| Satyam (India IT outsourcing Co.)chairman admits he cooked the books | |
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| Feb 21, 2009 20:49 |   |
 | 01-07) 19:38 PST -- A huge accounting scandal ravaging one of India's top outsourcing companies could have ramifications from Silicon Valley to Bangalore. Ramalinga Raju, chairman of Satyam Computer Services of Hyderabad, admitted Wednesday that he had cooked the books at the back-office giant, and resigned, citing the "tremendous burden that I am carrying on my conscience." In a letter to the board, Raju said he inflated the company's balance sheet by $1.04 billion so that 94 percent of assets Satyam claimed were, in fact, fictitious. Major accounting troubles at a company like Satyam could affect many industries that rely heavily on Indian outsourcing, including Silicon Valley firms and blue-chip stalwarts like General Electric, General Motors and Citigroup, all Satyam clients. In recent years, the vast majority of tech companies have used India for low-cost, highly educated labor. How much the Satyam scandal will affect those relationships remains to be seen. "It will probably put a cloud over India for a while," said Rob Enderle, a principal at consulting firm the Enderle Group in San Jose. "It will force a lot of their large clients to pull away from them, like having a run on the bank. The fact that they were able to conceal something of this level puts a big question mark over financial controls in India." |
| Feb 21, 2009 20:49 | #1 |
| Satyam - Sanskrit for "truth" - was quickly dubbed the Enron of India. It is India's fourth largest outsourcing firm after Infosys, TCS and Wipro. Raju, 54, founded the company in 1987 and grew it to 53,000 employees with branches in 66 countries. His younger brother, Rama Raju, who was managing director, also resigned. Raju said the fraud started years ago and had ballooned to unmanageable proportions as the company grew. "Every attempt to eliminate the gap failed," he wrote. "It was like riding a tiger, not knowing how to get off without being eaten." Sandra Notardonato, vice president and research analyst at Gartner Invest in Chicago, said it's a "no brainer to say that prospective clients will go elsewhere for their business. The existing clients are the question mark. A lot of their work with Satyam is on a contractual basis; moving or disrupting an outsourcing agreement to go from one company to another could be a challenge." Satyam's 690 clients also include Nestle, Caterpillar, Nissan Motor Co., Ford Motor Co., Sony Corp. and Qantas, according to press reports. The New York Times said Satyam works for more than one-third of the Fortune 500 companies. |
| Feb 21, 2009 20:50 | #2 |
| San Jose's Cisco, which had considered a minority investment in a Satyam subsidiary, issued a statement saying it had not yet finished the agreement. "The recent unfortunate developments unfolding at Satyam are not expected to have any material impact for Cisco," the company wrote. "At this point, we would not like to comment further and have full confidence in the government and regulatory authorities to address this matter as appropriate." Satyam triggered warning signs in December when Raju proposed the company pay $1.6 billion to buy two construction firms partly owned by him and his family. Investor outrage scuttled that deal. Also in December, the World Bank banned contracts with Satyam for eight years, saying the firm had inappropriate business practices. "Where you see one thing, there is usually something else," said David Smith, co-head of Asia Pacific corporate governance research for RiskMetrics Group in Singapore. "Emerging markets have had an extraordinary bull run over the past few years, and corporate governance has perhaps taken on less importance than in previous years. If you're going to keep your money in emerging markets, shareholders have to understand how they actively manage their corporate governance risk." |
| Feb 21, 2009 20:50 | #3 |
| Shares in Satyam, which is listed on the New York Stock Exchange, collapsed from $9.35 to 93 cents until trading was halted indefinitely. Other Indian equities also suffered. India's Sensex index fell 7.3 percent. "The Indian market went down over 7 percent because of what happened to Satyam," said Mario Belotti, a professor of economics at the Leavey School of Business at Santa Clara University and an expert on outsourcing. "It kind of scared everybody." However, he noted, Accenture, a U.S. rival to Satyam, was up 38 cents for the day. "It's not that much, but it was up," he said. "Maybe people feel they will take over some of Satyam's jobs. I would assume that Indian companies might lose some customers from the United States and from Europe." But others said they don't think Satyam's troubles should erode confidence in India. Norman Matloff, a professor of computer science at UC Davis and an outspoken critic of outsourcing, said it's not fair to assume accounting fraud is widespread in India based one case. |
| Feb 21, 2009 20:51 | #4 |
| "The U.S. had Enron and other accounting scandals," he said. "There are some critics of offshoring who will try to make hay out of this. Even though I'm a critic of offshoring, I don't see any reason to make hay out of it." PricewaterhouseCoopers, which is Satyam's auditor, had no comment other than that it is investigating the issue. |
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