Overstated Financials Put IT Service Provider in Bad Light

Jack Humphrey, Regulatory journalist
April 05, 2011 /

An Indian IT service provider has settled fraud charges from the Securities and Exchange Commission following investigation that unearthed major financial maneuvering in the company.

Former senior officials of Hyderabad-based Satyam Computer Services Limited allegedly falsified invoices and prefabricated bank statements that inflated the service provider‘s cash balances. Subsequently, investors were made to believe the business was more profitable than how it looked.

The Satyam financial fraud, which was exposed to public in 2009, has led the Institute of Chartered Accountants of India to urge the government to tighten accounting profession regulations. The regulatory body then created a panel to discuss how such accounting frauds can be stopped.

“The fact that Satyam’s former top officers were able to maintain a fraud of this scale represents a company-wide failure of extreme proportions that cut across a wide array of functions from customer invoicing to cash management,” said Cheryl Scarboro, Chief of the SEC’s Foreign Corrupt Practices Act Unit.

According to court papers, the former senior managers at the IT service provider have produced more than 6,000 phony invoices that were used in the company’s general ledger and financial statements.

The financial fraud was made possible through bogus bank statements created by Satyam employees. The fraud led to more than $1 billion of sham cash and cash-related balances, or half of Satyam’s total assets.

Satyam’s former auditors PricewaterhouseCoopers were also tagged in a complaint filed before the U.S. District Court in Washington, D.C. The SEC named as defendants Satyam’s former chairman Ramalinga, and other former senior and mid-level Satyam executives, as well as two lead engagement partners from Satyam’s former external audit firm.

The defendants settled SEC’s charges without admitting or denying allegations. The SEC’s enforcement action was based on the “scope and severity” of fraud within the IT service provider.

The regulator also took into account the harm brought to holders of Satyam’s American Depository Shares in comparison with the remediation efforts enforced in 2009 after the exposure of the financial fraud. The shares are traded in New York Stock Exchange, though Satyam is based in India.

The IT service provider, with its new management, also agreed to pay SEC’s settlements of $10 million. Additionally, the securities regulator ordered Satyam’s staff to undergo specific training related to securities laws and audit practices. The SEC also told Satyam management to tighten its internal audit controls.

With new internal controls that the IT service provider would put up, an independent consultant will be hired to evaluate Satyam’s practices.

Shortly after the fraud broke out, Indian authorities took over the IT service provider, in addition to criminal charges they filed against the top executives involved. The government dissolved the board of directors and appointed a new set of board. The selection of new shareholders was also monitored accordingly.

The trial is now underway in India. Likewise, the SEC’s investigation is ongoing.


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