Corporate Accounting Scandal

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CORPORATE ACCOUNTING SCANDAL AT SATYAM COMPUTER SERVICES LIMITED

BACKGROUND

Ironically, Satyam means “truth” in the ancient Indian language “Sanskrit” (Basilico et al., 2012). Satyam won the “Golden Peacock Award” for the best-governed company in 2007 and in 2009. From being India’s IT “crown jewel” and the country’s “fourth largest” company with high- profile customers, the outsourcing firm Satyam Computers has become embroiled in the nation’s biggest corporate scam in living memory (Ahmad, et al., 2010). Mr. Ramalinga Raju (Chairman and Founder of Satyam; henceforth called ‘Raju’), who has been arrested and has confessed to a $1.47 billion (or Rs. 7,800 crore) fraud, admitted that he had made up profits for years. According to reports, Raju and his brother, 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. THE FACTS

The loss of respect and confidence started at the end of 2008. On December 16, 2008, Ramalinga Raju, COB of Satyam, announced the purchasing of Maytas Infrastructure and Maytas Properties for $1.6 billion. The two Maytas companies were owned by the two sons of Raju and their businesses were unrelated to the core competencies of Satyam. Raju justified the decision by emphasizing the need of diversification at times of uncertainty and economic turbulence. On the following day, Satyam shares plunged as domestic and international investors were angry with the company, which on December 18, 2008 announced to rescind the decision to purchase the two Maytas companies. Few days later, another fact raised deep concerns for investors. On December 23, 2008 World Bank announced to ban Satyam for at least 8 years from its list of possible suppliers of services citing alleged bribing of the bank staff and data theft. Following this incident, Satyam’s ADRs fell by 50% overnight. From December 26 to December 29, 2008 four directors resigned including an independent director resigned. On January 7, 2009 Ramalinga Raju wrote a letter to the Board of Directors and the Exchange Board of India (SEBI) to admit fraudulent financial reporting and resign as the COB of Satyam. In his letter, Raju stated that the company’s balance sheet for the quarter ending on 30 September 2007 included inflated cash and bank balances of up to $1.44 billion, understated liabilities worth about $300 million and non-existent accrued income of $86 million. Furthermore, Raju stated that none of the board members or immediate and extended family members was aware of the accounting scam. Raju was arrested two days after the letter and charged with several offences, including criminal conspiracy, breach of trust, and forgery. The Board of Directors was dismantled and replaced with six board members appointed by the Indian Government. Financial red flags associated with Satyam and its financial statements were not lacking. Table 1 reports the last financial statements reported by Satyam. Investors, financial analysts, and regulators had available several financial indicators to detect fraudulent financial reporting, including the following: 1. There was the existence of large “accrued interests”, which raised the question of banks not paying interest on Satyam’s fixed deposits versus just accruing interest (in hindsight these cash deposits had been stolen by the Raju family). 2. Satyam was showing continuous and aggressive sales...
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