Satyam Scam-Creative Accounting_FORE


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Satyam Scam-Creative Accounting_FORE

  1. 1. CREATIVE ACCOUNTING The SATYAM Scandal Presented by: Mohd. Faraz Khan (91033) Mudita Maheshwari (91034) Rajat Rathore (91042) Roshan Sonthalia (91045) Smriti Gupta (91054) Stuti Gupta (91056)
  3. 3. Definition <ul><li>The application of variability in the accounting principles, practices and procedures to modify the books of accounts so that the organization objective is served. </li></ul><ul><li>Also known as aggressive accounting ,it’s the operation on financial numbers ,usually within the orbit of the law and accounting standards but not providing a “true and fair” value. </li></ul>
  4. 4. Aim <ul><li>To inflate the profits & Sales </li></ul><ul><li>To smoothen the financial result. </li></ul><ul><li>To inflate EPS </li></ul><ul><li>To do the manipulation of assets and liabilities </li></ul><ul><li>Off balance Sheet financing </li></ul><ul><li>Window Dressing </li></ul>
  5. 5. Creative Accounting Practices <ul><li>Movement of sales </li></ul><ul><li>Movement of interdivisional sales i.e. from subsidiary to parent or parent to subsidiary companies causing depiction of higher growth of sales </li></ul><ul><li>Income Recognition </li></ul><ul><li>By adjusting the profits from one year to another year leading to impression management of the financial performance of the company. </li></ul><ul><li>Corporate takeover </li></ul><ul><li>Leads to the adjustments in the assets, liabilities and capital of the organization, thus leading to the effective financial position. </li></ul><ul><li>Off-balance sheet financing </li></ul><ul><li>Leasing, higher purchases, share buyback, Special Purpose Vehicles are tools used to arrange finance </li></ul>
  6. 6. <ul><li>Some Other Accounting Practices : </li></ul><ul><li>Follow-up of matching concept </li></ul><ul><li>Capitalization of the matching concept </li></ul><ul><li>Adjustment in the capital employed </li></ul><ul><li>Movement in inventory </li></ul><ul><li>Manipulating the value of goodwill and intangibles </li></ul><ul><li>Overstatements of assets </li></ul><ul><li>Can be done in various assets such as Inventory, Cash, Plant & Equipment, Investments & Other current assets. </li></ul>
  7. 7. SATYAM – A snapshot <ul><li>Satyam was established in 1987 by owner & founder B. Ramalingam Raju. </li></ul><ul><li>4 th fastest growing IT company in India </li></ul><ul><li>9% market share </li></ul><ul><li>40,000 employees </li></ul><ul><li>Revenue $2.1 billion </li></ul>
  8. 8. Achievements <ul><li>Fastest growing company of India listed in three International Exchanges i.e. NYSE, DOW and EURONEXT. </li></ul><ul><li>Winner of Innovation award for Partner excellence in both 2007 and 2008 for giving significant business value. </li></ul><ul><li>UK Trade & Investment India (UKTI) Business award for corporate social responsibility. </li></ul><ul><li>Golden Peacock Award for excellence in corporate governance. </li></ul>
  9. 9. Fall of Satyam - How It Happened? Dec 16, 2008 Dec 18, 2008 Dec 23, 2008 Jan 3, 2009 Dec 17, 2008 Dec 19, 2008 Dec 28, 2008 Jan 7&8, 2009 Satyam board announces the decision to buy stake in MAYTAS infrastructure a company owned by the promoter family for $1.6 bn Satyam announces a board meeting on 29th in wake of investor revolt and says will consider buy back to prop up investor sentiment World bank confirms an 8 year ban of Satyam for data theft and bribery Sale of Pledged shares of promoters results in the promoter stake in Satyam coming down to less than 5% Satyam call of the MAYTAS deal as a result of investor revolt and says will focus on core IT business and will not diversify Post MAYTAS U-turn, Upaid files motion against Satyam and promoters for $1.1 Bn claiming fraud. 4 Board members resign in wake of MAYTAS controversy and board meeting postponed to Jan 10 th 2009. Market speculation talks of hostile takeover by peers Mr. B. R. Raju resigns and cites financial irregularities in the book of accounts to the tune of $1.5 Billion. Lack of liquidity and payroll thus putting employees in jeopardy
  10. 10. B.R. Raju’s Confession… <ul><li>“ It was like riding a tiger, not knowing how to get off without being eaten.” </li></ul>
  11. 11. Understanding the Scam… <ul><li>The Balance Sheet as on September 30, 2008 showed : </li></ul><ul><li>Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5312 crore reflected in the books) </li></ul><ul><li>An accrued interest of Rs. 376 crore which is non-existent. </li></ul><ul><li>An understated liability of Rs.1,230 crore on account of funds arranged by B.R. Raju </li></ul><ul><li>An overstated debtors position of Rs. 490 crore (as against Rs. 2651 crore reflected in the books) </li></ul><ul><li>For the second quarter, Satyam reported a revenue of Rs. 2,700 crore and an operating margin of Rs. 649 crore (24% of revenues) as against the actual revenues of Rs. 2,112 crore and an actual operating margin of Rs. 61 crore (3% of revenues). </li></ul><ul><li>This resulted in artificial cash & bank balances going up by Rs. 588 crores in Q2 alone. </li></ul>
  12. 12. Immediate Market Reaction: <ul><li>Sensex stock index dropped 7.3% </li></ul><ul><li>Satyam shares fell nearly 78% </li></ul>
  13. 14. How did the scam happen? <ul><li>Raju and his family held below 10% of the company’s equity. </li></ul><ul><li>Raju allegedly used accounts opened in the names of the relatives to divert money and carry out insider trading. </li></ul><ul><li>Siphoning off funds from Satyam into Maytas Infra, Maytas Properties and various 325 firms floated by Mr. Ramalinga Raju. </li></ul><ul><li>Diversion of Rs.1,700 crore from an overseas bank account. </li></ul>
  14. 15. Stake of Promoters in SATYAM
  15. 16. Creative Accounting at SATYAM : <ul><li>Income Recognition </li></ul><ul><li>Satyam adjusted profits from one year to another year resulting into inflated profits. </li></ul><ul><li>Overstatement of assets </li></ul><ul><li>They constantly increased their WIP from March 2004. </li></ul><ul><li>Creating Fictitious assets/revenues </li></ul><ul><li>Fake fixed deposits of worth Rs. 3317 crore. </li></ul><ul><li>An accrued interest of Rs. 376 crores which is non-existent. </li></ul><ul><li>Created fake overseas clients and contracts which resulted in overstated revenues. </li></ul>
  16. 17. <ul><li>Corporate Takeovers </li></ul><ul><li>Raju was siphoning the money from Satyam to Maytas since last 6 years. </li></ul><ul><li>He wanted to aquire Maytas to cover up Satyam’s inflated cash. Though, his last attempt to fill the fictitious assets with real ones failed. </li></ul>Creative Accounting at SATYAM :
  17. 18. The Auditors - PwC <ul><li>PricewaterhouseCoopers is one of the world's largest professional services firms. </li></ul><ul><li>PwC is a Big Four Auditor. Its clients include fortune 500 companies like IBM ,Yahoo, eBay, GUS and Marks & Spencer. </li></ul><ul><li>Point to be noted : </li></ul><ul><li>PwC was paid 3.53 crore for the year 2008 </li></ul><ul><li>Comparatively, same industry Infosys paid 1 crore </li></ul><ul><li>Reliance industries a much bigger company paid 9.18 crores as audit fees </li></ul>
  18. 19. PwC - Partners in Crime ??? <ul><li>Previous record - </li></ul><ul><li>Satyam has also been accused of frauds in 2001 and 2003. </li></ul><ul><li>No importance was given to this. </li></ul><ul><li>Getting third party evidence - </li></ul><ul><li>No bank confirmation on fixed deposits </li></ul><ul><li>Accrued interest(fixed deposit) </li></ul><ul><li>Debtors confirmation </li></ul><ul><li>Factors overlooked - </li></ul><ul><li>Changing of accounting years </li></ul><ul><li>Huge debt despite cash surplus </li></ul>
  19. 20. PwC - Partners in Crime ??? <ul><li>What could have been sensed? </li></ul><ul><li>Excess cash: </li></ul><ul><li>No distribution among share holders nor invested to earn valuable interest </li></ul><ul><li>Operating margin: </li></ul><ul><li>Peer companies - 20-25% </li></ul><ul><li>Satyam - 3% </li></ul><ul><li>Recession: </li></ul><ul><li>Huge profits compared to others always a chance of creative accounting. </li></ul>
  20. 21. Impact on India’s IT Industry <ul><li>The Satyam scandal has marred India’s reputation as a reliable provider of IT services. </li></ul><ul><li>It is likely that the other Indian outsourcing companies will be subjected to higher degree of scrutiny by regulators, investors and customers. </li></ul><ul><li>World Bank barred Wipro, Megasoft and 3 other IT companies after the Satyam debacle. </li></ul>
  21. 22. INDIA’S STEP TO SAVE SATYAM <ul><li>The Indian Government liquidity support </li></ul><ul><li>Six member Satyam board </li></ul><ul><li>Seeking bank loans to help cover salaries and other operating expenses </li></ul>
  22. 23. A New Leaf…. <ul><li>Board decided to sell 51% stake </li></ul><ul><li>Potential suitors: </li></ul><ul><ul><li>Larsen & Toubro (has 12% stake) </li></ul></ul><ul><ul><li>Cognizant </li></ul></ul><ul><ul><li>Tech Mahindra </li></ul></ul><ul><ul><li>B.K. Modi’s Spice Group </li></ul></ul><ul><ul><li>iGate </li></ul></ul><ul><ul><li>IBM </li></ul></ul><ul><ul><li>Fidelity </li></ul></ul><ul><li>Vineet Nayyar Executive Vice Chairman </li></ul><ul><li>C.P. Gurnani (CEO) </li></ul><ul><li>S Durgashankar (CFO). </li></ul>
  23. 24. Changes in the Rules and Regulations <ul><li>Limit Liability Partnership Act </li></ul><ul><li>The act was passed in the Parliament which was in the pipeline from few years. </li></ul><ul><li>Pledges disclosure </li></ul><ul><li>SEBI made it compulsory for the companies to disclose the amount of promoter’s shares that are pledged. </li></ul>
  24. 25. Suggestions <ul><li>More vigilant directors </li></ul><ul><li>Auditor rotation </li></ul><ul><li>Use of investigative audit techniques & Forensic auditors </li></ul><ul><li>Stricter norms for independent directors </li></ul><ul><li>Audit conduction in accordance with the Auditing and Assurance Standards (AAS) </li></ul><ul><li>Identifying and assessing the risk of material misstatement in financial statement & contacting major customers/suppliers </li></ul><ul><li>Blacklisting of Chartered Accountants by ICAI for indulging in fraudulent accounting practices. </li></ul>
  25. 26. Thank You !