On Wednesday Satyam Computer Services announced that B. Ramalinga Raju, its founding chairman had resigned after he’d admitted that he inflated his financial performance. Satyam, which is one of India’s six largest IT outsourcing corporations services such industry leading companies as Sony.

The company’s statement said that it had received a letter from its chairman on Wednesday, in which he outlined some of his accounting irregularities, and presented his resignation.

Satyam did not include a copy of the letter in its announcement but it has been published here and is available for your perusal.

In the letter, Raju said that his balance sheet for the third quarter of 2008 overstated 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 thanks to funds arranged by Raju, and an overstated debtors position of 4.9 billion rupees.

During the third quarter Satyam had also inflated revenue of 27 billion rupees where its actual generated revenue was of only 21.1 billion rupees. This yielded artificial operating margins of 24 percent of revenue, where its actual percent margin was in actuality 3 percent.

As Raju says in the letter:

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 letter’s contents shocked and angered not only the company but all of corporate India, for which the IT executives are role models for the new generation of Indian businesspersons. The benchmark Sensex stock index dropped 7.3% and Satyam shares fell nearly 78% on the day as investors fled in droves. Mr. Raju is not currently being charged with anything as a pending investigation has yet to gather sufficient evidence.