ENRON AND SATYAM: DIFFERENCES AND SIMILARITIES

The 2009 Satyam scam and 2001 Enron scam are sometimes compared side by side and
are often used as prominent examples of failures of large-scale corporate governance. The
common link between the two scams was the conduct of shady activities carried out with the
help of fraudulent accounting methods. There was a lot of similarity in how the internal
activities of the two companies were governed by the Board of Directors as well as the
auditing firms of these two companies as they did not adhere to their duties responsibly. The
Board of Directors signed off on shady techniques to be practiced in the company and the
auditors overlooked the misses and gaps in the books of accounts. They were liable to a
huge extent for the incidents in both the cases as they managed to bend the law and take
advantage of the loopholes in the system.
The Enron Debacle took place in the US in 2001 wherein Enron Corporation declared
bankruptcy. Enron Corporation, an energy company established in 1985 gained
unimaginable popularity in the sector. The company collapsed as soon as it had risen when
the burden became too big to maintain. Enron used a technique called mark to Market
technique wherein they recorded any asset or investment at market or the projected value
and not at the real value. Enron also created 3000 partnerships which were working almost
on Enron’s stock to hide the loss-making assets of Enron, hence, created a network of
hedging agreements. These companies were basically run by Enron personnel only.
However, it was later found out that most of the profits were cooked up and not actually
earned using fraudulent accounting activities. It drowned in its own lies. The employees of
the company indulged in insider trading and sell their stock just before the company filed for
bankruptcy. Later on, it announced a loss of $544 million and the price of Enron stock from
$90 to 26 cents.
On the other hand, the Satyam Scam often referred to as India’s Enron took place in 2009.
The IT company founded by Ramalinga Raju in 1987. It rose to fame very quickly just as
Enron and similarly, die to the same discrepancies and irregularities amounting to more than
Rs.7000 crores, it collapsed just as soon. In Satyam’s case, ait was found out that the
company inflated its balance sheet by $1.47 billion showing increased assets and revenues
and decreased liabilities and losses. Mr. Ramalinga Raju used the revenue made by the
company to buy land in the hope to sell it later at a profit. But the decline in the real estate
market left a big hole in the profits of the company which made the cooked-up numbers very
apparent.
Not just that, he created fake bills and accounts using a special software. He inflated the
number of employees working in the company by 13,000 as well and added thousands of
crores to human resources value. Moreover, 356 companies to siphon off money from
Satyam were created. The fraud was detected when Satyam expressed an interest in buying
51% of Maytas Infrastructure and 100% of Maytas Properties, which were both owned by the
family members of Mr. Raju. Various suits were filed by the shareholders protesting these
acquisitions which led to unfolding of irregularities in the company.
The Board allowed shady partnerships between Enron and the companies created without
any proper monitoring or supervision. The directors themselves received hefty salaries which
might have had a sway in their loyalties in the favour of Skilling and Fastow. The auditing
firm, Arthur Anderson LLP allowed Enron to continue its malpractices due to which the
stakeholders did not question the financial dealings. An auditing firm is supposed to act as a
public watchdog but Anderson failed in its duties to protect the interest of the investors.
Satyam had a diverse and quite vibrant BoD including professors, inventors, politicians.
However, once the fraud came to light, all the independent directors resigned stating no prior
knowledge in the matter but that wasn’t necessarily true since the Maytas deal was
authorised by the BoD. Satyam’s auditing firm, PwC similar to Anderson did not do anything
to control the illegal activities betraying the trust of the shareholders and was ultimately
found guilty by SEBI.
CONCLUSION
In both the cases, the BoD and the auditing firms fail to adhere to their responsibilities which
led to a loss of millions of dollars to the shareholders. The techniques used by the
companies to commit fraud were different but the outcome and the legal and ethical
consequences were more or less the same. Both were the results of excessive greed.
Fudging the numbers, showing increased assets and revenues and decreased liabilities and
losses was something that both the companies practiced. The practices by these companies
are grave examples of poor corporate governance where both the legal and ethical
boundaries were played with. It kept the shareholders in the dark about the true value of the
company and they ended up losing billions.
Not just the shareholders, thousands of employees lost their jobs and pensions, investors
lost a lot of money. Both the conspirators, Andrew Fastow and Ramalinga Raju were
arrested and charged with criminal conspiracy.
However, due to such scandals, the corporate governance regulations in India and US have
seen a lot of reforms in order to avoid loopholes and to better protect the interests of
investors, employees, shareholders and other stakeholders.

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