligated to remove all furnishings at the expiry of the lease and hand over the office in the same raw condition back to the lessor
In both the circumstances there is a cost which the Company will incur at the expiry of the lease, the question is whether these costs should be categorized as minimum lease payments of the leased office for determining the classification and accounting of the lease of the office.
GAAP by definition, defines lease as the right to use the asset, therefore only monies which are directly identifiable to that assetshould be included in the minimum lease payments.
Case 1 - As the Company leased a furnished office, and has to incur costs at the end of the lease term to dismantle the asset, the cost of the dismantling or ARO will be construed as a minimum lease payment as the rent for the leased property included the cost of the furnishings and that the assets belonged to the lessor.
On case 2, as the assets were constructed post the leasing of the office, the dismantling costs or the ARO should not be included as the costs are not linked to the lease payments of the office. Rather these should be accounted under FAS 143 under USGAAP, at present there is no such requirement under Indian GAAP.
Let us take an another example to illustrate this further
Company A (lessor) owns a petrol station that it leases to Company B (lessee). The property includes pre-existing underground fuel storage tanks that are required by the local government to be removed in ten years. Even though Company A leases the petrol station to another party, it remains legally obligated for removal of the underground storage tanks and must recognize an ARO pursuant to FAS143.
If the lease agreement requires Company B to remove the underground storage tanks at the end of the lease term, the cost of removal would be included in the minimum lease payments and accounted for under GAAP for leases
As the concept of ARO is still not very understood in the IndianGAAP context, one must always look for such costs embedded in agreements lease as these could be covered under AS 19.
Its an another example of an embedded lease - GAAP is in more ways than truly substance over form.
Srinivas Talluri is a worried man, having spent 20 years in the accounting profession, he would have wished the 7th day of the new year would never had happened. He is now guilty of certifying and giving a clean chit to the three golden rules of audit reports on Satyam's financials.... how he wished his last certification on Satyam's would have looked like this
Reproduction of Satyam's audit report (changed for our readers)
In our opinion and to the best of our information and according to the explanations given to us, the said financial statements together with the notes thereon and attached thereto give in the prescribed manner the information required by the Act and give a Satya(m) and fair view in conformity with the accounting principles generally accepted in Rajuland
(i) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2008;excepting for cash balances which have been overstated by Rs. 5000 crores, based on explanations and informations given by the management, the corresponding credit has been shown as a loan payable to Maytasor the offset could be in reserves and surplus,
(ii) in the case of the Profit and Loss Account, of the profit for the year ended on that date;excepting for only excel based workings given on interest accrued of Rs. 376 crores on the above cash balances and no confirmations or orders were found for revenues invoiced of Rs. 500 crores resulting in higher debtors, however the resulting higher profits have been offset by taxes booked against the same
(iii) in the case of the Cash Flow Statement, of the cash flows for the year ended on that dateexcepting for grossing up the financing activities where the offset to the cash balances of Rs. 5000 crores were shown as loans received.
Sgd Srinivas Talluri April 21, 2008
Having worked in the audit profession, I can picture the scene at PWC's office inHyderabadthese is what it could look like
The entire audit team of PWC would have been redeployed on Satyams e-audit workpapers, all scheduled leaves, vacations and other audit assignments would have been called off, beleive me, its worse than army deployments (PWC was the first to go on electronic audit documentation in India)
Article clerks will be given the mundane tasks of scanning the documents given by the seniors, seniors will be sharing confidential papers with the managers, managers will be wondering what to shred and what not to
There will be a set of article clerks who will be filling out the checklists including questions on Integrity of management, fraud checklist, accounting standard checklists etc
There will be a huge demand for green and red pens, after all linking of all audit work papers would need to be done...
Audit confirmations will be treated like GOLD, seniors would be combing the postal section of PWC's office to trace if at all any banks/debtors had confirmed balances. on PWC's stationary...... senior managers will be telling the seniors ..." I told you not to rely on email confirmations"
Someone, would definitely be searching for the management rep letter if at all signed by Raju
Managers and Senior Managers will now be recasting the reasons used in the variance analysis - a very popular tool used to audit balance sheet items..... imagine the answers which would have been documented for increase in cash balances, receivables and for non-increase in liabitlites......
And finally, someone will cast the schedules given (this practice has been done away with)... good chances are that someone will discover that higher bank balances of Rs. 5K crores were a result of casting errors, i.e. 10 FD's of Rs. 100,000,000 FD would have been shown as Rs. 10,000,000,000 on the excel schedule (with an extra 0) and the totals would have been a number entered on the cell, rather than a formula on the cell..... well if this happens to be the case, there is no audit negligence right..........
Well i beleive at the end of the day, no amount of form i.e. checklists etc) can hide the substance of the transaction..... Substance is truly greater than form
In the light of recent developments concerning the Satyam Computers issue, The Institute of Chartered Accountants of India (ICAI), discussed the matter in its 284th Council Meeting being held from January 12-13, 2009 and has decided to constitute a High Powered Committee to look into issues arising out of Satyam fiasco.
Accordingly, the President, ICAI, CA. Ved Jain today constituted a 6 member High Powered Committee. The Committee would be headed by Vice-President, ICAI, CA. Uttam P. Agarwal. The composition of the said Committee is as follows.
CA. Uttam P. Agarwal, Vice-President, Chairman
Shri K.R. Maheshwari, Central Council Member, Nominated by the Government
CA. S.L. Daga, Central Council Member
CA. Amarjit Chopra, Central Council Member
CA. Akshay Kumar Gupta, Central Council Member
CA. Subodh Kumar Agrawal, Central Council Member
The terms of reference of the Committee are as follows.
To look into the entire gamut of the Satyam fiasco, including helping / coordination with the investigation being carried out by various agencies, going into the roots of the problem, effectiveness of the system in place, systemic issues.
To identify the root causes including the persons involved / associated with this issue.
To suggest change(s), wherever required, for the purpose of making appropriate recommendation(s) to the Central Government, SEBI and other Regulators.
The Committee has been asked to submit its report latest by February 11, 2009.
Practice Unit selected for undergoing Peer Review, were advised to ensure that the Peer Review Process was completed in their cases latest by December 15, 2008.
Peer Review Board has decided to extend the date of completion of Peer Review Process till January 31, 2009.
The Practice Units are advised to ensure completion of Peer Review by stipulated date.
Reviewers are also requested to complete their review assignments by the stipulated date.
This has reference to the press reports which have been published today in some of the newspapers about the Income-Tax assessment of The Institute of Chartered Accountants of India. It is hereby clarified that Accounts of the Institute were duly audited and signed by the auditors and after adoption by the Institute, the same were published in the Gazette of India as well as circulated among its members and filed with the Income Tax authorities as well.
As regards allegations, which have been stated in the newspapers, it is clarified that exemption under section 10(23 C)(iv) has not been withdrawn but the fact is that it is only pending with the DG- Income Tax (Exemption).
As regards, the adverse remarks appearing in the papers, it is clarified that there is no violation of tax laws, hiding/concealment of any income including income from coaching activities and loan granted to associate body falls within the powers of the Council under the provisions of The Chartered Accountants Act, 1949. Moreover, there is no change in the activities of the Institute and all its activities are eligible for claiming the exemption which has been allowed over the years by the tax authorities.
A view taken by a particular officer in the Tax department in a specific year is not final and the Institute is quite sure that it is fully eligible for exemption and appropriate steps have been taken for the same.
A 700 point crash...ouch. market to go below 8K ......ooof......no increments this year...oh no, i hold Satyam stocks.........arre mat yaad dilao yaar, then what about financial analysts on PLAYBOY ...bring it on
Well when the chips are down, sex is the best thing to cheer you up. Playboy the adult entertainment magazine, might just get your spirits UP.
The adult entertainment magazine, famous for its photo spreads of nude women is launching a search for models to pose for its upcoming feature, "Women of Wall Street" for its Feb 2009 edition.
Playboy has in the past published editions with themes such as Women of Enron and Women of Worldcom, now comes up with this idea "Women of Wall Street" to cheer up moods in a dull and sombre market. "When the news gets bad, then maybe that's a chance to make people smile by coming up with something that puts a different twist on it," said Gary Cole, Playboy's photo editor.
To be eligible for the shoot, the model (female) must be 18 years of age and must have worked in a financial institution. So coming Feb 09, in addition to preparing for March year end, visit playboy.com, it might just get you going.
FORGET THE BULLS AND THE BEARS, ITS THE REIGN OF THE BUNNY.
P.S - Disclaimer - this article is meant only for readers over 18 and is to be taken in good humor.
If you wish to post any comments on the article, pls use the email author link at the bottom of the feed to send us your comments or by logging onto www.catroops.blogspot.com
As the CFO ofSatyamComputer Services Ltd. submitted his resignation in India's ballooning accounting-fraud scandal, remaining senior managers of the global outsourcing giant focused on explaining the internal challenges. Meanwhile, a stunning list of U.S., European, and other companies — and their investors — scrambled to assess their exposure.
Considering that Satyamhas admitted to a Rs.5Kcrores fraud on their balance sheet. If you do the numbers, that tells you they have somewhere around — best case — Rs.300croresin cash, and no ability to raise further cash. To make matters worse, Citibank has frozen their receivable bank accounts to protect their working capital loans given to Satyam.
No one will lend them money in their current circumstance. They have little or no hope of raising capital under their current ownership structure, unless they are rescued by a potential buyer.
Lack of cash is a serious concern, especially if you have a BPO contract with Satyam that requires it to spend capital up-front. Some of the contracts call for the construction of a new service facility, for example, or for adding technology, or reengineering processes. Reengineering business processes is a very expensive and complicated activity that can suck up a lot of cash before it starts generating cash. For customers of Satyam who have deals that require Satyam to spend cash, those contracts are potentially in very dire straits. And of course, contracts that depend on key people are, too.
For Satyam's part, its internal review is "focusing on our liquidity position," interim CEO Mynampati said in his webcast, conceding that the position "is not very encouraging at this point." The company has paid salaries for the month of December, and has paid its first installment of U.S. payroll.
"We are looking at the balance sheet and verifying the figures, including our receivables," he said. "Making an assessment of the steps to take to maintain liquidity in order to pay suppliers and [employees.] In order to deal with business continuity, we haveto have a healthy receivalbes position. We will put effort into ensuring that they are collected."
As forSatyam'sclients, in addition to the cash worries they must also be concerned that their outsourcing partner is now essentially rudderless. Customers may feel as there is no credibility left in the management, they wont know whom to contact in Satyam to make decisions.
That suggests, of course, thatSatyam'scustomers must make a decision to move on — now. "If you are a customer and you are materially dependent on them, you have to take prompt action. Compared to likes of IBM or EDS,Satyamdoes not have mega deals, but they could be looking after critical systems for companies.
With perhaps two-thirds ofSatyam'scontracts being worth under Rs.5crores, an exodus of clients might be handled by remaining players in the market. But the real challenge, is how do clients deal withSatyamespecially when their projects are half way through and they are in a hostage situation.
There is one clear conclusion, if the internal management team needs to getSatyamback on it feet, they will need a lot of cash to keep the operations running and retaining key talent.
After Satyam, its the turn of the shares of Maytas Infra, another firm promoted by the Ramalinga Raju family, The stock today fell nearly 5% and got stuck in its lower circuit on the bourses, after reports surfaced that the firm has also misrepresented its financials.
Yesterday, the company said that its chairman and non-executive director R.C. Sinha has tendered his resignation.
Maytas Infra has also understated its profit in the April-June quarter and the discrepancies were ‘duly accounted for’ in the company’s books later.
“The company’s statutory auditors has qualified that Maytas Infra made under-provision for service tax liability and excess provision for deferred tax liability, resulting in a net understatement of profit after tax by Rs1.60 million,” company VC B Teja Raju, son of Satyam’s founder B Ramalinga Raju, has said.
Srinivas Talluri is a worried man, having spent 20 years in the accounting profession, he would have wished the 7th day of the new year would never had happened. He is now guilty of certifying and giving a clean chit to the three golden rules of audit reports on Satyam's financials.... how he wished his last certification on Satyam's would have looked like this
Reproduction of Satyam's audit report (changed for our readers)
In our opinion and to the best of our information and according to the explanations given to us, the said financial statements together with the notes thereon and attached thereto give in the prescribed manner the information required by the Act and give a Satya(m) and fair view in conformity with the accounting principles generally accepted in Rajuland
(i) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2008; excepting for cash balances which have been overstated by Rs. 5000 crores, based on explanations and informations given by the management, the corresponding credit has been shown as a loan payable to Maytasor the offset could be in reserves and surplus,
(ii) in the case of the Profit and Loss Account, of the profit for the year ended on that date; excepting for only excel based workings given on interest accrued of Rs. 376 crores on the above cash balances and no confirmations or orders were found for revenues invoiced of Rs. 500 crores resulting in higher debtors, however the resulting higher profits have been offset by taxes booked against the same
(iii) in the case of the Cash Flow Statement, of the cash flows for the year ended on that date excepting for grossing up the financing activities where the offset to the cash balances of Rs. 5000 crores were shown as loans received.
Sgd Srinivas Talluri April 21, 2008
Having worked in the audit profession, I can picture the scene at PWC's office in Hyderabad these is what it could look like
The entire audit team of PWC would have been redeployed on Satyams e-audit workpapers, all scheduled leaves, vacations and other audit assignments would have been called off, beleive me, its worse than army deployments (PWC was the first to go on electronic audit documentation in India)
Article clerks will be given the mundane tasks of scanning the documents given by the seniors, seniors will be sharing confidential papers with the managers, managers will be wondering what to shred and what not to
There will be a set of article clerks who will be filling out the checklists including questions on Integrity of management, fraud checklist, accounting standard checklists etc
There will be a huge demand for green and red pens, after all linking of all audit work papers would need to be done...
Audit confirmations will be treated like GOLD, seniors would be combing the postal section of PWC's office to trace if at all any banks/debtors had confirmed balances. on PWC's stationary...... senior managers will be telling the seniors ..." I told you not to rely on email confirmations"
Someone, would definitely be searching for the management rep letter if at all signed by Raju
Managers and Senior Managers will now be recasting the reasons used in the variance analysis - a very popular tool used to audit balance sheet items..... imagine the answers which would have been documented for increase in cash balances, receivables and for non-increase in liabitlites......
And finally, someone will cast the schedules given (this practice has been done away with)... good chances are that someone will discover that higher bank balances of Rs. 5K crores were a result of casting errors, i.e. 10 FD's of Rs. 100,000,000 FD would have been shown as Rs. 10,000,000,000 on the excel schedule (with an extra 0) and the totals would have been a number entered on the cell, rather than a formula on the cell..... well if this happens to be the case, there is no audit negligence right..........
Well i beleive at the end of the day, no amount of form i.e. checklists etc) can hide the substance of the transaction..... Substance is truly greater than form
Can a bankrupt company have a market cap of $ 3.1 bn?
On 19th and 20th December, a galaxy of academics met in Mumbai for a seminar on the securities market by an institute set up by the Securities and Exchange Board of India (SEBI). Although corporate governance was just one session on the second day, it was the most discussed issue since the Satyam imbroglio was played out on the eve of the meeting. Chairman B Ramalinga Raju’s misfired heist to seize the cash horde lying at Satyam Computers aided by a star-studded board of directors caused much consternation among the star speakers, ministry officials and regulators.
So much so that the SEBI chairman, CB Bhave, announced on the sidelines of the conference that the regulator would look into the Satyam issue. It was a foolish move. A few days later, SEBI exonerated the Satyam board of any procedural wrongdoing, thereby inflicting more damage on the concept of good governance by reducing it to a set of procedures.
Good governance is not about ticking off check boxes on a compliance form. Obviously, even SEBI doesn’t quite get it. That is why, despite mandating adherence to a corporate governance code, companies have done exactly what they want to, before and after the code was mandated. Despite SEBI’s clean chit, the fact remains that the Satyam management’s action caused unprecedented outrage among shareholders, which sent its share value crashing and forced the management to reverse its dubious decision.
As we know, on Tuesday 16th December, all hell broke loose when Satyam Computer Services Limited announced its audacious plan to acquire controlling interest in Maytas Infrastructure and Maytas Properties for a whopping US$1.6 billion. The promoter family has a large stake in these two companies; Maytas is Satyam spelt in reverse. The move aimed at transferring over Rs6,000 crore of cash from Satyam’s shareholders to the pockets of the Rajus who control both Satyam and Maytas.
Mutual funds and institutional investors were outraged. They threatened legal action; Templeton Mutual Fund got into activist mode and announced that it would go to any extent to block the deal. On Tuesday evening, fund managers and large investors were spewing outrage at the action. The deal was announced after the Indian markets had closed, but Satyam’s ADR crashed over 50% when it opened for trading in the US. The word corporate governance, or the lack of it, was freely bandied around in this case. But remember, the deal was cleared by its board of directors, in spite of the fact that promoters hold a stake of only 8.6% in the company.
After a poor attempt to defend the decision, Raju gave in and cancelled the deal next day. The share price still crashed 30% on Wednesday and continued to fall. In another ill-considered move, the company hastily announced a buyback, which did nothing to stop the slide as another bombshell was dropped the following week. The World Bank confirmed that it had blacklisted Satyam for eight years “for giving improper benefits”, or bribes to Bank employees.
As questions flew thick and fast about Satyam’s atrocious actions, a few so-called independent members of Satyam’s stellar board of directors stepped forward but only to defend the deal. They had no regrets about going along with Raju. Despite shining academic achievements and extraordinary careers, they seemed oblivious to the fact that Raju was committing daylight robbery to which they were willing accomplices. They were happy to accept the justification that buying large infrastructure companies in an economic recession was good for Satyam and its shareholders.
What really was Raju’s game? And why did the board rubber-stamp it? We pieced together what must have really happened inside Satyam. Raju went to the US a few months ago and apparently met a few large investors and investing banks to sound them out about investing a part of Satyam’s money in infrastructure. Raju argued that the IT services business was cash flow positive and did not call for substantial expansion or capital expenditure right now.
So, the money lying with Satyam could not be profitably utilised. He argued that infrastructure offered far greater opportunity and, on this count, Satyam had already made a lot of progress. Maytas Infrastructure had got listed and has bagged major infrastructure projects in a fast-growing Indian state, Andhra Pradesh, from where he hails. Raju came back and briefed the board that foreign investors had looked favourably at the idea. The board asked him what the next step was. Raju said that Satyam will utilise its cash to buy a large stake in Maytas Infrastructure and Maytas Properties.
The board asked him about SEBI regulations, since Maytas Infrastructure and Satyam are both listed companies. The board insisted that everything should be by the rulebook, said a member. At that stage, directors such as TR Prasad, former cabinet secretary, were mainly focused on fair valuation of Maytas. Since these two were primarily asset-based companies with land, structures, cash and some contracts, they went by asset values.
They gave the job of valuation to Ernst & Young (E&Y), which has denied it and therein lies another story. In the midst of the controversy, Ramalinga Raju told the media that the valuation was done by one of the big four accounting firms. But each of them has denied it, apparently because the assignment was not given directly to E&Y but routed through another firm. Shouldn’t this needless subterfuge have alerted the board? In 2007, E&Y gave Ramalinga Raju its often controversial but much-hyped award of Entrepreneur of The Year. Was Satyam worried that an E&Y valuation would seem like a quid pro quo?
Anyway, it came up with a valuation of Rs6,400 crore, the core of which was 6,500 acres of land value multiplied by the ‘market rate’. One of the directors apparently objected and said the valuation should not be based on market value but the registration value prescribed by the government. Raju said that the registration value is usually much lower (this is no longer true in places like Mumbai and Kolkata where municipal authorities frequently revise registration values making them closer to market values, so that they can collect more revenues).
To this, certain board members seem to have said that in which case they need to first fix the value according to government rates and then separately justify the increase from that valuation. A director is also understood to have objected to the sweeping valuation method adopted by E&Y which simplistically multiplied acreage with so-called market rates; they wanted a more segmented approach, valuing each asset segment differently, at least breaking them up into components such as only land and land with structures, etc.
In all these discussions, the board was only concerned with two aspects – following the regulations (SEBI and company law issues) and valuation. It is not clear if anyone mentioned the fact that the slump in realty has affected land prices as builders rush to liquidate unaffordable land banks. Strangely, the aspect of money being transferred to the family does not seem to have come up at all. Were the directors, earning fat sitting fees, too polite to ask?
Dr Krishna Palepu, the high-profile Harvard professor from Andhra Pradesh who ironically specialises in strategy and governance, was not physically present but hooked up through video conferencing. Although he regularly lectures on corporate governance, a transfer of US$1.6 billion or 90% of the free cash, from an IT services company effectively into the promoters’ pockets to fund completely unrelated business of property and infrastructure, did not strike him as odd. The fact that it was a related party transaction too did elicit a debate, although the board knew that the Rajus controlled Maytas and had a significantly larger stake in those companies.
According to one of the directors, the US investors reacted sharply to money going into property because they have just witnessed the devastation caused by real estate speculation. None of the directors raised the issue of money going into the pockets of the promoters of Maytas. The main debate was on valuation. Interestingly, the CEO of Maytas Infra is PK Madhav. He was a director of Nagarjuna Finance earlier and has been arrested along with KS Raju, chairman and managing director of Nagarjuna Fertiliser, in an old case of default concerning Nagarjuna Finance.
Somebody who knows the Maytas story well had some key additional points to make. Maytas Infrastructure won the bid for Hyderabad metro rail project on the basis of a ‘negative grant’. This meant that Maytas not only did not need any grant but offered to pay the state government. No other bidder had offered this. Only in September 2008, the Delhi metro chief E Sreedharan, in a letter to the Planning Commission, had said that granting 296 acres of prime land to the promoters for commercial exploitation was a ‘scandal’ in the making.
He also hinted at corruption when he said, “there is something more to it than meets the eye.” Sreedharan said, “It is apparent the BOT operator has a hidden agenda which appears to extend the metro network to a large tract of his private land holdings so as to reap a windfall profit of four to five times the land price.” The Congress government in Andhra Pradesh then jumped into the fray and demanded an apology from Mr Sreedharan who has not bothered to oblige them.
The Maytas consortium then dropped Sreedharan from the project. Our sources also confirm that Maytas probably hoped to make bumper profits from real estate. The promoters are rumoured to have around 2,000 acres of land where the first phase of the metro project ends with a silent understanding that they would be allowed to develop another five to seven kilometres stretch of land after the metro ends.
Now that The World Bank has also banned Satyam for eight years for bribery, Sreedharan’s statements appear more worrying. Even business-wise, banking on land to reap profits and offering a negative guarantee also seem like potential blunders after the real estate bust and global economic slowdown. Our sources say, a disappointed bunch of politicians apparently want to cut loose from the deal and have begun to demand money from the consortium, especially with the general elections round the corner.
That is rumoured to be yet another motivation to push through the Satyam-Maytas deal. It is also a possible explanation for Satyam not putting money into Maytas but rather into the hands of the Rajus. Satyam has not been forthcoming with any explanation about why the money should go to them. Our source says, this is probably why Raju backed out of the deal so quickly – it was apparently not because of the backlash from institutional investors, as is popularly perceived. They can now tell the politicians ‘we tried to raise money, but look what has happened.’
If that is, indeed, the hidden story behind the deal, it still leaves us with the issue: what about the stellar board of independent directors? According to one source, Dr Palepu of Harvard played a key role in convincing the rest of the board about the acquisition of Maytas. We specifically asked Dr Palepu about several rumours swirling around his role in selling the idea to the board. There is even talk about Dr Palepu not being very ‘independent’ in his approach because of a business school that he wants to start in Andhra Pradesh in collaboration with Harvard.
Had Satyam promised to support his venture? Dr Palepu had not responded to our email at the time of going to press. However, Dr (Mrs) Mangalam Srinivasan, an exceptionally qualified, US-based academic, resigned at the end of December 2008 accepting moral responsibility for not casting a ‘dissenting vote’. She reportedly said in her resignation letter that although she had raised many issues “relating to procedures” and “expressed reservations” during the deliberations, she did not formally dissent.
So far, all the other ‘independent’ directors (see Box) are firmly glued to their chairs and have even argued that they did nothing wrong. Will some more of them follow Dr Srinivasan’s example? Or, are fat sitting fees paid to independent directors such a powerful magnet?
After all, Dr Palepu earned Rs92 lakh from Satyam and other directors earned as much as Rs13 lakh, plus perks. Many board members are probably worried that if they quit just now, no other company will invite them as a director. After all, corporate India makes no bones about the fact that it does not value too much independence.
This is where the Satyam story rests now. What Satyam did was not way out of line. A list of poor governance practices would cover the Who’s who of Indian companies. There is no obvious remedy. One option in cases like Satyam is a corporate raid. After all, the Rajus own just 8.6%. But unless institutional investors muster enough gumption to get together and replace the board (which will inevitably lead to a political tangle), this episode too, will end up as another example of how misaligned the interest of the average shareholder is with that of the dominant ones.
