The arrests follow revelations by Ramalinga Raju, who until the news broke was Satyam’s chairman, that he had overstated profitability, cash reserves and other assets for several years.
Raju has been arrested along with his brother and Satyam's chief financial officer Vadlamani Srinivas on various charges of conspiracy and forgery. The three will remain in jail until a trial commences, which is due to occur on January 23.
In his letter Raju explained that on the balance sheet for the second quarter of 2008, which was published in September, operating profit was ten times the actual figure. Raju has said that he has “not benefited in financial terms on account of the inflated results”.
The balance sheet also inflated Satyam’s cash reserves and bank balance, listed a non-existent accrued interest, understated the company’s liability and overstated its debtor position.
As a result of these actions the books showed Satyam to have $1bn in cash that did not really exist. Figures from previous quarters have not been released but Raju’s letter says that the fraud escalated over time until it “attained unmanageable proportions”.
Raju said: “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. It was like riding a tiger, not knowing how to get off without being eaten.”
The account by Raju of his role in the deception gives some idea of how the fraud was orchestrated but many questions remain. Some of these focus on PricewaterhouseCoopers (PwC) because the company audited Satyam’s books between 2000 and 2008.
PwC has stated that it followed “applicable auditing standards and [was] supported by appropriate audit evidence” when it did Satyam’s books. However, this has failed to appease investors who are shocked that PwC would fail to verify with banks that Satyam had the $1bn cash reserves that it claimed.
Indian government intervenes
Following the revelations made by Raju the Indian government has intervened in the company, laying off the entire board of directors and appointing three people to replace them.
The move has resulted in Satyam’s share price rising by over 50 per cent but this still falls a long way short of the 90 per cent it lost following the revelations.
Until the full extent of the fraud at Satyam is known and the board comes up with a plan to remedy the problem investors are likely to be understandably wary.
The new board has stated its first actions will include assessing the magnitude of the problem and work on the re-statement of accounts. A merger or the break-up of the company are believed to be two of the options open to the new board.
A complete copy of Raju’s letter can be found here.