‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

INTRODUCTION

Satyam Computer Services, a leading Indian company that served more than a third of the
Fortune 500 companies, while confessing to significantly inflating its earnings and assets for
years, sent the Indian stock markets roiling and throwing the industry into turmoil. The Satyam
scam shockwaves also impacted the entire auditing structure of Indian Corporate world. 1 The
scam has added to a notorious list of companies involved in fraudulent financial activities, one
that includes such names as Enron, WorldCom, Societe General, Parmalat, and includes listed
Indian companies namely Daewoo Motors India, Usha (India) and 16 companies of stock broker
Ketan Parekh. 2 The fraud scandal has adversely impacted stocks and the currency, as the
investors are worried over the damage to foreign investment in Asia‘s third-largest economy and
the once-booming outsourcing sector, a magnet for thousands of young job seekers.3 It has been
a 7,800 crore scam, biggest in Indian corporate history.4 The scam continued for eight years and
involved dual accounting books, more than 7,000 forged invoices, and dozens of fake bank
statements, thousands of unnecessary employees and auditors who received fees several times
the market rate.5

The episode provoked the concerns of several academics and practitioners of corporate
governance.6 The most serious concern is about the system of audits, for example the auditors
appointed by the Satyam are also allegedly made parties in the scam.7 The impact is so darer that
Infosys had to emphasize in a press release certifying its perfect Auditing system.8 The situation

1 See V. Venkateshan, Fraud and the Law Frontline Volume 26 - Issue 03 :: Jan. 31-Feb. 13, 2009, India‘s
National Magazine,The Hindu available at
http://www.hinduonnet.com/fline/fl2603/stories/20090213260301900.htm (last seen on 24 June 24, 2009).
2 See id .
3 See RBI checks exposure to fraud-hit Satyam, The Economic Times,13 Jan , 2009, available at

http://economictimes.indiatimes.com/articleshow/3973416.cms (last seen on 20 June 20, 2009).

4 See CBI to probe Satyam fraud, senior VP told, 16 Feb.,2009, The Finanial Express, available at

http://www.financialexpress.com/news/CBI-to-probe-Satyam-fraud-senior-VP-told-to-quit/424219/ ( last
seen on 20 June 20, 2009)
5 See Report Details Broad Scope of Fraud at Satyam, The New York Times, 22 April, 2009, available at

http://www.nytimes.com/2009/04/23/business/global/23satyam.html (last seen on 20 June 20, 2009).

6 See ―Beyond Satyam: Analyzing Corporate Governance in India‖, 13 Feb., 2009, Indian Corporate Law (A

Blawg containing a Periodic Review of Topics of Interest in Corporate and Business law that Impact India),
available at http://indiacorplaw.blogspot.com/2009/02/beyond-satyam-analyzing-corporate.html (last seen on
20 June 20, 2009).
7 See William m. Hebert, Janet k. Hebert and William M. Hebert Ira v. Satyam Computer Services Ltd.

B. Ramalinga Raju & others., (United States District Court Southern District Of New York), p. 3 available at
http://securities.stanford.edu/1042/SAY_01/200926_o01c_091124.pdf (last seen on 20 June 20, 2009).
8 See Infosys Technologies Limited Press Conference, Q3 FY 2009 Results, 13 January, 2009, p. 14, available at

http://www.infosys.com/investors/reports-filings/quarterly-results/2008-2009/Q3/transcripts/press-
conference.pdf (last seen on 24 June 24, 2009).

Electronic copy available at: http://ssrn.com/abstract=1878507

 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

puts a question about the obligations of Auditor and Company management towards the
shareholders.

To overcome this situation adherence to ISO 9000 can be seen as a solution in the International
market. This would help in restoring customer‘s faith.

DETAILS OF THE SCAM

According to Ramalingam Raju‘s disclosure, the fraud is to the tune of Rs 7,800 crore. 9 The
whole and sole link establishing that there was a scam still continues to be Raju‘s confessional
letter. 10 On December 16, 2008 when Satyam‘s founder and chairman, B. Ramalinga Raju
proposed that the company purchase two unrelated firms that were partially owned by his family,
Satyam‘s board did not hesitate to approve the deal. Shareholders revolted, and the in the
aftermath of the revolt, Mr. Raju admitted that he had been hiding a billion dollar fraud in the
company‘s books.11 Raju on this account stated that the cash pile of 1.6 billion $ in the company
was a non existent one, the property firm would have gotten a worthless check. Satyam on the
other hand would have brought onto its balance sheet 1.6 $ billion of property firm‘s asset just
to fill the hole created by the years of inflated profit. 12 In his letter to his board, Satyam's Raju shows
the markers of this pathology. He states that, ―What started as a marginal gap between actual
operating profit and the one reflected in the books of accounts. It continued to grow over the
years & attained unmanageable proportions as the size of company operations grew.‖13 Satyam‘s
revenue has been overstated for years, and that its real profit for the quarter that ended Sept. 30

9 See Tough to guess size of Satyam scam: SEBI, Indian Express, 21 Jan, 2009, available at
http://www.indianexpress.com/news/tough-to-guess-size-of-satyam-scam-sebi/413545/ ( last seen on 23
June 23, 2009).
10 See P.K.Doraiswamy, Hindsight and Foresight, (Comment: Satya Scam), Industrial Economist, availabl at

http://www.industrialeconomist.com/comment-satyam-mar09.htm ( last seen on 23 June 2009).

11 See Satyam Fraud Can Raise Bar on Corporate Governance -- A guest commentary from the World Council

for Corporate Governance, Corporate Govt. News, available at http://www.corpgov.net/news/2009/jan.html

(last seen on 23 Jan, 2009).
12See T.T.Ram Mohan, India‘s Enron: Auditor‘s to go AWOL at Satyam, available at

http://www.forbes.com/2009/01/08/satyam-raju-auditors-oped-cx_rm_0108mohan.html (last seen on 23

June 2009).
13 See Heather Timmons, Financial Scandal at Outsourcing Company Rattles a Developing Country, 7 Jan,

2009, The New York Times, available at

http://www.nytimes.com/2009/01/08/business/worldbusiness/08outsource.html?_r=1 (last seen on 23 June
2009).

Electronic copy available at: http://ssrn.com/abstract=1878507

 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

was only $12.5 million rather than the $136 million the company reported. 14 Mr. Raju, in other
words, had been cooking the books.15He stated in the letter16: Later, he describes the process as
"like riding a tiger, not knowing how to get off without being eaten."

The gap in the balance sheet has arisen on account of inflated profits over several years.

Also the company was making up more than 10,000 employees to siphon money from the
software company and using his elderly mother‘s name to buy benami land with the money.17

ROLE OF AUDITOR IN THE SCAM

There is little settled theory or evidence on which to build an assessment of the advantages and
disadvantages of uniform accounting rules within a country, let alone internationally. The pros
and cons of the same therefore are somewhat conjectural, the unbridled enthusiasm of allegedly
altruistic proponents. Now the question is in with regard to auditor‘s role in the scam. The image
of Satyam‘s statutory auditors, PricewaterhouseCoopers‘ has been tarnished. 18 The Chartered
accountants body, ICAI issued show cause notice to auditor Price Waterhouse.19 Before going
into whether the fault was on part of the Auditing house it would be important to first see the
responsibilities of a statutory Auditor.

The auditor is supposed to report to the beneficiaries20 of the company about the balance sheet
and profit and loss account on the basis of their assessment.21 This responsibility extends to
giving their honest opinion about the Financial Position of the Company and that all the

14 See Joe Nocera, In India, Crisis Pairs With Fraud, The NewYork Times, 9 Jan., 2009, available at
http://www.nytimes.com/2009/01/10/business/10nocera.html (last seen on 23 June, 2009).
15See Rama Lakshmi, Indian Outsourcing Giant Admits Fraud Company Reported ‗Fictitious Assets‘ for Years,

The Washington Post, 8 Jan, 2009, available at http://www.washingtonpost.com/wp-

dyn/content/article/2009/01/07/AR2009010703702.html ( last seen on 23 June 2009).
16 See Satyam fraud: Full text of Raju‘s letter to board, The Financial Express, available at

http://www.financialexpress.com/news/satyam-fraud-full-text-of-rajus-letter-to-board/407799/ ( last seen on

23 June 23, 2009).
17 See Heather Timmons, Prosecutor says head of Satyam faked jobs, 2 Feb., 2009, The New York Times,

available at http://www.nytimes.com/2009/01/22/business/worldbusiness/22iht-outsource.1.19587670.html
(last seen on 24 June 24, 2009).
18 See Satyam fraud puts auditors‘ role under scanner, 7 Jan,2009, available at

http://economictimes.indiatimes.com/Satyam_fraud_puts_auditors_role_under_scanner/articleshow/394823
7.cms ( last seen on 24 June, 2009).
19 SeePwC Did Not Find Any Fraud In Satyam‘s Account, available at http://satyamscam.in/2009/01/pwc-

did-not-find-any-fraud-in-satyams-account/ (last seen on 23 June 24, 2009).

20 See Caparo Industries Plc. vs Dickman, (1990) BCLC 273.
21 See § 227 of The Companies Act, 1956.
 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

accounts are being prepared according to the accounting standards and procedures prescribed by
the ICAI.22 Such an opinion must have proper reasons of qualifying it.23 For this purpose the
Auditors have wide powers to enquire invariably any official of the company. They can even
participate in any of the meetings or can ask for meeting minutes.

Failure of an auditor to report a known material in the financial statement shall be deemed to be
‗professional misconduct‘.24The auditor needs to report the same to a third party without the
consent and knowledge of the management, when he suspects that the management may be
involved.25

Any slackness in performance would make the auditors to face criminal consequences.26

PwC have been the auditors of Satyam since 1991.27 Satyam was hit with scam during this period.
There are certain facts which raise fingers against PwC. Sources close to Raju also blame PwC. ―If the
auditors had been more vigilant or honest, maybe we would not be where we are today.‖28

Satyam paid its auditor close to four times the fees other IT giants were paid theirs. 29 This may
be taken as the value which they accepted for not performing their job. The scam started 5-6 years
ago with adjustment of Rs 10 crore, inflated to Rs 200 crore. 30 The auditors were supposed to have
checked, verified cash balances, bank statements, assets with relevant confirmations. 31 There are
some facts which suggest the said professional negligence of the Auditors:

22 See Institute of Chartered Accountants v. P.K Mukherjee , also see CIT v. Dandekar
23 See § 227(4) of The Companies Act, 1956.
24 See Clause (6) Part I, Second Schedule of the Chartered Accountants Act, 1949
25 See Sasea Finance Ltd v. KPMG (2000) 1 BCLC 236.
26 See § 628 of The Company Act, 1956.
27 See Satyam‘s auditing as per standards: PwC, available at http://www.zeenews.com/news497202.html (last

seen on 24 June, 2009).

28 See Anjuli Bhargava, PW‘s Moral Dilemma, Will the auditing firm stand up for its troubled partners?, 3 April,

2009, Bussiness World, available at http://www.businessworld.in/index.php/Corporate/PWs-Moral-

Dilemma.html (last seen on 23 June 24, 2009).
29 See id.
30 See Satyam scam started with adjustment of Rs 10cr‘, 7 April, 2009, The Financial Express,

http://www.financialexpress.com/news/satyam-scam-started-with-adjustment-of-rs-10cr/444123/ ( last seen

on 24 June 24, 2009).
31 See Rajendra K. Aneja, The Satyam Scandal Explained: How the Ripple Effects of India‘s Enron have

Reached HBS, The Harbus, available at

http://media.www.harbus.org/media/storage/paper343/news/2009/02/17/News/The-
Satyam.Scandal.Explained-3633696.shtml (last seen on 24 June 24, 2009).
 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

1. The holdings of Raju saw subsequent decrease from 15% in 2005-06 to 8% in

September 2008 to 2 % with no one to notice.32
2. In 2006, transferring of the shares to his family‘s company, SRSR Holdings Pvt. Ltd.
from which he took out loan using his shares as collateral went unnoticed.33
3. The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of
last several years.34
4. The Company manages to acquire a loan of Rs.1230 Cr. without proper disclosures.35
5. The auditors have to maintain an independent bank confirmation as bank statement with
all bank certificates on the tax deducted on the interest accruing on the fixed deposits.36
If they did this then how come they could not see that the massive growth in fixed
deposits being shown were all fake.
In the Satyam case, the auditors ―relied upon forged bank confirmation letters supplied by the
other accused while conducting the statutory audit‖ and also failed to verify the company‘s
current account balances online whereas in the case of Infotech Enterprises, the same auditors
had obtained direct confirmation on the requisite pro-forma from the bankers and also reviewed
online the current account balances of the firm. The ―blatant deviations‖ adopted by the auditors
for Satyam accounts, showed their ―underlying conspiracy‖ with the other accused in the
accounting fraud.

All these indicate towards one fact that the auditors did not perform their duty with all diligence.
In such a situation need is to go for better and more trusted system of auditing.

The Auditing Profession37

The Indian auditing profession is highly fragmented. It would benefit from some consolidation as well as an independent
audit regulator

Like other markets around the world, India has suffered its fair share of accounting frauds over the
years (see box next page), with the Satyam case being only the largest and most egregious. Not
surprisingly, these frauds have made investors question not only the integrity of company accounts,
but the quality of the audit profession itself.

32 See Business Line, 3 January, 2009.

33 See Ajay Shah, Getting the Right Architecture for Corporate Governance, Financial Express, Jan. 13, 2009.
34 See letter by Raju
35 See Letter by Raju.
36 See Satyam Bank Documents at Issue, The Wall Street Journal, Jan. 21, 2009, available at

http://online.wsj.com/article/SB123240265378295353.html?mod=wsjcrmain (last seen on 25 June , 2009).

37 See ACGA White Paper on Corporate Governance in India, pg 42
 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

Audit firms need more depth

India has a surfeit of audit and accounting firms, but most are sole practitioners or have less than 10
partners. According to a 2008 questionnaire27 by Institute of Chartered Accountants of India
(ICAI), ―there is no hard core definition of a small and medium practitioner‖. However, in the
context of a market like India, a small firm would typically be seen as one having less than five
partners and would have a smaller number of employees and gross receipts of about Rs5m (US$
111,000), although these numbers may vary depending upon the demographic profile of the firm. An
auditor told ACGA that while there were no reliable sources as to how many small accounting and
auditing firms there were in India, it was safe to say that the number ranged between 90-95% of all
firms in India.

Surprisingly, even some large companies, including PSUs (public sector undertakings28)—a number
of which are listed on exchanges outside India and are Fortune 500 companies—are audited by these
small firms. It is doubtful whether smaller firms have the geographical reach and depth of knowledge
to handle the accounts of companies that are becoming increasingly global. It is also unlikely that
they would be able to scrutinise the internal controls and risk management processes of their clients
as thoroughly as they should.

As one accountant explained, smaller firms end up doing a ―tremendous amount of vouching,
looking at each transaction‖. He added that they would probably be horrified at how the bigger audit
firms do things, for ―we do comparatively little transaction vouching‖. Instead, the bigger firms ―test
the overall controls and document processes, and rely on IT tools to detect errors. We focus our
audits on looking at the IT systems, making sure that the controls and checks and balances are spot
on, and satisfying ourselves that nothing can slip through the cracks. Then you have to test a handful
of transactions, for the way IT systems work is if those are correct, then every one will be correct,
generally.‖

An independent regulatory body?38

ICAI is a self-regulatory body established under the Chartered Accountants Act, 1949 to regulate the
auditing profession in India. As it is an industry body, however, it is not independent from the
profession that it regulates. This is why India, for example, is not a member of the International
Forum of Independent Auditor Regulators (IFIAR)*, a network of independent regulatory bodies

38 Ibid.
 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

from North America, Europe, Asia-Pacific, the Middle East, South America and other parts of the
world. It is also why many Indian auditors believe that while ICAI should continue to provide
educational courses for accountants and auditors (which the Institute is seen as doing well), its
regulatory powers should be transferred to an independent body (as it is not seen as an effective and
independent regulator). Auditors feel that India is being left behind in terms of the quality of its audit
regulatory system.

Although there have been moves in recent years to create a more independent audit regulator in
India, the results have been less than impressive. In 2007, the Ministry of Corporate Affairs (MCA)
constituted the ICAI Quality Review Board (QRB), which was intended to set standards for services
provided by the Institute‘s members, review the quality of the services provided by them and ensure
they adhered to the various statutory and other regulatory requirements.

An independent audit regulator would not only bring India closer to international norms in this area,
but it could help to find solutions to a host of problems that audit firms face. It is a common
practice, for example, for auditors not to independently verify the bank statements of client
companies, but instead to rely on bank account information provided by clients.

SEBI policy reform39

Regulators in India have begun thinking about issues relating to audit quality and independence over
the past year. For example, in a discussion (consultation) paper SEBI released on September 14, 2009
on proposed changes to the Listing Agreement, one of the reforms suggested was the rotation of
either audit firms or audit partners as a way to enhance their independence from clients.

SEBI felt that the independence of auditors should be reviewed because, as it said in its discussion
paper:

―The quality of financials reported by companies and the true and fair view of the financial
statements submitted by listed entities to the stock exchanges has, of late, come into sharp focus.‖

It argued that while auditors were technically appointed by shareholders at annual meetings, ―in
practice, the shareholders merely approve a set of names that are proposed/nominated by the Board
of Directors and the promoters, who may be a part of the Board‖. Moreover, the ―Board of

39 See ACGA White Paper on Corporate Governance in India, pg45

 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

Directors and the promoters may ensure that the firm they wish to appoint is approved in the
meeting, in view of the sheer strength of their voting powers‖.

SEBI asked the Standing Committee on Disclosures and Accounting Standards (SCODA), a
committee that advises SEBI on financial and accounting policy, to consider whether there was a
need to set new rules on the mandatory rotation of audit firms or the mandatory rotation of the
partners of an audit firm.

SCODA concluded that the ―mandatory rotation of (audit) firms may not be practical by all (listed)
companies‖ and recommended that:

• ―SEBI may mandate that the partner of the audit firm signing the audited accounts of a listed
entity be mandatorily rotated every five years.‖

And:

• ―The Audit Committee shall be responsible for ensuring independence of the audit firm and its
partners.‖33

SCODA said that the aim of these recommendations was to ensure that external auditors were
independent from management and to break any long-term association between audit partners and
the management of listed entities.

SCANDLES AT INTERNATIONAL PLATFORM

Senior Enron and ENA commercial and accounting managers frequently generated earnings needed
to meet budget targets by artificially increasing the book value of certain of these assets , many
of which were volatile or poorly performing. Likewise, to avoid recording losses on these assets,
Enron's management fraudulently locked-in these assets' value in improper "hedging" structures.
 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

Boosted profits and hid debts totaling over $1 billion by improperly using off-the-books
partnerships; manipulated the Texas power market; bribed foreign governments to win contracts
abroad; manipulated California energy market

WorldCom was one of the big success stories of the 1990s. It was a symbol aggressive capitalism.
Founded by Bernie Embers, one of the most aggressive acquirer during the US mergers and
acquisitions boom of the 1990s. WorldCom's asset value had soared to $180bn before the US capital
market started witnessing a downtrend.

Overstated cash flow by booking $3.8 billion in operating expenses as capital expenses;

Gave founder Bernard Ebbers $400 million in off-the-books loans.

The company found another $3.3 billion in improperly booked funds, taking the total misstatement
to $7.2 billion, and it may have to take a goodwill charge of $50 billion.

Ex-CEO L. Dennis Kozlowski indicted for tax evasion. SEC investigating whether the company was
aware of his actions, possible improper use of company funds and related-party transactions, as well
as improper merger accounting practices

Said it will not certify its financial results until after an internal investigation is completed. The
Bermuda-based company is not required to meet the SEC's Aug. 14 deadline. Investors looking to
unseat all board members who served under Kozlowski may launch a proxy fight to do so.

PROPOSED REMEDIES AND INTERNATIONAL TREND

The corporate sector allover the world at different point of times have witnessed crisis that have
turmoiled the entire corporate regulation system into no more than myth.

To regulate such discrepancies at all levels through out the world initiatives was taken at different
levels. One such may be realized as to be the Sarbanes-Oxley Act of 200240 (SOX) provided for a
new set of corporate governance rules and regulations for public companies. Two provisions, (1)
―Corporate Responsibility for Financial Reports‖ 41 and (2) ―Management Assessment of Internal
Controls‖42; specifically address internal controls over financial reporting. The Sarbanes-Oxley Act is

40 See Sarbanes-Oxley Act of 2002 - http://www.sec.gov/about/laws/soa2002.pdf

41 See Section 302 of Sarbanes-Oxley Act of 2002.
42 See Section 404 of Sarbanes-Oxley Act of 2002.
 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

high-level and only addresses such requirements as corporate officers ―are responsible for
establishing and maintaining internal controls‖ and are required to periodically assess and report on
the effectiveness of such internal controls. There are no details on what are effective internal controls
and to what extent internal controls are required for ―financial reporting‖. The Securities and
Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) are
required by the Act to develop the final rules regarding compliance for the establishment,
maintenance, and assessment of internal controls over ―financial reporting‖.

Section 302 requires the Chief Executive Officer and Chief Financial Officer on a quarterly or annual
basis to have ―designed internal controls‖ over financial reporting, ―evaluated the effectiveness‖ of
internal controls, and reported to the Audit Committee and external auditors ―all significant
deficiencies in the design or operation of internal controls which could adversely affect the ability to
record, process, summarize, and report financial data and have identified for the [external] auditors
any material weaknesses in the internal controls‖ and to report ―any fraud‖.

Section 404 requires a corporation‘s annual report to contain an internal control report that states
―the responsibility of management for establishing and maintaining an adequate internal control
structure and procedures for financial reporting‖ and that management has performed ―an
assessment of the effectiveness of the internal control structure and procedures for financial
reporting.‖ In addition, the external auditor must independently assess the corporation‘s internal
control report.

So after looking at the Sarbanes-Oxley Act, you have only learned that ―internal controls‖ are
required for ―financial reporting‖ and that the ―internal controls‖ must be assessed on an annual
basis. The SEC and PCAOB are responsible for implementing the actual rules. The SEC final rules
require corporations to use a recognized internal control framework and specifically reference the
Sponsoring Organizations of the Tread way Commission (COSO) internal control framework. We
are finally getting somewhere – a framework and usually frameworks are good things.

Sarbanes-Oxley Act of 2002, SEC Rules, PCAOB43 Standards, COSO44 Framework, COBIT45, and
SEC46 define Rules for Corporations PCAOB. Define Standards for Auditors Suggests COSO.

43 The Public Company Accounting Oversight Board created by Sarbanes-Oxley Act of 2002.
 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

COSO provides a comprehensive framework for defining and evaluating internal controls, but only
addresses IT controls in a very general manner and does not provide any specific requirements for IT
control objectives or activities. IT general controls are defined as ―Policies and procedures that help
ensure the continued, proper operations of computer information systems. They include controls
over data-center operations, systems software acquisition and maintenance, access security, and
application system development and maintenance. General controls support the functioning of
programmed application controls. Other terms sometimes used to describe general controls are
general computer controls and information technology controls.‖ COSO identifies five essential
components of effective internal control – (1) control environment, (2) risk assessment, (3) control
activities, (4) information and communication, and (5) monitoring.

Summary of major Section of SOX

Summary of Section 302

• Sarbanes Oxley Section 302 addresses all financial information disclosed to investors
including MD&A in the 10Q and 10K.
Under SOX Section 302, CEO and CFO must:

• Certify quarter and annual financial statements and other published financial information are
fairly presented; no untrue facts or omissions
• Establish and maintain disclosure controls and procedures as of period end and for
disclosing material changes in internal control
• Disclose to auditors and Audit Committee if control deficiencies, material weaknesses, or
fraud exist.
Summary of Section 401

• Financial statements are published by issuers are required to be accurate and presented in a
manner that does not contain incorrect statements or admit to state material information.
These financial statements shall also include all material off-balance sheet liabilities,
obligations or transactions. The Commission was required to study and report on the extent
of off-balance transactions resulting transparent reporting. The Commission is also required
to determine whether generally accepted accounting principals or other regulations result in
open and meaningful reporting by issuers.

44 Committee of Sponsoring Organizations created by Sarbanes-Oxley Act of 2002.

45 Control Objectives for Information and related Technology (COBIT), 1996.
46 U.S. Securities and Exchange Commission.
 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

Summary of Section 404

• Section 404 is a subset of Section 302 and addresses Financial Statement Reporting controls
Under 404, CEO and CFO must:

• Issue Internal Control Report in 2004 Company Annual Report

• Certify Quarterly as to effectiveness of Internal Controls over Financial Reporting beginning
2005
The Accounting Firm must:

• Issue two opinions on internal controls over financial reporting in Company 2004 Annual
Report: (1) Management's assessment process and (2) effectiveness of controls.
Summary of Section 409

• Issuers are required to disclose to the public, on an urgent basis, information on material
changes in their financial condition or operations. These disclosures are to be presented in
terms that are easy to understand supported by trend and qualitative information of graphic
presentations as appropriate.

Summary of Section 802

• This section imposes penalties of fines and/or up to 20 years imprisonment for altering,
destroying, mutilating, concealing, falsifying records, documents or tangible objects with the
intent to obstruct, impede or influence a legal investigation. This section also imposes
penalties of fines and/or imprisonment up to 10 years on any accountant who knowingly
and willfully violates the requirements of maintenance of all audit or review papers for a
period of 5 years

Summary of Section 906

• Section 906 addresses criminal penalties for certifying a misleading or fraudulent report.
Under Sarbanes Oxley 906 penalties are:
• Up to $5 Million in fines
• Up to 20 years in jail
 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

• Other sections of SOX provide additional authority to regulatory bodies and courts relating
to fines or imprisonment for matters involving corporate fraud.

Summary of Section 1107

Criminal penalties for retaliation against whistleblowers

• Whoever knowingly, with the intent to retaliate, takes any action harmful to any person,
including interference with the lawful employment or livelihood of any person, for providing
to a law enforcement officer any truthful information relating to the commission or possible
commission of any federal offense, shall be fined under this title, imprisoned not more than
10 years, or both?

This summarization thus enables us to trace few paths which Indian security Regulators can
mandatorily adopt after Satyam fiasco:-

• The principle that shareholders own our corporations and that corporate managers should
be working on behalf of shareholders to allocate business resources to their optimum use.
• It advocates improved investor confidence and more accurate, reliable financial statements.
The CEO and CFO are now required to unequivocally take ownership for their financial
statements, which was not the case prior to SOX.
• Further, auditor conflicts of interest have been addressed.
• To restore trust in Indian markets by increasing accountability, speeding up reporting, and
making audits more independent.
• To improve investor confidence in financial reporting, Improvements in board, audit
committee, and senior management engagement in financial reporting and improvements in
financial controls may turn around the sitiation.
• Financial restatements would increase significantly in the wake of the such provision.
OTHER INTERNATIONAL INSTITUTIONAL SET UP

At international level IASB Framework was developed. It was formed in January 2001, the ISAB
replaced its predecessor, the International Accounting Standards Committee (IASC), as the
international standards setting body. Looking towards greater formalization of international
accounting standards, IASB is structured similarly to the FASB. It is currently the focus of the IASB,
 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

in collaboration with the FASB and other accounting focused organizations, to "converged"
standards and develops a single, universally accepted set of biding international accounting standards.
The IASC, and now IASB, issue a series of standards known as International Financial Reporting
Standards (IFRS), formerly called International Accounting Standards the International Accounting
Standards Board is an independent, private-sector body that develops and approves International
Financial Reporting Standards. The IASB operates under the oversight of the International
Accounting Standards Committee Foundation. The IASB was formed in 2001 to replace the
International Accounting Standards Committee.

It serves as a guide to resolving accounting issues that are not addressed directly in a standard.
Moreover, in the absence of a standard or an interpretation that specifically applies to a transaction,
IASB requires that an entity must use its judgment in developing and applying an accounting policy
that results in information that is relevant and reliable. In making that judgment, IASB requires
management to consider the definitions, recognition criteria and measurement concepts for assets,
liabilities, income, and expenses in the Framework. The IASB adopted the Framework in April 2001.
It had originally been adopted by the IASC in 1989. Currently, the IASB is working on a Project to
Revise the Framework.

Other initiatives which actually dealt with the issue was the FASB. It has been the organization
designated to establish authoritative financial accounting and reporting standards (Statements of
Financial Accounting Standards, SFAS) for business and other private-sector entities. Its mission is
to be responsive to the entire economic community and to operate in full view of the entire
community through a due-process system.

Yet another international organization which dealt with the crisis was International Financial
Reporting Standards and its functionality.

The term International Financial Reporting Standards (IFRSs) has both a narrow and a broad
meaning. Narrowly, IFRSs refers to the new numbered series of pronouncements that the IASB is
issuing, as distinct from the International Accounting Standards (IASs) series issued by its
predecessor. More broadly, IFRSs refers to the entire body of IASB pronouncements, including
standards and interpretations approved by the IASB and IASs and SIC interpretations approved by
the predecessor International Accounting Standards Committee.
 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

[On this website, consistent with IASB policy, we abbreviate International Financial

Reporting Standards (plural) as IFRSs and International Accounting Standards (plural) as IASs]

As of now, 102 countries have either adopted or are converging to IFRS, including Australia, New
Zealand, Pakistan, Singapore, China, West Asia, Japan, Africa and countries in the European Union
(EU). Now, the ICAI, India‘s premier accounting body, has decided to adopt IFRS with effect from
April 1, 2011, for public limited companies and will be extended to other entities in a phased manner.
The numerous union statuses to IFRS came about after the EU made IFRS mandatory for all its
listed companies starting 2005. Consequently, more than 8,000 EU-listed companies adopted IFRS in
one go. In the USA, the Securities and Exchange Commission (SEC, akin to our SEBI) is proposing
to eliminate, for IFRS foreign filers, the reconciliation requirement to US GAAP. In April 2007, SEC
lined up proposals to allow companies listed in the US to choose between IFRS or US GAAP for
reporting purposes to make a choice from 2009.

BENEFITS OF INTERNATIONAL FINANCIAL REPORTING STANDARDS

Immediate benefits of convergence are comparability of financial statements, portability of

professional skills across countries, ease of Mergers & Acquisitions process, and doing away with the
need to translate to different accounting norms. There are several more benefits with the
convergence of the IAS with the IFRS. They are:

• This will greatly bolster the ability of Indian companies to raise and attract foreign capital at low
cost

• Once Indian companies adopt IFRS, the global acceptability of them will be enhanced

• The adoption of IFRS is expected to increase transparency of financial statements

• Indian companies will be able to save on costs concomitant with reconciliation procedures

• The risk of being exposed to errors in reporting under different accounting frameworks for Indian
multi-national companies will be eliminated
 ‘SATYAM FIASCO -LESSONS FOR CORPORATE LEGISLATION’

CONCLUSION

While concluding, it would be of tremendous importance to note that while most of the developed
nations have seen the scams47 of the magnitude as vast as the Satyam scam before

adopting an improved and more preventive corporate system that would detect such a scam all at its
infancy.48 This evident the fact that India is also going through such a phase and soon everything
would be alright with India having a sound corporate infrastructure. 49 But before that, all that we
should understand that we are a still a way behind that situation. So we need an intermediary to take
care of the present situation. The Sarbanes-Oxley Act of 2002 (SOX) is the public company
accounting reform and investor protection act signed into law relates to involvement in corporate
and accounting scandals. These widely published corporate debacles, including those affecting
Enron, WorldCom and Tyco cost investors billions of dollars when the share prices of the affected
companies collapsed. In affect, investor confidence in the securities markets hit rock bottom.

THE INSTITUTE of Chartered Accountants of India (ICAI), Securities and Exchange Board of
India (SEBI), the Ministry of Finance and the Ministry of Corporate Affairs has to immediately step
in to investigate the affairs of Satyam Computers thoroughly. There is a need to bring to book the
auditors concerned who have vouched for the balance sheet. The auditors cannot hide under the
standard clause ‗auditors can be watchdogs and not blood-hounds‘ especially when cash and bank
balances have been overstated.

This would be just be effective in restoring faith of International market to restore good name of
India50 and that how particular are we about our integrity in uplifting the corporate culture to heights.

47 See Richard D. Hartely, Corporate Crime : A Reference Book, Oxford(England)

48 See Dr. Madhav Mehra, Satyam Fraud Can Raise Bar on Corporate Governance -- A guest commentary from
the World Council for Corporate Governance, Corporate Governance News: January 2009, available at
www.corpgov.net/news/2009/jan.html (last seen on 27 June, 2009).
49 See Corporate Hidglights and Governance, available at

http://www.epwrf.res.in/upload/MER/mer10903008.pdf ( last seen on 27 June 27, 2009).

50 World Bank has denied giving any work order to Indian outsourcing Companies because they engaged in

corrupt or questionable practices