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Satyam chairman resigns amid accounting scandal

Satyam Computer Services, one of India's largest IT outsourcing companies, says chairman admitted inflating the company's financial performance.

Satyam Computer Services announced Wednesday its founder and chairman, B. Ramalinga Raju, has resigned, following an admission that he inflated its financial performance.

Satyam, one of India's six largest IT outsourcing companies, counts such Fortune 500 companies as Sony among its customers.

The company said it received a letter from its chairman on Wednesday, outlining some of the accounting irregularities and his resignation.

While Satyam did not include a copy of the letter in its announcement, a report in The Wall Street Journal contains a copy of the letter.

Raju noted in his letter that Satyam's balance sheet for the quarter ending September 30 includes inflated cash and bank balances of 50.4 billion rupees ($1.04 billion), nonexistent accrued interest of 3.76 billion rupees, an understated liability of 12.3 billion rupees due to funds arranged by the chairman, and an overstated debtors position of 4.9 billion rupees, according to the Journal report.

And during the September quarter, the company also reported inflated revenue of 27 billion rupees, vs. actual revenue generation of 21.1 billion rupees. That resulted in artificial operating margins of 24 percent of revenue, compared with its actual 3 percent margin.

In the letter, Raju said:

The gap in the balance sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of the company operations grew significantly...The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations - thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The Securities and Exchange Board of India announced it is investigating the matter.

The company, in a statement, said it was "shocked" by the letter and is working toward moving forward, in light of the disclosure.