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    41741272 project-ii-failure-of-satyam3 41741272 project-ii-failure-of-satyam3 Document Transcript

    • Organizational Behaviour Project IIOrganizational Failure: The Satyam Saga Group Members (D/3): Daisy Basumatary 197 Dass Banty Ashok 198 Devashish Agarwal 200 Prateek Vijaivargia 225 Ravi Rambhatla 231 Satheesh Gowtham 233 Sathyamoorthy M 234 Shivakumar R 237
    • Organizational Behavior Table of Contents1.0 EXECUTIVE SUMMARY .....................................................................................42.0 COMPANY PROFILE ..........................................................................................5 2.1 Achievements ................................................................................................................... 6 2.2 Industry Presence ............................................................................................................. 6 2.3 Competencies ................................................................................................................... 7 2.4 Controversies .................................................................................................................. 10 2.4.1 Maytas acquisition ...................................................................................................... 10 2.4.2 World Bank................................................................................................................. 10 2.4.3 Upaid lawsuit .............................................................................................................. 10 2.4.4 Accounting scandal of 2009 ....................................................................................... 103.0 THE CHRONOLOGY OF SATYAM FAILURE: .....................................................11 3.1 Details............................................................................................................................. 11 3.2 The Aftermath: ............................................................................................................... 124.0 THE ANALYSIS: SOURCES/CAUSES ...............................................................13 4.1 Corporate Governance: .................................................................................................. 14 4.2 Failure of Supervisory and Regulatory Agencies: ......................................................... 15 4.3 The Auditor: ................................................................................................................... 15 4.4 Number of Employees:................................................................................................... 17 4.5 The Maytas chapter: ....................................................................................................... 18 4.6 The role of SEBI: ........................................................................................................... 20 4.7 Ministry of Corporate Affairs: ....................................................................................... 21 4.8 The Income Tax Department: ........................................................................................ 21 4.9 Institute of Chartered Accounts of India (ICAI): ........................................................... 215.0 MORAL AND ETHICAL FAILURE: ...................................................................216.0 MEASURES TO AVOID SUCH RECURRENCES:..................................................24 6.1 The Laxity of Indian laws: ............................................................................................. 24PGP13/Group 3/Section D Page 2
    • Organizational Behavior 6.2 Conclusions and Recommendations: ............................................................................. 25 6.3 Five Core Issues of governance ..................................................................................... 27 6.4 A problem of ethical deficit ........................................................................................... 287.0 CONCLUSION: .................................................................................................298.0 SOURCES OF INFORMATION ...........................................................................30PGP13/Group 3/Section D Page 3
    • Organizational Behavior1.0 Executive SummaryOn January 7th, 2009, Satyam Systems, a global IT company based in India was added to anotorious list of companies involved in fraudulent financial activities, one that includes suchnames as Enron, WorldCom, Societe General, Parmalat, Ahold, Allied Irish, Bearings andKidder Peabody. Satyams CEO, Ramalingam Raju, took responsibility for broad accountingimproprieties that overstated the companys revenues and profits and reported a cash holding ofapproximately $1.04 billion that simply did not exist.Satyam Computers, the fourth largest IT industry of India, The member of Nifty 50, BSESensex, and winner of golden peacock award for best corporate governance, and many morelaurels that it has in its kitty did not stop it from drowning like a rock in its dirty waters.Satyam, which means ―truth‖ in Sanskrit, plunged in New York trading, after earlier draggingdown India‘s benchmark index, in a scandal described as ―horrifying‖ by markets regulators.Raju‘s reign unraveled as a shareholder revolt blocked the asset purchases, a World Bank bankept Satyam from bidding for orders and four directors quit.The disclosure of fraud of such magnitude caught everyone by surprise. Questions arise overwhy this episode actually took place. What was the reason behind it.Was it the result of individual greed?Was it celebration of profit-making?Was it belief in markets or regulatory failure?Through this report we analyze the event and the happenings that covered the failure of satyamin the organization theory perspective.PGP13/Group 3/Section D Page 4
    • Organizational Behavior2.0 Company ProfileSatyam Computer Services Ltd was founded in 1987 by B Ramalinga Raju. The company offersconsulting and information technology (IT) services spanning various sectors, and is listed onthe New York Stock Exchange, the National Stock Exchange (India) and Bombay StockExchange (India). Satyams network spans 55 countries, across six continents. The companyemploys 45,000 IT professionals across development centers in India, the United States,the United Kingdom, the United Arab Emirates, Canada, Hungary, Singapore, Malaysia, China,Japan and Australia. It serves over 489 global companies, 156 of which are Fortune500 corporations. Satyam has strategic technology and marketing alliances with over 50companies.PGP13/Group 3/Section D Page 5
    • Organizational Behavior2.1 Achievements #1 in ASTD(American Society for Training and Development) BEST award, 2007 #2 BPO Global Rankings- BrownWilson Group‘s 2008 Black Book of Outsourcing UK Trade and investment India (UKTI) Business award for Corporate Social Responsibility Golden Peacock award for Excellence in Corporate Governance2.2 Industry Presence Banking, Financial Services Manufacturing, Chemicals & Aerospace and Defense Energy and Utilities Life Sciences & Healthcare &Insurance Automotive Telecom, Infrastructure, Media Travel and Logistics & Industrial Public Services & Education Retail and Consumer Packaged and Entertainment & Equipment SemiconductorPGP13/Group 3/Section D Page 6
    • Organizational Behavior2.3 CompetenciesMahindra Satyam offers the following ‗horizontal‘ services. Extended Web Business Engineering Quality Enterprise Commerce Intelligence Service Consulting Solutions Solutions Services Strategic Industry Outsourcing Native BPO Services Solutions2.4 Company CompositionPGP13/Group 3/Section D Page 7
    • Organizational Behavior2.5 Pioneereed Pioneered delivery of offshore service (John Deere & Co.) First Indian Co. to set-up dedicated satellite link First IT company to get ITAA certification Set-up India’s first private ISP – SIFY Among world’s first 10 companies to get SEI-CMM Level 5 assessment Forming Alliances with best of breed technology vendors very early on Adoption of Verticalization and a customer-centric organizational Structure Pioneered ITES quality framework – eSCM Among the first to be certified under BS 7799 for ISMS First & only Lead Auditor for eSCM2.6 Trusted By 8 of the top 10 Auto majors 7 of the top 10 Electronics and Electrical Equipment Manufacturers 6 of the top 10 Pharmaceutical companies 4 of the top 5 Networking and Other Communication Equipment Manufacturers 3 of the top 5 Healthcare companies 2 of the top 5 Securities companiesPGP13/Group 3/Section D Page 8
    • Organizational Behavior2.7 Company Structure Shareholding Pattern as on 31st March 2008 19.46% 8.74% Promoters 10.58% 61.22% Institutional ShareholdersPGP13/Group 3/Section D Page 9
    • Organizational Behavior2.7 Controversies2.7.1 Maytas acquisitionIn 2008, Satyam attempted to acquire (Maytas Infrastructure and Maytas Properties) founded byfamily relations of company founder Ramalinga Raju for $1.6 billion, despite concerns raised byindependent board directors. Both companies are owned by Rajus sons. This eventually led to areview of the deal by the government, a veiled criticism by the vice president of India andSatyams clients re-evaluating their relationship with the company. Satyams investors lostabout INR 3,400 crore in the related panic selling. The USD $1.6 billion (INR 8,000 crore)acquisition was met with skepticism as Satyams shares fell 55% on the New York StockExchange. Three members of the board of directors resigned on 29 December 2008.2.7.2 World BankThe World Bank had banned Satyam from doing business with it for 8 years due to inappropriatepayments to the World Banks staff. The World Bank accused Satyam of giving improperbenefits to its (the Banks) staff and of failing to maintain documentation to support fees chargedfor its subcontractors. However, it clarified that Satyam was not involved in incidences of datatheft or malicious attacks that had been made on the Banks information systems.2.7.3 Upaid lawsuitUK mobile payments company Upaid Systems sued Satyam for over 1 billion US dollars oncomplaints of fraud, forgery and breach of contract. On 9-December-2009 Satyam settled thelawsuit with UPAID for $70MM, of which $45MM was payable upon regulatory approval, andthe remaining $25MM was payable a year after the initial payment. The settlement requiresUpaid to give Mahindra Satyam a worldwide royalty-free license on its patents, and provides forthe dismissal of all pending actions including the litigation between the companies pending in theU.S. court.2.7.4 Accounting scandal of 2009The Satyam Computer Services scandal was publicly announced on 7 January 2009, whenChairman Ramalinga Raju confessed that Satyams accounts had been falsified.PGP13/Group 3/Section D Page 10
    • Organizational Behavior3.0 The chronology of satyam failure:Satyam means "truth" in Sanskrit. But the name was proved wrong by the founder himself when hehimself busted one of the biggest frauds in the world of India Inc.3.1 DetailsOn 7 January 2009, company Chairman Ramalinga Raju resigned after notifying board membersand the Securities and Exchange Board of India (SEBI) that Satyams accounts had beenfalsified.Raju confessed that Satyams balance sheet of 30 September 2008 contained: Inflated figures for cash and bank balances of Rs 5,040 crore (US$ 1.04 billion) (as against Rs 5,361 crore (US$ 1.1 billion) crore reflected in the books). an accrued interest of Rs. 376 crore (US$ 77.46 million) which was non-existent. an understated liability of Rs. 1,230 crore (US$ 253.38 million) on account of funds was arranged by himself.PGP13/Group 3/Section D Page 11
    • Organizational Behavior an overstated debtors position of Rs. 490 crore (US$ 100.94 million) (as against Rs. 2,651 crore (US$ 546.11 million) in the books).Raju claimed in the same letter that neither he nor the managing director had benefitedfinancially from the inflated revenues. He claimed that none of the board members had anyknowledge of the situation in which the company was placed.Satyam, the 2008 winner of the coveted Golden Peacock Award for Corporate Governance havefaced government and stakeholder‘s pressure ever since its plan to acquire two infrastructurecompanies owned by Mr. Ramalinga Raju‘s sons – Maytas infrastructure and Maytas propertiesfor $1.6 billion was rejected by investors last December. The failed acquisition plan resulted inpanic selling by investors causing loss worth millions to investors in India. In the New YorkStock Exchange, Satyam‘s share price plunged by 55%. Mr. Raju in his resignation statementconfessed that the acquisition plan was ―the last attempt to fill fictitious assets with the real ones.When it failed Mr. Raju had no other option but to resign taking entire responsibility for theaccounting fraud but hoping that the company would bounce back. Analysts however haveexpressed skepticism at Satyam‘s ability to bounce back.3.2 The Aftermath:As Mr. B. Ramalinga Raju, Chairman and founder of Satyam Computer Services resigned afterconfessing to falsifying accounting records and inflating accounting profits, Satyam sharesplummeted 77.69% on the Mumbai Stock Exchange. Analysts and journalists were quick to drawsimilarities between Enron and Satyam - India‘s 4th largest software consultancy, systemintegration and outsourcing firm, listed on the New York Stock Exchange, with networkoperations in 66 countries across six continents, employing over 50,000 IT professionals andserving over 654 global companies including a large number of Fortune 500 companies.PGP13/Group 3/Section D Page 12
    • Organizational Behavior4.0 The Analysis: Sources/Causes“It is only when the tide goes out that you realize who has been swimming naked.”Satyam was always seen as one of the top Indian IT companies and often represented as shiningexample of Indian liberalization and entrepreneurship. This fraud that will impact the investorsand employees of the company shows a systemic breakdown in audit and board oversight of thecompany. How this happened and who caused it to happen. As the scandal unfolded, MerrillLynch (Now with the Bank of America) terminated its engagement with the company. The NewYork Stock Exchange immediately suspended trading in Satyam shares. Consequently analystsspeculated about the possible negative impact of this scandal on foreign investors‘ willingness toinvest in emerging markets like India.Many analysts while attributing Satyam‘s downfall to failure of corporate governance haveemphasized on making family owned businesses founders aware of the risks inherent in nonadoption of corporate governance frameworks in their true spirit emanating from the reluctanceof the owners to introduce transparency and professionalism in their businesses. Even thoughSatyam Computers had independent directors on their board of directors, their inabilityapparently due to lack of expertise or knowledge of accounting frauds raises the question of thePGP13/Group 3/Section D Page 13
    • Organizational Behaviorrole and responsibilities as well as qualifications, skills and expertise of independentnonexecutive directors.4.1 Corporate Governance:ACCA research indicates that failure in corporate governance is a major contributor to the creditcrunch and consequently the current financial turmoil. Corporate governance is the set ofprocesses, customs, policies, laws, and institutions affecting the way a corporation is directed,administered or controlled. Corporate governance also includes the relationships among themany stakeholders involved and the goals for which the corporation is governed.The principal stakeholders are the shareholders, management, and the board of directors. Otherstakeholders include labor (employees), customers, creditors (e.g., banks, bond holders),suppliers, regulators, and the community at large. Corporate governance is a multi-facetedsubject. An important theme of corporate governance is to ensure the accountability of certainindividuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem.A related but separate thread of discussions focuses on the impact of a corporate governancesystem in economic efficiency, with a strong emphasis shareholders welfare. There are yet otheraspects to the corporate governance subject, such as the stakeholder view and the corporategovernance models around the world. Collapses like Satyam demonstrate that regulatory boxesmay have been ticked but fundamental principles of corporate governance have been breached.The charitable explanation for corporate collapses like Satyam is that those responsible did notunderstand the risks that were being taken thus suggesting a failure of diligence andprofessionalism. A less charitable explanation is that those responsible knew about the risks butchose to turn a blind eye.PGP13/Group 3/Section D Page 14
    • Organizational Behavior4.2 Failure of Supervisory and Regulatory Agencies:Satyam may be an exception because of the sheer magnitude of the amount of defalcation, whichis two-and-a-half times the sum involved in the Enron scandal. But the fact remains that all thesupervisory and regulatory agencies failed to detect and prevent the Satyam scam, and that thisfailure is structural and pervasive.These agencies include: The statutory auditor (Price Waterhouse, the Indian subsidiary of PriceWaterhouseCoopers) Satyams independent directors The Ministry of Corporate Affairs The Registrar of Companies The Company Law Board The Institute of Chartered Accountants of India The Securities and Exchange Board of India (SEBI) The Quality Review Board (QRB), a high-powered 11-member committee appointed by the Indian government for chartered accountants.Many of the agencies did not perform their assigned oversight functions, ignored complaints andwarnings, or actively covered up the fraud.4.3 The Auditor:Price Waterhouse, which has been Satyams auditor since 1991, blindly certified its account-books to be correct and accurate without verifying their authenticity. It failed to detect hugetransfers of funds, of the order of over one billion dollars, according to Rajus own confession.PGP13/Group 3/Section D Page 15
    • Organizational BehaviorBefore one gets into the endoskeleton of what exactly caused the audit failure in the Satyamcase, it would be prudent to examine what exactly is the role of the Auditor. The Role of Auditor:The complete scope of who an auditor is and what he does is laid down by many sections of theCompanies Act. Sec 209 of the Act lays down that not should a company maintain ―proper‖books of accounts; such books should also give a true and fair view of the state of affairs of thecompany. Sec 211 of the Act, inter alia, requires that every balance sheet of the company shouldgive a true and fair view of the state of affairs of the company at the end of the financial year andthat every profit and loss account should give a true and fair view of the of the profit and loss ofthe company and they should comply with accounting standards.An audit, as defined in the landmark case of Frankston and Hastings Corpn. v. Cohen, (1960)102CLR 607, comprises of three main objects – 1. To certify to the correctness of the financial position as shown in the balance sheet, and the accompanying financial statements. 2. The detection of errors. 3. The detection of fraud. The detection of fraud is of primary importance.Having said, it is also paramount to state that the auditor is a watch-dog, not a bloodhound.This means that his job is verification and not detection. When suspicion is aroused, it is his dutyto probe the issue to the bottom but in case there is no material to arouse suspicion, he is notbound to go sniffing around with the intention of uncovering financial anomalies.In the case of the Satyam audit failure, it shows that though there is evidence of negligence atmany levels, there is none with respect to collusion or criminal conspiracy on part of theauditors. PWC relied on the documents provided by the company to do the audit. The charges ofnegligence have been heaped on them because they did not go to every bank to independentlyverify that the cash deposits as shown in the books really existed. Though ideally, an auditor isPGP13/Group 3/Section D Page 16
    • Organizational Behaviorsupposed to do this, it is a fact that very few actually do. In fact when a firm like PWC is dealingwith a company like Satyam (which won the prestigious Golden Peacock Award for CorporateGovernance in 2008) it generally takes the company at its word that the statements provided aretrue and represent the true state of affairs.Two of accounting companys directors has since been arrested. They failed to verify theauthenticity of the bank documents pertaining to cash reserves and balances presented to them bySatyams management.It is likely that there was collusion between Satyam and its auditor. According to Deepak Parekh,the chairman of a reputed private bank who was appointed to the Satyam board after the scandalbroke out; these documents were obvious forgeries and would have been visible as such toanyone.4.4 Number of Employees:One of the biggest sources of defalcation at Satyam was the inflation of the number ofemployees. Raju claimed that the company has 53,000 people on its payroll. But according to theCriminal Investigation Department of the Andhra Pradesh police, the real number was just over40,000. This closely matches the number of Satyam employees registered for provident fundpayments, a little over 43,000.PGP13/Group 3/Section D Page 17
    • Organizational Behavior The fictitious number could be conjured uponly because payment to the remaining 10,000 employees was faked year after year - anoperation that evidently involved the creation of bogus companies with a large number ofemployees. Yet, no one detected this massive fraud.Similarly, going by Rajus account, Satyams operating margin was as low as three percent. ButIndias top-ranking IT companies have margins of 20 to 30 percent. If Satyams margin wasindeed higher, then hundreds of millions of dollars were spirited out of the company, withoutdetection.4.5 The Maytas chapter:WHEN the disgraced founder of Satyam, B. Ramalinga Raju, named his two other pet projects asMaytas Infra and Maytas Properties, the parent company spelt in reverse, little would he haveimagined that their fortunes too would go topsy-turvy.PGP13/Group 3/Section D Page 18
    • Organizational BehaviorAnother source of fraud was the Satyam boards decision last December to invest 1.6 billiondollars to acquire a 100 percent stake in Maytas Properties and in 51 percent stake in MaytasInfrastructure. Both of these real estate firms were promoted by Rajus sons. They also floated 21other companies under the Maytas brand.This investment decision was in gross violation of the Companies Act 1956, under which nocompany is allowed without shareholders approval to acquire directly or indirectly any othercorporate entity that is valued at over 60 percent of its paid-up capital.Yet, Satyams independent directors went along with the decision, raising only technical andprocedural questions about SEBIs guidelines and the valuation of the Maytas companies.They did not even refer to the conflict of interest in buying companies in a completely unrelatedbusiness, floated by the chairmans relatives. Indeed, one of the independent directors, KrishnaPalepu, a professor at Harvard Business School, praised the merits of real estate investment onSatyams part.Palepu was earlier an independent director on the Global Trust Bank, which collapsed in 2003,recalls former union revenue secretary E.A.S. Sarma, a public-spirited civil servant of highintegrity.PGP13/Group 3/Section D Page 19
    • Organizational Behavior4.6 The role of SEBI:C.B. Bhave, Chairman of SEBI, at a press conference in Mumbai on January 21Sarma recently warned SEBI and the Prime Ministers office about malfeasance in Satyam, butwas ignored.SEBIs failure was even starker. Irregularities were repeatedly reported to it in PriceWaterhouses handling of Satyam accounts in 2001 and 2002. But mysteriously, it failed toconduct an investigation. Similarly, a complaint was filed with SEBI by a Member of Parliamentin 2003. But under political pressure, this was not pursued.Last December, SEBI also approved the Maytas investments. The investment decision wereeventually reversed because of shareholder protests, not because of the regulatory authoritiesactionsPGP13/Group 3/Section D Page 20
    • Organizational Behavior.After Ramalinga Raju made his voluntary confession on Jan. 7, SEBI wasted precious time anddid not move to interrogate him or to seize Satyams papers until after he had surrendered to thestate police. The police have still not allowed SEBI to question him.4.7 Ministry of Corporate Affairs:Similarly, other official agencies, including those under the Ministry of Corporate Affairs, didnot discharge their obligations or were prevented from doing so.4.8 The Income Tax Department:The Income Tax Department unearthed several cases of illegal transfers by Satyam as early as2002. But the concerned official was transferred and the investigation suppressed.4.9 Institute of Chartered Accounts of India (ICAI):Equally striking is the failure of the Institute of Chartered Accounts of India (ICAI) to takepunitive action against Price Waterhouse, which it is empowered to do. Ironically, PriceWaterhouse has two members in the ICAI disciplinary council! The council met earlier thismonth, but failed to take action against PwC. ICAI is a closed professional guild. Like the BarCouncil or Medical Association of India, it shields even the most errant of its members. To thebest of knowledge, not a single auditor in India has ever faced punitive action by ICAI or beenconvicted and sentenced under the Companies Act and other laws.5.0 Moral and Ethical failure:Satyam downfall once again brings into focus the issue of moral and ethical failure. How couldthe owner and chairman of the company inflate accounting profits without the knowledge of thePGP13/Group 3/Section D Page 21
    • Organizational Behaviorentire board or anyone else in the company? Why did board of directors not question thefinancial statements? Greater emphasis on professionalism and ethics in business is the need ofthe hour. That is why ethics and professionalism figure so prominently in ACCA professionalaccountancy qualification, alongside the need for strong technical financial and accounting skills,and why the demand for people with ACCA international qualification is growing across theworld.What put Ramalinga Raju‘s fraud in a different league is the numerous awards and accolades hewon for his business skills. Chief Minister Y.S. Rajasekhara Reddy presenting the ITAward to B. Ramalinga Raju at GITEX India 2006, at Cyberabad, in Hyderabad, on January 11, 2006. P. Sabita Reddy, Minister forInformation Technology, Mines and Geology, is at right.A young man hailing from Bhimavaram town in West Godavari district of Andhra Pradeshpromoted a start-up, when information technology in India was just a nascent industry, toprovide software development and consultancy services to large corporations. All he had was anMBA degree from Ohio University in the United States and just enough money to hire 20employees. Twenty-one years later, this man, Byrraju Ramalinga Raju, now 54, stands at thecentre of Brand India‘s biggest corporate fraud.The tremors have shaken not merely bourses in India and abroad but also, more importantly, theconfidence of overseas and Indian investors about ethics and corporate governance practices inIndia‘s IT industry. Worse may be in store for the country‘s reputation as a global outsourcingPGP13/Group 3/Section D Page 22
    • Organizational Behaviorhub once hearings begin on a clutch of class action lawsuits filed in the U.S. by purchasers ofSatyam‘s American Depository Receipts. British mobile solutions firm Upaid, which is alreadyfighting a forgery case against Satyam in the U.S., questioned how $1.6 billion was siphoned outof the company to acquire Maytas in advance of a judgment on its lawsuit.Gilded image: What put Ramalinga Raju in a different league is the numerous awards andaccolades he won for his entrepreneurial skills, his ability to compete with the biggest in SiliconValley, and his becoming the IT service provider for the 2010 and 2014 FederationInternationale Football Association (FIFA) World Cups in South Africa and Brazil. This gildedimage as a global player and Satyam‘s operating profits of up to 50 per cent were apparently acover-up for the false inflation of profits that Raju had been indulging in ―over a period of lastseveral years‖Charade of integrity: That these claims of integrity were a charade became evident after he wrotea five-page confessional letter to his Board of Directors making five shocking admissions. Allthis was done to fill ―a marginal gap‖ between actual operating profit and the one reflected in theaccount books. This gap attained unmanageable proportions as the size of the company‘soperations grew significantly.IT poster boy: In 2000, Raju was showcased by the then Chief Minister, N. Chandrababu Naidu,to the then U.S. President, Bill Clinton, as a first-generation entrepreneur and the face of India‘sIT prowess when the dignitary visited Hyderabad. Andhra Pradesh was desperately in need ofposter boys, big-ticket entrepreneurs either in the manufacturing sector or in the digital sphere.The Institute of Chartered Accountants of India (ICAI) gave him the Golden Peacock award forcorporate governance. All this now appears as cruel irony. Ramalinga Raju has fallen from hisiconic status after committing a Rs.7,100-crore fraud in a company that he himself built fromscratch.PGP13/Group 3/Section D Page 23
    • Organizational Behavior6.0 Measures to avoid such recurrences:6.1 The Laxity of Indian laws:If an auditor fails in his duty in India, he faces a ridiculous penalty of Rs 10,000 (under 200dollars) and maximum imprisonment of two years. In contrast the U.S. Sarbanes-Oxley Actpassed after the Enron and WorldCom scandals, awards imprisonment for 20 years.The U.S. and many other countries have greatly improved fraud detection by reforming auditmethods and offering incentives to whistle-blowers. India is yet to do any of this.India lacks adequate corporate regulation. And its enforcement is appalling. For instance, asmany as 1,228 of the Bombay Stock Exchanges 4,995 listed companies have failed to submitreports required by the Listing Agreement, including information on their boards composition,audit committees, CEO certification of accounts, and related-party transactions and subsidiarycompanies.Unless we urgently take corrective measures, corporate fraud will continue, cheatingshareholders and milking the public exchequer. Statutory auditors arent enough. We need aBoard of Audit, which is authorized to conduct surprise audit on its own or on whistle-blowercomplaints. Only then will the conviction rate in corporate frauds, which is currently under fivepercent in India, improve.The Satyam episode has forced a rethink of the accounting and audit policies that Indiancompanies now follow. Many solutions have come up to plug the loopholes which were exposedby the Satyam scandal and if implemented, some of the solutions could be highly effective. Withrespect to accounting and audit, knee-jerk reactions like taking confirmations from banks withrespect to amount of funds have already begun. Most of the big auditors have started toimplement the aforesaid. However, these are procedural changes and not policy ones. It‘s thelatter which can hope to accomplish anything. One very viable solution put forward by the IASCPGP13/Group 3/Section D Page 24
    • Organizational BehaviorFoundation is a call for all major Indian companies to move towards full convergence with theInternational Financial Reporting Standards (IFRS).The evidence base for firm recommendations on corporate governance in financial institutions isthinner than one would like, and certainly not robust enough to offer a standardized set ofrecommendations valid at all times and in all places.6.2 Conclusions and Recommendations: First, that people are more important than processes. Many of the failed firms, or near failed firms which we have encountered, had Boards with the prescribed mix of executives and non-executives, with socially acceptable levels of diversity, with directors appointed through impeccably independent processes, yet where the individuals concerned were either not skilled enough for, or not temperamentally suited to, the challenge role that came to be required when the business ran into difficulty. Secondly, and in spite of first conclusion, there are some good practice processes worth having. Properly constituted audit committees, and Board risk committees can play an important role, as long as they are prepared to listen carefully to sources of advice from outside the firm. Third, and this is a foundation stone of the FSAs approach, a regulatory regime built on senior management responsibilities is absolutely essential. In some of the cases we have wrestled with, senior management did not consider themselves to be responsible for the control environment and indeed, in the old pre FSA regime, were able successfully to claim that they were not responsible even if the business failed. So our regulation is built on a carefully articulated set of responsibilities up and down the business. It is important that they are not unrealistic. We do not expect the CEO to check in the bottom drawers of each of his traders for un-booked deal tickets. But we do expect the CEO to ensure that there is a risk management structure and a control framework throughout the business which ought to identify aberrant behaviour, or at least prevent it going on unchecked for any length of time.PGP13/Group 3/Section D Page 25
    • Organizational Behavior One consequence of this senior management regime, fourth point, is that regulators must focus attention on the top level of management in the firm. For the major firms we regulate we insist that our supervisors have direct access to the Board, and that they present to the Board their own unvarnished view of the risks the firm is running, and of how good the control systems are by comparison with the best of breed in their sector. Unfortunately, we find some resistance to this approach. The management of some of our firms want to negotiate the regulators assessment, so that when it reaches the Board it is an agreed paper and sufficiently bland to cause no debate. Well-structured Board, and a confident management, should welcome an independent view, even expressed at the Board level, which they may challenge and contest if they wish. And non-executive directors should find it helpful to see a knowledgeable view of the institution which does not come from or through its own senior management. Fifth and penultimate point may not be a popular one. Boards should take more interest in the nature of the incentive structure within the organisation. I am not talking solely about the pay of the CEO, important though that is to get right - as some firms in Britain have recently discovered. Talking about ensuring that the incentives within the firm, and pay is a very powerful one, are aligned with its risk appetite. A number of our most problematic cases have their roots in a misalignment of incentives. Lastly, no corporate governance system will work well unless there is some engagement on the part of shareholders. Boards are responsible to shareholders. That is the received wisdom in Anglo-American capitalism, at least. But if those shareholders are not prepared to vote their shares, and show little interest in business strategy, then that accountability is somewhat notional, and unlikely to be effective. Certainly regulators cannot hope to substitute for concerned and challenging shareholders, though in some senses they may complement them.PGP13/Group 3/Section D Page 26
    • Organizational BehaviorAmong other measures being suggested are compulsory rotation of auditors every three years,the creation by the government of a pool of independent directors from amongst citizens of highintegrity, and their appointment by impartial authorities, as well as tighter enforcement andstiffer penalties.With respect to independence of directors, there have been many ‗suggestion‘ and a few stepstaken by the government which should help in ensuring good Corporate Governance. TheCompanies Bill of 2008 sought to increase the levels of transparency and corporate governanceto ensure greater accountability to stakeholders. To this end, the Bill brings in a more stringentdefinition of an independent director. The new Bill introduces the requirement that independentdirectors must not receive any remuneration, other than a sitting fee or reimbursement ofexpenses. However, they may receive profit-related commission or stock options if approved bythe members.In addition, an independent director must, in the opinion of the board, be a person of integrityand possess relevant expertise and experience.6.3 Five Core Issues of governanceChairman and CEO: It is considered good practice to separate the roles of the Chairman of theBoard and that of the CEO. The Chairman is head of the Board and the CEO heads themanagement. If the same individual occupies both the positions, there is too much concentrationof power, and the possibility of the board supervising the management gets diluted.Audit Committee: Boards work through sub-committees and the audit committee is one of themost important. It not only oversees the work of the auditors but is also expected toindependently inquire into the workings of the organisation and bring lapse to the attention of thefull board.Independence and conflicts of interest: Good governance requires that outside directorsmaintain their independence and do not benefit from their board membership other thanPGP13/Group 3/Section D Page 27
    • Organizational Behaviorremuneration. Otherwise, it can create conflicts of interest. By having a majority of outsidedirectors on its Board.Flow of information: A board needs to be provided with important information in a timelymanner to enable it to perform its roles. A governance guideline of General Motors, for instance,specifically allows directors to contact individuals in the management if they feel the need toknow more about operations than what they are being told.Too many directorships: Being a director of a company takes time and effort. Although a boardmight meet only four or five times a year, the director needs to have the time to read and reflectover all the material provided and make informed decisions. Good governance, therefore,suggests that an individual sitting on too many boards looks upon it only as a sinecure for he orshe will not have the time to do a good job.6.4 A problem of ethical deficitThe Satyam scam is a one-off episode. But it highlights the need to create value systems infirmsSatyam seems very much like India‘s Enron. The strong brand that had been created, with aname that meant truth, was respected by its customers and was attractive to very high qualitytalent. The independent directors on the board were people with top credentials and the auditorswere one of the top four names in the business. Yet, both the size of the deceit and the length oftime it went on were remarkable, leading to a justifiably strong and loud outcry.It is time business schools had a code of ethics for their own governance. IIMs can jointly draftthe ethics code for all the processes and practices in an institute and for the conduct of thegoverning board, director, faculty and students. There should be clear guidelines of conduct fordirectors or faculty members who join boards of companies. If any faculty member lends hisname to a board, he is also lending the name of the institute he represents, and should be mademore accountable. Similarly, ethical ways of internal processes—including admissions, facultyPGP13/Group 3/Section D Page 28
    • Organizational Behaviorselection and evaluation, the selection of the director, student evaluation, interaction withindustry, placements, etc.— should be clearly defined. Such a document can be a guide for allbusiness schools. Maybe this could be the agenda of the next quarterly meeting of all IIMdirectors.7.0 Conclusion:The Satyam incident, though unfortunate, exposed some big loopholes in the system. Just as theUnited States needed the Enron Scandal to clean up its act, perhaps India needed the Satyamfiasco to introduce sweeping changes in its own financial reporting system. It cannot be deniedthat the Satyam episode was a stark failure of the code of Corporate Governance inIndia. Corporate Governance is not something which can be enforced by mere legislation; it is away of life and has to imbibe itself into the very business culture the company operates in.Ultimately, following practices of good governance leads to all round benefits for all the partiesconcerned. The company‘s reputation is boosted, the shareholders and creditors are empowereddue to the transparency Corporate Governance brings in, the employees enjoy the improvedsystems of management and the community at large enjoys the fruits of better economic growthin a responsible way.PGP13/Group 3/Section D Page 29
    • Organizational Behavior8.0 Sources of Informationhttp://en.wikipedia.org/wiki/Satyam_scandalhttp://en.wikipedia.org/wiki/Satyam_Computer_Serviceshttp://www.frontlineonnet.com/fl2603/storieshttp://suchetadalal.com/?id=c38e8fff-6b1a-eb9b-495b1c23ddaa&base=sections&f&t=The+Truth+about+Satyamhttp://www.radianceweekly.com/142/3193/CORPORATE-INDIA-OR-CORRUPT-INDIA-The-Satyam-of-the-Loot-March/2009-01-18/Cover-Story/Story-Detail/Corporate-India-or-Corrupt-IndiaThe-Satyam-of-the-Loot-March.htmlhttp://businessmagazines.wordpress.com/2009/02/03/february-issue-of-outlook-business-magazine-brings-to-you-the-dismal-condition-of-the-software-sector-post-satyam/http://www.financialexpress.com/news/satyams-true-lies/409266/http://www.forbes.com/2009/01/07/satyam-raju-governance-oped-cx_sb_0107balachandran.htmlhttp://businesstoday.intoday.in/index.php?option=com_content&task=view&id=9744&sectionid=22&issueid=48&Itemid=1http://simulating.blogspot.com/2009/01/what-happened-to-satyam.htmlhttp://www.slideshare.net/aseemsidhu/satyam-fiascohttp://www.livemint.com/2009/01/11223309/Satyam-shows-Bschools-too-nee.htmlhttp://www.ethicalcorp.com/content.asp?ContentID=6281http://www.ethicalcorp.com/content.asp?ContentID=6281http://www.karmayog.org/newspaperarticles/newspaperarticles_22038.htmhttp://www.outlookindia.com/gsearch.aspx?cx=partner-pub-8484176841147392:mw5jlf-i5af&cof=FORID:9&ie=ISO-8859-1&q=satyam&sa=Search&siteurl=www.outlookindia.com/search.htmhttp://www.nwlink.com/~donclark/leader/leadob.htmlhttp://www.livemint.com/2008/09/12000541/The-great-accounting-scam.htmlhttp://www.corporatenarc.com/accountingscandals.phpPGP13/Group 3/Section D Page 30