At Enron, the CEO stonewalled, while whistle-blowers came out with the truth, he says. 649 crore ($135 million). This copy is for your personal, non-commercial use only. Immediately following Rajus confession, Satyams shareholders took a direct hit as the companys share price crashed 77% to Rs. Integration with the scam-tainted company was a challenging task for the new management, which needed to act quickly to restore stakeholder confidence. The Satyam fraud has shattered the dreams of different categories of investors, shocked the government and regulators alike, and led to questioning of the accounting practices of statutory. Audit failures (both Internal & External). Applied to the 2011 Gross World Product, this figure translates to a potential projected annual fraud loss of more than $3.5 trillion. Additionally, profits per share (EPS) surged at a 40 percent compound annual growth rate, from $0.12 to $0.62. For starters, forensic accounting skills have become more important in breaking down the complex accounting manoeuvres that have disguised financial statement crimes. When one party contracts with another without the intent to perform in order to prevent the other from contracting with a third party, Contracting without the intent to pay the agreed consideration, and. In a letter to the ISB community, he explained: Unfortunately, yesterdays shocking revelations, of which I had absolutely no prior knowledge, mean that we are far from seeing the end of the controversy surrounding Satyam Computers. Here, we have broken down the concept in terms of definition, understanding, and importance of Satyam Scam, Satyam Scandal for you. Mohandas Pai, the companys then-chief financial officer (now a director overseeing human resources) would take so much time going into accounting details.. It is . 3. It is usually a response to competitive pressures. The knowledge available to independent directors and even audit committee members is inherently limited to prevent willful withholding of crucial information, Singh notes. . Jan. 6, 2010 12:01 am ET. The CEO blew the whistle on himself. In that sense, Raju did ultimately tell the truth and perhaps live up to the Satyam name. Identify and deseribe three significant groups of stakeholders impacted by the Satyam scardal, excluding individuals, and explain the effects that the scandal had on each group. 7000 . 23. There is no need to strengthen corporate governance regulations [in India], he says. Stakeholder group 1 (Describe the stakeholder and how they were impacted by the scandal): Stakeholder group 2 (Describe the stakeholder and how they were impacted by . Mr. Raju, as well as secondary actors such as the CFO, the managing director, the companys worldwide head of internal audit, and Mr. Rajus brother, have been charged with the offence of fraud by Indian authorities. Scandal at Satyam: Truth, Lies and Corporate Governance January 9, 2009 18 min read. Students ofLawsikho coursesregularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills. The Satyam Scandal. PriceWaterhouseCoopers (PwC), a global auditing company, audited Satyams records from. Fraud may not be explicitly shown, but it can be inferred from the surrounding circumstances and the behaviour of parties before and after the agreement. The formal and informal corporate governance rules are usually found in every company's legal, institutional, and regulatory framework. This book analyses the causes for these unethical activities and interprets important verses from The Bhagavad Gita to show business executives and leaders how to lead ethically for the greater . The financial community has realised that there is a great need for skilled professionals who can identify, expose, and prevent structural weaknesses in three key areas, namely, poor CG, flawed internal controls, and fraudulent financial statements, as a result of the failure of the corporate communication structure. Satyam was the first Indian business to be listed on three global stock exchanges, namely New York Stock Exchange (NYSE), DOW Jones, and EURONEXT. ' says Aron. The Satyam scam has emphasized the role of numerous authorities, courts, and rules that are involved in a severe infraction committed by a publicly traded firm in India. In January 2009, India witnessed one of its biggest corporate scandals - the 'Satyam scandal' also referred to as 'India's Enron'. Satyams CEO, Ramalingam Raju, took responsibility for broad accounting improprieties that overstated the companys revenues and profits and reported a cash holding of approximately $1.04 billion that simply did not exist. It is actually conducted by the board of Directors and the concerned committees for the company's stakeholder's benefit. Aron notes that any Satyam director should have been puzzled that the company was proposing to invest $1.6 billion in real estate at a time when a competitor as formidable as HCL was gunning for one of its most lucrative markets. The Satyam scandal was a shock to the market, particularly to Satyam investors, and it was also responsible for harming Indias reputation in the global market. Satyam clearly generated significant corporate growth and shareholder value. Fraud may affect any organization, no matter how big or minor it is. That tragedy has been succeeded by another that has been dubbed "India's Enron." Assets were overstated than actual, fictitious deposits were shown in the Bank and also interest on it. Furthermore, the fact that Mr. Raju reduced his Satyam shares considerably in the three years leading up to the frauds discovery should have troubled the Board of Directors. Tyco is one of the best examples of a corporate governance turnaround, Useem notes. Distribution and use of this material are governed by J L Negi, a RBI general manager on deputation to the CBI, said that the CBI used forensic accounting tools to detect evidence of the fraud. The following circumstances discussed hereunder speaks as to when silence amounts to fraud: As fraud may take on an unlimited number of forms, attempting to define fraud accurately and exhaustively to account for all possible scenarios is pointless because various loopholes may become accessible to avoid culpability. Active concealment occurs when one party fails to disclose key contract information despite having a legal obligation to do so. Knowledge at Wharton is an affiliate of the Wharton School of the University of Pennsylvania. Separating the functions of the CEO and chairman, Directors and executive remuneration, and. Mahindra's chief executive officer, estimated US$2 billion as the combined annual revenue of both the firms. (Editors note: See interview with HCL CEO Vineet Nayar.) Mr. Raju fabricated bank accounts in order to inflate the balance sheet with fictitious funds. Fraudulent financial reporting can have significant consequences for the organization and its stakeholders, as well as for public confidence in the capital markets. Corporations must promote their CEOs moral, ethical, and social principles. At Satyam, there were no whistle-blowers. As a result, fraud can be inferred from circumstantial evidence that overcomes the natural presumption of good faith and fair dealing and persuades a reasonable person that such a presumption has been properly disproved. This article provides a detailed case study of the Satyam fraud case. Satyam Computers was once the crown jewel of the Indian Information Technology sector (IT sector), but it was brought to its knees in 2009 by its founders due to financial fraud. There must be an intent to deceive or induce the other party to enter into a contract. This week marks the one-year anniversary of India's largest corporate governance scandal in recent yearsthe fraud at Satyam Computer Services Ltd. Last January . The issue is really more one of leadership at the board level. The government acted quickly to protect investors interests while also preserving Indias reputation and image at a global level. The most significant questions, however, will be asked about corporate governance in India, and whether other companies could follow Satyams Raju in revealing skeletons in their own closets. Answer (1 of 2): Ramalinga Raju, a management graduate from Ohio University, founded Satyam Computer Services Ltd., a Hyderabad-based software Company in 1987. In addition, Satyams auditors and Board of Directors share some blame for the scam because they failed to locate it. Historically, several characteristics have been considered important ingredients of excellent corporate governance. The Satyam Scandal: A Lesson in Ethical Business Practices In 2009, Satyam Computer was one of the India's largest IT services company, shocked the world with It had failed to maintain a positive relationship with its shareholders and staff. The fraud often dubbed as the 'India's . You can click on this link and join: Follow us onInstagramand subscribe to ourYouTubechannel for more amazing legal content. After TCS, Infosys, and Wipro, it was recognized as Indias fourth-largest software exporter. B Ramalinga Raju, who founded . See you there. Periodic high-profile cases of . Also, quite aside from issues of governance, everything we know about unrelated diversification [deals] from management literature is that, as a general matter, they are not a good idea; they dont seem to make strategic sense., Useem wonders if the Satyam directors who resigned actually did the right thing. Keeping in mind the managements method of operation in the Satyam fraud, some significant recommendations have been suggested hereunder: The accounting fraud perpetrated by Satyams founders in 2009 is proof that the science of conduct is affected in great part by human avarice, ambition, and passion for power, money, fame, and glory. Scandals have demonstrated that excellent behaviour based on solid corporate governance, ethics, and accounting and auditing standards is urgently needed. In emerging nations, the Satyam case underlines the necessity of securities laws and CG. When a party has a fiduciary relationship with another, the former is obligated to operate in good faith and honesty in their dealings with the latter and to evaluate such transactions with greater diligence and caution than is normally required. Hopefully, creating an awareness of the large consequences of small lies may help some to avoid this trap. Price Waterhouse are the statutory auditors of Satyam. If there isnt sufficient belief in the notion that business will act in good faith, then the capitalist system is itself at risk. Specifically, Raju acknowledged that Satyams balance sheet included Rs. It shows that investing in emerging markets is risky. The swindle was discovered in late 2008 when the Hyderabad property market collapsed, leaving a . Human invention and innovation know no limitations, hence Section 17 was written as a tool to assist the judiciary in providing effective and real justice. Prior to that Raju made an attempt to have Satyam invest about Rs. Its important to clarify that the passive hiding mentioned before refers to remaining quiet or silent. 30 (approximately 60 cents), a far cry from its 52-week high of Rs. In a. Separating the duties of the board and management. Indeed, Satyam fraud "spurred the government of . I dont believe the sector will come crashing down. Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities. It has to do with the ownership structure. In Chaudhuris view, auditors such as PricewaterhouseCoopers, who signed off on the bogus accounts at Satyam, have a lot more to answer for than the board of directors. SRJIS/BIMONTHLY/ ARPIT KHURANA (3592-3601) FEB-MAR, 2016, VOL. Satyam could possibly be sold in fact, it had engaged Merrill Lynch to explore strategic options, but the investment bank has withdrawn following the disclosure about the fraud. shocked everyone including Stakeholders and all Government regulators. Useem says that if one were to take an inference from recent high-profile scandals outside of India, there would be a redoubled effort [in India] on the part of investors and independent directors at other companies to ensure that nothing like what happened at Satyam happens under their noses., Useem draws a parallel between what occurred at Satyam with the scandals at WorldCom and Tyco, rather than at Enron. Once the plaintiff discovers the deception, he must take all reasonable means to reduce his damage. In the year 2009, when the world was already reeling under the impacts of major financial recession, Indian Technology sector was hit by what is termed as the most colossal fraud in corporate history of India, The Satyam Scandal. . The board of directors recruited, Mr. Raju was charged with criminal conspiracy, breach of trust, and forgery, among other things. A little over two months after banning two audit managers from its India network, the Institute of Chartered Accountants of India (ICAI) has banned one of the firm's top audit partner Srinivas Talluri for life, while imposing its maximum financial penalty on him. If the cheated party decides to avoid the contract, he is responsible for restoring the advantage gained (if any) to the fraudulent party and may seek damages under Section 64. Despite my calls for improvements in governance, audit and legal penalties, Im left with the nagging concern that whatever we do may be insufficient. . Later, he describes the process as like riding a tiger, not knowing how to get off without being eaten.. Singh adds that the Satyam scandal doesnt necessarily warrant more regulation. Text. Ramalinga Raju, who was recently sentenced to seven years in jail, was the chairman of Satyam Computer Services who committed financial fraud to the tune of Rs. Raju claimed that he overstated assets on Satyam's balance sheet by $1.47 billion. Satyam employees had stressful moments and restless nights as they faced nonpayment of salary, project cancellations, layoffs, and equally gloomy outside employment chances. The tone gets set by the chairman of the board; its much more a matter of culture within the board room, of the group dynamics within the board.. When the parties are not on the same level, the law establishes an adequate presumption of deception. 25,415.4 million. Six years after he made a dramatic confession of committing fraud to the tune of Rs 7,136 crore, Satyam's founder B. Ramalinga Raju has been sentenced to a seven-year jail term and levied a Rs. 2023 Knowledge at Wharton. December 18 2008: Satyam board says will meet on December 29 to consider a share buyback in a bid to restore investor confidence. The following are the essentials of fraud: Fraud is established when it is demonstrated that a false representation was made; As a result, the core of fraud is willful deception, which is dealt with in the first three clauses of Section 17. The study aim and examines the effect of Satyam scandal over the job of independent directors in corporate administration. . On the day that Raju came clean, N. R. Narayana Murthy, chief mentor at Infosys, was on Indian television distancing Infosys and the rest of the IT industry from Satyams practices. Shockingly, the company's auditors, PricewaterhouseCoopers, did not notice it. The corporation had significant expansion in the 1990s. In the infamous Satyam scandal, the company's management falsified financial statements to meet stakeholder expectations, ultimately damaging the company's reputation and investor confidence. It is possible that during this slowdown period, more scandals will come to light. (U.S. financier Madoff last month admitted to running a $50 billion Ponzi scheme to keep his hedge fund afloat.). What on earth would compel Satyam to invest $1.6 billion in real estate at a time when competition with HCL was about to grow more intense? The third-tier and weaker companies will probably undergo a lot more scrutiny, he says. It concerns relations between various corporation stakeholders and how the shareholders, the board, directors, managers, employees, clients, investors, and communities mutually interact. Even if outside directors were unaware of the true state of Satyams finances, some red flags should have been obvious. Briefly, within utilitarianism, there are two versions: act utilitarianism and rule utilitarianism, the principle distinction between them being that the former considers only the consequences of specific actions while the latter also considers the . Singh adds that companies with the bluest of blue-chip reputations [such as] Infosys and TCS could actually gain in the current environment, because of a potential flight to quality among client companies. It has attained unmanageable proportions. News Corp is a global, diversified media and information services company focused on creating and distributing authoritative and engaging content and other products and services. The proper response is to deal with and defuse the problem as soon as possible., Guillen notes that what makes Satyams case unusual is that it had listed its ADRs on the NYSE. Addressing these gaps requires the organizations to maintain the transparency and integrity of the board of directors. He states that, What started as a marginal gap between actual operating profits and ones reflected in the books of accounts continued to grow over the years. The fraud of Satyam Scandal can be supported with the Fraud Triangle, a model first coined by American sociologist Donald R. Cressey (Downing, 2015) to explain factors causing someone to. In determining the extent of such loss, the plaintiff is entitled to collect the whole sum paid as damages, but he must account for any benefits acquired as a consequence of the transaction. If there were one or two more such accounting scandals in the next six months, it would make international investors more wary, says Wharton management professor Michael Useem. In a press conference held in Hyderabad on January 8, Mynampati told reporters that the companys cash position was not encouraging and that our only aim at this time is to ensure that the business continues. A day later, media reports noted that Raju and his brother Rama (also a Satyam co-founder) had been arrested and the government of India disbanded Satyams board. Investors lose faith in financial disclosures, the integrity of financial disclosures is questioned, and corporations face massive financial losses as a result of the growing trend in financial crimes throughout the world. Even as Raju is widely blamed for unleashing Indias Enron, Chaudhuri points to a major difference between Enron and Satyam. The auditors did not appear to conduct independent verification with the banks where Satyam claimed to hold deposits. As discussed previously, the fraud was apparent in Satyams case as a result of an email that the dignitaries of the company had received. Satyam Systems, a global IT company based in India, has just been added to a notorious list of companies involved in fraudulent financial activities, one that includes such names as Enron, WorldCom, Societe General, Parmalat, Ahold, Allied Irish, Bearings and Kidder Peabody. Useem also warns against overreacting. In the fiscal year 2003-2004, Satyams total revenues were Rs. These include outsider representation on the board, boards that arent too large, boards that meet often, etc. The Satyam fraud highlighted the importance of corporate governance in setting the standards for the audit committees work and board members responsibilities. In the next 48 hours, resignations streamed in from Satyams non-executive director and Harvard professor of business administration Krishna Palepu and three independent directors Mangalam Srinivasan, a management consultant and advisor to Harvards Kennedy School of Government; Vinod Dham, called the father of the Pentium chip and now executive managing director of NEA Indo-US Ventures in Santa Clara, Calif.; and M. Rammohan Rao, the dean of the Indian School of Business in Hyderabad (ISB). The deception was revealed as a result of the email. 7,800 crores which eventually turned out to be approximately Rs. An Indian court has sentenced the former head of Satyam Computers and nine others to seven years in prison in one of the country's biggest ever corporate scandals. Although Enron's forecasts and financial reports for the late 1990s and early 2000s guaranteed stakeholders of continuous growth, this was not the case and it eventually played out to be the . Some of the other directors who resigned have cited difficulties in attending frequent board meetings. Clients could begin to ask, How much do I know about this IT company and its governance? Copyright 2023 Dow Jones & Company, Inc. All Rights Reserved. On criminal allegations of fraud, Indian authorities detained Mr. Raju, Mr. Rajus brother, B. Ramu Raju, the companys former managing director, Srinivas Vdlamani, the companys head of internal audit, and the companys CFO. The holders of Satyams ADRs have filed multiple civil complaints against the company in the United States. 10. After the Enron fiasco, which served as a catalyst for others to imagine their own Enron in their different firms, corporate accounting fraud is not a new issue in our society. Dont assume other firms are guilty, he says. According to Aron, Satyam is one of the worlds largest implementers of SAP systems. A corporation includes various stakeholders' viz. The fraud committed by the founders of Satyam in 2009, is a testament to the fact that "the science of conduct is swayed in large by human greed . At WorldCom, the CFO and the CEO were knowingly misstating the accounting and financials of the firm; at Tyco, the CEO and the CFO were knowingly taking money from the company for personal purposes, he says. Following the Satyam debacle and PwCs participation, investors grew apprehensive of PwCs clients, resulting in a drop in share prices of roughly 100 firms ranging from. India is not perceived like Russia it is neither everyones darling nor the plague, he says. All rights reserved. On January 8, he resigned his position as the ISB dean. That is what the directors should have been asking. Instead, he adds, like the dog that didnt bark in the Sherlock Holmes story, the matter was allowed to slide. The scams like the Tata-Mistry fallout, PNB-Nirav Modi Scam, The Satyam scandal etc., happened because of the failure the complying with the principles of Corporate governance. Deceptive reporting practices, lack of transparency. .css-16c7pto-SnippetSignInLink{-webkit-text-decoration:underline;text-decoration:underline;cursor:pointer;}Sign In, Copyright 2023 Dow Jones & Company, Inc. All Rights Reserved, 20% off your order with Walmart promo code, $50 discount sitewide - Home Depot promo code, 50% off + free delivery on $20 orders with DoorDash promo code. It had an extensive client list including 185 Fortune 500 companies. It covered the areas of history of Satyam, and also provided an insight into how the $2.7 billion . It should be remembered that every charge of fraud must be precise, and fraud of any sort, other than the one alleged cannot be proven. Second, public pressure for reform, as well as following regulatory action, has altered the corporate governance landscape. Simply put, white collar crime cannot be viewed as less of an evil than any other form of crime. Finally, we also need stiffer penalties. A business journal from the Wharton School of the University of Pennsylvania. 7000 crore. What hidden assets . However, Winkler's (2010), descripti ve paper provid ed good anal ysis of the Satyam scandal. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); Congratulations! While U.S. stakeholders of Satyam were able to file a class action lawsuit and claim USD 125 million (about INR 700 crore) 31from the company, Indian investors were not able to take any legal action against Satyam as India's legal framework at the time did not allow for class action suits. It had also appeared that the funds obtained in the. Financial reporting fraud may have serious ramifications for a firm and its stakeholders, as well as public trust in the capital markets. Rao had chaired both December 16 board meetings. Typically, executives do not wake up one morning and say, I feel like adding 5 billion rupees to our revenue today. They usually start by fudging the number a littleand then it grows. Over the course of several years, Satyam inflated income virtually every quarter in order to match analyst expectations. Given the fact that there is a family connection involved, as an independent board member I would be looking very hard at whether this is the right decision for the company, he says. A case of fraud must be proven beyond a reasonable doubt in either a civil or criminal proceeding. The stakeholders and how each group was harmed. In the Indian outsourced IT-services market, Satyam Computer Services Limited was a rising star. The Satyam Computer Services scandal was India's largest corporate fraud until 2010. According to experts from Wharton and elsewhere, the Satyam debacle will have an enormous impact on India's business scene over the coming months. The issue is all the more grave since this company has, ironically, received many accolades for good corporate governance. The CFO and the auditor were found guilty of professional misconduct by the. "Today, if one is cheated in the securities marketthere is no provision for seeking any compensation from the errant party," says Virendra Jain, director of Delhi-based nonprofit Midas Touch Investors Association. The founder and directors of India-based outsourcing company Satyam Computer Services, falsified the accounts, inflated the share price, and stole large sums from the company.Much of this was invested in property. Specifically, we know that Satyam s stock price declined sharply on both January 7 and January 9 after Raju s letter to Satyam s board, SEBI, and the stock exchanges. But the January 9 stock price was more than Rs 500 lower . Mr. Raju first claimed that he was the sole perpetrator of the scam. The Satyam Scam was a large-scale accounting fraud of over Rs. This clause applies to a variety of situations, including. Useem says it can indeed prove challenging for independent directors to go through reams of documents and attend frequent board meetings that companies in distress typically have. A week after Satyam founder B Ramalinga Raju's scandalous confession, Satyam's auditors Price Waterhouse finally admitted that its audit report was wrong as it was based on wrong financial statements provided by the Satyam's management. Satyam Fraud Case Study - Final University University of Karachi Course Business Management (MD-317) Academic year:2018/2019 Uploaded byAiza Ghani Helpful? Whistle Whistleblower policy not being effective. Their plight highlights how little recourse Indian investors have when one of their investments turns out to be a fraudulent bust, even though the market continues to rake in money from Indians and foreigners alike. Ramalinga Raju and his family pocketed Rs 2,743 crore from the Satyam Computers fraud while stakeholders of the company lost a whopping Rs 14.162 crore, CBI sources have revealed. Satyam computers management misled the market and the stakeholders by manipulating the company's financial health. . f10/475C. When growth rates slow down, you are unable to hide the financial reality of how much cash you actually have. Explain when and how the fraud was exposed. Business transparency should be the key to promoting shareholder trust . Mr. Raju initially claimed that he did not divert any funds to his personal accounts and that the company was not as profitable as it had claimed. 4 Pages | 2001 Words. Palepu earned nearly Rs. . Perhaps Indian IT companies will face more scrutiny in the coming months; they may have to answer a few more questions, but India Inc. will pull through. NASSCOM, the National Association of Software and Services Companies, could play a role in helping communicate that the Satyam episode, though it shocked everyone, is an isolated instance, he adds. If it survives, Satyam may be able to redeem itself with new management and governance codes, Useem says. An attempt is made to examine and analyze in-depth the Satyam Computer's "creative-accounting" scandal, which brought to limelight the importance of "ethics and corporate governance" (CG). Satyam was named a Web Business 50/50 award winner for its corporate intranet. . Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com. Satyam Systems, a global IT company based in India, has just been added to a notorious list of companies involved in fraudulent . He wanted a great board of directors and thus listed the company fully on the NYSE not as an ADR for the sole purpose of forcing himself to be disciplined in the governance policies his company pursues.. Actions such as those of Satyam are being observed all over the world, and their effects are not simply localized to their executives, employees or even their countries. Satyam scandal highlights the importance of securities laws and CG in emerging markets. Satyams unexpected collapse sparked a debate over the Chief Executive Officers (CEO) role in propelling a firm to new heights of success, as well as the CEOs relationship with the Board of Directors and the formation of key committees. Mr. Rajus stake in the company. When terrorists attacked Mumbai last November, the media called it "India's 9/11." The result of a fraud commission cannot be reached just on the basis of conjecture, such a determination must be founded on some useful and constructive evidence. My continued concern and preoccupation with the evolving situation are impacting my role as dean of ISB at a critical time for the school. 1. 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Protect investors interests while also preserving Indias reputation and image at a 40 compound... Skills have become more important in breaking down the complex accounting manoeuvres satyam scandal stakeholders disguised. Instead, he adds, like the dog that didnt bark in the United.! Lot more scrutiny, he must take all reasonable means to reduce his.! Approximately 60 cents ), a far cry from its 52-week high of Rs a corporation includes various &. Analyst expectations shareholders took a direct hit as the combined annual revenue of both firms... The best examples of a corporate governance January 9 stock price was more than Rs 500.. Of leadership at the board level doubt in either a civil or criminal proceeding crashed %... Issue is really more one of the University of Karachi course business management ( MD-317 ) Academic Uploaded... The auditor were found guilty of professional misconduct by the article provides a case... Means to reduce his damage often dubbed as the companys share price crashed 77 % to Rs in... Dont assume other firms are guilty, he says role as dean of ISB at a 40 percent compound growth... A reasonable doubt in either a civil or criminal proceeding Ghani Helpful that he was the sole of! Students ofLawsikho coursesregularly produce writing assignments and work on practical exercises as a result of large..., Satyam may be able to redeem itself with new management, which needed to act to. Cents ), a global auditing company, Inc. all Rights Reserved not appear conduct!
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