Satyam CFO Quits as Scandal’s Scope Widens

Giant list of global clients turns to assessing damage. Satyam auditor PwC will be involved in the internal self-evaluation, although its role, too...
Don Durfee and Roy HarrisJanuary 8, 2009

Correction: In an earlier version of this story, the CFO of Satyam was misidentified.

As the CFO of Satyam Computer 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.

Among the biggest questions for some of the world’ largest companies that are Satyam clients: the implications of Satyam admitting to having at least $1 billion in fraudulently claimed cash on its balance sheet.

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In a webcast interview today, interim CEO Ram Mynampati revealed that the CFO, identified as Srinivas Vadlamani, had tendered his resignation, but that the board hadn’t yet accepted it. Mynampati said the finance chief had promised to provide information for the internal investigation, and said he would come to work next week. He was not expected in the office this week because of “personal challenges,” the CEO added. According to one news report, Vadlamani was said to have the books in his possession, off-site.

PricewaterhouseCoopers is expected to remain as Satyam’s auditor, Mynampati said, although the company plans to look closely at the auditor’s performance. “If it turns out we need a different audit firm, we will [find one.] But it’s premature to say,” according to the CEO.

On Wednesday, the basics of the scandal were circumscribed by the four-and-a-half page letter from former CEO B. Ramalinga Raju to the Bombay Stock Exchange — admitting to a scam that involved his creation of a $1-billion cash entry on the books. The fraud, he wrote, “attained unmanageable proportions in size.” And he compared his own position as CEO of a fraud-infected company as having been “like riding a tiger, not knowing how to get off without being eaten.”

His replacement as CEO assured the press that the company was committed to ensuring that the business continued to run uninterrputed, “reaching out” to customers and talking to the top 100 clients, which represent 80 percent of Satyam’s revenue. That revenue was reported to be $2.1 billion in the year ended last March 31, after growing at a 48-percent clip. Mynampati said his companiwas communicating with its 53,000 employees, and hadn’t seen any exodus, as some in the media had been reporting this week.

But with U.S. and global outsourcing clients like General Electric, Cisco Systems, Ford Motor, Nestle, Sony, Caterpillar, and the U.S. government being identified in news accounts, the main concern shifted quickly away from India.

Satyam has about 600 clients, a third of which are for contracts worth over $1 million, according to Peter Barta, CEO of Everest Group Australasia, an advisory group that follows oursourcers globally. Barta told in an interview that for clients, the central concern is Satyam’s cash position. Since outsourcing projects typically require a big outlay of cash by the vendor, a vendor lacking the capital can lead to projects that can’t get off the ground.

“The real issue is that Satyam has admitted to a $1-billion fraud on their balance sheet. If you do the numbers, that tells you they have somewhere around — best case — $63 million in cash, and no ability to raise cash,” Barta said. “No one will lend them money in their current circumstance. They have little or no hope of raising capital under their current ownership structure.”

That’s a worry 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,” according to Barta. “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.”

Asked whether any potential buyers have emerged, he responded that the company is “exploring strategic alternatives.”

Mynampati said that Satyam — the company’s name comes from the Sanskrit for “truth” — is still unclear on many details of the fraud. “Let me set the record straight: I, along with other members of the board received reports and data that were audited by the accounting firms,” he said. “We relied on that data. I am in no way related to the promoters of the company,” he added, calling Satyam “a very matrixed organization.”

According to the interim CEO, “In the company the central team is responsible for aggregating the results across the business. All of us in operations are only able to see the performance of our units. None of us were able to see that the corporate numbers were not possible.”

As for Satyam’s clients, in addition to the cash worries they must also be concerned that their outsourcing partner is now essentially rudderless. “No one in the management can make decisions,” Everest Group’s Peter Barta said. “Who’s got any credibility?”

He discounted the possibility of a rescuer for Satyam. “Is there a white knight on the horizon? I can’t see that happening quickly or at all, frankly. There’s a lot we don’t know about the ability of the company to sell the business or the ability of someone to do it quickly,” Barta observed.

That suggests, of course, that Satyam’s customers 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, Satyam does not have mega deals, but they could be looking after critical systems for companies,” he said. “The operational risks are pretty high. You’d have to think pretty carefully about continuing to rely on Satyam.”

Clients will also worry that the company is essentially rudderless. “No one in the management can make decisions,” Barta said. “Who’s got any credibility?”

With perhaps two-thirds of Satyam’s contracts being worth under $1 million, an exodus of clients might be handled by remaining players in the market. “But the challenge,” Barta said, “becomes, ‘How do I get a good deal when I’m hostage to a bad situation, and need someone to rescue me?’ And not all of Satyam’s customers are desirable to other suppliers. Perhaps not at the price or for the kind of work.”

One clear conclusion that he sees: Companies need to do more research before selecting an outsourcing partner. “Due diligence has been lacking,” Barta said. “Due diligence usually boils down to ‘Let me call a few references and check your credit rating.’ It needs to go deeper than that.”