Corporate Accounting Fraud: A Case Study of

Satyam Computers Limited

BY VIDUSHI PURI
(BENNETT UNIVERSITY)
CORPORATE ACCOUNTING FRAUD: A CASE STUDY OF SATYAM
COMPUTERS LIMITED

OBJECTIVE OF STUDY:

In order to further elucidate on the subject of corporate accounting fraud, this article will
investigate a case study of Satyam Computers Limited. To back up our results, we'll look at a
variety of case examples. The researchers examined several books and articles to critically
examine the consequences of corporate governance in order to figure out why the government's
efforts to discover Satyam Computer Services Ltd.’s financial fraud were ineffective.

RESEARCH METHODOLOGY:

The primary goal of this study is to draw lessons from Satyam Computer's financial crisis in
terms of corporate governance issues, hence secondary data is mostly used to support the
research. Satyam Computers' Financial Reports for the Financial Year 2008-09, as well as their
quarterly results for Quarter 1 and Quarter 2 of the financial year 2009-10, were a primary source
of financial data for the study. Numerous articles from various magazines and newspapers were
also evaluated as part of the research.

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 INDEX

S.NO. PAGE NO.

1. Introduction ……………………………………………………………..

2. Company’s Summary……………………………………………………

3. How did fraud happen…………………………………………………...

4. Victims of Fraud……………………..………………………………….

5. Auditor’s role and Factors contributing to fraud………………………...

6. SEBI’S Judgement…………...…………………………………………

7. Failure of Corporate Governance………………………….…………..

8. Consequences faced by Corporate Governance………………………..

9. Conclusion………………………………………………………………

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10. Bibliography……………………………………………………………

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 ABSTRACT

Scandals, such as those involving Enron and Satyam Computer's "creative-accounting" scam, are
frequently the "obvious" failings of corporations. India's Enron and Satyam Computer are
examined in depth in this article. The rising prevalence and severity of corporate accounting
fraud in India is a big concern. The corporate governance structure in India has been severely
harmed by this affair. Indeed, research has indicated that an increasing number of frauds have
harmed the integrity of financial statements, caused significant financial losses, and destroyed
investors' trust in the usefulness and trustworthiness of financial statements.

With white-collar crime on the rise, it's critical that laws are efficiently enforced with strong
penalties, exemplary punishments, and the right spirit. This form of 'creative' accounting is
becoming more common in public firms, prompting regulatory probes. Corporate accounting
fraud is on the rise, and it's becoming more serious.

In 2009, the founders of Satyam committed fraud, illustrating that human greed, ambition, and
the desire for money, fame, and power may have a significant impact on 'the science of conduct.'
Satyam was pushed to its knees by the tunnelling effect, not by agency difficulties as was the
case with Enron. In emerging markets, the Satyam affair demonstrates the relevance of market
legislation and corporate governance. In reality, the fraud forced India's government to
strengthen its CG regulations in order to prevent future frauds. As a result, big financial reporting
frauds must be analysed for lessons gained and solutions for avoiding future fraud instances.

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HOW DID THE FRAUD HAPPEN?

The scam began in 1999, when Satyam decided to boost its annual growth by tampering with
financial documents, according to the Central Bureau of Investigation (CBI). The goal of
tampering with financial documents was to increase the company's profits. To begin with, the
chairman intended to keep the stock price of the firm high on the different stock exchanges
where it was traded. A healthy company has a high share price. The goal was to boost the
company's investor confidence. Raju raised the company's market capitalization before courting
new investors.

In October 2009, the World Bank imposed an eight-year ban on Satyam after it was discovered
that it had installed eavesdropping systems on its computers and had stolen assets. Satyam's
Chairman Ramalinga Raju said in December 2008 that the company would buy two non-IT
enterprises, Maytas Properties and Maytas Infrastructure. Raju's family owned a greater
investment in Maytas Properties and Mayras Infrastructure than it did in Satyam, which
prompted shareholder backlash from those who perceived it as an attempt to syphon money from
Satyam for his family.

After Forrester Research analysts recommended clients to stop doing business with Satyam, the
company recruited Merrill Lynch to advise it on how to improve shareholder value. Merrill
Lynch informed the stock market on January 7 that it was terminating its representation of
Satyam due to serious accounting problems that Merrill Lynch discovered during its
representation. Mr. Raju revealed the deception within hours after receiving that letter.

Satyam inflated its assets on its financial sheet by $1.47 billion, according to Raju, with about
$1.04 billion in bank loans and cash that the business claimed to control being nonexistent.
According to Raju, Satyam also had unreported obligations. Satyam inflated earnings almost
every quarter for several years to match analyst expectations. Satyam's earnings were overstated
over time due to falsified bank statements and unrealized bank account differences.

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By reporting interest income from the fictitious bank accounts, the income statement was
exaggerated. After the corporation deposited the payments, fake salary accounts were formed,
and the money in them was appropriated. Phony client identities were constructed, fake invoices
were prepared in their names to inflate revenue, falsified board resolutions were forged, and
unlawful loans were secured for the company by the company's worldwide head of internal audit.
It also looked that the funds obtained in the United States via American Depository Receipts
(ADRs) never made it to the balance sheets.

Following the exposure of the fraud, the government took control of the corporation and initiated
an inquiry into the issue. The Raju brothers were charged with forgery, deceit, fraud conspiracy,

and breach of trust.

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VICTIMS OF FRAUD

1) Satyam's employees experienced sleepless nights and restless minutes dealing with non-
payment of compensation rates, venture scratch-offs, layoffs, and other similarly grim job
prospects. They were stuck from a variety of perspectives — ethically, fiscally, legally,
and socially.

2) Satyam clients reported a loss of faith in the company and looked into their contracts,
intending to switch to competitors. Satyam lost contracts with Cisco, Telstra, and the
World Bank. Due to the project's congruity, secrecy, and cost explosion, customers were
astonished and stressed.

3) Investors lost their large investments, and the restoration of India as a preferred
investment destination was questioned. The shift, according to Mahindra's VC and MD,
has "caused unwarranted and unwelcome harm to Brand India and Brand IT."

4) The recovery of budgetary and non-financial earnings from introductions and reviews
was a problem for brokers.

5) India's IT sector influenced the country's image and trust in interacting or cooperating
across borders.

AUDITOR’S ROLE AND FACTORS CONTRIBUTING TO FRAUD

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Price Waterhouse Coopers has been accused by accounting and auditing specialists of failing to
spot financial misconduct in Satyam's books for the past ten years. The auditing behemoth has
long been regarded as one of the greatest in the world. Because it signed the financial statements,
PWC is equally liable for the deception. Concerning items in Satyam's balance sheet were "non-
interest-bearing deposits."

"Any fair corporation would either have invested the excess cash or refunded it to depositors,"
accountants claimed. The fact that the organization has cash on hand, but no revenue indicates
that the audit should be done correctly. The Auditors made no independent checks on the banks
where the business reportedly placed money.

Satyam always generated false income sources to suit analyst expectations, and it did so multiple
times without being caught by the auditor PWC. PWC reviewed Satyam's records from June
2000 until the financial swindle was found, a period of almost nine years, while Merrill Lynch
identified the fraud in just ten days. The auditors' failure to notice these signals suggested either
great incompetence or complicity between them and Mr. Raju in the fraud.

Independent directors, institutional investors, SEBI, retail investors, and professional investors
who had access to specific information and models for the company were among the many
others who contributed to the financial fraud. Mr. Raju engaged in all of these deceptions in his
pursuit of power, money, and success.

Satyam's storey exemplifies a failure to uphold all fiduciary obligations, including loyalty,
transparency, and corporate social responsibility. Mr. Raju's actions are the result of his failure to
follow any ethical or corporate responsibility standards. Mr. Raju's activities were motivated by a
desire to maintain high earnings per share (EPS), increase executive compensation, and sell the
shareholding at a profit.

FAILURE OF CORPORATE GOVERNANCE

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A. Independent Auditors Concept: When SEBI implemented the Corporate Governance
Concept, Independent Directors were appointed to provide a true and unbiased perspective of
financial numbers and to participate actively in company audits. This concept, however, proved
to be a complete failure in this circumstance.

B. The Audit Committee's Inability to Prevent Financial Misrepresentation: Satyam

Computers' Audit Committee was mainly unsuccessful in preventing financial misrepresentation.
As a result, this case signals a major shift in Corporate Governance.

In this example, the CEO/CFO failed in his duties by certifying the company's incorrect financial
status in accordance with the principle of Corporate Governance. According to Corporate
Governance, the company's CEO/CFO must confirm the accuracy and fairness of the company's
financial statements.

C. Failure to report on corporate governance compliance in the company's financial

statements: - In the case of Satyam Computers, the annual report did include corporate
governance compliance, but nearly none of the information was accurate.

Failure of SEBI to detect this Finance Scam in a timely manner:

Listed companies are regulated by the Security Exchange Board of India, an independent panel
which regulates all aspects of the financial administration of listed companies, including the
presentation of financial figures and insider trading. Despite the price increases of Satyam
Computers' shares, SEBI had completely failed to notice any foul smell or even detect the
increase in price at all. The insider trading resulted in that the promoters of the company
purposefully increased the value of shares by misrepresenting financial data and then sold their
stock at those higher values, and therefore the company had its value erosion.

Failure of Auditors in the Due Deligence in their duties: -

Pricewaterhouse Coopers is a large auditing business on a global scale. Financial scams are
equally the responsibility of this firm, as there are a number of signs that could indicate the
necessity for additional research, such as money held by the company with no methods of

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earning revenue. PWC, for example, never checked with the bank or debtors to see if the faked
statements were true. In addition, the firm is completely irresponsible in its duties. Merilynch, an
investment banker, discovered the financial scam within ten days, demonstrating PWC's
ineptitude. As a result, we can deduce that if PWC had worked rigorously, the Satyam fraud
would not have occurred.

CONSEQUENCES FACED BY CORPORATE GOVERNANCE

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Following the disclosure of such a big accounting scam, India has experienced a slew of
challenges. The reluctance and loss of foreign investment as a result of the scandal, which was
foreseeable in advance, has lowered India's appeal for foreign investment in the IT services
sector. Satyam's stock also plummeted to a new low of $30, a 77 percent drop in value. Investing
in any firm and being a victim of a scam serves as a warning to both investors and the broader
public. ICG (Indian corporate governance) has taken the required efforts to address the problem.
The Federation of Indian Chambers of Commerce and Industry (FICCI) also issued a statement,
claiming that this was an exceptional occurrence and that investors need not be concerned about
Indian accounting standards.

The scheme exposed various flaws in ICG rules, including non-disclosure of key data to
stakeholders, insider trading, unethical behaviour, fraudulent accounting, and so on. The
Confederation of Indian Industries formed a task force to address these challenges, and the
Ministry of Corporate Affairs (hereafter referred to as MCA) produced optional standards for
Corporate Governance in 2009 based on its suggestions. The National Association of Software
and Services Companies also established the Corporate Governance and Ethics Committee,
which has the authority to offer recommendations on audit committees, shareholder rights, and
whistleblower procedures.

A number of corporate governance guidelines were also amended by the SEBI. As part of the
listing agreement, modifications were made to make sure such fraud was prevented. The SEBI
also introduced the SEBI (Listed Obligation and Disclosure Regulation), 2015 (hereinafter
referred to as LODR), which applies to all public companies, thereby making strict guidelines
and rules regarding disclosures of material events and accounts.

The government took appropriate steps to protect the interests of all stakeholders by enacting the
Companies Act, 2013 (hence referred to as Act). The Act also made corporate fraud a criminal
offence, and it established rules for cost accountants, company secretaries, and auditors to
disclose wrongdoing. It also included the introduction of a check and balances provision in the
Act, which ensures the country's corporate management and governance integrity. It also
included a condition that required auditors to rotate every five years and auditing firms to rotate

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every ten years. Accountants are required by law to report any fraud discovered by the company
or its linked parties to the company.

Further, decisions by the US Supreme Court1, the opinions of Justices Bradley and Fuller are
crucial. They've stressed the need of directors exercising proper caution and skill considering the
current situation. Before approving the Maytas sale, Satyam's board would have been obligated
to review the transaction's advantages, question the valuation technique, and evaluate alternative
uses for the cash under this duty of care.

BIBLIOGRAPHY

1
Railroad Co v. Lockwood, 1873

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WEBSITES

1) https://www.bing.com/search?q=Satyam Computer Services Ltd. (Merged), Economic

times, https://economictimes.indiatimes.com/satyam-computer-services
ltd(merged)/infocompanyhistory/companyid-11407.cms.&FORM=QSUTIL&PC=U602
2) Creative Accounting Scam at Satyam Computer Limited: How the Fraud Story
Unfolded? (scirp.org)
3) Satyam case: Sebi bans Raju, others for 14 years - The Hindu

BOOKS

1) Banerjee, R. (2015). Who cheats now: Scams, frauds and the dark side of the
corporate world. New York, NY: SAGE Publications
2) Bhasin, M. (2016). Creative accounting practices at Satyam computers limited: A case
study of India’s Enron. International Journal of Business and Social Research 6(6), 24-
48

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