Satyam Fraud Case Study

Satyam Computers Fraud Introduction Financial mismanagement by the founders of Satyam Computers led to its demise in 2009, which was a major blow to the Indian IT industry (Atesci et al., 2010). There has been a discussion regarding the CEO's duties in running an organisation towards new levels of achievement, as well as the relationship between the CEO and Board of Directors, and the creation of critical committees, since Satyam collapsed unexpectedly in 2013 (M. L. Bhasin, 2013). Incidents like this demonstrate the significance of corporate governance (CG) in setting an audit committee merits and defining board member roles for board members and executives. Satyam fraud caused damage to India's international finance reputation which resulted in anger and uncertainty within investor groups. Satyam Fraud Case Indian-based multinational Information Technology Company Satyam Computer Services Limited was recently incorporated to a well-known group of corporations engaged in accounting embezzlement practices. Satyam's CEO, Mr Ramalingam Raju, admitted accountability for all financial malice that amplified the organisation’s sales and profitability, along with an erroneous cash status of approximately $1.04 billion (M. Bhasin, 2013). Both in 2007 and again in 2009, Satyam was honoured with the Golden Peacock Award for its outstanding corporate governance on its behalf (Rishi and Singh, 2011). Satyam Computers, formerly India's crowning achievement in the software industry and the 4th largest firm in India with strong clientele, is now entangled in the today ’s greatest accounting scandals in recent years. It was revealed that Mr. Ramalinga Raju, who admitted to a $1.47 billion fraud, had been forging revenue for years (Bhasin, 2016a). There were allegations that Raju and his brother, Mr. B. Rama Raju, Managing Director, conspired to cover up the fraud from auditors and members of the company's board of directors (Bhasin, 2016b). Background of the Case Satyam Computers was an emerging achiever in India’s Software and IT services department. The company was established in 1987 by Mr. Ramalinga Raju in Hyderabad (Bhasin, 2016c). The organisation began with just 20 workers, but it has since grown into a multinational conglomerate that has operations in 65 countries and 53000 employees (Mishra et al., 2021). India’s first company to be added to the three international stock exchanges, including the New York Stock Exchange (NYSE), the Dow Jones Industrial Average, and the EURONEXT (Bhasin, 2016d). TCS, Infosys, and Wipro were ranked as India's top three software exporters. During the 1990s, the company grew significantly (Bhasin, 2016e). As a result, four new companies, Satyam Renaissance, Satyam Infoway, Satyam Spark Solutions, and Satyam Enterprise Solutions, were born. The first-ever Indian ICT enterprise to be counted amongst the New York Stock Exchange was Satyam Infoway (Sify) (NASDAQ) (Singh et al., 2010). A number of acquisitions were made by Satyam in the new millennium, as well as agreements with a number of international corporations. After launching its first Customer-Oriented Global Organisation training programme in May 2000, Satyam went on to sign agreements with a long list of global organisations, such as Microsoft and Emirates, as well as with TRW, i2 Technologies, and Ford (Brown et al., 2014). Satyam also claimed its place in history as the world's first ISO 9001:2001 certified company, and opened offices in Singapore and Dubai (Singh et al., 2010). During the financial year 2003-2004, Satyam generated profits totalling Rs 25,415.4 million (Ahmad et al., 2010). As of March 2008, sales revenue had more than tripled for the company since then, the company has grown at a conjoined yearly development rate of thirtyeight percent. Net profit margins ranged from 28% to 33%, and operating cash flows were 35% on average (Kumar et al., 2012). From $0.12 to $0.62, profits per share (EPS) increased by 40% (Kumar et al., 2012). Satyam undoubtedly had a positive impact on the company's growth and profitability. When it came to global information technology, it was a household name and a rising star. Although Satyam was awarded the Global Peacock Award less than five months after receiving it (Vasant Raval and Raval, 2020), the company was the victim of a major accounting scandal. Satyam: How did it Begin On December 16th, 2008, Satyam's chairman, Mr. Ramalinga Raju, made a $1.6 billion offer for two Maytas companies, implying that he intended to use the cash to benefit investors, which led to the company's downfall (Shirur, 2011). Raju's family marketed and owned both businesses. Investors and the market both turned their backs on him, so he had no choice but to leave after just 12 hours. Satyam's share price fell 55% due to concerns about the company's corporate governance (Vasant Raval and Raval, 2020). After being accused of data theft and employee corruption, With effect from December 23, 2008, Satyam was prohibited from engaging in any contract with the World Bank for a 8 year period (M.L. Bhasin, 2013). Chief executives Vinod K Dham, M. Rammohan Rao, and Krishna Palepu stepped down after Mangalam Srinivasan's departure on December 28, 2008 (Brown et al., 2014). The resignation of B. Ramalinga Raju as chairman of Satyam came after he admitted to a Rs. 7800 crore financial fraud on January 7, 2009 (Singh et al., 2010). According to his letter, this was his last try to substitute fraudulent money reserves with legitimate ones when he bought Maytas enterprises. In his letter, he wrote that this power and greed felt like riding on a lion and being unable to step down without being pleased. The state police in Andhra Pradesh detained Satyam's owners, B Ramalinga Raju and his brother B Rama Raju, and the organisation was seized by the Indian Central Government. According to the Indian Penal Code of 1860, the Raju brothers were alleged of embezzlement, fraud, criminal planning for a crime, and falsification. With the appointment of HDFC Chairman Deepak Parekh, former Nasscom Chairman Kiran Karnik and former SEBI member C Achuthan to Satyam's board of directors, the Central Government reformed the board (Mishra et al., 2021). India's Central Government appointed CII's Tarun Das, TN Manoharan (former IICAI President), and S Balakrishnam (CEO of LIC) to the newly reconstituted Board. Within a week of founder B Ramalinga Raju's shocking confession, Satyam's auditors, PricewaterhouseCoopers (PwC), accepted their audit report was inaccurate due to erroneous fiscal statements forged by Satyam management (Gurung and Gupta, 2019). He admitted to inflating the quantity of workers at Satyam by 10,000 on January 22, 2009, the company's chief financial officer (Lal Bhasin, 2017). To get away with withdrawing Rs 20 crore per month from linked but fake payrolls, he claims this method allowed for this. Satyam Fraud Aftermath An investigation was launched immediately by the Indian government, but the government's direct involvement was kept to an absolute minimum. The government reconstituted Satyam's board of directors in an effort to still protect the corporation, with the goal of selling it within 100 days (Beerbaum, 2021). A sales strategy was immediately formulated by the board of directors, which included bankers, accountants, attorneys, and government representatives. When it came time to sell the company, the board of directors opted to work with Goldman Sachs and Avendus Capital to make the process easier. In 2008, Satyam's market value reached a high of Rs. 36,600 crores (Luo and Zhou, 2020). Satyam was acquired by Tech Mahindra for Rs. 58 per share, which valued the company at Rs. 5600 crores, a year later (Kumar et al., 2012). Immediately following Raju's admission on January 9, 2009, the stock plummeted from an all-time high of Rs. 542 in 2008 to an incalculable Rs. 6.30 (Vasant Raval and Raval, 2020). After a 2008 high of 544 rupees, Satyam's shares fell to 11.50 rupees on January 10, 2009, their cheapest level since March 1998 (Shirur, 2011). In 2008, Satyam's stock price on the New York Stock Exchange climaxed at $29, and by March 2009, it had fallen to about $1.80. Satyam stockholders lost $2.82 billion as a result (Gurung and Gupta, 2019). There are allegations against Raju of criminal conspiracy, abuse of trust, and fraud. He is expected to appear in court soon. 100 firms had their share values fall between 5percent of total and 15percent amid the Satyam crisis and PwC's participation with the firm's customers. India's share market plunged more than 5percent after this action, which was soon connected to Enron's downfall. Satyam's share price has dropped by over 70percent (Ahmad et al., 2010). Financial Implications of Satyam Fraud Case The Satyam Scandal was, at its core, an accounting fraud. Forgeries, fraud, and misstatements abound in the financial reporting industry due to oversights, omissions, and blatant disregard for standard practises. Bank deposits and interest were reported as fake because assets were overstated. It is dishonest to swindle public funds from the company by fabricating data and accounts with the help of external auditors. The early financial consequences of the Satyam disaster were influenced by policy decisions. According to the media, a number of Indian companies may be facing similar hidden difficulties. In the event that investors became suspicious, it could have a negative impact on the country's corporate sector and its ability to return to 9% growth (Beerbaum, 2021). For Satyam to have survived, it had to overcome its pre-existing financial difficulties first. Some business customers who were initially loyal to Satyam but sought a new provider as soon as they exited the company because they could not afford to rely on a corporation that might not exist. The only way out for Satyam in this situation was almost certainly a takeover, which would have allowed the company's disgraced senior management to be completely replaced. In a nutshell, Satyam's corporate governance failure resulted in its inability to retain customers, which resulted in the loss of $500 million in contracts and the transfer of every significant client to TCS, the company's main competitor (Rishi and Singh, 2011). Secondly, this has ramifications for the Indian corporate sector. As a result of Satyam's demise, investors began questioning their outsourcing plans, which had a negative impact on the entire Indian business community. When PwC ignored their obligation and allowed Satyam to have an audit that was flawed, it had an impact on the reputation of global audit firms like PwC. Firms like KPMG and Deloitte quickly displaced PwC. When India's corporate governance standards were called into question by the Satyam fraud, another possibility emerged. Maytas acquisition was criticised by Satyam's board of directors, but they claimed they relied on PwC to conduct an adequate audit, which they did not. For the government to get involved, there is an important consideration. Following the onset of the crisis, the government arrested all of the key players and even hired a new board of independent executives to oversee the enterprise. Social Implications of Satyam Fraud Case Due to wage non-payment, project cancellations, layoffs, and other similar poor outside work options, Satyam employees endured difficult times and sleepless nights. They were confined in a variety of ways, including morally, economically, legally, and socially. Customers who were dissatisfied with Satyam's performance renegotiated their contracts with the company in favour of one of its competitors. Withdrawal from Cisco, Telstra, and the World Bank contracts resulted in Satyam's dismissal (Luo and Zhou, 2020). Customers were astounded by the lack of consistency, confidentiality, and expense overruns on the project. Shareholders suffered losses, and there was widespread uncertainty about India's recovery as a popular investment channel. Mahindra's VC and MD declared in a address that the “incident caused enormous and unacceptable harm specifically to Brand India and Brand IT” (Rishi and Singh, 2011). Bankers were worried regarding the fiscal and non-fiscal exposure recovery, along with facility recalls. The Indian national and federal agencies feared that the state and its IT industry’s negative representation would deter investors from investing or conducting business in the country. The Satyam debacle demonstrates the critical nature of securities regulations and corporate law in developing economies. Indeed, the Satyam theft pushed the Indian government to improve corporate governance standards in order to avert future frauds. Practical Implications of Satyam Fraud Case Shareholder and Corporate Governance Regulation Reforms While shining a light on the banking sector of a growing democracy, the Satyam case exposed serious flaws in India's legal and judicial systems. Following the highly publicised episode, the following actions were taken: Following the Satyam debacle, investors and regulators alike urged for a more stringent securities market legislative structure. In reaction to the Satyam debacle, the SEBI strengthened governance principles and corporate accounting laws for public businesses listed in India. The SEBI has also emphasised the importance of implementing international financial accounting standards (IFRS) (Bhasin, 2016b). The Ministry of Corporate Affairs (MCA) has created a new Corporate Code and is thinking of altering stocks regulations to form tier litigation increasingly accessible to investors. Some of India's latest CG reforms are as follows; Appointment of independent directors. Disclosure of the securities that have been pledged Financial accounting disclosures have increased. In addition to IFRS, The Ministry of Corporate Affairs has produced a new corporate code. Satyam was a flagrant violation of any and all rules of corporate governance. The Satyam fiasco serves as a sobering example of the perils of poor computer graphics (CG) practises (Brown et al., 2014). With its stockholders and employees, it has not been able to build solid connections CG was a result of Satyam's inability to meet its commitments to a wide range of stakeholders. It is worth noting the following things; The board and management of a company can be better served by separating their roles. Separating the CEO role from the chairman role Acknowledgement as a board member In addition to the salary of directors and executives, Defending the rights of corporate directors and shareholders Scams like Enron and the current financial catastrophe have shown again and again how important it is to conduct oneself ethically. It should not come as a surprise that such deceptions might take place everywhere in the world at any given time. Capital market regulations in India were tightened after the Satyam disaster in order to prevent future frauds. India's government took rapid actions to safeguard investors' money, trust, and perspective while also saving the country's global image and goodwill. Recommendations for the Future Corporations with an unethical corporate culture are more likely to fail than those with ethical ones. Satyam's demise was triggered by the tunnelling effect, unlike Enron, which was brought down by a regulatory issue. Scams of all kinds have shown the value of ethical behaviour as a model to follow. In light of the management's strategy in the Satyam fraud, the following suggestions are particularly pertinent: C.E.Os.’ moral, ethical, and social beliefs must be promoted by the companies in which they work. As a result, board members are expected to take diligent and proactive actions in order to protect the concerns of shareholders. In the instance of Satyam, there was a lack of timely and accurate information, which should be addressed in the future (Luo and Zhou, 2020). It is possible to rein in a company's management through shareholder activism. Additionally, the board and management can be held accountable by block holders and institutional investors. Finally, the CG structure must be adhered to in both its written and ethereal form. It is always a good idea to learn from scandals like Satyam's. Businesses, for example, should be made aware that any inaccuracies would be thoroughly investigated. – Investigate any discrepancies you notice in your financial statements. The process of uncovering mistakes or misused funds is made easier when responsibilities are distributed across a group of people. Satyam's crisis tarnished the reputations of both the corporation and the country. Increasingly, India is being singled out as a fraudster. Indian competitors will be scrutinised more closely as a result of this. The need of good company governance is emphasised in the third lesson. By keeping CEO and Chairman of the Board of Directors duties separate, incidents like the one at Satyam are less likely to occur (Atesci et al., 2010). Conclusion "The science of behaviour is deeply influenced by human determination, ambition, and desire for power, money, popularity, and glory," as stated by Satyam's founders in their 2009 accounting fraud (M. Bhasin, 2013). The requirement for "positive behaviour dependent on strong corporate governance, ethics, and accounting and auditing merits" has been proved by recent scandals. Regulatory frameworks and corporate governance in developing countries are crucial, as shown by the Satyam case. Even the Indian government was "inspired by Satyam to improve India's capital market regulations to prevent future frauds," as the saying goes. Due to this, significant audit reporting frauds should be examined for "best practises" to prevent future frauds of the same magnitude.