Satyam Computer Services
Ltd. — (31-3-2009)
Appointment :
1. We have been appointed as
statutory auditors of SATYAM COMPUTER SERVICES LIMITED (‘the Company’) for the
year ended March 31, 2009 by the Board of Directors of the Company (hereinafter
referred to as the ‘Board’) subject to the ratification by the shareholders of
the Company, pursuant to the order of the Honourable Company Law Board (CLB),
dated October 15, 2009. This report is addressed to the members of the Company,
subject to the ratification of our appointment.
Report on the Financial
Statements :
2. We have audited the
attached Balance Sheet of the Company as at March 31, 2009, the Profit and Loss
Account and the Cash Flow Statement of the Company for the year ended on that
date, both annexed thereto.
Management’s responsibility for
the Financial Statements :
3. These financial
statements are the responsibility of the Company’s Management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
Auditors’ responsibility :
4. Subject to the matters
discussed in this report, we conducted our audit in accordance with the auditing
standards generally accepted in India. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and the disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by the Management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
Companies (Auditor’s Report)
Order, 2003 (CARO) :
5. As required by the
Companies (Auditor’s Report) Order, 2003 (CARO) issued by the Central Government
in terms of S. 227(4A) of the Companies Act, 1956 (‘the Act’) we give in the
Annexure a statement on the matters specified in paragraphs 4 and 5 of the said
Order, which is subject to the matters discussed in this report.
Basis for opinion :
6. As stated in Note 3 of
Schedule 18 :
(a) On January 7, 2009, in a communication (‘the letter’) addressed to the then-existing Board of Directors of the Company and copied to the Stock Exchanges and Chairman of Securities and Exchange Board of India (‘SEBI’), the then Chairman of the Company, Mr. B. Ramalinga Raju (‘the erstwhile Chairman’) admitted that the Company’s Balance Sheet as at September 30, 2008 carried inflated cash and bank balances, non-existent accrued interest, understated liability and overstated debtors position. As per the letter, the gap in the Company’s Balance Sheet had arisen purely on account of inflated profits over a period of last several years. Consequently, various regulators have initiated their investigations and legal proceedings, which are ongoing and are more fully described in the said Note.
(b) The Government-nominated Board of Directors appointed an independent counsel (‘Counsel’) to conduct an investigation of the financial irregularities that would enable preparation of the financial statements of the Company. The Counsel appointed forensic accountants to assist in the investigation (referred to as ‘forensic investigation’) and preparation of the financial statements. The forensic accountants have expressed certain reservations and limitations in their investigation process, which are more fully described in the said Note.
(c) Pursuant to the investigations conducted by the Central Bureau of Investigation (‘the CBI’)/other regulatory authorities, most of the relevant documents in the possession of the Company were seized by the CBI/other authorities and partial access was granted to the Company including for taking photo-copies of the relevant documents as may be required in the presence of the CBI officials.
(d) The former statutory auditors of the Company vide their letter dated January 13, 2009 to the Board of Directors have indicated that their reports and opinions in relation to the financial statements of the Company from the quarter ended June 30, 2000 until the quarter ended September 30, 2008 should no longer be relied upon.
(e) As confirmed by the order of the CLB, and in accordance with Accounting Standard 5 — ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’, adjustments resulting from financial irregularities and errors relating to periods prior to April 1, 2008, to the extent identified, have been accounted for as ‘Prior Period Adjustments’ in these financial statements.
(f) As per the assessment of the Management, based on the forensic investigation carried out through an independent counsel/forensic accountants, and the information available at this stage, all identified/required adjustments/disclosures arising from the financial irregularities, have been made in these financial statements.
The Management is of the view that since matters relating to several of the financial irregularities are sub judice and various investigations are ongoing, any further adjustments/disclosures to the financial statements, if required, would be made in the financial statements of the Company as and when the outcome of the above uncertainties is known and the consequential adjustments/disclosures are identified.
In view of the above, we are unable to comment on the adjustments/disclosures which may become necessary as a result of further findings of the ongoing investigations and the consequential impact, if any, on these financial statements.
7. As stated in Note 3.3(ii) of Schedule 18, the Company has, based on the forensic investigation, accounted for the opening balance differences (net debit) of Rs.11,221 million as at April 1, 2002, other differences (net debit) of Rs.166 million during the period from April 1, 2002 to March 31, 2008 and Rs.7 million relating to the period from April 1 to December 31, 2008 aggregating Rs.11,394 million under ‘Unexplained Differences Suspense Account (Net)’ under Schedule 12 due to non-availability of complete information. These net debit amounts aggregating Rs.11,394 million have been fully provided for on grounds of prudence.
In the absence of complete/required information, we are unable to comment on the accounting treatment/ disclosure for the aforesaid unexplained amounts accounted under ‘Unexplained Differences Suspense Account (Net)’ in these financial statements.
8. As stated in Note 6.1 of Schedule 18, the alleged advances amounting to Rs.12,304 mil-lion (net) have been presented separately under ‘Amounts Pending Investigation Suspense Account (Net)’ in the Balance Sheet. In this regard, there are certain claims by thirty-seven companies seek-ing repayment of the amounts allegedly paid by them to the Company as temporary advances which were earlier not recorded in the books of ac-count of the Company. These companies have also claimed damages/compensation/interest on these amounts. Further, these companies have also filed recovery suits/petitions against the Company. The details of these claims are more fully described in the said Note. The Company has not acknowledged any liability to any of the thirty-seven companies and has replied to the legal notices stating that the claims are legally untenable.
The Directorate of Enforcement (‘ED’), Govern-ment of India, is conducting an investigation under the Prevention of Money Laundering Act, 2002 on the amounts allegedly advanced by the aforesaid parties and has directed the Company not to return the amounts until further instructions from the ED.
The Management has represented that since the matter is sub judice and the investigations by various Government agencies are in progress, the Management, at this point of time is not in a position to predict the ultimate outcome of the legal proceedings initiated by these thirty-seven companies.
In view of the above, we are unable to determine whether any adjustments/disclosures will be required in respect of the aforesaid alleged advances amounting to Rs.12,304 million (net) and in respect of the non-accounting of any damages/compensation/interest in these financial statements.
9. As stated in Note 6.3 of Schedule 18, sub-sequent to the letter by the erstwhile Chairman of the Company relating to various financial irregularities in the Company’s financial statements, a number of persons claiming to have purchased the Company’s securities have filed class action lawsuits in various courts in the United States of America. These class action suits are more fully described in the said Note. Based on the legal advice obtained by the Company, the Company is contesting the above lawsuits.
Since the matter is sub judice, the outcome of which is uncertain at this stage, we are unable to comment on the consequential impact, if any, on these financial statements.
10. As stated in Note 8.1(vi) of Schedule 18, an amount of Rs.674 million has been paid as interim dividend for the year 2008-09. Since there are no profits for the purpose of declaring dividend, there is a non-compliance of S. 205 of the Act. Further, as stated in Note 8.1(vii) of Schedule 18, the consequen-tial transfer of the stipulated minimum amounts of profits to General Reserves in accordance with the Companies (Transfer of Profits to Reserves Rules), 1975, has also not been effected due to inadequate balance in the Profit and Loss Account. The Management is proposing to make an application to the appropriate authority for condoning these non-compliances. Refer to paragraph 17 below also.
The possible impact of these non-compliances in the event the Company’s condonation requests are not granted has not been determined or recognised in these financial statements.
11. Attention is invited to the following matters:
(a) As stated in Note 9.2 of Schedule 18, in the absence of certain documents/information, adjustments required in respect of the opening balances as at April 1, 2008 (including the adjustments consequent to the assessment of consistent application of accounting policies) have been carried out to the extent feasible by the Management, based on available alternate evidences/information.
In the absence of the aforesaid documents/ information for the periods prior to April 1, 2008, we could not perform some of the required auditing procedures on the opening balances to the extent deemed necessary by us. Furthermore, due to inadequate records, we are unable to fully assess whether the Company’s accounting policies have been applied on a basis consistent with that of the preceding period.
(b) As stated in Note 9.3 of Schedule 18, certain reconciliations between the sub-systems/sub-ledgers and the general ledger could not be performed completely due to non-availability of all the required information. The Company has identified certain amounts aggregating Rs.27 million (net debit), comprising of Rs.494 million (gross debits) and Rs.467 million (gross credits) appearing in the general ledger, for which complete details are not available and, hence, these amounts have been accounted under ‘Unexplained Differences Suspense Account (Net)’ under Schedule 12 and the Management has made provision for the net unexplained debit amounts aggregating Rs.27 million as at March 31, 2009 on grounds of prudence. Further, there are certain differences in data between inter-connected sub-systems, ultimately interfaced to the general ledger, for which complete details are not available.
In the absence of the required information, we are unable to determine the additional impact, if any, of such unexplained amounts/ differences on these financial statements.
(c) Responses were not received in 3,047 number of cases out of our total sample of 3,746 number of requests sent out for confirmations of balances/other details in respect of parties reflected under Sundry Debtors, Loans and Advances, Current Liabilities, etc. Further, confirmations could not be sent in 47 number of cases due to the non-availability of complete records/ addresses relating to these parties. Refer Note 9.4 of Schedule 18.
Had all the confirmations been received and reconciled, there may have been additional adjustments required to these financial statements which are not determinable, at this stage.
12. Attention is invited to the following matters:
(a) Further to our comments in paragraph 8 above, the amounts received during the year and shown under ‘Amounts Pending Investigation Suspense Account (Net)’ has been presented in the cash flow statement separately since the Management could not identify the nature of the same and, hence, could not categorise the same as operating, investing or financing cash flows.
This is not in accordance with Accounting Standard (AS) 3 — Cash Flow Statements.
(b) Identification of companies/firms/other parties covered in the Register maintained u/s. 301 of the Act, companies under the same management within the meaning of S. 370(1B) of the Act, firms/ private limited companies in which a director is a member or a partner, the non-scheduled banks where a director of the Company is interested and the related parties as required under AS-18 — Related Party Disclosures as stated in Notes 19(iv) and 30 of Schedule 18 has been done by the Management based on available information. For the reasons stated in the said Notes, there may be additional related parties whose relationship would not have been disclosed to the Company, and, hence, not known to the Management.
We are unable to comment on the completeness/correctness of the above-referred details in the absence of all the required information.
(c) As stated in Note 12.4 of Schedule 18, the Company has given as finance lease, vehicles to the employees under the Associates Car Purchase Scheme, the gross original cost of which aggregates Rs.654 million (net book value Rs.382 million as at March 31, 2009), which have not been accounted for as finance leases in accordance with AS-19 — Leases in the absence of complete/adequate information.
In the absence of complete/adequate information, we are unable to determine the extent to which fixed assets and depreciation have been overstated and the impact of the non-compliance with AS-19 — Leases on these financial statements.
(d) As stated in Notes 14.5 and 37 of Schedule 18, the Company has not maintained proper records of its inventories during the year though the required adjustments to account for the inventory in the books of account were made based on the available information with the Management as at the year end. Further, the Company has not disclosed the quantitative details of purchase and sale of hardware equipment and other items as required under Schedule VI of the Act in the absence of complete information.
13. The Management has evaluated and accounted for certain transactions/made the relevant disclosures based on and to the extent of the information available with the Company in respect of the following Notes of Schedule 18:
(a) Adjustment of unapplied receipts against Sundry Debtors, classification of Sundry Debtors and provisioning for doubtful debts as stated in Note 14.1.
(b) Accounting for contracts under percentage of completion method and unbilled revenue as stated in Notes 14.2 and 14.3.
(c) Accounting for multiple deliverable elements, hardware equipments and other items, etc., as stated in Notes 14.4 and 14.5.
(d) Accounting for unearned revenue as stated in Note 14.7.
(e) Accounting for reimbursements/recoveries from customers as stated in Note 14.9.
In the absence of the required information, we are unable to determine the additional impact, if any, of the above matters on these financial statements.
14. As stated in Note 6.6(vi) of Schedule 18, the Company is carrying a total amount of Rs.4,371 million (net of payments) as at March 31, 2009 towards provision for taxation which was made primarily on the basis of the past financial statements. Considering the effects of financial irregularities, status of disputed tax demands, appeals/claims pending before the various authorities, the consequent uncertainties regarding the outcome of these matters and the significant uncertainties in determining the tax liability, the Company has been professionally advised that it is not appropriate to make adjustments to the outstanding balance of tax provision as at March 31, 2009.
In view of the above, we are unable to comment on the adequacy or otherwise of the provision for taxation carried in these financial statements.
15. In view of the matters described in paragraph 6 above and as stated in Note 39 of Schedule 18, information relating to the previous year has been provided only for the purpose of statutory requirements and the same cannot be used for any comparison purposes or otherwise.
16. Without qualifying our opinion, we invite attention to the following Notes of Schedule 18 relating to various claims and contingencies:
(a) Note 6.2 regarding the settlement amount of Rs.3,274 million (equivalent to USD 70 million) deposited into the escrow account payable to Upaid Systems Limited.
(b) Note 6.4 regarding the Division of Enforcement of the United States Securities and Exchange Commission conducting a formal investigation into misstatements in the financial statements of the Company for the prior years pursuant to the letter of the erstwhile Chairman and recommending enforcement action against the Company.
(c) Notes 6.6 to 6.8 regarding the various demands/disputes raised by the direct and indirect tax authorities both in India as well as overseas jurisdictions.
As stated in Note 6.13 of Schedule 18, the Company has made appropriate provision for contingencies as at March 31, 2009 which, in the opinion of the Management, is adequate to cover any probable losses in respect of the above litigations and claims.
17. Without qualifying our opinion, we invite attention to the following Notes of Schedule 18 relating to certain regulatory non-compliances/breaches:
(a) Note 8.1 regarding various non-compliances with the provisions of the Act.
(b) Note 8.2 regarding certain non-compliances of the guidelines issued by the SEBI with respect to allotment of stock options to the employees.
(c) Note 8.3 regarding certain non-compliances of the provisions of the Foreign Exchange Management Act, 1999.
(d) Note 8.5 regarding certain non-compliances of the provisions of the Income-tax Act, 1961.
(e) Note 8.6 regarding delay in filing of tax returns in overseas jurisdictions.
The Management has represented that:
(i) the various non-compliances and breaches by the Company of the statutory requirements which have been noticed/observed, duly considering the findings of the forensic investigation/other ongoing regulatory investigations have been summarised in the aforesaid Notes.
(ii) the Company is proposing to make an application to the appropriate authorities, where applicable, for condoning these non-compliances and breaches relatable to the Company.
(iii) the possible impact of these non-compliances and breaches in the event the Company’s condonation requests, where applicable, are not granted has not been determined or recognised in these financial statements.
18. Without qualifying our opinion, we invite attention to the following Notes of Schedule 18 relating to certain accounting and other matters:
(a) Note 9.1 regarding the Management’s identification of several deficiencies in the Company’s internal control over financial reporting as at March 31, 2009 along with certain remediation action taken subsequently.
(b) Note 9.5 regarding various risks and uncertainties relevant to the Company’s financial condition as identified by the Management.
(c) Note 12.8 regarding adjustments that may be required on account of the physical verification of fixed assets conducted subsequent to the year end.
(d) Note 13.9 regarding the provisions made for the diminution in the value of investments and Note 19(iii) regarding the provision made for the dues from the subsidiaries.
19. Without qualifying our opinion, we invite attention to Note 22 of Schedule 18 regarding provision for statutory audit fees of Rs.57 million (including for the audit of prior period items) debited to the profit and loss account which is subject to the approval of the shareholders.
Opinion:
20. Further to our comments in the Annexure referred to in paragraph 5 above and paragraphs 16 to 19 above and subject to our comments in paragraphs 6 to 15 above, we report that:
(a) we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit;
(b) in our opinion, proper books of account as required by law have been kept by the Company so far as it appears from our examination of those books;
(c) the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement dealt with by this report are in agreement with the books of account;
(d) in our opinion, the Balance Sheet, the Profit and Loss Account and the Cash Flow Statement dealt with by this report are in compliance with the Accounting Standards referred to in S. 211(3C) of the Act;
(e) in our opinion and to the best of our information and according to the explanations given to us, the said Accounts, read together with the notes thereon, give the information required by the Act in the manner so required and, subject to the consequential effects of our comments in paragraphs 6 to 15 above which are not quantifiable, give a true and fair view in conformity with the accounting principles generally accepted in India:
(i) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2009;
(ii) in the case of the Profit and Loss Account, of the loss of the Company for the year ended on that date; and
(iii) in the case of the Cash Flow Statement, of the cash flows of the Company for the year ended on that date.
Reporting requirements relating to S. 274(1)(g):
21. Since all the Directors as on March 31, 2009 were Government nominees, the reporting requirement relating to S. 274(1)(g) of the Act does not arise.
Compiler’s Note:
The other disclosures in the Notes to Accounts referred to in the audit report are voluminous and hence not reproduced here. The same can be made available by the compiler on request.
