Satyam Story Gets Stranger By the Day

As I blogged about a few weeks ago, the Chairman of Indiaâ''s Satyam Computer Services, the country's fourth largest outsourcing company, resigned after he confessed to doctoring the outsourcing companyâ''s books for the past â''several years." The Chairman, Ramalinga Raju, admitted that fictitious assets and non-existent cash concealed a $1 billion operating deficit.

Since then, Mr. Raju's along with that of his brother, B. Rama Raju, Satyam's former managing director, and Srinivas Vadlamani, the company's former chief financial officer all have been charged with forgery, cheating and fraud.

Today's New York Times reports that Mr. Raju now has confessed to making up more than 13,000 of the claimed 53,000 company employees and forging documents related to bank deposits, the latter to fool auditors. Raju supposedly used the money "generated" by the phantom employees to buy land.

The Times story notes: "Making up employees might sound complicated, but investigators said it was not that difficult. 'Employees are just code numbers in your system,â'' explained one person involved in the investigation, who was granted anonymity to provide details about it. 'You can create any amount of them. All you need to do is make sure the income tax is deducted properly' and insurance is paid."

Shades of the classic Equity Funding fraud.

I bet a whole lot of the Fortune 500 companies doing business with Satyam will be asking themselves some hard questions this weekend. For instance, if the contract wasn't firm fixed priced (FFP) but a time and materials (T&M) one, were they paying for phantom employees?

Did Satyam win their contracts based on fraudulent information about how many employees (and their experience) were available to work on a contract?

How did Satyam get all its work done? They were known to bid 20% below competitors to win the business as it was.

How did Satyam program and project managers not know that the number of employees being billed was 20% more than what existed? One could do it on FFP contracts, but it would be hard on T&M contracts not to see that the labor hours being billed were 20% higher than the number of people working on the project.

I suspect that people inside Satyam knew something was a bit hinky. More than 14,000 staff had their resumes on the street within a day of the scandal breaking.

I bet a lot more companies than only State Farm are going to pull the plug on their outsourcing contracts with Satyam given this latest news - or at the very least, start demanding refunds.

Satyam wants companies to pay $371 million owed to it in fees early to help cover its cash shortfall. Good luck with that now; if I owed Satyam money on anything other than a FFP contract, I would want proof that I wasn't paying for phantom employees.

Satyam still has a whole lot of explaining to do.

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