Role Of Management And Auditors In True Presentation Of Books Of Accounts

The Satyam Scandal

Discuss about the Continuous Audit of Online Systems.

Fraud is regarded as the worldwide phenomenon that creates an impact on all the sectors of the economy, fraud includes wide range of illegal practices and acts that consists of the deception of misrepresentation. In other words, mistakes cannot be termed as fraud (Vasarhelyi and Halper 2018). Fraud refers to the group of unscrupulous people that manipulates or influence the activities of the business with the purpose of making money. The current report is based on the analysis of the role of management and auditors in true presentation of books of accounts. The report will placing emphasis on the collapse of Satyam from the failure of auditors and management of the company.

Mr Medcraft was the formed charman of Australian Securities and Exchange Commission and is largely concerned regarding the roles and responsibilities of the auditors at the time of performing auditing functions. Mr Medcraft has issued cautioned that another auditing scandal may be at the horizon if the auditors does not assure the true and fair view of the financial statement (William, Glover and Prawitt 2016). Mr Medcraft has expressed his uncertainties relating to the fair presentation of financial statements. As per Mr Medcraft there numerous instances where major auditing firms such as KPMG, Deloitte, PWC and E&Y have failed to offer sufficient amount of assurance that the books of accounts are free from any material misstatement. Mr Medcraft has identified a lack of professional scepticism and usually lacked challenges. 

Over the span of six years Mr Medcraft has performed several in depth intensity surveillance with more than hardens have been investigated and imprisoned close to 80 individuals. According to Mr Medcraft there is a need for higher level of tougher actions against the corporate frauds rather than simply imposing civil penalties (Wright 2017). A statement made by Mr Medcraft there is a serious lack of professional scepticism among the auditor’s roles and responsibilities. According to Mr Medcraft Australian organizations require impose severe auditing principles as this would help in avoiding the stains on the auditing profession.

Audit forms the vital aspect of business and Satyam is not exempted from this. The audit report consists of the auditor’s opinion that is associated to the financial report. The organizations are forced to adhere with the required auditing standards in the preparation of audit report. The chief objective of performing Satyam audit is to provide the financial report users with the required information necessary to understand business performance.    

Auditors’ Role and Responsibility

There were several forms of users of financial report for Satyam. These usually consists of the auditors, customers, shareholders, lenders and creditors (Roy 2015). The auditor’s report of PWC asserted that Satyam books of accounts are free from material misstatement and error however in actual scenario the auditors reported differed drastically. Ever since the year 2000, PWC was the principal auditor of Satyam and provided a falsified financial statement. PWC was ethically successful in performing the audit accountabilities in relation to required standards of audit.

The opinion of auditors and vital audit subject was completely different from the actual state of affairs presented in the financial report. Findings suggest that PWC contributed in the decline of Satyam as they significantly contributed to the fraudulent activities (Soh and Martinov-Bennie 2015). The US SEC handed the Satyam with a fine of $ 6million and also slapped ban from conducting audit for a period of two years since PWC was a failure in adhering to the necessary auditing standards.

The auditors of PWC ignored the aspects of materiality misstatement and failed to reflect a correct view of the financial report of Satyam (Tassadaq and Malik 2015). With cases of falsified bookkeeping of information and the case of insider trading were held immensely accountable in the decline of Satyam.

Satyam was the large and highly successful IT service company in India. The company formed in 1987 and expanded rapidly. Satyam provided higher amount of IT and business process outsources that spanned through numerous sectors (Pai and Tolleson 2015). Satyam (India) was also awarded with the global excellence in the areas of corporate accountability and was projected to be the fasted growing company in India.

Problems began in Satyam when the chairman decided to acquire the Maytas companies for a bid of $1.6 billion. Several investors expressed their discontent and forcing the company to withdraw its bid in 12 hours (Pandit, Conway and Baker 2017). The share prices fell significantly by 55% and bought forward questions of weak corporate governance. The price of shares fell further by 14% and finally the chairman admitted of committing fraud of $1.6 billion. PWC being the main auditors of Satyam confessed finally by stating that the audit report were false and was prepared on incorrect information given by Satyam management.     

The board of directors for Satyam comprised of nine members with five of the board members were independent. While filing with SEC it was revealed by Satyam that it does not have the financial expert on the board. This led to the growing concerns regarding lack of board of director’s role in the lack of independence (Rezaee et al. 2018). The failed transaction of purchasing Maytas Properties and Maytas ltd gave the investors with the impression that there is not active monitoring of Satyam activities. The board mus have flagged some of the activities which the auditors of PWC missed. The failure of board of directors provide that they should have expressed the concerned upon the knowledge that the chairman has decreased the holdings of Satyam to a significant extent over the span of three years that resulted in the disclosure of fraud.

Lack of Professional Scepticism in Auditors

The founder of Satyam in 2009 revealed a shocking truth that the founder has been for a long period of time concealing the fraud of $1.47 billion on the balance sheet of Satyam. The clarifying of act ahead the confession discloses the deceitful and unprincipled activities that remain disguised for quite a few years. There was no form of obvious or understood code of ethics to bind the corporate culture of Satyam (Gattiker 2013). Flaws in governance can be noticed as the management of the company commonly engaged in bribery activities, exchange of favours inside and outside of companies that seems to have occurred at a frequent level. The World Bank in its disclosure publically criticized the unethical culture of work and announced the imposition of charges of stealing vital information and bribery of staff. The moral ethics in the business were comparatively poor.

The CEO and the CFO of the have been charged with driving ahead their self-interest rather than the business’s interest (Griffith 2015). Prior to the confession of fraud the CEO and CFO were vigorously selling a part of their shares in the business.

Investigations performed by the central authorities suggest that the promoters have engaged in the foulest form of insider trading of the Satyam shares so that they can raise money to construct a large land of bank. The funds that were collected by the chairman were used to purchase the land in the name of 330 companies (Groomer and Murthy 2018). The promoters based on the inflated books of accounts impersonated a healthy monetary position of the corporation in market. During this time the promoters of Satyam maintained the purpose of divesting their shareholdings at regular intermissions. Therefore, the promoters not only manipulated the prices of shares for their private gains but also duped the investors and shareholders.

As per the findings the balance sheet of Satyam carried an accrued interest that was never existent. The figures of accrued interest were falsely recorded in the balance sheet to supress the revelation of non-presence of fixed deposits based on the inflated profits (Klassen, Lisowsky and Mescall 2015). Evidences from the investigations suggest that the corporation had purposely paid higher amount of tax for the non-existent of accumulated interest which constituted a considerable amount of loss for the company. As revealed Satyam has falsely created an impression of higher fixed deposits which in actual was relatively low.

Flaws in Governance and Ethics of Satyam

The SFIO report suggest that fabrication of deposits of current account was largely prepared through numerous banks in India. The promoters on constant basis generated the monthly statement of bank to feed the bankbooks (Leung et al. 2014). Additionally, Satyam management falsely generated validations of the bank balance on the conclusion of every quarter against the non-existing fixed deposits and interest thereon. Perhaps the evidences suggest that Satyam stated higher sum of current account balances for numerous years.

The board of Satyam contained the composition of friendly chairman that failed to raise query regarding the administration policy of Satyam and usage of leverage in re-forming their business. The lax board of Satyam were tremendously sluggish to react when it was very much evident that the corporation was under financial distress (Media 2012). The board of directors of Satyam were ignorant or failure in reacting upon learning about the critical facts associated to wrong financial practices prior to the ultimate collapse of the company.

In a bid to acquire the Maytas companies the price of the Satyam market share increased intensely against the tender however the share values declined by 55% raising concerns relating to the management and corporate governance (Messier, Glover and Prawitt 2015). This led the independent directors to come into the action by withdrawing from the board. The unconvinced role of the Satyam independent directors resulted in the failure of corporate governance that hindered the objectivity of the oversight functions of Satyam.

The deceitful role of PWC  led to the failure of Satyam is in accordance with the act by Arthur Anderson in the fall of Enron. The chairman admitted that they have fudged the books of accounts for numerous years that ultimately puts statutory auditors role in doubt (Groomer and Murthy 2018). The reports of SFIO specified that the statutory auditors as a replacement for using the autonomous testing apparatus employed the Satyam instruments for investigation and ultimately jeopardized the standards for financial reporting. The global head of internal audit stated that the resources of internal audit was not corresponding to the size of the organization.

PWC on regular basis disregarded the fact and qualified the company. The auditors of PWC neither checked the invoices nor did they paid sufficient attention in the verification of sundry debtors which was overstated (Leung et al. 2014). The statutory auditors failed to discharge their duty when it can to verify the balances of cash and bank of both the current and fixed deposits. The common public were reliant for correct information on statutory auditors report but they not only failure in their occupation but also played a poor role in preparing a fraud audit report to perpetrate fudged, manipulated and cooked books of accounts.

Conclusion

Numerous factors contributed to fraud of Satyam (India) with the auditors being held as the prime contributors. The international auditing firms were auditing the books of accounts of Satyam for several years until the frauds were discovered. Numerous commentators have lashed their criticism on PWC for being failure in detecting the fraud (Griffith 2015). It is worth mentioning that the auditors have been failure in independently verifying the fraud with large sum of money in bank as deposits. The fraudulent activities of auditors continued for number of years and consisted of manipulation of balance sheet and income statement.

Conclusion:

On a conclusive note a lesson has been learned from the financial scam caused by the Chairman of Satyam. It is widely known that the corporate organizations of all the size around the world are susceptible to frauds and accounting scandals. Unquestionably, numerous types of frauds and scams reduces the creditability of the financial information that is used by the investors in making decisions. Perhaps no other financial fraud has greater negative impact on the profession of auditing and accounting than Enron and more recently India’s Satyam. Mr. G. Medcraft in its statement has rightly asserted that auditor’s role lacks responsibilities and requires severe implementation of measures.

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