Nobody really knows what has happened at Satyam. No one will ever know unless Mr. Raju writes an autobiography. Ever since the whole thing broke out there are numerous reports about what has happened and what will happen at Satyam.
Some even went on to capitalize on this madness by offering a inside-out report for $499. That is not a typo. The price was really four hundred and ninety nine dollars only. Like all seasonal things one more study came out about a brand new observation that 1 in 5 of the BSE 500 companies have accounting discrepancies.
Few people were worried about the operating margin of Satyam and tried to extrapolate it to the whole IT industry. Many people mentioned about the lack of transparency and the failure of corporate governance. What were the independent directors doing? What were the auditors doing? Why do we need SEBI anyway? And so it went.
But nothing useful was written so far. I should point to Gurucharan Das’s column about how we should see the problem. That should give a different angle to the story.
I read today about 12 ways a company can inflate its profits in Mint which was done with the collaboration of Crisil. The 12 ways make up for an interesting read and gives you some brand new information. If you are planning to become a CEO or CFO these 12 ways are a must read.
Don’t think that these are the only ways to inflate profits. This will also be useful for investors who will not go by the irrational exuberance around them and actually go through the annual reports of a company.
12 ways a company can inflate profits :
- Write-off expenses from reserves
- Show previous year’s expenses as this years income
- Revalue assets to write off losses/expenses
- Revalue assets to write off transfer values
- Show loan waiver as income
- Transfer loans to associates
- Transfer fixed assets to current assets
- Continue with dead projects.
- Inventory valuation
- Inflate sales
- Sale/Lease back of assets
- Change depreciation policies.
From the 12 ways above, #6&7 are the things which Raju tried when he proposed to buy Maytas properties. There will be no cash exchanged but the books will be clean. #10 is what has happened to show inflated profits over the period of time. This of course is based on the first version of Raju’s letter. But, the case has shifted focus since then because of new revelations that the money is siphoned off.
There are 2 other things that were used to inflate profits from the Satyam episode:
- Overstate the debtors position
- Show interest accrued when there wasn’t any.
The next list should be 12 ways to siphon off funds. Let me start with the first one. You can try filling in the rest.
- Inflate employee count and divert those funds to one of your 200 companies.
PS : If a company has more than one business like a conglomerate it is very easy to do all kinds of financial gymnastics. There are very few companies like these.