On Wednesday, Satyam Computer Services Ltd founder chairman B Ramalinga Raju acknowledged that the company had massaged its balance sheet to show an inflated accrual of Rs 9,440 crore over the years. Moreover, he confessed in a letter to the board and market regulator Sebi, that to cover his tracks, he had cajoled one of India?s largest IT companies into a plan to buy out of two infrastructure and real estate firms run by his sons at a cost of Rs 8,000 crore ($1.6 billion).

As markets regulator Sebi ordered a probe into a scandal that chairman CB Bhave described as ?horrifying?, Satyam?s shares fell to a low of Rs 39.95 on the BSE, while its ADRs turned into penny stock, slipping below a dollar to 85 cents, a drop of 91% since last night. The ministry of corporate affairs is mulling reference of the case to the Serious Fraud Investigation Office after a report from the registrar of companies, Hyderabad.

In its wake, Indian investors are now left wondering whether the fabled run of India?s IT sector is over. For corporates across sectors, the big fallout would be on valuations abroad, while family-run enterprises could now find themselves fielding uncomfortable questions on corporate governance. The government is left fuming, as the impact of the second round of fiscal stimulus, which had perked up the economy and helped nudge the BSE Sensex above the 10,000 mark by Tuesday, was reversed.

NR Narayana Murthy, chief mentor at software major Infosys, said India should take quick decisive action to punish the guilty in the Satyam saga. Ruling out any angel investor role by Infosys in Satyam, he said, ?Action by India before the SEC in the US starts work will restore the credibility of the Indian corporate sector among foreign investors at this point drastically.?

As Raju stepped down as chairman, the company now faces a clutch of class action suits, which means anyone acquiring Saytam would have to make enormous provisions for them. Even though interim CEO Ram Mynampati in a mail to employees said the core strength of the company was intact, its business is up for grabs. Institutional investors could be asked to jointly take over the company as an interim measure, a government official said.

How the company, one of the poster boys of Indian IT, fell from grace so quickly can be attributed to the country?s biggest corporate accounting scandal. What Raju has confessed to in his letter is that as on September 30, 2008, the balance sheet of the company:

•Carried inflated cash and bank balances of Rs 5,040 crore, against a sum of Rs 5,361 crore reflected in the books

•Accrued interest to the tune of Rs 376 crore that is non-existent

•Under-stated liabilities to the extent of Rs 1,230 crore on account of funds arranged by Raju by pledging all promoter shares, and

•Over-stated the debtors? position of Rs 490 crore.

Moreover, in the second quarter of FY09, the company reported revenues of Rs 2,700 crore, against actual revenues of Rs 2,112 crore (inflated by 28%) and reported operating profits of Rs 649 crore, against actual profits of a mere Rs 61 crore (inflated by a whopping 964%), which resulted in inflated cash and bank balances of Rs 588 crore. This financial jugglery has been going on for years.

Though the exact modus operandi of the window dressing of accounts will only surface in days to come, FE pieced together some of the evidence. Analysts said there was elaborate internal forgery that made it possible to dress up cash accruals as income and spread out the expenditure stream.

Analysts are also questioning the total number of employees, stated to be around 53,000. That the actual number was probably far less made it easier for the company to balance its expenditure. Satyam’s payroll as a component of total expenditure stood at a whopping 79% for the quarter ended September 30, 2008.

Though Raju, in his letter, has absolved all others of the crimes, CFO Srinivas Vadlamani is not. Experts said fudging the accounts to such an extent could not have been possible without the complicity of the company?s finance and accounts departments, internal and external auditors, as well as tax advisors.

According to a Bangalore-based auditor, Satyam might have shown on its books revenues from certain contracts even before delivering them. ?A services company cannot show a figure in its books until it delivers the work to the client,? he said. ?In Satyam?s case, it was tightrope walking for the auditors. If they say they were not aware of what was going on, it shows their incompetence. On the other hand, if they agree to being a party to this, they have committed a crime,? the auditor added.

According to Diljeet Titus, senior partner in corporate law firm Titus & Co, ?A crime of such a magnitude is not possible without compliant finance department and auditors. Under the law, all such officials will have to be prosecuted. Even the directors, independent included, cannot escape as they failed in discharging their fiduciary duties.?

Vishesh Chandiok, national managing partner, Grant Thornton, said, “There is little chance that no one else within the company and outside was aware of the irregularities. In any case, several parties should have been aware if they had their eyes open?. He said that being a US-listed company, the CEO and CFO certify the adequacy and effectiveness of internal controls, and that auditors certify this management assessment. “Clearly, if nothing else, the SOX certification was wrong if only the chairman could have done all this single-handedly.?