Head of Indian outsourcing giant admits $1bn fraud

THE HEAD of one of India's biggest outsourcing groups has confessed to fixing the company's books in a $1 billion fraud described as the country's "Enron".

B Ramalinga Raju, chairman and chief executive of Satyam Computer Services, resigned yesterday after admitting he had manipulated the accounts for "several" years to show hugely inflated profits and fictitious assets. The fraud is India's biggest corporate scandal since the early 1990s and its first high-profile casualty since the start of the global financial crisis.

Its disclosure will ring alarm bells for hundreds of Fortune 500 companies across the world that entrust their most critical data and computer systems to Indian outsourcing companies and threatens to damage the country's reputation as a place to do business. Satyam's clients ranged from Unilever and Nestlé to Cisco, GE, Sony and, until recently, the World Bank.

The scandal will also raise questions over how outsourcing companies are regulated and audited around the world. Satyam was audited by PriceWaterhouseCoopers (PwC) and was the first Indian company to list on three international stock exchanges - Mumbai, New York and Amsterdam - yet the fraud went unnoticed for years.

The news sent shares on India's stock markets tumbling. The Mumbai exchange's benchmark Sensex index fell 7 per cent as shares in Satyam plummeted nearly 80 per cent.

In a startling letter to the board of Satyam, Mr Raju confessed to the scam and said he would resign and "subject myself to the laws of the land".

In the letter, he explained how the cover-up, which he said started as an attempt to disguise a poor quarterly performance by artificially inflating the group's profit, got out of hand over time.

"It was like riding a tiger, not knowing when to get off without being eaten," Mr Raju said.

India's stock market regulator, the Securities and Exchange Board of India, announced it was launching an investigation into the fraud. We "need to check whether the audit was done properly", said CB Bhave, the chairman.

PwC said it was examining Mr Raju's statement but could not comment further due to confidentiality issues. The fraud could cause problems for PwC. Since Satyam was listed in the US, investors can turn to the courts there for recompense, and there are legal precedents for holding auditors accountable.

In his letter, Mr Raju said Satyam's accounts in the quarter ended last September included a cash pile of Rs53.61 billion ($1.2 billion), of which 94 per cent was "fictitious". The group's operating margin was inflated to 24 per cent of revenue compared with an actual figure of 3 per cent, due to misstated revenue and profit figures, Mr Raju said. - (Financial Times service)