ACFE Cookbook

Where are these three infamous cases now?

Over the last few issues I've explained numerous financial reporting schemes using cases that might be obscure to some. However, in this column, I revisit three cases that captured the headlines when their stories first broke. Since then, their sagas have been relegated to the back pages, but they continue to have interesting developments. I'll also discuss the common thread among the three — and, yes, it does have to do with money but also higher matters.

Satyam founder sentenced to seven years in prison

In April 2015, the former chairman of Satyam Computer Services, B. Ramalinga Raju, was sentenced to seven years in prison, along with nine others who were involved in a massive fraud that surfaced in 2009 — costing investors an estimated $2 billion. (See Founder of Satyam, Software Outsourcing Company in India, Found Guilty of Fraud, by Nida Najar and Suhasini Ray, The New York Times, April 9.)

The Indian Central Bureau of Investigation alleged that Raju's fraud lasted for at least eight years. The company recorded more than $1 billion in phony revenues to make Satyam appear more successful and attract new investors and customers. The case shocked Indians when it emerged in 2009 and reverberated throughout the business world because of its magnitude.

In fictitious revenue cases like this, classic red flags are a disproportionate increase in accounts receivable relative to revenues, large and aging accounts receivable balances and poor cash flows from operations. However, the unique Satyam fraud didn't show any of these flags because it didn't leave the phony revenue on the books as accounts receivable. Raju inflated Satyam's cash balances so it appeared that customers had paid the company for the additional recorded revenue.

Raju accomplished this by arranging for the creation of more than 7,000 forged sales invoices — supplemented by dozens of fake bank statements that showed payments coming in from the phony sales. Some of the fictitious sales involved legitimate customers (without their knowledge, Satyam recorded additional transactions) and others stemmed from the creation of completely fake customers.

As with so many financial reporting frauds, the Satyam scheme grew over time. As the company became more desperate, the amount by which it inflated its revenues each year escalated. When the U.S. Securities and Exchange Commission (SEC) filed its complaint against Satyam, it alleged these phony revenues by fiscal year:

2004 — $46 million
2005 — $69 million
2006 — $149 million
2007 — $151 million
2008 — $430 million

The SEC also alleged that phony revenues were $275 million in the first six months of fiscal year 2009. Shortly after, Raju sent his infamous resignation letter to Satyam's board of directors and exposed the entire scam. In the letter, Raju wrote that managing the growing nature of the fraud was "like riding a tiger, not knowing how to get off without being eaten."

Another interesting twist is that none of the respective heads of the business units into which the company recorded much of the fictitious revenue knew anything about the fraud. The perpetrators accomplished this by providing special log-in access to a team of employees who recorded the phony sales. So, the recording of the fake sales transactions circumvented the usual sales recording process yet still were included on the company's financial statements.


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