I. Analyze the case and respond to the following questions: a) Discuss the earnings management techniques employed by the management of Satyam.
Earning management or creative accounting is referred to the manipulation or misrepresentation of the company’s financial earnings in order to achieve stable and positive financial position. This was achieve through directly or indirectly use of the accounting methods. Even though the manipulation may follow all the accounting standards and laws, they may go opposite of what the standards and laws were originally trying to establish. Therefore, earning management is often considered materially misleading and referred to a fraudulent activity.
Satyam Computer Services is a leading Indian outsourcing company which provides a wide range of information technology services. However, this company was involved in earning management where in 7 January 2009 it was publicly announced that the Chairman, Ramalinga Raju confessed that Satyam’s accounts had been falsified.
By referring to the Satyam case, one of the earning management technique used by the management of Satyam is off-balance sheet financing which an asset or debt was not disclose in the company’s balance sheet. This can hide the company's true financial state. In Satyam case, Ramalinga Raju had understated the company’s liability of US$ 261.99 million on account of funds and he had also overstated the debtor’s position of US$ 104.37 million as against US$ 564.66 million. The amount was so significant that the financial statement was not showing the true position of the company.
The other technique employed by Satyam is through income recognition where Raju had adjusted the profit figures from one year to another year resulting into inflated profits. As in the Raju’s letter, he had confessed that he was manipulating the reported revenue for September quarter of Rs 2,700 crore as against the actual revenues of Rs 2,112 crore. Raju manipulated this revenue figures in order to increase the company’s profit figures and show a better financial performance. However the gap between actual operating profit and the one reflected in the books of account continued to grow over the years and Raju finally failed to eliminate this gap.
Satyam had also created the fictitious revenue in order to manipulate his profit figures so that he can meet the shareholders expectation. This earning management technique was applied by creating a non-existent accrued interest of US$ 80.09 million to the books of account of Satyam. When this amount created, the revenue of the company will increase and finally boost up the company’s operating profit and shows a good company performance to the users of their financial statement. Satyam also created a fictitious asset in his earning management. The cash and bank figures amounted to US$ 1.07 billion had been created to inflate their financial statement.
The other earning management technique used is by using corporate takeover where in this case, Satyam wanted to acquire Maytas Properties and Maytas Infrastructure to cover up Satyam’s inflated cash. Raju, the Chairman of Satyam was siphoning the money from Satyam to Maytas for the past 6 years. Unfortunately, his last attempt to fill the fictitious assets with the real ones failed.
b) In your opinion, why do the managers of Satyam want to manage their earnings and subsequently be engaged in fraudulent activities?
In my opinion, Satyam want to manage their earnings and subsequently be engaged in fraudulent activities because of the pressure to meet the investor’s expectations. It was started with the company cooking up false numbers so that the profit expectations could be met but slowly and steadily, things had blow out of proportion. It is management’s responsibility to direct the organization’s operations with a goal to achieve targeted result set by the shareholders. This had created a pressure...