Satyam Scandal

Summary of Satyam Scandal Satyam Computer services Limited was founded by Mr. B. Ramalinga Raju at Hyderabad in 1987. Mr. Raju is the Founder Chairman of Satyam Computer, although the company was incorporated in 1987 with 20 employees, it went public in 1992. It grew rapidly as a Global business. It offered IT and business process outsourcing (BPO) services spanning various sectors. It was as an example of “India’s growing success.” The company won many awards for innovation, governance, and corporate accountability. In 2007, Ernst & Young awarded Mr. Raju with the ‘Entrepreneur of the Year’ award. On April 14, 2008, Satyam won awards from MZ Consult’s for being a ‘leader in India in CG and accountability’. In September, 2008, the World Council for Corporate Governance awarded Satyam with the ‘Global Peacock Award’ for global excellence in corporate accountability.” Unfortunately, less than five months after winning the Global Peacock Award, Satyam became the centerpiece of a ‘massive’ accounting fraud. On December the 16th , 2008; Mr. Ramalinga Raju, in a surprise move announced a $1.6 billion bid for two Maytas companies ( Maytas Infrastructure Ltd and Maytas Properties Ltd) saying he wanted to deploy the cash available for the benefit of investors. The two companies have been promoted and controlled by Raju’s family. But the thumbs down given by investors and the market forced him to retreat within 12 hours and share prices plunges by 55% on concerns about Satyam’s corporate governance. In a surprise move, the World Bank announced on December 23, 2008 that Satyam has been barred from business with World Bank for eight years for providing Bank staff with “improper benefits” and charged with data theft and bribing the staff. Share prices fell another 14% to the lowest in over 4 years. In early 2009, Satyam’s scam came to light which is the biggest scam in Indian corporate history which rocked the Indian stock market and shocked many people. On 7, January 2009, Chairman Mr. Ramalinga Raju confessed that Satyam's accounts had been falsified notifying board members and the Securities and Exchange Board of India (SEBI). Mr. Raju confessed that company’s balance sheet of September month, 2008 carries inflated cash and bank balance of Rs. 5040 crore as against Rs. 5361 crore reflected in the books, nonexistent interest of Rs. 376 crore, overstated the operating margin as RS.649 crore as against the actual 61 crore, understated liability of Rs. 1230 crore, artificial cash and bank balance of Rs. 588 crore, over stated debtors of Rs. 490 crore. Mr. Raju took responsibility for overstating the company’s revenues and profits and reported a cash holding of approximately $1.04 billion that simply did not exist. He confessed that the gap in the balance sheet was arisen purely on account of inflated profits over a period of last several years. He revealed in his letter that his attempt to buy Maytas companies was his last attempt to “fill fictitious assets with real ones”. He admitted in his letter, “It was like riding a tiger without knowing how to get off without being eaten”. Greed for money, ambitious corporate growth, deceptive reporting practices, lack of transparency, preparing fake bills, audit failures, desire to make company's financial performance or condition seem better than it actually is, less effective Whistle- blower policy, weak independent directors and audit committee, aggressiveness of investing and commercial banks etc. lead to the biggest scandal in Indian business history. Several different groups of people involved with Satyam Scandal. After investigation, Indian authorities arrested - Mr. Raju, Mr. Raju’s brother - B. Ramu Raju, former managing director, Srinivas Vdlamani, the company’s head of internal audit, Global head of internal audit, it’s CFO and several of the company’s auditors (PwC) who are responsible for fraud. Accounting fraud Accounting fraud refers to the misrepresentation or alteration of accounting records in order to obtain favorable financing and to boost net income and sales figures of a company. That means accounting fraud is intentional misrepresentation or alteration of accounting records regarding sales, revenues, expenses and other factors for a profit motive such as inflating company stock values, obtaining more favorable financing or avoiding debt obligations. This hides any financial problems the company is facing. So, what I understand by accounting fraud is Over-recording sales revenue- Example: sales revenue is 500,000, but recorded 5,000,000 Under-recording expense - Example: expense is 3,000,000, but recorded 300,000 Inflating profit, hiding loses- Example: profit is 500,000 but recorded 5,000,000 or the company has loses of 500,000, they hided the loss. Making a company's financial performances or conditions seem better - Example: Satyam did fraud to make the company’s financial condition seem better than I actually is. Merging short and long term debt- Merging short and long term debt into one amount to improve the perceived liquidity of the company is a kind of fraud. Failing to disclose risky investments- Failing to disclose risky investments or “creative” accounting practices is a type of fraud. Falsifying accounting statement- Any act or attempt to falsify an accounting statement for financial gain is doing accounting fraud. Example- Satyam falsified their accounting statement for financial gain. False corporate or individual tax returns: Example- Income of a company or individual is filled fake or less on tax return paper, so false tax return is doing fraud according to law. Attracting customers by appearing successful: By changing financial statement to appear more successful to attract customer, is a fraud with customer, shareholder, owner. Examples:A clear example of accounting fraud is the act of deliberately overpricing a company's assets in order to drive up its share price what Satyam did. Another example is filing bankruptcy to avoid debt, rather than because of financial hardship. One of the biggest accounting frauds in history occurred during the Enron scandal in 2001. The facts that lead to the Satyam Scandal Problems in Satyam begin when on December the 16th , 2008; its chairman Mr. Ramalinga Raju, in a surprise move announced a $1.6 billion bid for two Maytas companies ( Maytas Infrastructure Ltd and Maytas Properties Ltd) saying he wanted to deploy the cash available for the benefit of investors. The two companies have been promoted and controlled by Raju’s family. But the thumbs down given by investors and the market forced him to retreat within 12 hours and share prices plunges by 55% on concerns about Satyam’s corporate governance. In a surprise move, the World Bank announced on December 23, 2008 that Satyam has been barred from business with World Bank for eight years for providing Bank staff with “improper benefits” and charged with data theft and bribing the staff. Share prices fell another 15% to the lowest in over 4 years. On January 7, 2009, B. Ramalinga Raju announced confession of over Rs. 7800 crore (1.47 billion) financial fraud and he resigned as chairman of Satyam. He wrote in his letter that the balance sheet of September, 2008 carries some fraud information –  Inflated cash and bank balance of Rs. 5040 crore as against Rs. 5361 crore reflected in the books.  An accrued interest of Rs. 376 crore which is non-existent.  Understated liability of Rs. 1230 crore on account of funds was arranged by him.  Over stated debtors of Rs. 490 crore.  For September quarter (Q2), there was an artificial cash and bank balance of Rs. 588 crore. He also wrote that the gap in the balance sheet was arisen purely on account of inflated profits over a period of last several years. He revealed in his letter that his attempt to buy Maytas companies was his last attempt to “fill fictitious assets with real ones”. He admitted in his letter, “It was like riding a tiger without knowing how to get off without being eaten”. By analyzing the case, the facts that lead to Satyam scandal are –  Over-recording sales revenue.  Over-stated assets.  Inflating profit, hiding loses and liabilities.  They wanted to increase their market share prices in unethical way.  Greed for money, ambitious corporate growth, deceptive reporting practices.  Lack of transparency, preparing fake bills, audit failures.  Desire to make company's financial performance or condition seem better than it actually is.  Less effective Whistle- blower policy.  Weak independent directors and audit committee  Aggressiveness of investing and commercial banks etc. No doubt, Satyam did accounting fraud and practiced unethically. So, all these facts described above lead to Satyam scandal. Parties responsible for Satyam scandal The main parties responsible for Satyam scandal are- Mr. Raju Mr. Raju was the primary individual responsible for the fraud. He was the chairman and falsified the bank accounts to inflate the balance sheet. He created numerous bank accounts to advance the fraud. He also created more than 6000 fake salary accounts. He confessed that he was responsible for falsifying balance sheet of September month which carried inflated cash and bank balance of Rs. 5040 crore as against Rs. 5361 crore reflected in the books, non- existent interest of Rs. 376 crore, overstated the operating margin as RS.649 crore as against the actual 61 crore, understated liability of Rs. 1230 crore, artificial cash and bank balance of Rs. 588 crore, over stated debtors of Rs. 490 crore. Global head of internal audit Mr. Raju and the company's global head of internal audit used a number of different techniques to perpetrate the fraud. The company's global head of internal audit created fake customer identities and generated fake invoices against their names to inflate revenue. The global head of internal audit also forged board resolutions and illegally obtained loans for the company. It also appeared that the cash that the company raised through American Depository Receipts in the United States never made it to the balance sheets. Global auditing firm Global auditing firm Price Waterhouse Coopers ("PWC") audited Satyam's books from June 2000 until the discovery of the fraud. Several commentators criticized PWC harshly for failing to detect the fraud. They are responsible for not detecting the fraud and collecting double money from Satyam. Board of Directors The Board of Directors should have been concerned with the knowledge about the fraud and that Mr. Raju decreased his holdings of Satyam significantly over the three years leading up the disclosure of the fraud. The Board did not actively monitored Satyam. Furthermore, the Board should have caught the parties responsible for fraud. Several different groups of people involved with Satyam Scandal. Indian authorities arrested these people who responsible of fraud Mr. Raju Mr. Raju’s brother, B. Ramu Raju, Former managing director, Srinivas Vdlamani, The company’s head of internal audit, Global head of internal audit, It’s CFO. Several of the company’s auditors (PwC) who responsible for fraud. All these parties are responsible for Satyam scandal. Note : The Institute of Chartered Accountants of India (ICAI) ruled that “the CFO and the auditor were guilty of professional misconduct.” There were also several civil charges filed in the U.S.against Satyam by the holders of its ADRs. The investigation also implicated several Indian politicians. Both civil and criminal litigation cases continued in India and civil litigation continues in the United States . So, many parties are responsible for Satyam scandal. How to prevent a fraud like Satyam Scandal I think fraud like Satyam Scandal could have been prevented by following the guidelines given below:Creating a fraud policy: By designing, publishing and implementing a fraud policy that establishes; expected employee conduct, prohibited actions, how fraud could be reported and the punishment for noncompliance, fraud could be prevented. In Satyam, there had not any Fraud policy. So, many parties related with Board and Owner did fraud. Training employees in fraud prevention: Employees serve as the eyes and ears of a company and by ensuring that staffs were knowledgeable about basic fraud prevention techniques, the company could establish a first line of anti-fraud defense. In Satyam, the employees did not have any fraud prevention training, so employees did not find out about the fraud. Regulations and regulatory compliance: I with the view to tightening the regulations and ensuring regulatory compliance, so the fraud like Satyam scandal could have been prevented. The Capital market regulator should control strictly the market and take necessary steps to monitor share price and to prevent fraud. When Satyam scandal happened, the SEBI failed to do their duty properly which ultimately allowed Satyam to do fraud. Management Board: To prevent fraudulent activities, management must implement internal controls, or structure, and know what situations to look for. Management should be aware of types of fraud. They must establish a strong control environment. A strong tone should be developed by establishing and complying with a written set of policies. The policies must be concise and include consequences when procedures are disobeyed. In Satyam, management board didn’t do their job properly. If they had done their job honestly, the fraud would never happen. By establishing a good management board, fraud like Satyam scandal could have been prevented. Financial statements: Annual examinations of financial statements should be done by an outside party. So, they could find out the mistake and unrealistic report/ balance of financial statement. This practice wasn’t in Satyam. Independent Board: Management board should be independent. Sometimes it may happen that owners of farm make changes of company’s financial report for self-interest which is fraud. So, management board should be established with honest and independent people. Independent controller of management: Management may feel pressure to meet financial goals for the company or may receive incentives if certain goals are met. So, greed for money and success can lead one to do fraud. Example: Mr. Raju did fraud to reach his goals and to make the company successful by falsifying financial statement, instead of making real profit. So there should be independent party to monitor the management board. By nature, fraud is hidden. There is no 200% guarantee to avoid fraud. Over the past couple of years, the public’s attention has been captured by cases of corporate fraud. The best way to prevent fraud is “ethical education”. One should be conscious and determine not to do any kind of fraud. What I would have done if I were CFO of Satyam If I would have known that fraud was going on in Satyam, definitely I would try my best to prevent the fraud. If I would have seen something wrong in company’s financial statement, I would first find out what wrong happening. I would analyze the balance sheet and income statement. Then I would check the transaction and balance of Bank accounts. If I had found the bank balance didn’t match with the balance sheet or there were something made of paper, I would have talked with the managing board and the Directors and requested them to prevent the fraud. If they take necessary steps, then the fraud would come out light. But, in case if they would not take steps to prevent fraud, I would complain to the SEBI writing a letter, describing the facts what going on. I hope that they would take actions to prevent fraud and do investigations to arrest the responsible person. I would provide them all the required information about Satyam’s fraud. And definitely, I would resign from the Company’s CFO designation. I would do these because my ethics would never allow me to let the fraud happen. I don’t care about my job. If one has qualifications and talent, he doesn’t need to fear about finding a job. He will find out many jobs around the world. I believe doing work with Respect and honesty is most important. In doing any job in any company, if I find that something wrong is going on which should not happen or I am not capable of doing the job, I will resign from the job. Because, working with honesty gives me a mind satisfaction. .