Description
The presentation tries to determine whether it was possible to identify the fraud being committed by satyam.
KeyWords: RamaLinga Raju, Beneish Model, Horizontal Analysis,Vertical Analysis, Ratio Analysis
Mahindra Satyam (formerly known as Satyam Computer Services Ltd) was founded in 1987 by B Ramalinga Raju.
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The company offers consulting and information technology (IT) services spanning various sectors. It is listed on the New York Stock Exchange, the National Stock Exchange (India) and Bombay Stock Exchange (India). In June 2009, the company unveiled its new brand identity “Mahindra Satyam” subsequent to its takeover by the Mahindra Group?s IT arm, Tech Mahindra.
Industry Presence
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Competencies
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Aerospace and Defence Banking, Financial Services & Insurance Energy and Utilities Life Sciences & Healthcare Manufacturing, Chemicals & Automotive Public Services & Education Retail and Consumer Packaged Telecom, Infrastructure, Media and Entertainment & Semiconductor Travel
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Mahindra Satyam offers the following „horizontal? services. Extended Enterprise Solutions Web Commerce Solutions Business Intelligence Services Quality Consulting Strategic Outsourcing Services Industry Native Solutions BPO Engineering Services
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Maytas acquisition World Bank
Upaid lawsuit
Accounting scandal of 2009
1. Days Sales 2. Gross Margin Index 3. Asset Quality Index 4. Depreciation Index
0.954 0.984 1.259 1.145 1.090 -0.035 1.463 0.219 200 0.410 0.000 0.000 -1.258 0.057 or 5.7%
5. SG&A Index
6. Total Accruals to Total Assets 7. Sales Growth Index 8. Abnormal Return 9. Time Listed 10. Leverage 11. Positive Accruals Dummy 12. Declining Cash Sales Dummy Manipulation Index Probability of Manipulation
Between 5.99% and 11.72% ? Serious risk of earnings manipulation; further analysis necessary to confirm or dispel negative signal.
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1. Days Sales 2. Gross Margin Index 3. Asset Quality Index 4. Depreciation Index
2.426
0.984
1.259
1.145
5. SG&A Index
6. Total Accruals to Total Assets 7. Sales Growth Index 8. Abnormal Return 9. Time Listed 10. Leverage 11. Positive Accruals Dummy 12. Declining Cash Sales Dummy Manipulation Index Probability of Manipulation
1.090
-0.035 1.463 0.219 200 0.410 0.000 0.000 -1.258 0.104 or 10.4%
120% 100% 80% 60% 40% 20% 0% 2006
17% 3% 16% 2% 17% 2% 63% 64% 64% 100% 100% 100%
Sales Cost of Goods Sold Selling and Admin Exp Depreciation
2007
2008
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2006 2007 2008
25% 19% 38% 22% 23% 10% 13% 11% 86% 83%
Cash Account Receivables Total Current Assets Net PP&E
9%
9%
120%
100%
80% 60%
100%
100%
100%
40%
20% 0%
1% 1% 12% 2% 1%
42%
44%
48%
13% 1% 1% 1% 2% 1% 1%
15% 1% 2%
2006
Accounts Payable Long Term Debt Total Liabilities and Equities
2007
Current Portion of LTD Common Shares
2008
Total Current Liabilities Retained Earnings
2008
167% 133% 136% 129% 124% 120% 100% 100% 100% 100% 100%
195% 197% 191% 197%
Sales
Cost of Goods sold
Gross Profit Selling, General and Admin Expenses Net Income
2007
2006
0%
50%
100%
150%
200%
250%
231% 2008 99% 183% 222% 166%
290% 269%
A/R Goodwill Prepaid Expenses Total CA
2007
76% 60% 52%
118%
153% 100% 100% 100% 100% 100% 100%
2006
Cash and Cash Equivalents Net PPE
150% 200% 250% 300% 350%
0%
50%
100%
2008
124% 139% 130%
219%
272%
451%
239% 215% 186%
Current Maturity of LTD A/P Accrued Expenses Accrued Income Tax Total Current Liabilities Long Term Debt Paid up Capital
2007
141% 136% 130% 152% 124% 122% 145% 100% 100% 100% 100% 100% 100% 100% 100%
2006
0%
100%
200%
300%
400%
500%
$ Million
2006
2007
2008
Current Ratio Quick Ratio Cash Ratio
5.59 5.59 3.35
2.88 2.88 4.36
7.32 7.32 5.01
$ Million
2006
2007
2008
Debtors Collection Period Payment Period Employee Turnover Ratio Fixed Assets Turnover
73.25 6.30
90.96 6.54
86.79 8.70
383000.3
10.28 0.93
374545.1
8.96 0.90
422800.1
9.04 0.95
Total Assets Turnover
$ million
2006
2007
2008
Debt Ratio LT Debt to Total Capitalization Times interest earned Cash Flow Coverage Ratio
0.14
0.16
0.17
0.02
223.00 25.03
0.02
93.08 10.18
0.01
95.47 11.57
$ million
2006
2007
2008
GP Margin OP Margin NP Margin Return on Assets Return on Equity
0.37 0.20 0.23 0.21 0.25
0.36 0.20 0.20 0.19 0.22
0.36 0.19 0.20 0.19 0.22
Board of Directors B Ramalinga Raju B Rama Raju Ram Manyampati Dr Mangalam Srinivasan Krishna G Palepu Vinod K Dham M Rammohan Rao T R Prasad V S Raju
Position Chairman MD & CEO President & Wholetime Dir. Director Director Director Director Director Director
Audit Committee
Compensation Committee
Investor Grievance Committee
No of BOD/ Advisor Positions in other Organizations
-Y --Y Y Y Y Y Y Y Y Y Y 3 3 8 6 8 4
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At the height of the boom, top software firms Tata Consultancy Services, Infosys Technologies, Wipro and Satyam consistently reported annual 50-per cent increases in profits every quarter. Pressure to maintain this pace of growth, please investors and shareholders and justify inflated P/E multiples during a six-year bull run on the stock market have all been cited as reasons why Satyam cooked the books
Period: 2006-2008 Average Margins
Infosys
Wipro
GP Margin OP Margin NP Margin Revenue Growth Rate
Source: Form 20F, SEC Filings
42% 28% 27%
33%
47% 29% 27%
27%
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Dec 26: Mangalam Srinivasan resigned, just over a week after the company's botched attempt to enter into construction. Dec 29: Krishna G Palepu and Vinod Dham quitting the board and the company announced that lenders were possibly selling promoters equity that is entirely pledged with them.
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Open admission of Fraud by Mr. Ramalinga Raju In the words of Mr. Raju “ It was like riding a tiger without knowing how to get off without being eaten” Modus Operandi Used was:Inflated Profit Fictitious Asset Satyam wanted to take over Maytas in order to replace real assets with fictitious assets and when this was stopped by the shareholders , Mr. Raju had to admit fraud. Fraud admitted to the tune of Rs 7800/- Crores CBI Estimates the Fraud to be of 14000 crores
Fraud started 7 years ago when Satyam started inflating profits to prop up its share Price and market capitalisation ? Promoter?s stake was reduced from 25.6% to 8.74% ? Cash raised through sale of stake was invested to purchase land through Maytas companies in order to reap the benefits of realty boom ? Satyam kept showing inflated profit figures in order to keep away takeover bids
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Balance sheet showed cash and bank balance of Rs 5360 Crores , of this Rs 5040 Crores was fictitious ? Accrued interest to the tune of Rs 376 Crores was non existent ? Overstated debtors by Rs 490 Crores ? Promoters reportedly brought in Rs 1230 Crores to shore up Finance which was not reflected in books of account.
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Government took over the management of Satyam and appointed nominees on its board Govt. moved Company Law Board to take over Maytas Properties and Maytas Infra which were impacted due to this fraud Matter was referred to CBI and SFIO ( Serious Fraud Investigation Office) Simultaneously the matter was also probed by SEBI and ICAI to look into Auditor?s accountability To avoid its occurance in future Companies Bill was amended and early warning system was put in place Voluntary Corporate Governance Code based on CII and FICCI Report
doc_379059804.pptx
The presentation tries to determine whether it was possible to identify the fraud being committed by satyam.
KeyWords: RamaLinga Raju, Beneish Model, Horizontal Analysis,Vertical Analysis, Ratio Analysis
Mahindra Satyam (formerly known as Satyam Computer Services Ltd) was founded in 1987 by B Ramalinga Raju.
?
?
?
The company offers consulting and information technology (IT) services spanning various sectors. It is listed on the New York Stock Exchange, the National Stock Exchange (India) and Bombay Stock Exchange (India). In June 2009, the company unveiled its new brand identity “Mahindra Satyam” subsequent to its takeover by the Mahindra Group?s IT arm, Tech Mahindra.
Industry Presence
? ? ? ? ?
Competencies
?
? ?
?
?
Aerospace and Defence Banking, Financial Services & Insurance Energy and Utilities Life Sciences & Healthcare Manufacturing, Chemicals & Automotive Public Services & Education Retail and Consumer Packaged Telecom, Infrastructure, Media and Entertainment & Semiconductor Travel
? ? ? ? ? ? ? ?
Mahindra Satyam offers the following „horizontal? services. Extended Enterprise Solutions Web Commerce Solutions Business Intelligence Services Quality Consulting Strategic Outsourcing Services Industry Native Solutions BPO Engineering Services
? ? ? ?
Maytas acquisition World Bank
Upaid lawsuit
Accounting scandal of 2009
1. Days Sales 2. Gross Margin Index 3. Asset Quality Index 4. Depreciation Index
0.954 0.984 1.259 1.145 1.090 -0.035 1.463 0.219 200 0.410 0.000 0.000 -1.258 0.057 or 5.7%
5. SG&A Index
6. Total Accruals to Total Assets 7. Sales Growth Index 8. Abnormal Return 9. Time Listed 10. Leverage 11. Positive Accruals Dummy 12. Declining Cash Sales Dummy Manipulation Index Probability of Manipulation
Between 5.99% and 11.72% ? Serious risk of earnings manipulation; further analysis necessary to confirm or dispel negative signal.
?
1. Days Sales 2. Gross Margin Index 3. Asset Quality Index 4. Depreciation Index
2.426
0.984
1.259
1.145
5. SG&A Index
6. Total Accruals to Total Assets 7. Sales Growth Index 8. Abnormal Return 9. Time Listed 10. Leverage 11. Positive Accruals Dummy 12. Declining Cash Sales Dummy Manipulation Index Probability of Manipulation
1.090
-0.035 1.463 0.219 200 0.410 0.000 0.000 -1.258 0.104 or 10.4%
120% 100% 80% 60% 40% 20% 0% 2006
17% 3% 16% 2% 17% 2% 63% 64% 64% 100% 100% 100%
Sales Cost of Goods Sold Selling and Admin Exp Depreciation
2007
2008
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2006 2007 2008
25% 19% 38% 22% 23% 10% 13% 11% 86% 83%
Cash Account Receivables Total Current Assets Net PP&E
9%
9%
120%
100%
80% 60%
100%
100%
100%
40%
20% 0%
1% 1% 12% 2% 1%
42%
44%
48%
13% 1% 1% 1% 2% 1% 1%
15% 1% 2%
2006
Accounts Payable Long Term Debt Total Liabilities and Equities
2007
Current Portion of LTD Common Shares
2008
Total Current Liabilities Retained Earnings
2008
167% 133% 136% 129% 124% 120% 100% 100% 100% 100% 100%
195% 197% 191% 197%
Sales
Cost of Goods sold
Gross Profit Selling, General and Admin Expenses Net Income
2007
2006
0%
50%
100%
150%
200%
250%
231% 2008 99% 183% 222% 166%
290% 269%
A/R Goodwill Prepaid Expenses Total CA
2007
76% 60% 52%
118%
153% 100% 100% 100% 100% 100% 100%
2006
Cash and Cash Equivalents Net PPE
150% 200% 250% 300% 350%
0%
50%
100%
2008
124% 139% 130%
219%
272%
451%
239% 215% 186%
Current Maturity of LTD A/P Accrued Expenses Accrued Income Tax Total Current Liabilities Long Term Debt Paid up Capital
2007
141% 136% 130% 152% 124% 122% 145% 100% 100% 100% 100% 100% 100% 100% 100%
2006
0%
100%
200%
300%
400%
500%
$ Million
2006
2007
2008
Current Ratio Quick Ratio Cash Ratio
5.59 5.59 3.35
2.88 2.88 4.36
7.32 7.32 5.01
$ Million
2006
2007
2008
Debtors Collection Period Payment Period Employee Turnover Ratio Fixed Assets Turnover
73.25 6.30
90.96 6.54
86.79 8.70
383000.3
10.28 0.93
374545.1
8.96 0.90
422800.1
9.04 0.95
Total Assets Turnover
$ million
2006
2007
2008
Debt Ratio LT Debt to Total Capitalization Times interest earned Cash Flow Coverage Ratio
0.14
0.16
0.17
0.02
223.00 25.03
0.02
93.08 10.18
0.01
95.47 11.57
$ million
2006
2007
2008
GP Margin OP Margin NP Margin Return on Assets Return on Equity
0.37 0.20 0.23 0.21 0.25
0.36 0.20 0.20 0.19 0.22
0.36 0.19 0.20 0.19 0.22
Board of Directors B Ramalinga Raju B Rama Raju Ram Manyampati Dr Mangalam Srinivasan Krishna G Palepu Vinod K Dham M Rammohan Rao T R Prasad V S Raju
Position Chairman MD & CEO President & Wholetime Dir. Director Director Director Director Director Director
Audit Committee
Compensation Committee
Investor Grievance Committee
No of BOD/ Advisor Positions in other Organizations
-Y --Y Y Y Y Y Y Y Y Y Y 3 3 8 6 8 4
?
?
At the height of the boom, top software firms Tata Consultancy Services, Infosys Technologies, Wipro and Satyam consistently reported annual 50-per cent increases in profits every quarter. Pressure to maintain this pace of growth, please investors and shareholders and justify inflated P/E multiples during a six-year bull run on the stock market have all been cited as reasons why Satyam cooked the books
Period: 2006-2008 Average Margins
Infosys
Wipro
GP Margin OP Margin NP Margin Revenue Growth Rate
Source: Form 20F, SEC Filings
42% 28% 27%
33%
47% 29% 27%
27%
?
Dec 26: Mangalam Srinivasan resigned, just over a week after the company's botched attempt to enter into construction. Dec 29: Krishna G Palepu and Vinod Dham quitting the board and the company announced that lenders were possibly selling promoters equity that is entirely pledged with them.
?
• • • ? ? •
• •
Open admission of Fraud by Mr. Ramalinga Raju In the words of Mr. Raju “ It was like riding a tiger without knowing how to get off without being eaten” Modus Operandi Used was:Inflated Profit Fictitious Asset Satyam wanted to take over Maytas in order to replace real assets with fictitious assets and when this was stopped by the shareholders , Mr. Raju had to admit fraud. Fraud admitted to the tune of Rs 7800/- Crores CBI Estimates the Fraud to be of 14000 crores
Fraud started 7 years ago when Satyam started inflating profits to prop up its share Price and market capitalisation ? Promoter?s stake was reduced from 25.6% to 8.74% ? Cash raised through sale of stake was invested to purchase land through Maytas companies in order to reap the benefits of realty boom ? Satyam kept showing inflated profit figures in order to keep away takeover bids
?
Balance sheet showed cash and bank balance of Rs 5360 Crores , of this Rs 5040 Crores was fictitious ? Accrued interest to the tune of Rs 376 Crores was non existent ? Overstated debtors by Rs 490 Crores ? Promoters reportedly brought in Rs 1230 Crores to shore up Finance which was not reflected in books of account.
?
? ?
? ? ? ?
Government took over the management of Satyam and appointed nominees on its board Govt. moved Company Law Board to take over Maytas Properties and Maytas Infra which were impacted due to this fraud Matter was referred to CBI and SFIO ( Serious Fraud Investigation Office) Simultaneously the matter was also probed by SEBI and ICAI to look into Auditor?s accountability To avoid its occurance in future Companies Bill was amended and early warning system was put in place Voluntary Corporate Governance Code based on CII and FICCI Report
doc_379059804.pptx