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International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421
Volume 5, No. 6, June 2016
i-Explore International Research Journal Consortium www.irjcjournals.org
31
Revisiting the Satyam Accounting Scam: A Case Study
Dr. Madan Lal Bhasin, Professor, School of Accountancy, College of Business, Universiti Utara Malaysia, Sintok, Kedah
Darul Aman, Malaysia
ABSTRACT
Satyam Computers were once the crown jewel of Indian IT
industry, but were brought to the ground by its founders in
2009 as a result of financial crime. The untimely demise of
Satyam raised a debate about the role of CEO in driving a
company to the heights of success and its relation with the
board members and core committees. The scam brought to
the light the role of corporate governance (CG) in shaping
the protocols related to the working of audit committees
and duties of board members. The Satyam scam was a jolt
to the market, especially to Satyam stockholders, which
tarnished the reputation of India. An attempt is made in
this paper to examine in-depth and analyze India‟s Enron,
Satyam Computer‟s “accounting” scandal. Unlike Enron,
which sank due to agency problem, Satyam was brought to
its knee due to tunneling effect. In public companies, this
type of accounting leading to fraud and investigations are,
therefore, launched by the various governmental oversight
agencies.
The accounting 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, ambition,
and hunger for power, money, fame and glory.” Scandals
have proved that “there is an urgent need for good
conduct based on strong corporate governance, ethics and
accounting & auditing standards.” The Satyam scandal
highlights the importance of securities laws and CG in
emerging markets. Indeed, Satyam fraud “spurred the
government of India to tighten the CG norms to prevent
recurrence of similar frauds in future.” Thus, major
financial reporting frauds need to be studied for
„lessons-learned‟ and „strategies-to-follow‟ to reduce the
incidents of such frauds in the future. The increasing rate
of white-collar crimes “demands stiff penalties, exemplary
punishments, and effective enforcement of law with the
right spirit.”
Keywords
Satyam, accounting scandal, case study, India, Enron,
corporate governance, accounting and auditing standards.
1. INTRODUCTION
Fraud is a worldwide phenomenon that affects all
continents and all sectors of the economy. Organizations
of all types and sizes are subject to fraud. Fraudulent
financial reporting can have significant consequences for
the organization and its stakeholders, as well as for public
confidence in the capital markets. As Bhasin (2013)
reiterated, ―Corporate accounting fraud is not a new thing
in this world after the debacle of Enron, which proved to
be a stimulus for others to fancy their own Enron in their
respective organizations.‖ With increasing trend in
financial crimes across the globe, investors lost their
confidence, the credibility of financial disclosures were
being questioned and companies were facing huge
financial losses. Satyam Computer Services Limited
(henceforth ‗Satyam‘) was just another case featuring
almost same causes like that of Enron and others including
WorldCom (Vasudev, 2010). Satyam computers were once
the crown jewel of Indian IT industry, but were brought to
the ground by its founders in 2009 as a result of financial
crime. ―The debacle of Satyam raised a debate about the
role of CEO in driving an organization to the heights of
success and its relation with the board members and core
committees,‖ concludes Bhasin (2016) The scam at
Satyam brought to the light the role of corporate
governance in shaping the protocols related to the working
of audit committee and duties of board members. Thus, an
International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421
Volume 5, No. 6, June 2016
i-Explore International Research Journal Consortium www.irjcjournals.org
32
in depth study is conducted to analyze the financial scam
from a management‘s perspective.
No doubt, recent corporate accounting frauds and scandals,
and the resultant outcry for transparency and honesty in
reporting, have given rise to two disparate yet logical
outcomes. Recently, Bhasin (2016a) stated, ―First,
‗forensic‘ accounting skills have become crucial in
untangling the complicated accounting maneuver‘s that
have obfuscated financial statement frauds. Second, public
demand for change and subsequent regulatory action has
transformed ‗corporate governance‘ (henceforth, CG)
scenario.‖ In fact, both these trends have the common goal
of addressing the investors‘ concerns about the transparent
financial reporting system. The failure of the corporate
communication structure has made the financial
community realize that there is a great need for ‗skilled‘
professionals that can identify, expose, and prevent
‗structural‘ weaknesses in three key areas: poor CG,
flawed internal controls, and fraudulent financial
statements. ―Forensic accounting skills are becoming
increasingly relied upon within a corporate reporting
system that emphasizes its accountability and
responsibility to stakeholders.‖
2. LITERATURE REVIEW
Several analytical studies, from time to time, have been
reported in the media. Unfortunately, majority of them
were performed in developed, Western countries. The
nature of the present study is ―primarily qualitative,
descriptive and analytical, with latest evidence and
updates.‖ Hence, the present study seeks to fill this gap
and contributes to the literature.
Bhasin (2008) examined the reasons for ‗check‘ frauds, the
magnitude of frauds in Indian banks, and the manner, in
which the expertise of internal auditors can be integrated,
in order to detect and prevent frauds in banks. In addition
to considering the common types of fraud signals, auditors
can take several ‗proactive‘ steps to combat frauds.
Winkler, D. (2010), paper provided an analysis of the
Indian scandal that analysts have called ―India's Enron.‖ It
covered the areas of corporate history of Satyam and also
provided an insight into how the $2.7 billion scandal
evaded regulators, investors, and the board of directors. He
also provided a discussion of who was responsible for the
fraud, and also explained the scandal‘s effect in India and
the implications for dealing with future obstacles. Finally,
the author discussed the regulatory reform following
Satyam and the current status of Indian securities markets.
In another research study performed by Bhasin (2013),
―the main objectives of this study were to: (a) identify the
prominent companies involved in fraudulent financial
reporting practices, and the nature of accounting
irregularities they committed; (b) highlighted the Satyam
Computer Limited‘s accounting scandal by portraying the
sequence of events, the aftermath of events, the key parties
involved, and major follow-up actions undertaken in India;
and (c) what lesions can be learned from Satyam scam?‖
To attain the above stated research objectives we applied a
―content‖ analysis to the ―press‖ articles. Niazi and Ali‘s
(2015) paper unfolds Satyam‘s corporate scandal of
inflated financial health, the aroused concerns of investors
about the effectiveness of CG framework in India, the
long-term effects over Indian stock market resulting from
Satyam‘s scam, and several suggestions from the CG
theory and practice that could have helped in preventing
this debacle. Thus, an in depth study is conducted to
analyze the financial scam from a management‘s
perspective.
Another descriptive study by Pai and Tolleson (2015)
examined the capture of government regulators using the
case of Satyam Computer Services Ltd., one of India‘s
largest software and services companies, which disclosed a
$1.47 billion fraud on its balance sheet on January 7, 2009.
The authors reviewed the Satyam fraud and PWC‘s failure
to detect Satyam‘s accounting shenanigans, and also
discussed the societal implications associated with a ―too
big to fail‖ mentality and the moral hazard of such a
mindset. In addition, the paper provides suggestions to
protect the public interest while citing lessons learned
International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421
Volume 5, No. 6, June 2016
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from this scandal.
3. MATERIALS AND METHODS
The main objective of this study is to highlight the Satyam
Computer Services Limited‘s accounting scandal by
portraying the emergence of Satyam, sequence of events,
key players involved in the scam process, anatomy of
Satyam fraud, the aftermath of events, auditors role, major
follow-up actions, regulatory reforms undertaken in India,
etc. This study is primarily based on ―secondary‖ sources
of data, and the nature of the study is ―primarily
qualitative, descriptive and analytical.‖ Best possible
efforts have made by the author to provide the latest
evidence supporting the case.
4. REVISITING THE SATYAM SCAM: A
CASE STUDY
4.1 Introduction
The Satyam Computer Services Limited (hereinafter,
‗Satyam‘), a global IT company based in India, has just
been added to a notorious list of companies involved in
fraudulent financial activities. Satyam‘s CEO, Mr.
Ramalingam Raju (hereinafter, ‗Raju‘), took responsibility
for all the accounting improprieties that overstated the
company‘s revenues and profits, and reported a cash
holding of approximately $1.04 billion that simply did not
exist. This leads one to ask a simple question: How does
this keep on happening for five years, without any
suspicions? So, while Raju ran his fraud, the auditor slept,
the analysts slept, and so did the media. To be fair, the
media did an excellent job of exposing Raju and his many
other ―shenanigans‖ after he had confessed (Kaul, 2015;
Miller 2006). In his letter (of Jan.7, 2009) addressed to
board of directors of Satyam, Raju showed the markers of
this fraud ‗pathology‘. He stated, ―What started as a
marginal gap between actual operating profits and ones
reflected in the books of accounts continued to grow over
the years. It has attained unmanageable proportions.‖ Later,
he described the process as ―like riding a tiger, not
knowing how to get off without being eaten.‖ Now, more
than six years later, the first decision in the Satyam scam
has been made. Of course, we have not seen the last of this
case, given the slow pace at which our judicial system
works.
The case of Satyam accounting fraud has been dubbed by
the media as ―India‘s Enron‖. Ironically, Satyam means
―truth‖ in the ancient Indian language ―Sanskrit‖ (Basilico
et al., 2012). Satyam won the ―Golden Peacock Award‖ for
the best governed company in 2007 and in 2009. From
being India‘s IT ―crown jewel‖ and the country‘s ―fourth
largest‖ company with high-profile customers, the
outsourcing firm Satyam Computers has become
embroiled in the nation‘s biggest corporate scam in living
memory (Ahmad, et al., 2010). Mr. Ramalinga Raju
(Chairman and Founder of Satyam; henceforth called
‗Raju‘), who has been arrested and has confessed to a
$1.47 billion (or Rs. 7,800 crore) fraud, admitted that he
had made up profits for years. According to reports, Raju
and his brother, Mr. B. Rama Raju, who was the Managing
Director, ―hid the deception from the company‘s board,
senior managers, and auditors.‖
4.2 Emergence of Satyam Computer Services Ltd.
Satyam Computer Services Limited was a ‗rising-star‘ in
the Indian ‗outsourced‘ IT-services industry (Fernando,
2010). The company was formed in 1987 in Hyderabad
(India) by Mr. Ramalinga Raju. The firm began with 20
employees, grew rapidly as a ‗global‘ business, which
operated in 65 countries around the world. Satyam was the
first Indian company to be registered with three
International Exchanges (NYSE, DOW Jones and
EURONEXT).
Satyam was as an example of India‘s growing success; it
won numerous awards for innovation, governance, and
corporate accountability. As Agrawal and Sharma (2009)
stated, ―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 the
International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421
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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 centre-piece of a ‗massive‘ accounting
fraud.
Table-1: Operating Performance of Satyam
(Rs. in millions)
Particulars
2003-04
2004-05
2005-06
2006-07
2007-08
Average Growth
Rate (%)
Net Sales
25,415.4
34,642.2
46,343.1
62,284.7
81,372.8
38
Operating Profit
7,743
9,717
15,714.2
17,107.3
20,857.4
28
Net Profit
5,557.9
7,502.6
12,397.5
14,232.3
17,157.4
33
Operating Cash Flow
4,165.5
6,386.6
7,868.1
10,390.6
13,708.7
35
ROCE (%)
27.95
29.85
31.34
31.18
29.57
30
ROE (%)
23.57
25.88
26.85
28.14
26.12
26
(Source: www.geogit.com)
From 2003-2008, in nearly all financial metrics of interest
to investors, the company grew measurably, as
summarized in Table-1. Satyam generated Rs. 25,415.4
million in total sales in 2003-04. By March 2008, the
company sales revenue had grown by over three times.
The company demonstrated ―an annual compound growth
rate of 38% over that period.‖ Operating profits, net profit
and operating cash flows averaged 28, 33 and 35%,
respectively. In addition, earnings per share (EPS)
similarly grew, from $0.12 to $0.62, at a compound annual
growth rate of 40%. Over the same period (2003‐2009),
the company was trading at an average trailing EBITDA
multiple of 15.36. Finally, beginning in January 2003, at a
share price of Rs. 138.08, Satyam‘s stock would peak at
Rs. 526.25: a 300% improvement in share price after
nearly five years. Satyam clearly generated significant
corporate growth and shareholder value. The company was
a leading star (and a recognizable name) in a global IT
marketplace.
4.3 Mr. Ramalinga Raju and the Satyam Scandal
On January 7, 2009, Mr. Raju disclosed in a letter (as
shown in Exhibit-1) to Satyam Computers Services
Limited Board of Directors, ―He had been manipulating
the company‘s accounting numbers for years.‖ Mr. Raju
claimed that He overstated assets on Satyam‘s balance
sheet by $1.47 billion. Nearly $1.04 billion in bank loans
and cash that the company claimed to own was
non-existent. Satyam also underreported liabilities on its
balance sheet and overstated its income nearly every
quarter over the course of several years in order to meet
analyst expectations. For example, the results announced
on October 17, 2009 overstated quarterly revenues by 75%
and profits by 97%. Mr. Raju and the company‘s global
head of internal audit used a number of different
techniques to perpetrate the fraud (Willison, 2006). As
Ramachandran (2009) pointed out, ―Using his personal
computer, Mr. Raju created numerous bank statements to
advance the fraud. He falsified the bank accounts to inflate
the balance sheet with balances that did not exist. He also
inflated the income statement by claiming interest income
from the fake bank accounts. Mr. Raju also revealed that
He created 6,000 fake salary accounts over the past few
years and appropriated the money after the company
deposited it. 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 (Wharton, 2009).
International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421
Volume 5, No. 6, June 2016
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Exhibit-1: Satyam’s Founder, Chairman and CEO, Mr.
Raju’s Letter to his Board of Directors
To The Board of Directors, January 7, 2009
Satyam Computer Services Ltd.
From: B. Ramalinga Raju
Chairman, Satyam Computer Services Ltd.
Dear Board Members,
It is with deep regret, and tremendous burden that I am
carrying on my conscience, that I would like to bring the
following facts to your notice:
1. The Balance Sheet carries as of September 30, 2008:
(a) Inflated (non-existent) cash and bank balances of
Rs.5,040 crore (as against Rs. 5,361 crore reflected in
the books); (b) An accrued interest of Rs. 376 crore
which is non-existent; (c) An understated liability of
Rs. 1,230 crore on account of funds arranged by me;
and (d) An over stated debtors position of Rs. 490
crore (as against Rs. 2,651 reflected in the books).
2. For the September quarter (Q2), we reported a
revenue of Rs.2,700 crore and an operating margin
of Rs. 649 crore (24% of revenues) as against the
actual revenues of Rs. 2,112 crore and an actual
operating margin of Rs. 61 Crore (3% of revenues).
This has resulted in artificial cash and bank balances
going up by Rs. 588 crore in Q2 alone.
The gap in the Balance Sheet has arisen purely on
account of inflated profits over a period of last several
years (limited only to Satyam standalone, books of
subsidiaries reflecting true performance). What started
as a marginal gap between actual operating profit and
the one reflected in the books of accounts continued
to grow over the years. It has attained unmanageable
proportions as the size of company operations grew
significantly (annualized revenue run rate of Rs.
11,276 crore in the September quarter, 2008 and
official reserves of Rs. 8,392 crore). The differential
in the real profits and the one reflected in the books
was further accentuated by the fact that the company
had to carry additional resources and assets to justify
higher level of operations —thereby significantly
increasing the costs.
Every attempt made to eliminate the gap failed. As the
promoters held a small percentage of equity, the
concern was that poor performance would result in a
take-over, thereby exposing the gap. It was like riding
a tiger, not knowing how to get off without being
eaten.
The aborted Maytas acquisition deal was the last
attempt to fill the fictitious assets with real ones.
Maytas‘ investors were convinced that this is a good
divestment opportunity and a strategic fit. Once
Satyam‘s problem was solved, it was hoped that
Maytas‘ payments can be delayed. But that was not to
be. What followed in the last several days is common
knowledge.
I would like the Board to know:
1. That neither myself, nor the Managing Director
(including our spouses) sold any shares in the last
eight years—excepting for a small proportion
declared and sold for philanthropic purposes.
2. That in the last two years a net amount of Rs. 1,230
crore was arranged to Satyam (not reflected in the
books of Satyam) to keep the operations going by
resorting to pledging all the promoter shares and
raising funds from known sources by giving all kinds
of assurances (Statement enclosed, only to the
members of the board). Significant dividend payments,
acquisitions, capital expenditure to provide for growth
did not help matters. Every attempt was made to keep
the wheel moving and to ensure prompt payment of
salaries to the associates. The last straw was the
selling of most of the pledged share by the lenders on
account of margin triggers.
3. That neither me, nor the Managing Director took even
one rupee/dollar from the company and have not
benefitted in financial terms on account of the inflated
results.
4. None of the board members, past or present, had any
knowledge of the situation in which the company is
placed. Even business leaders and senior executives in
the company, such as, Ram Mynampati, Subu D, T.R.
Anand, Keshab Panda, Virender Agarwal, A.S.
Murthy, Hari T, SV Krishnan, Vijay Prasad, Manish
Mehta, Murali V, Sriram Papani, Kiran Kavale, Joe
Lagioia, Ravindra Penumetsa, Jayaraman and
Prabhakar Gupta are unaware of the real situation as
against the books of accounts. None of my or
Managing Director‘s immediate or extended family
members has any idea about these issues.
Having put these facts before you, I leave it to the wisdom
of the board to take the matters forward. However, I am
also taking the liberty to recommend the following steps:
1. A Task Force has been formed in the last few days to
address the situation arising out of the failed Maytas
acquisition attempt. This consists of some of the most
accomplished leaders of Satyam: Subu D, T.R. Anand,
Keshab Panda and Virender Agarwal, representing
business functions, and A.S. Murthy, Hari T and
Murali V representing support functions. I suggest
that Ram Mynampati be made the Chairman of this
Task Force to immediately address some of the
operational matters on hand. Ram can also act as an
interim CEO reporting to the board.
2. Merrill Lynch can be entrusted with the task of
quickly exploring some Merger opportunities.
3. You may have a ‗restatement of accounts‘ prepared
by the auditors in light of the facts that I have placed
before you. I have promoted and have been associated
with Satyam for well over twenty years now. I have
seen it grow from few people to 53,000 people, with
International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421
Volume 5, No. 6, June 2016
i-Explore International Research Journal Consortium www.irjcjournals.org
36
185 Fortune 500 companies as customers and
operations in 66 countries. Satyam has established an
excellent leadership and competency base at all levels.
I sincerely apologize to all Satyamites and
stakeholders, who have made Satyam a special
organization, for the current situation. I am confident
they will stand by the company in this hour of crisis.
In light of the above, I fervently appeal to the board to
hold together to take some important steps. Mr. T.R.
Prasad is well placed to mobilize support from the
government at this crucial time. With the hope that
members of the Task Force and the financial advisor,
Merrill Lynch (now Bank of America) will stand by
the company at this crucial hour, I am marking copies
of this statement to them as well.
Under the circumstances, I am tendering my resignation as
the chairman of Satyam and shall continue in this position
only till such time the current board is expanded. My
continuance is just to ensure enhancement of the board
over the next several days or as early as possible.
I am now prepared to subject myself to the laws of the
land and face consequences thereof.
Signature
(B. Ramalinga Raju)
(Source: Letter distributed by the Bombay Stock Exchange
and Security and Exchange Board of India, available at
www.sebi.gov.in)
The fraud took place to divert company funds into
real-estate investment, keep high earnings per share, raise
executive compensation, and make huge profits by selling
stake at inflated price. In this context, Kripalani (2009)
stated, ―The gap in the balance sheet had arisen purely on
account of inflated profits over a period that lasted several
years starting in April 1999.‖ ―What accounted as a
marginal gap between actual operating profit and the one
reflected in the books of accounts continued to grow over
the years. This gap reached unmanageable proportions as
company operations grew significantly,‖ Ragu explained
in his letter to the board and shareholders. He went on to
explain, ―Every attempt to eliminate the gap failed, and the
aborted Maytas acquisition deal was the last attempt to fill
the fictitious assets with real ones. But the investors
thought it was a brazen attempt to siphon cash out of
Satyam, in which the Raju family held a small stake, into
firms the family held tightly (D‘Monte, 2008). Fortunately,
the Satyam deal with Maytas was ‗salvageable‘. It could
have been saved only if ―the deal had been allowed to go
through, as Satyam would have been able to use Maytas‘
assets to shore up its own books.‖ Raju, who showed
‗artificial‘ cash on his books, had planned to use this
‗non-existent‘ cash to acquire the two Maytas companies
(Ahmad et al., 2010). Table-2 depicts some parts of the
Satyam‘s fabricated ‗Balance Sheet and Income Statement‘
and shows the ‗difference‘ between ‗actual‘ and ‗reported‘
finances.
Table-2: Fabricated Balance Sheet and Income
Statement of Satyam: As of September 30, 2008
Actual
Reported
Difference
Cash and Bank Balances
321
5,361
5,040
Accrued Interest on bank FDs
Nil
376.5
376
Understated Liability
1,230
None
1,230
Overstated Debtors
2,161
2,651
490
Total
Nil
Nil
7,136
Revenues (Q2 FY 2009)
2,112
2,700
588
Operating Profits
61
649
588
Greed for money, power, competition, success and prestige
compelled Mr. Raju to ―ride the tiger,‖ which led to
violation of all duties imposed on them as fiduciaries: the
duty of care, the duty of negligence, the duty of loyalty,
and the duty of disclosure towards the stakeholders
(Bhasin, 2016b). According to Damodaran (2012), ―The
Satyam scandal is a classic case of negligence of fiduciary
duties, total collapse of ethical standards, and a lack of
corporate social responsibility.‖ Indeed, the Satyam fraud
activity dates back from April 1999, when the company
embarked on a road to double‐digit annual growth. As of
December 2008, Satyam had a total market capitalization
of $3.2 billion dollars (Dixit, 2009).
On 7 January 2009, the Indian stock market regulator, the
SEBI commenced investigations under various SEBI
regulations. The Ministry of Corporate Affairs (MCA) of
the Central Government separately initiated a fraud
investigation through its Serious Fraud Investigation
Office (SFIO). In addition, the MCA filed a petition
before the Company Law Board (CLB) to prevent the
existing directors from acting on the Board and to appoint
new directors. On 9 January 2009, the CLB suspended the
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current directors of Satyam and allowed the Government
to appoint up to 10 new nominee directors. Subsequently,
the new, six-member Board had appointed a chief
executive officer and external advisors, including the
accounting firms KPMG and Deloitte to restate the
accounts of Satyam.
4.4 The Anatomy of Satyam Fraud
In its recent indictment of the former promoters and top
managers of Satyam, the Securities and Exchange Board
of India (SEBI) had provided minute and fascinating
details about how India‘s largest corporate scam was
committed. But SEBI‘s account also revealed ―how
stupendously easy it is to pull off financial fraud on a
grand scale, even in publicly listed companies.‖ The
following is a brief description about the methodology
used by the Satyam to commit the accounting fraud:
1. Maintaining Records: Raju maintained thorough
details of the Satyam‘s accounts and minutes of
meetings since 2002. He stored records of accounts
for the latest year (2008-09) in a computer server
called ―My Home Hub.‖ Details of accounts from
2002 till January 7, 2009 – the day Mr. Raju came out
with his dramatic (5-page confession) were stored in
two separate Internet Protocol (IP) addresses.
2. Fake Invoices and Bills: The investigators had used
cyber forensics to uncover how in-house computer
systems were exploited to generate fake invoices.
Regular Satyam bills were created by a computer
application called ‗Operational Real Time
Management (OPTIMA)‘, which created and
maintained information on all company projects. The
‗Satyam Project Repository (SRP)‘ system then
generated project IDs; there is also an ‗Ontime‘
application for entering the hours worked by Satyam
employees; and a ‗Project Bill Management System
(PBMS)‘ for billing. An ‗Invoice Management System
(IMS)‘ generated the final invoices.
From the above, an intriguing question that arises here
is: ―how were the fake invoices created by subverting
the IMS?‖ In the IMS system, there is a mandatory
field earmarked ‗Invoice Field Status‘. Unless this is
filled, processing of the order does not go ahead. So,
what Raju & Company did was to use two alphabets
‗H‘ (Home) or ‗S‘ (Super) in the Invoice Field Status
to process the entry. The invoices, thus created were
‗hidden‘ from the view of those who ran the finance
units. There were about 74,625 invoices generated in
the IMS between April 2003 and December 2008.
About 7,561 invoices out of 74,625 had ‗S‘ marked in
their invoice field status. Out of this, 6,603 were also
found on the company‘s Oracle Financials software
system, to make it seem like these were actual sales.
Entries into this system get reflected straight in the
Profit and Loss Statement. The balance of 958
invoices remained in the invoice state, and therefore,
within the IMS system—they were not keyed into the
Oracle enterprise-ware. The total revenues shown
against these 7,561 fake invoices were Rs. 5,117 crore.
Of this, sales through the ‗reconciled‘ 6,603 invoices
were about Rs. 4,746 crore. The CBI has also found
that ―sales were inflated every quarter and the average
inflation in sales was about 18%. After generating
fake invoices in IMS, a senior manager of the finance
department (named Srisailam), entered the 6,603 fake
invoices into Oracle Financials with the objective of
inflating sales by Rs. 4,746 crore. By reconciling the
receipts of these invoices, the cash balances in the
company‘s account were shown at Rs. 3,983 crore.‖
The CBI officers have concluded that ―the scandal
involved this system structure being bypassed by the
abuse of an emergency ‗Excel Porting System‘, which
allows invoices to be generated directly in IMS…by
porting the data into the IMS.‖ This system was
subverted by the creation of a user ID called ‗Super
User‘ with ―the power to hide/unhide the invoices
generated in IMS.‖ By logging in, as Super User, the
accused were hiding some of the invoices that were
generated through Excel Porting. Once an invoice is
hidden the same will not be visible to the other
divisions within the company but will only be visible
to the company‘s finance division sales team. As a
result, concerned business circles would not be aware
of the invoices, which were also not dispatched to the
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customers. Investigation revealed that all the invoices
that were hidden using the Super User ID in the IMS
server were found to be false and fabricated. The face
values of these fake invoices were shown as
receivables in the books of accounts of Satyam,
thereby dishonestly inflating the total revenues of the
company.
3. Web of Companies: A web of 356 investment
companies was used to allegedly divert funds from
Satyam. All these companies had several transactions
in the form of inter-corporate investments, advances
and loans within and among them. One such ‗sister‘
company, with a paid-up capital of Rs. 5 lakh, had
made an investment of Rs. 90.25 crore, and received
unsecured loans of Rs. 600 crore.
4. Why did he need the Money?: The cash so raised
was used to purchase several thousands of acres of
land, across Andhra Pradesh, to ride a booming realty
market. It presented a growing problem as facts had to
be doctored illegally to keep showing healthy profits
for Satyam that was growing rapidly both in size and
scale. Every attempt made to eliminate the gap failed.
As Raju put it, ―it was like riding a tiger, not knowing
how to get off without being eaten.‖ Cashing out by
selling Maytas Infrastructure and Maytas Properties to
Satyam for an estimated Rs. 7,800 crore was the last
straw.
5. The Modus Operandi of Accounting Fraud: As
financial frauds go, the one perpetrated by Raju and his
team from Satyam Company was quite uncomplicated.
Satyam‘s top management simply cooked the
company‘s books by overstating its revenues, profit
margins, and profits for every single quarter over a
period of 5-years, from 2003 to 2008. Not for them,
complex methods like derivatives accounting or
off-balance sheet transactions that were used by
Enron‘s executives (Krishnan, 2014).
Keen to project a perpetually rosy picture of the
company to investors, employees and analysts, the
Rajus manipulated Satyam‘s books, as already
described above. To achieve this, they sewed up deals
with fictitious clients, and introduced over 7,000 fake
invoices into the company‘s computer systems to
record sales that simply did not exist. For good
measure, profits too were padded up to show healthy
margins. Over the years, these ghostly clients
understandably never paid their bills, leading to a‖
big-hole‖ in Satyam‘s balance sheet. The hole was
plugged by inflating the debtors (dues from clients) in
the balance sheet and forging bank statements to show
a mountain of cash and bank balances (Ingam, 2015).
After several years of such manipulation, Satyam was
reporting sales of over Rs. 5,200 crore in 2008-09,
when it was in reality making about Rs. 4,100 crore. Its
operating profit margins were shown at 24% when they
were actually at 3% and its handsome profits on paper
covered up for real-life losses. It was when the
company ran out of cash (of the real variety) to pay
salaries that Ramalinga Raju decided that ―he could not
ride the tiger any longer and made his confession.‖
6. Riding a Tiger: Raju was compelled to admit to the
fraud following an aborted attempt to have Satyam
invest $1.6 billion in Maytas Properties and Maytas
Infrastructure, two firms promoted and controlled by
his close family members. On December 16, Satyam‘s
board cleared the investment, sparking a negative
reaction by investors, which pummeled its stock on
the New York Stock Exchange and Nasdaq. The board
hurriedly reconvened the same day a meeting and
called off the proposed investment. Unfortunately, the
matter did not die there, as Raju may have hoped. In
the next 48 hours, resignations streamed in from
Satyam‘s non-executive director, Krishna Palepu, and
three independent directors. The trigger was obviously
the failed attempt to merge Maytas with Satyam. The
effort failed and in January 2009 Raju confessed to
irregularity on his own, and was arrested two days
later. The attempt finally failed, and Raju made the
stunning confessions three weeks later on Jan. 7,
2009.
7. Truth in Numbers: Satyam‘s finances were a
black-box with an access card so rare that only Raju
and his confidants knew what exactly was going on in
the company. Ganesh Natarajan of Zensar
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Technologies famously said, ―If anybody in the
industry is capable of pulling off a scam like this, it
would be Ramalinga Raju…the capability, the
thinking through, the planning of such a large
operation….only he had the ability to pull it off‖
(Shubhashish, 2015).
Notwithstanding Raju‘s confession, the Satyam
episode has brought into sharp relief the role and
efficacy of ―independent‖ directors. The SEBI
requires the Indian publicly held companies to ensure
that independent directors make up at least half of
their board strength. The knowledge available to
independent directors and even audit committee
members was inherently limited to prevent willful
withholding of crucial information. The reality was, at
the end of the day, even as an audit committee
member or as an independent director, I would have to
rely on what the management was presenting to me,
drawing upon his experience as an independent
director and audit committee member. As Bhasin
(2008, 2011) pointed out, ―It is the auditors‘ job to see
if the numbers presented are accurate. That is what the
directors should have been asking… Like the dog that
didn‘t bark in the Sherlock Holmes story, the matter
was allowed to slide. Even if outside directors were
unaware of the true state of Satyam‘s finances, some
‗red‘ flags should have been obvious.
8. Showing Fake and Underutilized Employees: To
quote Bhasin (2012a), ―One of the biggest sources of
defalcation at Satyam was the inflation of the number
of employees. Founder chairman of Satyam, Raju
claimed that the company had 53,000 employees on
its payroll. But according to investigators, the real
number was around 43,000. The fictitious/ghost
number of employees could be fabricated because
payment to the remaining 13,000 employees was
faked year-after-year: an operation that evidently
involved the creation of bogus companies with a large
number of employees.‖ The money, in the form of
salaries paid to ghost employees, came to around $4
million a month, which was diverted through front
companies and through accounts belonging to one of
Mr. Raju‘s brothers and his mother to buy thousands
of acres of land. Making up ghost employees might
sound complicated, but investigators said it was not
that difficult. ―Employees are just code numbers in
your system; you can create any amount of them by
creating bogus employee IDs with false address,
time-sheets, opening salary accounts with banks, and
collecting payments through an accomplice.‖
Interestingly, the charge-sheet filed by the
investigators is of the view that Satyam employees
remained underutilized. For instance, the utilization
level shown in the latest investor update by the
company is about 74.88% for offshore employees.
However, the actual utilization was 62.02%. This
clearly shows that the bench strength was as high as
40% in the offshore category. Further, as a result of
underutilization, the company was forced to pay
salaries to associates without jobs on hand, which
increased the burden on company‘s finances. Even in
the onshore category, the bench strength was around
5% (of total staff).
9. Punishment by the Court: All the accused involved
in the Satyam fraud case, including Raju, were
charged with cheating, criminal conspiracy, forgery,
breach of trust, inflating invoices, profits, faking
accounts and violating number of income tax laws.
The CBI had filed three charge-sheets in the case,
which were later clubbed into one massive
charge-sheet running over 55,000 pages. Over 3000
documents and 250 witnesses were parsed over the
past 6 years.
A special CBI court on April 9, 2015 finally,
sentenced Mr. B. Ramalinga Raju, his two brothers
and seven others to seven years in prison in the
Satyam fraud case. The court also imposed a fine of
Rs. 5 crore on Ramalinga Raju, the Satyam Computer
Services Ltd‘s founder and former chairman, and his
brother B Rama Raju, and Rs. 20-25 lakh each on the
remaining accused. The 10 people found guilty in the
case are: B. Ramalinga Raju; his brother and Satyam‘s
former managing director B. Rama Raju; former chief
financial officer Vadlamani Srinivas; former PwC
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auditors Subramani Gopalakrishnan and T. Srinivas;
Raju‘s another brother, B Suryanarayana Raju; former
employees (G. Ramakrishna, D. Venkatpathi Raju and
Ch. Srisailam); and Satyam‘s former internal chief
auditor V.S. Prabhakar Gupta.
4.5 Failed Attempt to Acquire Maytas Infrastructure
Limited
It all started with Raju‘s love for land and that
unquenchable thirst to own more and more of it. Satyam
planned to acquire a 51% stake in ―Maytas Infrastructure
Limited,‖ for $300 million. The trigger was obviously the
failed attempt to merge Maytas with Satyam. Satyam had
tried to buy two infrastructure company run by his sons,
including Maytas, in December 2008. As Bhasin stated
(2016c), ―The effort failed and in January 2009 Raju
confessed to irregularity on his own, and was arrested two
days later. This was followed by the law-suits filed in the
U.S. contesting Maytas deal.‖ Four independent directors
quit the Satyam board and SEBI ordered promoters to
disclose pledged shares to stock exchanges.
4.6 Tunneling Strategy Used by Satyam
As part of their ―tunneling‖ strategy, the Satyam promoters
had substantially reduced their holdings in company from
25.6% in March 2001 to 8.74% in March 2008.
Furthermore, as the promoters held a very small
percentage of equity (mere 2.18%) on December 2008, as
shown in Table-3, the concern was that poor performance
would result in a takeover bid, thereby exposing the gap.
The aborted Maytas acquisition deal was the final,
desperate effort to cover up the accounting fraud by
bringing some real assets into the business. When that
failed, Raju confessed the fraud. Given the stake the Rajus
held in Matyas, pursuing the deal would not have been
terribly difficult from the perspective of the Raju family.
Table-3: Promoter’s Shareholding pattern in Satyam
Particulars
March
2001
March
2002
March
2003
March
2004
March
2005
March
2006
March
2007
March
2008
Dec.
2008
Promoter‘s holding in
Percentage
25.6
22.26
20.74
17.35
15.67
14.02
8.79
8.74
2.18
As pointed out by Shirur (2011), ―Unlike Enron, which
sank due to agency problem, Satyam was brought to its
knee due to tunneling. The company with a huge cash pile,
with promoters still controlling it with a small per cent of
shares (less than 3%), and trying to absorb a real-estate
company in which they have a majority stake is a deadly
combination pointing prima facie to tunneling.‖ The
reason why Ramalinga Raju claims that he did it was
because every year he was fudging revenue figures and
since expenditure figures could not be fudged so easily,
the gap between ‗actual‘ profit and ‗book‘ profit got
widened every year. In order to close this gap, he had to
buy Maytas Infrastructure and Maytas Properties. In this
way, ‗fictitious‘ profits could be absorbed through a
‗self-dealing‘ process. Bhasin, (2013a) concludes, ―The
auditors, bankers, and SEBI, the market watchdog, were
all blamed for their role in the accounting fraud.‖
4.7 The Insider Trading Activities at Satyam
Investigations into Satyam scam by the CID of the State
Police and Central agencies have established that the
promoters indulged in nastiest kind of insider trading of
the company‘s shares to raise money for building a large
land bank. According to the SFIO Report (2009) findings,
―promoters of Satyam and their family members during
April 2000 to January 7, 2009 sold almost 3.9 crore shares
collecting in Rs. 3029.67 crore. During this course, the
founder ex-chairman Ramalinga Raju sold 98 lakh shares
collecting in Rs. 773.42 crores, whereas, his brother Rama
Raju, sold 1.1 crore shares pocketing Rs. 894.32 crores.‖
Table-4 provides details of sale of shares by the promoters
and their family. Finding these top managers guilty of
unfair manipulation of stock prices and insider trading,
SEBI has asked them to deposit their ‗unlawful gains‘ of
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Rs. 1850 crore, with 12% interest, with the regulator within
45 days. They have also been barred from associating with
the securities markets in any manner for the next 14 years.
Table-4: Stake Sold by the Promoters oef Satyam
Computers Limited
Name of Promoter
No. of
Shares Sold
Money
Earned Rs.
in Crore
B. Ramalinga Raju
98,25,000
773.42
B. Rama Raju
1,13,18,500
894.32
B. Suryanarayana Raju
1,11,000
12.81
B. Nandini Raju
40,47,000
327.59
B. Radha
38,73,500
313.55
B. Jhansi Rani
1,00,000
11.25
B. Pritam Teja
9,42,250
49.01
B. Rama Raju (Jr.)
9,34,250
48.59
Maytas Infra Ltd (Satyam
Construction Ltd.)
0
0.00
B. Satyanarayana Raju
0
0.00
B. Appal Anarsamma
0
0.00
Elem Investments Pvt. Ltd.
25,47,708
181.29
Fincity Investments Pvt. Ltd.
25,30,400
180.41
Highgrace Investments Pvt.
Ltd.
25,30,332
170.83
Veeyes Investments Pvt. Ltd.
57,500
71.79
Other Individuals connected
to investment co‘s
68,000
515.58
Off-market transfers by
investment co‘s in the year
2001 (value estimated)
1,90,000
78.29
Promoters Group Total
3,90,75,440
3,029.67
4.8 Satyam’s Earnings and Cash Flows
Through long and bitter past experience, some investors
have developed a set of early warning signs of financial
reporting fraud. One of the strongest is ―the difference
between income and cash flow.‖ Because overstated
revenues cannot be collected and understated expenses still
must be paid, companies that misreport income often show
a much stronger trend in earnings than they do in cash flow
from operations. But now, we can see there is no real
difference in the trends in Satyam‘s net income and its cash
flow from operations during 2004 and 2005, as shown in
Figure 1 below. Both net income and cash flow lines were
almost overlapping each other for 2004 and 2005. That is
not because the earnings were genuine; it is because the
cash flows were manipulated too. To do that, Raju had to
forge several big amount accounts receivables, and
simultaneously falsify about their cash collections. Thus,
the fake cash flows had led to the bogus bank balances. To
keep from tripping the income-cash flow alarms, Raju had
to manipulate almost every account related to operations.
However, wide gaps can be noticed in net income and cash
flow from operation during 2006, 2007 and 2008,
respectively. During 2006 to 2008, cash flows were far less
than net income due to accounting manipulations. Indeed,
Satyam fraud was a stunningly and very cleverly articulated
comprehensive fraud, likely to be far more extensive than
what happened at Enron (Bhasin, 2015a). The independent
board members of Satyam, the institutional investor
community, the SEBI, retail investors, and the external
auditor—none of them, including professional investors
with detailed information and models available to them,
detected the malfeasance.
4.9 The Auditor’s Role and Factors Contributing to
Fraud
Global auditing firm, PricewaterhouseCoopers (PwC),
audited Satyam‘s books from June 2000 until the
discovery of the fraud in 2009. Several commentators
criticized PwC harshly for failing to detect the fraud
(Winkler, 2010). Indeed, PwC signed Satyam‘s financial
statements and was responsible for the numbers under the
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Indian law. One particularly troubling item concerned the
$1.04 billion that Satyam claimed to have on its balance
sheet in ―non-interest-bearing‖ deposits. The large amount
of cash thus should have been a ‗red-flag‘ for the auditors
that further verification and testing was necessary. As to
the external auditors, who are supposed to look out for
investors, they seem to have been quite a trusting lot
(Bhasin, 2016d). While verifying bank balances, they
relied wholly on the (forged) fixed deposit receipts and
bank statements provided by the ‗Chairman‘s office‘. The
forensic audit reveals differences running into hundreds of
crores between the fake and real statements as captured by
the computerised accounting systems. But for some
strange reason, everyone, from the internal auditor to the
statutory auditors, chose to place their faith in the
‗Chairman‘s office‘ rather than the company‘s information
systems (Bhasin, 2015). Furthermore, it appears that the
auditors did not independently verify with the banks in
which Satyam claimed to have deposits‖ (Kahn, 2009).
Furthermore, PwC audited the company for nearly 9 years
and did not uncover the fraud, whereas Merrill Lynch
discovered the fraud as part of its due diligence in merely
10 days. Missing these ―red-flags‖ implied either that the
auditors were grossly inept or in collusion with the
company in committing the fraud.
Table-5: Satyam’s Total Income and Audit Fees (Rs. in Millions)
Year
2004-05
2005-06
2006-07
2007-08
Total Income (A)
35,468
50,122.2
64,100.8
83,944.8
Audit Fees (B)
6.537
11.5
36.7
37.3
% of B to A
0.0184
0.0229
0.0573
0.0444
(Source: Annual Reports of Satyam, Percentage computed)
A point has also been raised about the increase in audit fee.
A reference to the figures of audit fee in comparison with
total income over a period of time may be pertinent.
Table-5 shows that over a period of four years, 2004-05 to
2007-08, the audit fee increased by 5.7 times, whereas
total income increased by 2.47 times during the same
period. Nevertheless, it is difficult to draw any conclusion
as to whether the increase in audit fee was justified or not.
Suspiciously, Satyam also paid PwC twice what other
firms would charge for the audit, which raises questions
about whether PwC was complicit in the fraud (Bhasin,
2013).
4.10 The Aftermath of Satyam Scandal
The Indian government immediately started an
investigation, while at the same time limiting its direct
participation. The government appointed a ‗new‘ board of
directors for Satyam to try to save the company: goal was
to sell the company within 100 days. To devise a plan of
sale, the board met with bankers, accountants, lawyers,
and government officials immediately. To accomplish the
sale, the board hired Goldman Sachs and Avendus Capital
and charged them with selling the company in the shortest
time possible.
At its peak market capitalization, Satyam was valued at Rs.
36,600 crore in 2008. Just a year later, the scam-hit
Satyam was snapped up by Tech Mahindra for a mere Rs.
58 per share—a market cap of a mere Rs. 5600 crore. The
stock that hit its all-time high of Rs. 542 in 2008 crashed
to an unimaginable Rs. 6.30 on the day Raju confessed on
January 9, 2009. Satyam‘s shares fell to 11.50 rupees on
January 10, 2009, their lowest level since March 1998,
compared to a high of 544 rupees in 2008. In the New
York Stock Exchange, Satyam shares peaked in 2008 at
US$ 29.10; by March 2009 they were trading around US
$1.80. Thus, investors lost $2.82 billion in Satyam.
Criminal charges were brought against Mr. Raju, including:
criminal conspiracy, breach of trust, and forgery. After the
Satyam fiasco and the role played by PwC, investors
became wary of those companies who are clients of PwC
(Blakely, 2009), which resulted in fall in share prices of
around 100 companies varying between 5 to 15%. The
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news of the scandal (quickly compared with the collapse
of Enron) sent jitters through the Indian stock market, and
the benchmark Sensex index fell more than 5%. Shares in
Satyam fell more than 70%. The graph, ―Fall from Grace,‖
shown in Figure 2, depicts the Satyam‘s stock decline
between December 2008 and January 2009.
Figure 2: Stock Charting of Satyam from December 2008 to January 2009
In the aftermath of Satyam, India‘s markets recovered and
Satyam now lives on. India‘s stock market is currently
trading near record highs, as it appears that a global
economic recovery is taking place. Civil litigation and
criminal charges continue against Satyam. Tech Mahindra
purchased 51% of Satyam on April 16, 2009, successfully
saving the firm from a complete collapse. As Winkler
states (2010), ―With the right changes, India can minimize
the rate and size of accounting fraud in the Indian capital
markets.‖
4.11 Investigation into the Satyam Case: Criminal,
Civil Charges
The Satyam fraud has highlighted the multiplicity of
regulators, courts and regulations involved in a serious
offence by a listed company in India. The investigation
that followed the revelation of the fraud has led to charges
against several different groups of people involved with
Satyam. Indian authorities arrested Mr. Raju, Mr. Raju‘s
brother, B. Ramu Raju, its former managing director,
Srinivas Vdlamani, the company‘s head of internal audit,
and its CFO on criminal charges of fraud. Indian
authorities also arrested and charged several of the
company‘s auditors (PwC) with fraud. The Institute of
Chartered Accountants of India (ICAI 2009) ruled that
―the CFO and the auditor were guilty of professional
misconduct.‖ The CBI is also in the course of investigating
the CEO‘s overseas assets. 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
continue in India and civil litigation continues in the
United States.
4.12 Regulatory and Corporate Governance Reforms
in India
After the Satyam scandal, investors and regulators called
for strengthening the regulatory environment in the
securities markets. In response to the scandal, the SEBI
revised CG requirements as well as financial reporting
requirements for publicly traded corporations listed in the
country. The SEBI also strengthened its commitment to
the adoption of International Financial Accounting
Reporting Standards (IFRS). In addition, the Ministry of
Corporate Affairs (MCA) has devised a new Corporate
Code and is considering changing the securities laws to
make it easier for shareholders to bring class-action
lawsuits (Bhasin, 2012). Some of the recent CG reforms
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undertaken in India, as summed up by Sharma (2015), are:
(a) Appointment of Independent Directors, (b) Disclosure
of Pledged Securities, (c) Increased Financial Accounting
Disclosures, (d) IFRS (Adoption of International
Standards), and (e) Creation of New Corporate Code by
the Ministry of Corporate Affairs.
Satyam grossly violated all rules of corporate governance
(Chakrabarti, 2008). The Satyam scam had been the
example for following ―poor‖ CG practices. It had failed
to show good relation with the shareholders and
employees. As Kahn (2009) stated, ―CG issue at Satyam
arose because of non-fulfillment of obligation of the
company towards the various stakeholders. Of specific
interest are the following: distinguishing the roles of board
and management; separation of the roles of the CEO and
chairman; appointment to the board; directors and
executive compensation; protection of shareholders rights
and their executives.‖ Scandals from Enron to the recent
financial crisis have time and time again proved that there
is a need for good conduct based on strong ethics. Not
surprising, such frauds can happen, at any time, all over
the world. Satyam fraud spurred the government of India
to tighten CG norms to prevent recurrence of similar
frauds in the near future. The government took prompt
actions to protect the interest of the investors and
safeguard the credibility of India and the nation‘s image
across the world.
6. CONCLUSION AND
RECOMMENDATIONS
The fraud committed by the founders of Satyam is a
testament to the fact that ―the science of conduct is swayed
in large by human greed, ambition, and hunger for power,
money, fame and glory.‖ The culture at Satyam, especially
dominated by the board, symbolized an unethical culture.
Unlike Enron, which sank due to ‗agency‘ problem,
Satyam was brought to its knee due to ‗tunneling‘ effect.
All kind of frauds have proven that there is a need for
good conduct based on strong ethics. The debacle of
Satyam raised a debate about the role of CEO in driving an
organization to the heights of success and its relation with
the board members and core committees. The scam at
Satyam brought to the light the role of CG in shaping the
protocols related to the working of audit committee and
duties of board members (Niazi, and Ali, 2015).
The Indian government took very quick actions to protect
the interest of the Satyam investors, safeguard the
credibility of India, and the nation‘s image across the
world. Moreover, Satyam fraud has forced the government
to re‐write the CG rules and tightened the norms for
auditors and accountants (Bhasin, 2013b). The Indian
affiliate of PwC ―routinely failed to follow the most basic
audit procedures. The SEC and the PCAOB fined the
affiliate, PwC India, $7.5 million in what was described as
the largest American penalty ever against a foreign
accounting firm‖ (Norris, 2011). According to Mr. Chopra,
President (ICAI), ―The Satyam scam was not an
accounting or auditing failure, but one of CG. This apex
body had found the two PwC auditors ‗prima-facie‘ guilty
of professional misconduct.‖ The CBI, which investigated
the Satyam fraud case, also charged the two auditors with
complicity in the commission of the fraud by consciously
overlooking the accounting irregularities.
Keeping in view the ―modus operandi‖ used by the
management in Satyam scam, we recommend the
followings: (a) Corporations must uplift the moral, ethical
and social values of its executives. (b) Board members
need to feel the importance of the responsibility entrusted
with them: be proactive and watchful in protecting the
interests of owners. (c) There was a lack of proper and
timely information in Satyam‘s case. (d) Shareholder
activism is an excellent mechanism of keeping a check on
the corporation and its executives. (e) Block-holders and
institutional investors can also serve as an effective means
for board‘s and management‘s accountability. And finally,
CG framework needs to be implemented in letter as well
as spirit.
The Satyam fraud, finally, had to end and the implications
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were having far reaching consequences. With all the 10
people involved in the multi-crore accounting fraud found
guilty of cheating, forgery, destruction of evidence and
criminal breach of trust, by a special Central Bureau of
Investigation court in Hyderabad, the six-year-old case has
reached its logical conclusion. This includes the founder
and the Chairman of the company B Ramalinga Raju. The
court pronounced a seven year-jail term for the founder
and also imposed a Rs. 5 crore fine on Raju. The decision
came more than six years after the scam first came to light
in 2009. Since liberalization, serious efforts have been
directed at overhauling the CG system, with the SEBI
instituting the Revised Clause 49 of the Listing
Agreements dealing with CG. With the right changes, India
can minimize the rate and size of accounting fraud in the
Indian capital markets.
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