PROJECT REPORT

(Submitted for the degree of B.Com Honours in Accounting and

Finance under the University of Calcutta)

Title of the project

CORPORATE ACCOUNTING FRUAD: A CASE STUDY OF SATYAM
COMPUTER SERVICES LIMITED

Submitted by
Name of the Student: SAGNIK CHAKRABORTY

C.U. Registration No.: 224-1121-3645-15

C.U University Roll No.: 1224-61-0287

College Details of the Student

College Roll No.: 404 Shift: EVENING

Supervised by
Name of the Supervisor: Prof. Shuvendu Roy Chowdhury

Name of the College: Seth Anandram Jaipuria College

Year of Submission: FEBRUARY, 2018

1
 ACKNOWLEDGEMENT

It is a matter of great pleasure to present this project on

“Corporate Accounting Fraud”

I take this opportunity to thanks our respected Principal Dr. Asok

Mukhopadhyay for giving me an opportunity to work on this field.

I am eagerly grateful to our Head of the Department Prof. Anil Kumar

Saha without whom this project would not have been successful one.

I am very thankful to my supervisor Prof. Shuvendu Roy Chowdhury

for his support in completing this project work.

Finally, I gratefully acknowledge the support of my family, friends,

and would also like to thank to Mr. Kaustav Guha and Mr. Anirban
Ganguli whom I interacted during the survey, who had given me full
support and co-operated with me to carry out this research work
and help me to complete the project work.

Sagnik Chakraborty

2
ANNEXURE- IA

SUPERVISOR’S CERTIFICATE

This is to certify that Mr. Sagnik Chakraborty a student of B.Com

Honours in Accounting and Finance of SETH ANANDRAM JAIPURIA
COLLEGE under the University of Calcutta has worked under my
supervision and guidance for his project work and prepared a project
report with the title CORPORATE ACCOUNTING FRAUD: A CASE
STUDY ON SATYAM COMPUTERS, which he is submitting, is his
genuine and original work to the best of my knowledge.

Signature of the supervisor

PLACE: Kolkata NAME: Shuvendu Roy Chowdhury

DATE: DESIGNATION: Lecturer

NAME OF THE COLLEGE: Seth

Anandram Jaipuria College

3
ANNEXURE- IIA

STUDENT’S DECALRATION

I hereby declare that the project work with the title (CORPORATE
ACCOUNTING FRAUD: A CASE STUDY OF SATYAM COMPUTER
SERVICES LIMITED) submitted by me for the partial fulfilment of the
degree of B.Com HONOURS in Accounting and Finance under the
University of Calcutta is my original work and has not been
submitted earlier to any other University/Institution for the
fulfilment of the requirement for any course o study.

I also declare that no chapter of this manuscript in whole or in part

has been incorporated in this report from any earlier work done by
others or by me. However extracts of any literature which has been
used for this report has been duly acknowledged providing details of
such literature in the references.

Signature of the student

NAME: SAGNIK CHAKRABORTY

C.U. REGISTRATION NO.: 224-1121-3645-15

C.U. ROLL NO.(PART III): 1224-61-0287

COLLEGE ROLL NO.: 404

PLACE: KOLKATA SHIFT: EVENING

4
 TABLE OF CONTENT
SL No. CHAPTER NAME PAGE no.

1) INTRODUCTION
1.1 BACKGROUND OF THE STUDY 06
1.2 NEED FOR THE STUDY 06
1.3 REVIEW OF LITERATURE 07
1.4 OBJECTIVE OF THE STUDY 07
1.5 METHODOLOGY 08
1.6 LIMITATIONS 08
2) 1.7 CHAPTER PLANNING
3) CONCEPTUAL FRAMEWORK
2.1 SATYAM COMPUTER SERVICES LIMITED 09
2.2 FRAUD 11
2.3 WHO COMMIT FRAUD 11
2.4 CONSEQUENCES OF FRAUDULENY REPORTING 12

4) PRESENTATION OF DATA ANALYSIS AND FINDINGS

3.1 CORPORATE ACCOUNTING SCANDAL AT SATYAM 13
COMPUTER SERVICES LIMITED
3.2 EMERGENCE OF SATYAM 14
3.3 MR RAMALINGA RAJU AND THE SATYAM SCANDAL 15
3.4 FALSIFICATION OF BANK FIXED DEPOSIT ACCOUNT 17
3.5 FAKE INVOICES AND BILLING SYSTEM 18
3.6 LAX BOARD OF DIRECTORS 19
3.7UNCONVINCING ROLES OF INDEPENDENT DIRECTORS 20
3.8 GAPS IN SATYAM’S EARNING AND CASH FLOW 21
3.9 THE AUDITORS ROLE AND FACTORS CONTRIBUTING TO FRAUD 22
3.10 ABNORMAL FEES PAID TO PwC INDIA AGENT 23
3.11 THE AFTERMATH OF SATYAM SCANDAL 24
3.13 INVESTIGATION INTO THE SATYAM CASE: 26
CRIMINAL & CIVIL CHARGES
5) CONCLUSION AND SUGGESTION 28
6) BIBLIOGRAPHY 31

5
CORPORATE ACCOUNTING FRAUD:
A CASE STUDY OF SATYAM
COMPUTERS LIMITED
CHAPTER 1: INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Fraud is a worldwide phenomenon that affects all continents and all sectors of the economy.
Fraud encompasses a wide-range of illicit practices and illegal acts involving intentional
deception, or misrepresentation. According to the Association of Certified Fraud Examiners
(ACFE), fraud is “a deception or misrepresentation that an individual or entity makes
knowing that misrepresentation could result in some unauthorized benefit to the individual or
to the entity or some other party” [1]. In other words, mistakes are not fraud. Indeed, in fraud,
groups of unscrupulous individuals manipulate, or influence the activities of a target business
with the intention of making money, or obtaining goods through illegal or unfair means.
Fraud cheats the target organization of its legitimate income and results in a loss of goods,
money, and even goodwill and reputation. Fraud often employs illegal and immoral, or unfair
means. It is essential that organisations build processes, procedures and controls that do not
needlessly put employees in a position to commit fraud and that effectively detect fraudulent
activity if it occurs. The fraud involving persons from the leadership level is known under the
name “managerial fraud” and the one involving only entity’s employees is named “fraud by
employees’ association”.

1.2 NEED FOR THE STUDY

a) Highlighting the role of existing regulatory authority for preventing corporate fraud.

b) Study of case law and relating to corporate fraud and reason behind the fraud.

c) Study of the existing law dealing with corporate governance and their implementation.

d) Effects of corporate fraud on the society.

6
1.3 REVIEW OF LITERATURE

Starting in the late 1990s, a wave of corporate frauds in the United States occurred with
Enron’s failure, perhaps being the emblematic example. Jeffords examined 910 cases
of frauds submitted to the “Internal Auditor” during the nine-year period from 1981 to 1989
to assess the specific risk factors cited in the Treadway Commission Report. He concluded
that “approximately 63 per- cent of the 910 fraud cases are classified under the internal
control risks”.
On the other hand, Haugen and Selin in their study discussed the value of “internal”
controls, which depends largely on management’s integrity and the ready availability of
computer technology, which assisted in the commitment of crime. Sharma and Brahma
emphasized on “bankers” responsibility on frauds; bank frauds could crop-up in all spheres of
bank’s dealing. Major cause for perpetration of fraud is laxity in observance in laid-down
system and procedures by supervising staff. Harris and William, however, examined the
reasons for “loan” frauds in banks and emphasized on due diligence program.
From the above, it is evident that majority of studies were performed in developed,
Western countries. How- ever, the manager’s behaviour in fraud commitment has been
relatively unexplored so far. Accordingly, the objective of this paper is to examine managers’
unethical behaviours in Satyam Computer Limited, which constitute an ex-post evaluation of
alleged or acknowledged fraud case. The present study seeks to fill this gap and contributes to
the literature.

1.4 OBJECTIVE OF THE STUDY

1) To understand and distinguish the different methods for creating fraudulent financial
statements.
2) To be familiar with the classification of fraud and the different roles that business
owners, employers, investors and auditors play in each type of fraud
3) To identify the prominent American and foreign companies involved in fraudulent
financial reporting practices and the nature of accounting irregularities they
committed;

4) To highlight the Satyam Computers 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 lesions learned.

7
1.5 METHODOLOGY

1. RESEARCH DESIGN

Research design of the project involves secondary data collection, theoretical framework
is based on secondary sources and it includes sever and electronic sources.

2. DATA TYPE

Financial reporting practice can be developed in reference to a particular setting in which

it is embedded. Therefore, ‘qualitative’ research could be seen useful to explore and describe
fraudulent financial reporting practice. Here, two issues are crucial. First, to understand why
and how a ‘specific’ company is committed to fraudulent financial reporting practice an
appropriate “interpretive” research approach is needed. Second, case study conducted as part
of this study, looked specifically at the largest fraud case in India, involving Satyam
Computer Services (Satyam).

3. SAMPLE SIZE

Regarding data analysis and finding I used the tools like ms word and ms excel for
interpretation of data. For the graphical presentation of data I used the chart option from the
insert option to give the quick view of data.

1.6 LIMITATIONS OF THE STUDY

a) Explanation of the analysis is limited due to restriction in length of the project.
b) The subject is vast and requires extensive study and research to have an in-depth
knowledge of fraudulent accounting reporting.

1.7 CHAPTER PLANNING

The study has been divided into the following chapters:
a) Introduction
b) Conceptual Framework
c) Case Study: Presentation of data, analysis and findings
d) Conclusion and Suggestion.

8
CHAPTER 2: CONCEPTUAL FRAMEWORK

2.1 SATYAM COMPUTER SERVICES LIMITED

Satyam Computer Services Limited was a “rising-star” in the Indian “outsourced” IT-services
industry. The company was formed in 1987 in Hyderabad (India) by Mr. Ramalinga Raju.
The firm began with 20 employees and grew rapidly as a “global” business. It offered IT and
business process outsourcing services spanning various sectors. Satyam was as an example of
“India’s growing success”. Satyam won numerous awards for innovation, governance, and
corporate accountability. “In 2007, Ernst & Young awarded Mr. Raju with the ‘Entrepreneur
of the Year’ award. On April 14, 2008, Satyam won awards from MZ Consult’s for being a
‘leader in India in CG and accountability’. In September 2008, the World Council for
Corporate Governance awarded Satyam with the ‘Global Peacock Award’ for global
excellence in corporate accountability” [26]. Unfortunately, less than five months after
winning the Global Peacock Award, Satyam became the centrepiece of a “massive”
accounting fraud.
From 2003-2008, in nearly all financial metrics of interest to investors, the company
grew measurably. Sat- yam generated USD $467 million in total sales. By March 2008, the
company had grown to USD $2.1 billion. The company demonstrated “an annual compound
growth rate of 35% over that period”. Operating profits averaged 21%. Earnings per share
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 138.08 INR, Satyam
Computer’s stock would peak at 526.25 INR—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 market
place. The external environment in which Satyam operated was indeed beneficial to the
company’s growth. But, the numbers did not represent the full picture. The case of Satyam
accounting fraud has been dubbed as “India’s Enron”.
By 2003, Satyam’s IT services businesses included 13,120 technical associates
servicing over 300 customers worldwide. At that time, the world-wide IT services market
was estimated at nearly $400 billion, with an estimated annual compound growth rate of
6.4%. “The markets major drivers at that point in time were the increased importance of IT

9
services to businesses world-wide; the impact of the Internet on e-Business; the emergence of
a high‐quality IT services industry in India and their methodologies; and, the growing need of
IT services providers who could provide a range of services.” To effectively compete, both
against domestic and global competitors, the company embarked on a variety of
multi‐pronged business growth strategies. In financial terms, Satyam displayed, in its
reported statements, spectacular results in all key operating parameters (see Table-1).

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 25415.40 36462.20 46343.10 62248.70 81372.80 38
OPERATING 7743.00 9717.00 15714.20 17107.30 20857.40 28
PROFIT
NET PROFIT 5557.90 7502.60 12397.50 14232.30 17157.40 33
OPERATING 4165.50 6386.60 7968.10 10390.60 13708.70 35
CASH FLOW
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 : geogit.com)

From 2003-2008, in nearly all financial metrics of interest to investors, the company grew
measurably. 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. Earnings per share 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 138.08 INR, Satyam’s stock
would peak at 526.25 INR–a 300% improvement in share price after nearly five years
(www.capitaliq.com). Satyam clearly generated significant corporate growth and shareholder
value. The company was a leading star–and are cognizable name–in a global IT marketplace.
The external environment in which Satyam operated was indeed beneficial to the company’s

10
growth. But, the numbers did not represent the full picture. The case of Satyam accounting
fraud has been dubbed as “India’s Enron”.

2.2 FRAUD
Fraud is a worldwide phenomenon that affects all continents and all sectors of the economy.
Fraud encompasses a wide-range of illicit practices and illegal acts involving intentional
deception, or misrepresentation. According to the Association of Certified Fraud Examiners
(ACFE), fraud is “a deception or misrepresentation that an indvidual or entity makes knowing
that misrepresentation could result in some unauthorized benefit to the individual or to the
entity or some other party” [1]. In other words, mistakes are not fraud. Indeed, in fraud,
groups of unscrupulous individuals manipulate, or influence the activities of a target business
with the intention of making money, or obtaining goods through illegal or unfair means.
Fraud cheats the target organization of its legitimate income and results in a loss of goods,
money, and even goodwill and reputation. Fraud often employs illegal and immoral, or unfair
means. It is essential that organizations build processes, procedures and controls that do not
needlessly put employees in a position to commit fraud and that effectively detect fraudulent
activity if it occurs. The fraud involving persons from the leadership level is known under the
name “managerial fraud” and the one involving only entity’s employees is named “fraud by
employees’ association”.

2.3 WHO COMMITS FRUAD?

Every day, there are revelations of organizations behaving in discreditable ways [8].
Generally, there are three groups of business people who commit financial statement frauds.
They range from senior management (CEO and CFO); mid- and lower-level management and
organizational criminals [9]. CEOs and CFOs commit ac- counting frauds to conceal true
business performance, to preserve personal status and control and to maintain personal
income and wealth. Mid- and lower-level employees falsify financial statements related to
their area of responsibility (subsidiary, division or other unit) to conceal poor performance
and/or to earn performance-based bonuses. Organizational criminals falsify financial
statements to obtain loans, or to inflate a stock they plan to sell in a “pump-and-dump”
scheme. While many changes in financial audit processes have stemmed from financial fraud,
or manipulations, history and related re- search repeatedly demonstrates that a financial audit
simply cannot be relied upon to detect fraud at any significant level.

11
2.4 CONSEQUENCES OF FRAUDULENT REPORTING

Fraudulent financial reporting can have significant con- sequences for the organization and its
stakeholders, as well as for public confidence in the capital markets. Pe- riodic high-profile
cases of fraudulent financial reporting also raise concerns about the credibility of the US
financial reporting process and call into question the roles of management, auditors,
regulators, and analysts, among others. Moreover, corporate fraud impacts organizations in
several areas: financial, operational and psychological [10]. While the monetary loss owing to
fraud is significant, the full impact of fraud on an organization can be staggering. In fact, the
losses to reputation, goodwill, and customer relations can be devastating. When fraudulent
financial reporting occurs, serious consequences ensue. The damage that result is also
widespread, with a sometimes devastating “ripple” effect [6]. Those affected may range from
the “immediate” victims (the company’s stockholders and creditors) to the more “remote”
(those harmed when investor confidence in the stock market is shaken). Between these two
extremes, many others may be affected: “employees” who suffer job loss or diminished
pension fund value; “depositors” in financial institutions; the company’s “underwriters,
auditors, attorneys, and insurers”; and even honest “competitors” whose reputations suffer by
association.

12
CHAPTER 3: PRESENTATION OF DATA,
ANALYSIS AND FINDINGS

3.1 CORPORATE ACCOUNTING SCANDAL AT SATYAM COMPUTER

SERVICES LIMITED: A CASE STUDY

Ironically, Satyam means “truth” in the ancient Indian language “Sanskrit” [24]. Satyam won
the “Golden Pea- cock 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. 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. 7800 crore) fraud, admitted that he had made up profits for years. According to
reports, Raju and his brother, B. Rama Raju, who was the Managing Director, “hid the
deception from the company’s board, senior managers, and auditors”. The case of Satyam’s
accounting fraud has been dubbed as “India’s Enron”. In order to evaluate and understand the
severity of Satyam’s fraud, it is important to understand factors that contributed to the
“unethical” decisions made by the company’s executives. First, it is necessary to detail the
rise of Satyam as a competitor within the global IT services market-place. Second, it is
helpful to evaluate the driving-forces behind Satyam’s decisions: Ramalinga Raju. Finally,
attempt to learn some “lessons” from Satyam fraud for the future.

13
3.2 EMERGENCE OF SATYAM COMPUTER SERVICES LIMITED

Satyam Computer Services Limited was a “rising-star” in the Indian “outsourced” IT-services
industry. The company was formed in 1987 in Hyderabad (India) by Mr. Ramalinga Raju.
The firm began with 20 employees and grew rapidly as a “global” business. It offered IT and
business process outsourcing services spanning various sectors. Satyam was as an example of
“India’s growing success”. Satyam won numerous awards for innovation, governance, and
corporate accountability. “In 2007, Ernst & Young awarded Mr. Raju with the ‘Entrepreneur
of the Year’ award. On April 14, 2008, Satyam won awards from MZ Consult’s for being a
‘leader in India in CG and accountability’. In September 2008, the World Council for
Corporate Governance awarded Satyam with the ‘Global Peacock Award’ for global
excellence in corporate accountability”. Unfortunately, less than five months after winning
the Global Peacock Award, Satyam became the centred-piece of a “massive” accounting
fraud.
By 2003, Satyam’s IT services businesses included 13,120 technical associates servicing over
300 customers worldwide. At that time, the world-wide IT services market was estimated at
nearly $400 billion, with an estimated annual compound growth rate of 6.4%. “The markets
major drivers at that point in time were the in- creased importance of IT services to
businesses world- wide; the impact of the Internet on e-Business; the emergence of a
high‐quality IT services industry in India and their methodologies; and, the growing need of
IT ser- vices providers who could provide a range of services”. To effectively compete, both
against domestic and global competitors, the company embarked on a variety of
multi‐pronged business growth strategies.
From 2003-2008, in nearly all financial metrics of interest to investors, the company grew
measurably. Sat- yam generated USD $467 million in total sales. By March 2008, the
company had grown to USD $2.1 billion. The company demonstrated “an annual compound
growth rate of 35% over that period”. Operating profits averaged 21%. Earnings per share
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 138.08 INR, Satyam’s stock
would peak at 526.25 INR—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. The external
14
environment in which Satyam operated was indeed beneficial to the company’s growth. But,
the numbers did not represent the full picture. The case of Satyam accounting fraud has been
dubbed as “India’s Enron”.

3.3 MR RAMALINGA RAJU AND THE SATYAM SCANDAL

On January 7, 2009, Mr. Ramalinga Raju disclosed in a letter to Satyam Computers Limited
Board of Directors that “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. Satyam overstated
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 percent and profits by 97 percent. Mr. Raju and the company’s global head of
internal audit used a number of different techniques to perpetrate the fraud. “Using his
personal computer, Mr. Raju created numerous bank statements to advance the fraud. Mr.
Raju falsified the bank accounts to inflate the balance sheet with balances that did not exist.
He inflated the income statement by claiming interest income from the fake bank accounts.
Mr. Raju also revealed that he created 6000 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” [27]. 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.

15
 Raju claimed in the letter that “neither he nor the managing director had benefited
financially from the inflated revenues, and none of the board members had any knowledge of
the situation in which the company was placed”. 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. 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. Table 2 depicts some parts of the Satyam’s fabricated ‘Balance Sheet and
Income Statement’ and shows the “difference” between “actual” and “reported” finances.
Fortunately, the Satyam deal with Matyas 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. As
part of their “tunnelling” 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, the
concern was that poor performance would result in a takeover bid, 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 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. Unlike Enron, which sank due to agency problem,
Satyam was brought to its knee due to tunnelling

16
TABLE 2: FABRICATED BALANCE SHEET AND INCOME STATEMENT
OF SATYAM AS ON SEPTEMBER 30TH 2008

ITEMS Rs. IN CRORES ACTUAL REPORTED DIFFERENCE

CASH AND BANK 321 5361 5040

BALANCES
ACCRUED INTEREST ON NIL 376.50 376
FIXED DEPOSIT
UNDERSTATED LIABILITY 1230 NONE 1230
OVERSTATED DEBTORS 2161 2651 490
TOTAL 3712 NIL 7136
REVENUES (Q2 FY 2009) 2112 2700 588
OPERATING PROFITS 61 649 588

3.4 FALSIFICATION OF BANKS FIXED DEPOSIT ACCOUNTS

The promoters of Satyam regularly used to generate monthly bank statements to be fed into
the bankbooks. Similarly, they also used to generate confirmations of bank balances, at the
end of every quarter, against non-existent fixed deposit receipt (FDRs) and interest
earned/due thereon. Thus, as on 30 Sept. 2008, while the actual FDs balances with various
banks was just under Rs. 10 crore, fake FD receipts shown to the auditors total over Rs. 3,300
crore. At HDFC Bank, for example, Satyam claimed Rs.704 crores in deposits without
having a single rupee parked with the bank branch concerned. With Citi Bank, it reported Rs.
613.32 crore of FDs when it actually had just Rs. 1.32 crore. And so on

17
TABLE 3: FALSIFICATION OF FIXED DEPOSITS ACCOUNTS (Rs.In
crores)

FINANCIAL YEAR AMOUNT AS PER AMOUNT AS PER AMOUNT FALSIFIED

BALANCE SHEET/ BANK
TRIAL BALANCE
2001-02 1243.15 5.43 7000.00
2002-03 1252.37 0.00 1252.37
2003-04 1465.33 1.89 1446.46
2004-05 1801.47 5.97 1795.50
2005-06 1906.47 1.11 1705.50
2006-07 3364.94 5.65 3308.41
2007-08 3318.37 8.53 3308.41

As shown below in TABLE 3.the company had created a false impression about its
fixed deposits summing to be about Rs. 3,318.37 crores, while they actually held FDRs of
just about Rs. 9.96 crores. Many experts cast partial blame for the scandal on Satyam’s
auditor Price Waterhouse (PwC) India, because the fraud went undetected for so many years.

3.5 FAKE INVOICES AND BILLING SYSTEM

By using the IT skills in-house and tampering with the invoice management system (IMS) of
the company, a software module that was internally developed .The Central Bureau of
Investigation (CBI) has revealed details of the fake invoicing system used by Satyam.
Documents released by media reports to the general public in India showed how the
company’s standard billing systems were subverted to generate false invoices to show
inflated sales, before its former boss, Ramalinga Raju, admitted to his role in the India’s
largest-ever corporate scandal. 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 „On time‟ 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.

18
 .

3.7 LAX BOARD OF DIRECTORS

The Satyam Board was composed of “chairman-friendly” directors, who failed to question
the management’s strategy and use of leverage in recasting the company. Moreover, they
were also extremely slow to act when it was already clear that the company was in financial
distress. Here, it is observed, “The directors acted as mere rubber stamps and the promoters
were always present to influence the decision. The glue that held the board members together
was Mr. Ramalinga Raju (Chairman). Each of the board members were there on his personal
invitation and that made them ineffective. The Board ignored, or failed to act on, critical
information related to financial wrong-doings before the company ultimately collapsed.” It
was only when Raju in the Dec. 2008 announced a $1.6 billion bid for two Maytas companies
(Maytas Infra and Maytas Properties) and while the share market reacted very strongly
against the bid and prices plunged by 55% on concerns about Satyam’s CG, that some of the
independent directors came into action by announcing their withdrawal from the Board, by
then was then too late.

19
TABLE 4: PROMOTER’S SHAREHOLDING PATTERN IN SATYAM
FROM 2003-08

AS ON PROMOTER’S HOLDING IN
PERCENTAGE
MARCH 2003 20.74
MARCH 2004 17.35
MARCH 2005 15.67
MARCH 2006 14.02
MARCH 2007 08.79
MARCH 2008 08.74
DECEMBER 2008 02.18

Satyam board‟s investment decision to invest 1.6 billion dollars to acquire a 100%
stake in Maytas Properties and in 51% stake in Maytas Infrastructure (the two real estate
firms promoted by Raju‟s sons) was in gross violation of the Companies Act 1956, under
which no company is allowed, without shareholder‟s approval to acquire directly or
indirectly any other corporate entity that is valued at over 60% of its paid-up capital.

3.8 UNCONVINCING ROLE OF INDEPENDENT DIRECTORS

With regard to the role of the „independent‟ directors (IDs) at Satyam, we should understand:
how „independent‟ they actually were? It was seen that all the non-executive directors
(NEDs) at Satyam have been allotted significant stock options at an unbelievable low strike
price of Rs. 2 per share, and apart from this, all the NEDs have also earned handsome
commissions during 2007-08, as reflected by Satyam’s audited results. Table 5 shows
the details of number of Stock options and commission given to different NEDs, as per
Satyam’s audited results for 2007-08.

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TABLE 5: SATYAM’S SUMPTIOUS GIFT TO ITS NON- EXECUTIVE
DIRECTORS

NAME NO. OF OPTIONS COMMISSION (IN Rs)

KRISHNA PALEPU 10000 1.20 MILLION

MANAGALAN 10000 1.20 MILLION
SRINIVASAN
T R PRASAD 10000 1.13 MILLION
V P RAMA RAO 10000 0.10 MILLION
M RAM MOHAN RAO 10000 1.20 MILLION
V S RAJU 10000 1.13 MILLION
VINOD DHAM 10000 1.20 MILLION

Notwithstanding Raju’s confession, the Satyam episode has brought into sharp focus
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 will full 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 pointed out, “It is the auditors‟ job
to see if the numbers presented are accurate”.

3.9 GAPS IN SATYAM’S EARNING AND CASH FLOWS

Through long and bitter past experience, some investors have developed a set of early
warning signs of financial reporting fraud. It is described as: “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

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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. If cash flow
from operating activities of a company is consistently less than the reported net income, it is a
warning sign. The investor must ask why operating earnings are not turning into cash. 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,” said in Bhasin Report on Stayam Computer’s. 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.

FIGURE1: GRAPH SHOWING SATYAM’S EARNING AND CASH FLOW

3.10 THE AUDITORS 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. Indeed, PwC signed Satyam’s financial statements and was
responsible for the numbers under the Indian law. One particularly troubling item concerned

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the $1.04 billion that Satyam claimed to have on its balance sheet in “non-interest- bearing”
deposits. According to accounting professionals, “any reasonable company would have either
invested the money into an interest-bearing account, or returned the excess cash to the
shareholders. The large amount of cash thus should have been a ‘red-flag’ for the auditors
that further verification and testing was necessary. Further- more, it appears that the auditors
did not independently verify with the banks in which Satyam claimed to have deposits”.
Numerous factored contributed to the Satyam fraud. 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. The following is a list of factors that
contributed to the fraud: greed, ambitious corporate growth, deceptive reporting practices—
lack of transparency, excessive interest in maintaining stock prices, executive incentives,
stock market expectations, nature of accounting rules, ESOPs issued to those who prepared
fake bills, high risk deals that went sour, audit failures (internal and external), aggressiveness
of investment and commercial banks, rating agencies and investors, weak independent
directors and audit committee and whistle blower policy not being effective.

3.11 ABNORMAL FEES PAID TO PwC INDIA AGENT

A point has also been raised about the unjustified increase in audit fees. A reference to the
figures of audit fee in comparison with total income over a period of time may be pertinent.
Table6 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. Here, Bhasin
(2013) remarked, “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.” Another development that came under investigators lens was that
between 2003- 2008, audit fee from Satyam had increased three times. For instance, Satyam’s
auditor’s fee jumped from Rs. 92 lakhs in 2004-05 fiscal to Rs. 1.69 crore the next year. But
it was the financial year 2006-07 when PwC’s auditing fees shot phenomenally to Rs. 4.31
crores.

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TABLE 6: SATYAM’S TOTAL INCOME AND AUDIT FEES
(Rs. IN MILLION)
YEAR 2004-05 2005-06 2006-07 2007-08

TOTAL INCOME (A) 35468 50122.22 64100.80 83944.80

AUDIT FEES (B) 6.537 11.50 36.70 37.30

% OF B TO A 0.0184 0.0229 0.0573 0.0444

The Price Waterhouse received an annual fee of Rs. 37.3 million (or Rs. 4.31 crore)
for financial year 2007-2008, which is almost twice, as what Satyam peers (i.e., TCS,
Infosys, Wipro),on an average, pay their auditors. Consequently, on 24thJan, 2009, two
senior partners of PwC, Mr. S. Gopalakrishna (was due for retirement by March 09) and
Mr. Srinivas Talluri were booked by Andhra Pradesh CID police on charges of fraud and
criminal conspiracy. The PwC has suspended the two partners, who signed on Satyam‟s
balance sheet and are currently in prison. The SFIO report also states that PwC outsourced
the audit function to some audit firm, “Lovelock and Lewis,” without the approval of Satyam.

3.12 THE AFTERMATH OF SATYAM SCANDAL

At its’ peak ‟market-capitalization, Satyam was valued at Rs. 36,600crore in 2008. Following
the shocking disclosure, the traders counter saw frantic selling on the bourses and nearly 143
million shares (or a quarter of the total 575 million shares) had changed hands and finally, the
shares closed down 77.69% at Rs.39.95 at the Bombay Stock Exchange (BSE), wiping out
Rs.139.15 per share in a single day. After Wednesday’s fall, the firm’s market value has sunk
to little more than $500 million from around $7 billion as recently as last June. The stock that
hit its all-time high of Rs. 542 in 2008 crashed to an unimaginable Rs. 6.30 on the day Raju
confessed on January 9, 2009. Satyam’s shares fell to 11.50 rupees on January 10, 2009, their
lowest level since March 1998, compared to a high of Rs. 544 in 2008. In the New York
Stock Exchange, Satyam shares peaked in 2008 at US$ 29.10; by March 2009 they were
trading around US $1.80. Thus, investors lost $2.82 billion in Satyam.

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FIGURE 2: STOCK CHARTING OF SATYAM FROM DECEMBER 2008 TO JANUARY 2009

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 5-15%. The 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.

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 mere Rs. 5,600 crore. 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. On 13 April 2009, via a formal public auction
process, a 46% stake in Satyam was purchased by Mahindra & Mahindra owned company
Tech Mahindra, as part of its diversification strategy. Effective July 2009, Satyam rebranded
its services under the new Mahindra management as Mahindra Satyam. After a delay due to
tax issues, Tech Mahindra announced its merger with Mahindra Satyam on 21 March 2012,
after the board of two companies gave the approval. The companies are merged legally on 25
June 2013.”As Winkler states (2010), “With the right changes, India can minimize the rate
and size of accounting fraud in the Indian capital markets.”

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3.13 INVESTIGATION: CRIMINAL, CIVIL CHARGES AND VICTIM

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. Ramalinga
Raju, his 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) 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. Some of
the main victims, according to Manoharan Report (2011), were:

a) EMPLOYEES of Satyam spent anxious moments and sleep-less nights as they faced
non-payment of salaries, project cancellations, layoffs and equally-bleak prospects of
outside employment opportunities. They were stranded in many ways: morally,
financially, legally, and socially.
b) CLIENTS of Satyam expressed loss of trust and reviewed their contracts, preferring to
go with other competitors. Several global clients like Cisco, Telstra, and World Bank
cancelled their contracts with the Satyam. Customers were shocked and worried about
the project continuity, confidentiality and cost overrun.
c) SHAREHOLDERS lost their valuable investments and there was doubt about revival
of India, as a preferred investment destination. The VC and MD of Mahindra, in a
statement, said that the development had “resulted in incalculable and unjustifiable
damage to Brand India and Brand-IT, in particular”.
d) BANKERS were concerned about recovery of financial and non financial exposure
and recalled facilities.
e) INDIAN GOVERNMENT was worried about the image of the nation and IT sector
affecting faith to invest, or to do business in the country.

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FIGURE3. CHART SHOWS INVESTIGATION OF SATYAM FRAUD CASE

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CHAPTER 4: CONCLUSION & SUGGESTION
The Satyam scam is clearly a glaring example of abuse‟ of accounting in which the account
books were cooked up unethically and illegally. The purpose was to inflate the share price of
the company and sell the promoters holding at inflated price. As a result of this fraud, the
share of the company fell drastically thus, wiping out Rs. 9,376 crores of investors‟ wealth in
just one single day. Moreover, Satyam investigators have uncovered “systemic” insider
trading.. Even to a casual observer of the Satyam fiasco, the enormity of the scandal is a great
eye-opener.

FIGURE 3: FALL OF SHARE PRICE OF SATYAM COMPUTER SERVICES LIMITED

The accounting scam 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. Recently, Mr. Bhasin in his report lucidly pointed out that
“the culture at Satyam (especially dominated by the board) symbolized an unethical
culture.”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 various
core committees. This scam brought to light the role of CG in shaping the protocols related to
the working of Audit Committee and duties of Board members. At last, Tech Mahindra

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purchased 51% of Satyam shares on April 16, 2009, and successfully saving the firm from a
complete collapse. Undoubtedly, the inability of stock analysts to identify the gaps in
Satyam’s books and ring warning bells proved costly for investors.

Now, it is amply clear that the Satyam scam was plotted at the top and driven by
Ramalinga Raju and his brother. They were the key players in the plot to falsify the accounts
and hide the bottom-line truth from everyone. It is also clear that all the culprits—from Raju
down to the finance guys—did everything possible to give SEBI and other investigative
agencies a run-around and delay the verdict. This is what explains, why it took more than
five-and-a-half years to close an open-and-shut-case. It took nearly 2 years, involvement of
multitude of investigation agencies, and over 200 experts to assess the total damage of the
scam perpetrated by Raju. Now, the final figure is a shade under Rs. 8,000 crore. A special
CBI Court in Hyderabad on April 9, 2015 finally, sentenced all the 10 people involved in the
multi-crore accounting scam found guilty of cheating, forgery, destruction of evidence and
criminal breach of trust, almost 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 7 year-jail term for the founder and also imposed on Raju a fine of Rs. 5 crore.
Undoubtedly, the Indian government took quick actions to protect the interest of the
investors, safeguard the credibility of India, and the nation’s image across the world.

SUGGESTIONS
LESSONS LEARNED FROM SATYAM SCAM:
The 2009 Satyam scandal in India highlighted the nefarious potential of an improperly
governed corporate leader. As the fallout continues, and the effects were felt throughout the
global economy, the prevailing hope is that some good can come from the scandal in terms of
lessons learned [35]. Here are some lessons learned from the Satyam Scandal:

a) INVESTIGATE ALL INACCURACIES: The fraud scheme at Satyam started very

small, eventually growing into $276 million white-elephant in the room. Indeed, a lot
of fraud schemes initially start out small, with the perpetrator thinking that small
changes here and there would not make a big difference, and is less likely to be
detected. This sends a message to a lot of com- panies: if your accounts are not
balancing, or if something seems inaccurate (even just a tiny bit), it is worth
investigating. Dividing responsibilities across a team of people makes it easier to
detect irregularities or misappropriated funds.
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b) RUINED REPUTAIONS: Fraud does not just look bad on a company; it looks bad on
the whole industry and a country. “India’s biggest corporate scandal in memory
threatens future foreign investment flows into Asia’s third largest economy and casts a
cloud over growth in its once-booming outsourcing sector. The news sent Indian
equity markets into a tail-spin, with Bombay’s main benchmark index tumbling 7.3%
and the Indian rupee fell”. Now, because of the Satyam scandal, Indian rivals will
come under greater scrutiny by the regulators, investors and customers.
c) CORPORATE GOVERANCE NEEDS TO BE STRONGER: The Satyam case is just
another example supporting the need for stronger Corporate Governance. All public –
companies must be careful when selecting executives and top-level managers. These
are the people who set the tone for the company: if there is corruption at the top, it is
bound to trickle-down. Also, separate the role of CEO and Chairman of the Board.
Splitting up the roles, thus, helps avoid situations like the one at Satyam. The Satyam
Computer Services’ scandal brought to light the importance of ethics and its relevance
to corporate culture. 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.

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BIBLIOGRAPHY
Name of websites used :

a) https://economictimes.indiatimes.com
b) www.academia.edu
c) www.hisdustantimes.com
d) www.wikipedia.org
e) www.livemint.com

REPORTS:
a) Unethical accounting practices in connivance with top management by Madan Lal
Bhasin.
b) Corporate Accounting Fraud by Kavya Bhargawa.

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