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Satyam Scam

In: Business and Management

Submitted By nihkhurana
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Pages 7'S_ENRON (point 5)
(page 9 onwards imp) The Satyam Computer Services scandal is a corporate scandal that worked in India in 2009 where chairman Ramalinga Raju confessed that the company's accounts had been falsified. The Global corporate community was shocked and scandalised when the chairman of Satyam, Ramalinga Raju resigned on 7 January 2009 and confessed that he had manipulated the accounts by US$1.47-Billion. It is about corporate governance and fraudulent auditing practices allegedly in connivance with auditors and chartered accountants. The company misrepresented its accounts both to its board, stock exchanges, regulators, investors and all other stakeholders. It is a fraud, which misled the market and other stakeholders by lying about the company’s financial health. Even basic facts such as revenues, operating profits, interest liabilities and cash balances were grossly inflated to show the company in good health
The promoters are primary culprits, although it is almost impossible to misrepresent such facts without the connivance of the auditors and some executive board members. Independent directors, it seems, were kept in the dark about the actual books of accounts.

In February 2009, CBI took over the investigation and filed three charge sheets (on April 7, 2009, November 24, 2009 and January 7, 2010), which were later clubbed into one. On April 10, 2015, Ramalinga Raju was convicted with 10 other members.

PricewaterhouseCoopers affiliates served as independent auditors of Satyam Computer Services when the report of scandal in the account books of Satyam Computer Services broke. The role of external third party auditors, who were tasked to ensure that no financial bungling is undertaken to carry out promoters’ interest or hide facts, have also been brought to question. The Indian arm of PwC was fined $6 million by the SEC (US Securities and Exchange Commission) for not following the code of conduct and auditing standards in the performance of its duties related to the auditing of the accounts of Satyam Computer Services.[1]
1. Maintaining records

· Raju maintained thorough details of the Satyam's accounts and minutes of meetings since 2002.

· Raju stored records of accounts for the latest year (2008-09) in a computer server called "My Home Hub."

2. Fake invoices and bills

· Details of accounts from 2002 till January 7, 2009 – the day Raju came out with his dramatic, five-page confession - were stored in two separate Internet Protocol (IP) addresses.
· Fake invoices and bills were created using software applications such as 'Ontime' that was used for calculating hours put in by an employee
· A secret programme was allegedly planted in the source code of the official invoice management system creating a user id 'Super User' with the power to hide or show the invoices in the system.

3. Web of companies

· A web of 356 investment companies was used to allegedly divert funds from Satyam.
· These companies had several transactions in the form of inter-corporate investments, advances and loans within and among them.
· One such company, with a paid up capital of Rs 5 lakh, had made an investment of Rs 90.25 crore and received unsecured loans of Rs 600 crore.
4. Why did he need the money

· The cash so raised was used to purchase several thousands of acres of land across Andhra Pradesh to ride a booming realty market.

· It presented a growing problem as facts had to be doctored to keep showing healthy profits for Satyam that was growing in size and scale.

· Every attempt made to eliminate the gap failed.

· As Raju put it, "it was like riding a tiger, not knowing how to get off without being eaten."

· Cashing out by selling Maytas Infrastructure and Maytas Properties to Satyam for an estimated Rs 7,800 crore was the last straw. The attempt failed and Raju made the stunning confessions three weeks later.v

We acknowledge that greed and hubris are an integral part of human nature. History of mankind and the scams perpetrated by humans on unsuspecting fellow humans make for an interesting read. We believe that no amount of regulation can eliminate completely the possibility of recurrence of such scams. However, we certainly can make efforts towards minimizing the probability of scams and their size by utilizing the twin tools of enhanced scrutiny and deterrent punishment.

It is critical to work towards increasing the probability of discovering nascent scams early enough if we were to minimize damage to trust and transparency which, combined together, form the underpinnings of any financial system. The interesting part is that most of these suggestions are already being partly applied in India with quite positive results. So we are not reinventing the wheel but just suggesting an extension of the existing format for wider coverage. While I do believe in self regulation, we also believe in strong industry regulators who can ‘police the police’.I acknowledge that greed and hubris are an integral part of human nature. History of mankind and the scams perpetrated by humans on unsuspecting fellow humans make for an interesting read. I believe that no amount of regulation can eliminate completely the possibility of recurrence of such scams. However, we certainly can make efforts towards minimizing the probability of scams and their size by utilizing the twin tools of enhanced scrutiny and deterrent punishment.
It is critical to work towards increasing the probability of discovering nascent scams early enough if we were to minimize damage to trust and transparency which, combined together, form the underpinnings of any financial system. The interesting part is that most of these suggestions are already being partly applied in India with quite positive results. So we are not reinventing the wheel but just suggesting an extension of the existing format for wider coverage. While I do believe in self regulation, I also believe in strong industry regulators who can ‘police the police’. Without further ado, here is a prescription sheet which, if implemented, can probably control the spread of the disease.
Make the auditors and people in charge accountable for the theft: Punishment should be substantial
We hope that the truth about the role played by Satyam’s auditors will come out after an extensive investigation. When questioned about the investment decision, the common refrain is that the investors relied on certifications by Price Waterhouse, the reputed auditors of Satyam. If these so called savvy and professional watchdogs could not detect the fraud at Satyam, then how can we expect the due diligence done by investors to reveal the mischief?Maybe, the auditors were misled and were negligent in the conduct of their duties or they willfully colluded with the management at Satyam in perpetrating the fraudulent events. In any event, the impact of their role cannot be underestimated.
In both scenarios, they failed their duties miserably. A punishment would raise the stakes for others who may have been knowingly or unknowingly aiding or turning a blind eye to similar events at other firms.
SEBI, had passed strictures against some prominent foreign banks some time back due to their role in activities considered undesirable. This action by SEBI had indeed led to a greater due diligence by their risk management and compliance departments and certainly has led to a salutatory effect on these and other foreign banks in respecting the laws of the land. Deterrent punishment is not the panacea for all ills. However, it does serve its purpose in raising the stakes for players abusing the system.
Rotate the watchdogs: Fixed, finite and rotating tenure
Auditors and independent directors are the first line of defense against abuse for ordinary investors. The best strategy would be to have one watchdog watch the other. I suggest a fixed tenure for auditors for a finite period of three years. At the end of his tenure, the auditor will have to hand over his assignment to a new auditor. The new auditor will take a sign off from the previous auditor and it would be reasonably difficult for any auditor to assist in perpetuating wrongdoings if there is a more than reasonable chance of being discovered by the new incoming auditors. This could be a simple and effective deterrent against wrongdoing
More often than not, the independent director chosen by management is chosen because of his proximity to the controlling management and is beholden to management for selecting him to the board of the company. This raises serious conflicts of interest in impartial discharge of duties. Many independent directors are not technically and professionally qualified to head the committees they chair in the companies.
I recommend that the independent directors be chosen from a pool of qualified professionals who are known for their expertise and integrity. Further, like the auditors, they should be chosen for a fixed tenure of three years, after which they should be replaced by another set of independent directors from the identified pool of independent directors.…...

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