Discuss about the Satyam Scam.
In 1987, Mr. Ramalinga Raju founded ‘Satyam ltd’ as an IT sector in Hyderabad. In the beginning, there were around twenty employees in the firm but gradually it witnessed progression by rapid movements. The company aimed to offer BPO (Business Processing Outsourcing) and IT solution services to its customers. Due to its hard work over the years, it attained huge rewards for accountability, creativity, and governance in the corporate environment. Even Ramalinga, founder of Satyam was awarded the ‘Entrepreneur of the year’ award in 2007 and the company was awarded a ‘Global Peacock award’ in 2008 for possessing effective qualities in fields of accountability and corporate governance (Pilbeam, 2009).
Satyam Business had a potential to cater around 310 customers across the world through its 13130 technical associates. The estimation of IT market at that time reported $400 billion and the compounded annual growth stood at a rate of 6.5%. The reason behind such was the extreme necessity of IT services to the corporate world. As a result, influence of e-business developed at a rapid rate and sooner Satyam attained a massive sales figure of around US$470 and by the year 2008, the growth enhanced to US$2.2 billion. The company’s aspects were entirely profitable and it attained a growth of approximately 35% in that time (Agrawal & Sharma, 2009). This further resulted into an enhancement in the operating profits of the company by 21% that in turn resulted in increment of the company’s EPS from $0.13 to $0.64. Furthermore, the stock prices increased from INR 138.08 to INR 562.25 that depicted a leap of 300%. The operating activities and management of Satyam was of immense utilization and hence, it could reap such massive profits. However, these figures failed to portray the key apertures prevailing within the company and therefore, Satyam case has always been regarded as ‘India’s Enron’ (Viney, 2009).
It was clearly observable through Mr. Raju’s letter to the Board of Directors of Satyam that huge amount of falsification was done in the company accounts. As per Mr. Raju, he enhanced the balance sheet assets by $1.47 billion, which made it clear that there was approximately $1.05 billion non-existent cash and bank loans in the company accounts. Falsification even prevailed in the company liabilities that went unreported. Furthermore, the company revenues had been so greatly increased that investors did not lose faith upon the company. In other words, the company bluffed about its earned incomes so that the expectations of investors were adequately satisfied. This was done to keep the investor invested. For instance, the outcomes provided by the company in October 2009 portrayed an increase in profit figures by 97% and quarter revenues by more than 75%. Both the internal auditor together with Mr. Raju adopted varied strategies to come up with the falsification (Agrawal & Sharma, 2009). Hence, it can be seen that there was major loophole in the entire working that led to the scam. Mr. Raju even utilized the computer of other people to generate false statements of bank that were the key factors in this fraud. This falsification gave ways to enhancement in figures of balance sheet and income statements of the company. Furthermore, the company also created more than 6000 false salary accounts that were utilized to influence the company accounts and resources. In order to enhance company revenues, the international head of internal audit also assisted in generated false customer identities and invoices (Caraballo et. al, 2010). The resolutions taken in Board meetings were false and loans taken were on an unlawful basis. Cash attained from the ADR (American Depositary Receipts) were absent from the balance sheet and the same was utilized in other fraud motives. Overall, the scam was designed in an effective manner that could not be traced easily.
Acquisitiveness of success, power, resources, and fame made Mr. Raju contravene all the statutory rules and regulations binded on him and other officers. This contravention of duties also resulted in cheating the investors of the company. On a whole, the Satyam Scam is a total devastation of moral standards within an organization (Bhasin, 2008).
The falsified bank statement of Satyam as on 30 September 2008:
|
Actual |
Reported |
Difference |
|
|
Balances in terms of cash and bank |
320 |
5361 |
5039 |
|
Interest accruing on FD |
Nil |
375 |
375 |
|
Liability reduced |
1231 |
Nil |
1231 |
|
Debtors inflated |
2160 |
2650 |
490 |
|
Total |
Nil |
Nil |
Nil |
|
Revenue(Q2) |
2113 |
2701 |
588 |
|
Operating profits |
60 |
650 |
590 |
The company effectively compromised accounts and since a long time, such irregularities remained undetected and investors were completely unknown to such frauds. From January 2000, PricewaterhouseCoopers or PwC was entrusted with a responsibility to look after Satyam’s audit procedures. When the fraud was discovered in the year 2009, PwC encountered huge criticism for failure to detect such prevailing frauds in Satyam. PwC easily approved several financial statements of Satyam and therefore, this resulted in a huge blunder. The most important problem was the $1.05 billion claims by Satyam by way of non-interest bearing deposits in the balance sheet. It was clearly observable that the company auditors were ineffective in their duties as they failed to adopt an independent decision and did not crosscheck company operations with that of the bank (Rezaee & Kedia, 2012).
Both the balance sheet and income statement were influenced in such a way that whenever the expectations of investors could not be met, it generated more fictitious sources and this process continued for a long period. Furthermore, even the company auditors did not took proper steps to track such fraudulent operations. Double audit fees provided to PwC raises the doubts upon the people whether it was involved in the fraud activity or not. Besides, failure to discover this fraud for nearly nine years also establishes a doubt on the honesty of auditors. In contrast to this, the fraud was easily discoverable by Merrill Lynch in just ten days. Although, there remains a huge doubt on PwC’s part in the fraud, yet it stated that maintenance of every accounting policies and procedure were adequate. This clears the fact that there are innumerable factors that played a role in the creation of such a fraud. The investors, SEBI, independent board of directors of the company were not provided appropriate information that resulted in frauds being undetected. Overvaluation and misstatement were consistently done so that none could doubt the effectiveness of the activities of the company, thereby contributing towards such scam.
Satyam’s fraud case was very enlightening and witnessed massive variations both domestically and internationally. Merrill Lynch terminated its operations with Satyam after discovery of the fraud. Even Credit Suisse abandoned its association for the company (Bhasin, 2008). The respectful awards warned by the company were also extraneously removed. Even the company shares witnessed a devastating change as it fell down to 11.52 rupees that became the lowest ever since 1998. These shares were attained a height of US$ 29.20 in the year 2008 and by 2009, it came down to US$ 1.90. As a result, the investors suffered a massive loss of $ 2.80 billion. Satyam fraudulently enhanced its assets and revenues over the years and demoted the Indian Stock Market. The greed of Mr. Raju was such that innumerable methods were taken into consideration for duping the innocent shareholders. A rosy picture was highlighted just to bluff the outside world. Besides, Mr. Raju encountered criminal allegations like forgery, criminal conspiracy, and breaking of trust that were the major outcomes of this scandal.
The outcomes of Satyam scam witnessed several variations. The investors became careful of the companies audited by PwC and as a result, even these companies encountered serious problems like fall of shares etc (Ramachadran, 2009). Even the impact on Indian stock market was huge when the public knew such news and as a result, it encountered a downfall of more than five percent while Satyam witnessed a share downfall of more than 70%. A new BOD appointed by the Indian government assisted in recovering the company by making it saleable in approximately hundred days. For this purpose, they interacted with accountants, bankers, and lawyers and finally integrated with Avendus Capital and Goldman Sachs. The investigations helped in identifying the culprits and created various charges upon them for such fraudulent activities. The Indian Officials arrested Mr. Raju, together with his brother B. Raju (former managing director). Charges were even put on the internal auditors of the company that facilitated in the creation of this scam (Clarke, 2010). Both the Chief Financial Officer and the company auditors were majorly at default. The holders of ADR in US also filed charges against Satyam for fraud. The affected people consisted of:
Hence, it is significant to possess an appropriate control on the undertaking so that there do not remain any chances of frauds.
Scandals and frauds result into risks and volatility in the economical sector of any country and ultimately people start fearing to invest in the stock markets. The Satyam scandal of 2009 depicted the various flaws and inaccuracies. Besides, the rules and measures were extremely deprecated because it did not meet the expectations (Timmons & Wassener, 2009). Therefore, following measures or policies are referable for avoiding future frauds or scams:
Conclusion
From the above discussion, it is observable that whether it is Lehman Brother scandal or Satyam Fraud, the profession continues to improve the feature so that auditors can track problems with simplicity. Due to these frauds, auditors’ role was extremely doubtful and came under investigation in ISA 240. It is the duty of auditors to offer an understanding that detection and prevention of frauds depends on the internal accounting measures and accounting policies of the management (Black, 2010). However, it is notable that these strategies can minimize the impact of fraud and not eliminate it. Furthermore, it is not the auditors who must be held liable for such detection and prevention of frauds in the financial statements. Despite that an audit took place, it is the duty of auditors to obtain appropriate evidence clarifying the fact that frauds or errors in financial statements have not generated and if it has, then the auditor must adopt corrective actions to prevent these frauds or errors. However, auditors encounter an unavoidable risk due to such frauds and errors still being found in the financial statements even if effective audit procedures take place (Gilbert et. al, 2005). After the introduction of ethical standards and corporate governance within a company, frauds and errors can be traced in a more effective way and the enhanced responsibilities of an auditor assists in achieving better results.
References
Agrawal, S. & Sharma, R 2009, Beat this: Satyam won awards for corporate governance,
Internal audit, viewed 28 September 2016, https://www.vccircle.com/news/technology/2009/01/09/beat-satyam-won-awards-corp-governance-internal-audit
Bhasin, M 2013, Corporate Accounting Fraud: A Case Study of Satyam Computers Limited, viewed 28 September 2016, https://file.scirp.org/pdf/OJAcct_2013042509481787.pdf
Bhasin, M. L 2008, ‘Corporate Governance and Role of the Forensic Accountant’, The Chartered Secretary Journal, vol. 38, no. 10, pp. 1361-1368.
Black, W. K 2010, Epidemics of “Control Fraud” lead to Recurrent, Intensifying Bubbles and
Crises, Working paper, University of Missouri-Kansas City.
Caraballo, C., Cheerla, A., & Jafari, O 2010, Satyam: The Brotherly Demise, The George
Washington University, May.
Clarke, T 2010, International Corporate Governance, London and New York, Routledge.
Damodaran, M 2009, Listed firms to get new conduct code, viewed 28 September 2016,
https://wrd.mydigitalfc.com.
Gilbert, W. Joseph J and Terry J. E 2005, The Use of Control Self-Assessment by Independent Auditors, The CPA Journal, vol.3, pp. 66-92
Pilbeam, K 2009, Finance and Financial Markets, Palgrave Macmillan
Rezaee, Z & Kedia, B. L 2012, ‘Role of Corporate Governance Participants in Preventing and Detecting Financial Statement Fraud’, Journal of Forensic & Investigative Accounting, vol. 4, no. 2, pp. 176-205.
Ramachadran, S 2009, Raju brings down Satyam, shakes India, viewed 28 September 2016, https://www.atimes.com/atimes/South_Asia/KA09Df01.html
Timmons, H. & Wassener, B 2009, Satyam chief admits huge fraud, viewed 28 September 2016, https://timesofindia.indiatimes.com/business/india-business/Satyam-Chief-Admits-Huge-Fraud/articleshow/4588792.cms
Viney, C 2009, McGrath’s Financial Institutions, Instruments and Markets, Sydney
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