Learn, Case Study on Corporate Governance for Satyam Scam!
Satyam Computers services limited was a consulting and an Information Technology (IT) services company founded by Mr. Ramalingam Raju in 1988. It was India’s fourth largest company in India’s IT industry, offering a variety of IT services to many types of businesses. It is networking spanned from 46 countries, across 6 continents and employing over 20,000 IT professionals. On 7th January 2009, Satyam scandal was publicly announced & Mr. Ramalingam confessed and notified SEBI of having falsified the account. Also learn, Tata Motors Acquisition of Jaguar and Land Rover for Case Study, Corporate Governance for Satyam Scam!
Also Learn, What is Fraud?
Fraud is a worldwide phenomenon that affects all continents and all sectors of the economy. Fraud encompasses a wide-range of illicit practices and illegal acts involving intentional deception, or misrepresentation. According to the Association of Certified Fraud Examiners (ACFE), fraud is “a deception or misrepresentation that an individual or entity makes knowing that misrepresentation could result in some unauthorized benefit to the individual or to the entity or some other party”. In other words, mistakes are not fraud. Indeed, in fraud, groups of unscrupulous individuals manipulate or influence the activities of a target business with the intention of making money or obtaining goods through illegal or unfair means.
Fraud cheats the target organization of its legitimate income and results in a loss of goods, money, and even goodwill and reputation. Fraud often employs illegal and immoral, or unfair means. It is essential that organizations build processes, procedures, and controls that do not needlessly put employees in a position to commit fraud and that effectively detect fraudulent activity if it occurs. The fraud involving persons from the leadership level is known under the name “managerial fraud” and the one involving only entity’s employees is named “fraud by employees’ association”.
Raju confessed that Satyam’s balance sheet of 30 September 2008 contained:
- Inflated figures for cash and bank balances of Rs 5,040 crores (US$ 1.04 billion) [as against Rs 5,361 crores (US$ 1.1 billion) reflected in the books].
- An accrued interest of Rs. 376 crores (US$ 77.46 million) which were non-existent.
- An understated liability of Rs. 1,230 crores (US$ 253.38 million) on account of funds which were arranged by himself.
- An overstated debtors’ position of Rs. 490 crores (US$ 100.94 million) [as against Rs. 2,651 crores (US$ 546.11 million) in the books].
- The letter by B Ramalinga Raju where he confessed to inflating his company’s revenues contained the following statements:
“What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly [annualized revenue run rate of Rs 11,276 crores (US$ 2.32 billion) in the September quarter of 2008 and official reserves of Rs 8,392 crores (US$ 1.73 billion)]. As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. It was like riding a tiger, not knowing how to get off without being eaten”. Also learn, Intrapreneurship Better than Entrepreneurship!
The scandal all came to light with a successful effort on the part of investor’s to prevent an attempt by the minority shareholding promoters to use the firm’s cash reserves to buy two companies owned by them i.e. Maytas Properties and Maytas Infra. As a result, this aborted an attempt of expansion on Satyam’s part, which in turn led to a collapse in price of company’s stock following with a shocking confession by Raju, The truth was its’ promoters had decided to inflate the revenue and profit figures of Satyam thereby manipulating their balance sheet consisting non-existent assets, cash reserves and liabilities.
The Probable Reasons:
Deriving high stock values would allow the promoters to enjoy benefits allowing them to buy real wealth outside the company and thereby giving them the opportunity to derive money to acquire large stakes in other firms on another hand. There could be the reason as to why Raju’s family build its shareholding and shed it when required. Also learn, What is Bookkeeping?
After the scandal, on 10 January 2009, the Company Law Board decided to bar the current board of Satyam from functioning and appoint 10 nominal directors. On 5th February 2009, the six-member board appointed by the Government of India named A. S. Murthy as the new CEO of the firm with immediate effect. Also learn, What is Organizational Climate? The board consisted of:
1) Banker Deepak Parekh.
2) IT expert Kiran Karnik.
3) Former SEBI member C Achuthan S Balakrishnan of Life Insurance Corporation.
4) Tarun Das, chief mentor of the Confederation of Indian Industry, and.
5) T N Manoharan, former President of the Institute of Chartered Accountants of India.
Investigation: Criminal and Civil Charges!
The investigation that followed the revelation of the fraud has led to charges against several different groups of people involved with Satyam. Indian authorities arrested Mr. Raju, Mr. Raju’s brother, B. Ramu Raju, its former managing director, Srinivas Vdlamani, the company’s head of internal audit, and its CFO on criminal charges of fraud. Indian authorities also arrested and charged several of the company’s auditors (PwC) with fraud. The Institute of Chartered Accountants of India ruled that “the CFO and the auditor were guilty of professional misconduct”. As well as, The CBI is also in the course of investigating the CEO’s overseas assets. There were also several civil charges filed in the US against Satyam by the holders of its ADRs.
The investigation also implicated several Indian politicians. Both civil and criminal litigation cases continue in India and civil litigation continues in the United States. Some of the main victims were: employees, clients, shareholders, bankers and Indian government.In the aftermath of Satyam, India’s markets recovered and Satyam now lives on. India’s stock market is currently trading near record highs, as it appears that a global economic recovery is taking place. Civil litigation and criminal charges continue against Satyam. Tech Mahindra purchased 51% of Satyam on April 16, 2009, successfully saving the firm from a complete collapse. With the right changes, India can minimize the rate and size of accounting fraud in the Indian capital markets.
Corporate Governance Issues at Satyam!
On a quarterly basis, Satyam earnings grew. Mr. Raju admitted that the fraud which he committed amounted to nearly $276 million. In the process, Satyam grossly violated all rules of corporate governance. As well as, The Satyam scam had been the example of following “poor” CG practices. It had failed to show the good relationship between the shareholders and employees. CG issue at Satyam arose because of non-fulfillment of the obligation of the company towards the various stakeholders. Of specific interest are the following: distinguishing the roles of board and management; separation of the roles of the CEO and chairman; appointment to the board; directors and executive compensation; protection of shareholders rights and their executives. Also read it, Dell Social Business Strategy for Case Study!
Lessons Learned from Satyam Scam!
The 2009 Satyam scandal in India highlighted the nefarious potential of an improperly governed corporate leader. As the fallout continues, and the effects were felt throughout the global economy, the prevailing hope is that some good can come from the scandal in terms of lessons learning. Here are some lessons learning from the Satyam Scandal:
- Investigate All Inaccuracies: The fraud scheme at Satyam started very small, eventually growing into $276 million white-elephant in the room. Indeed, a lot of fraud schemes initially start out small, with the perpetrator thinking that small changes here and there would not make a big difference and is less likely to detect. This sends a message to a lot of companies: if your accounts are not balancing, or if something seems inaccurate (even just a tiny bit), it is worth investigating. Dividing responsibilities across a team of people makes it easier to detect irregularities or misappropriated funds.
- Ruined Reputations: Fraud does not just look bad on a company; it looks bad on the whole industry and a country. “India’s biggest corporate scandal in memory threatens future foreign investment flows into Asia’s third-largest economy and casts a cloud over growth in its once-booming outsourcing sector. The news sent Indian equity markets into a tail-spin, with Bombay’s main benchmark index tumbling 7.3% and the Indian rupee fell”. Now, because of the Satyam scandal, Indian rivals will come under greater scrutiny by the regulators, investors, and customers.
- Corporate Governance Needs to Be Stronger: The Satyam case is just another example supporting the need for stronger CG. All public companies must be careful when selecting executives and top-level managers. These are the people who set the tone for the company: if there is corruption at the top, it is bound to trickle-down. Also, separate the role of CEO and Chairman of the Board. Splitting up the roles, thus, helps avoid situations like the one at Satyam.
The Satyam Computer Services’ scandal brought to light the importance of ethics and its relevance to corporate culture. The fraud committed by the founders of Satyam is a testament to the fact that “the science of conduct” is swayed in large by human greed, ambition, and hunger for power, money, fame, and glory. Also Learn, Good for Company, The Corporate Entrepreneurship Categories, and Organizational Thinking!