In September, Mr. Mukherjea used a computer model to examine India’s 500 largest public companies for signs of accounting manipulation. He found that more than 20 percent of them were potentially engaged in aggressive accounting, but Satyam was not on the list.
This is because the automated screens that analysts like Mr. Mukherjea use to pick up signs of fraud begin by searching for large discrepancies between reported earnings and cash flow. In Satyam’s case, the cash seemed to keep pace with profits.
But Kawaljeet Saluja, an analyst from Kotak Securities, an Indian investment bank, spotted a puzzling phenomenon. From December 2006 through September 2008, the company’s total Indian bank deposits remained more or less flat. But over that period the portion of that money kept in current accounts, which allow easy access to cash but earn little interest, increased more than sevenfold.
Mr. Saluja quizzed the company’s management during a September conference call. Satyam’s former chief financial officer, Srinivas Vadlamani, said the money would soon be transferred to higher-earning accounts.
Mr. Saluja pointed out that for the last four quarters “most of the incremental cash flows have been parked in current accounts” and asked Mr. Vadlamani again to “highlight a reason for it.” Mr. Vadlamani brushed the question aside.
Today, Mr. Vadlamani is in jail, charged along with Mr. Raju and his brother, B. Rama Raju, a former Satyam director, with conspiracy to commit fraud, cheating and forgery.
S. Bharat Kumar, the lawyer for the men, could not be reached for comment.
The presence of large sums of cash in current accounts could be further evidence money was being siphoned from the company, according to Mayur Joshi, an Indian forensic accountant.
The Satyam scandal bears only passing similarity to Enron, where top executives used a maze of special-purpose vehicles and related-party transactions to move liabilities off the company’s balance sheet.
Instead, Satyam may have more in common with HealthSouth, the rehabilitation services company that barely survived an accounting fraud uncovered in 2003, and Peregrine Software, which inflated revenue and earnings by hundreds of millions of dollars until prosecutors caught up with the company, also in 2003.
At HealthSouth, according to prosecutors, senior executives engaged in a conspiracy from 1996 through 2002 that inflated the company’s profits by $2.7 billion. Executives used a variety of techniques, including falsifying entries in the company’s accounting system. They also resorted to outright forgery, generating bank statements for 20 fake accounts that allowed the company to overstate cash reserves by more than $370 million. At Peregrine, prosecutors said, executives also falsified accounting entries to record nonexistent sales.
At Satyam, investigators say they are beginning to see signs of similar tactics.
K. Ajay Kumar, a public prosecutor, said that investigators had found one forged deposit receipt for an account with the Indian bank HDFC. Other forged bank statements also have been found, according to Indian news reports. Such forgeries may explain why Satyam’s auditors, Price Waterhouse, the Indian arm of the accounting giant PricewaterhouseCoopers, failed to raise the alarm.
In HealthSouth’s case, its auditor, Ernst & Young, contended it was duped by the company’s management, which presented it with fraudulent data. A number of investor groups, however, are still suing the accountants for failing to detect the scam.
Price Waterhouse has said it was unaware of Satyam’s inflated financial figures until Mr. Raju revealed them. Investigators are not so sure. Over the weekend, police arrested two Price Waterhouse accountants who oversaw the audit of Satyam’s books, charging them with criminal conspiracy and cheating.