This SlideShare provides a detailed description about two biggest corporate scams- Enron and Satyam.

1. ANALYSIS ON FAILURE OF CORPORATE GOVERNANCE OF
TWO BIGGEST SCAMS- ENRON AND SATYAM
SUBMITTED BY
MONISHA R

2. The term corporate failure entails discontinuation of company’s operations leading to inability to reap sufficient profit or
revenue to pay the business expenses. It happens due to poor management, incompetence, and bad marketing strategies.
MAJOR REASONS FOR FAILURE OF CORPORATE GOVERNANCE
 Ineffective board
 Complexity
 Poor communication
 Risk blindness
 Unhealthy company culture
 Technological disruption
 Not enough working capital
 Information glass ceiling
 Systematic failures
 Economic distress

3. TWO BIGGEST SCAMS
 ENRON
Enron was once the 7th largest corporation in
America and they revolutionized trading and the
energy market. They were far smarter than their
competitors and their business was intricate and
too complex for the average person to understand
except in reality, it was all a big scam filled with
lies, fraud and political manipulation. Enron was
the biggest scam in US history. Billions of
dollars were stolen and thousands of employees
lost jobs and dozens of convictions. This is the
story of how one company took ten years to
grow to 60 billion dollars in value and go
bankrupt in less than a month.
 SATYAM
Satyam was India industry's 4th largest IT software
exporter. In the case of companies or big corporations,
when the type of fudging is done, the perpetrators not
only screw over the company, but they also screw over
everyone who has stakes in the company. That one such
case is the Satyam case. Or, as it is otherwise known as,
India’s biggest corporate scam. It is also defined as
India’s Enron. This is the case which plays a vital role in
revolutionize the corporate governance importance in the
company. There hasn't been another fraud affecting CAs
and audit companies like the Satyam Scam. The ethics
and governance of the corporations are being called into
question by these frauds. Corporate governance, which is
the central idea relating to a company's ethics and
principles in managing it, has always been a component
of the Indian Companies Act since its establishment,
although it has received little attention.

4. SUMMARY OF ENRON
 Enron was founded by Kenneth Lay in 1985. The company was created as a result of a merger between Houston Natural
Gas Corporation and Inter North, Inc., two natural-gas distribution companies. As a result, in 1986, the name of the
amalgamated firm, HNG Inter North, was changed to Enron.
 When lay took over as CEO of Enron, he immediately transformed the business into an energy trader and provider. Enron
planned to take full advantage of the deregulation of the energy markets in the 1990s, which allowed businesses to put
wagers on future prices. Lay established the "Enron Finance Corporation" in 1990 and named Jeffrey Skilling as its
director.
 Jeff Skilling pushed Enron to switch from the Historical approach to the Market-to-Market method of accounting. This
would offer a more accurate appraisal and analysis of the company's present financial system.
 However, from 1996 and 2001, Fortuned named Enron "America's Most Innovative Company" for six years in a row.
 By the august of 2001, Enron was in freefall. Kenneth Lay, the company's CEO, resigned in February and was succeeded
by Jeffrey Skilling. Furthermore, Skilling resigned as CEO in August 2001, claiming personal reasons. Analysts began
lowering Enron's stock around the same time, and the price fell to a 52-week low of $39.95.
 The SEC began an inquiry into the company and discovered surprising findings. Enron had lost $591 million and owed
$690 million at the end of 2000.

5. FALL OF ENRON
 M2M accounting techniques
This approach uses the current market value of a security rather than the book value to assess its worth. The company
would construct an asset, such as a power plant, and immediately record the projected profit. As a result, even if the
project or asset became unsuccessful, predicted earnings would be displayed to make it appear successful.
 Subsidiary company
Enron transferred all its assets to subsidiary company and that company went to bank to took loans by mortgaging the
assets transferred by Enron. That money was transferred to Enron and by this their financial needs were met.
 Insider trading
It is the trading of public company’s stock based on material, non public information about the company.
 Role of Arthur Andersen
Auditing firm which plays a major role on Enron's fraud. They destroyed every evidence against the Enron.
 Bankruptcy
At its height, Enron's stock was worth $90.75, but by the time company filed for bankruptcy, it was only worth $0.26.

6. PUNISHMENTS
 Skilling was found guilty of 19 of the 28 counts of securities and wire fraud, and acquitted of the other nine,
including insider trading allegations. He was sentenced a term of imprisonment of 17 years and 4 months.
Skilling's sentence was reduced by 14 years when the US Department of Justice negotiated an agreement with him
in 2013.
 Lay was found guilty of all six counts of securities and wire fraud on which he was prosecuted, and he was
sentenced to 20 years imprisonment. Lay, however, died on July 5, 2006, before his sentence was due. In addition
to civil fines, the SEC was seeking more than $90 million from Lay at the time of his death.
 For destroying thousands of papers and deleting e-mails and corporate files that connected the firm to its audit of
Enron, Arthur Andersen was charged with obstruction of justice and found guilty. Despite the fact that just a few
Arthur Andersen personnel were engaged in the scandal, the firm was ultimately closed down since the SEC would
not accept audits from convicted criminals. On August 31, 2002, the organization surrendered its CPA licence,
resulting in the layoff of 85,000 workers.

7. AFTERMATH
 While certain workers got substantial bonuses in the closing days of the firm, such as John D. Arnold, Enron's stockholders lost
$74 billion in the four years leading up to the company's bankruptcy ($40 to $45 billion was linked to fraud). Although Enron
owed creditors almost $67 billion, employees and stockholders received little, if any, aid from the company other from severance.
Enron used auctions to sell assets such as paintings, photos, brand signs, and pipelines to pay its creditors.
 In May 2004, more than 20,000 former Enron workers were awarded $85 million in compensation for pension losses totalling $2
billion. The employees each earned roughly $3,100 as part of the settlement.
 The Sarbanes-Oxley Act was passed on July 30, 2002, as a result of these hearings and the business crises that followed Enron.
 The Act is almost "a mirror image of Enron: the company's alleged corporate governance failures are practically mirrored point
for point in the Act's major provisions." The Sarbanes-Oxley Act's main provisions included the creation of the Public Company
Accounting Oversight Board to develop standards for the preparation of audit reports; the prohibition of public accounting firms
from providing non-auditing services when auditing; provisions for the independence of audit committee members; and the
requirement that executives sign off on financial reports
 Stock exchange Regulations - The SEC suggested amendments to stock exchange regulations on February 13, 2002, in response
to instances of corporate misconduct and accounting breaches. The New York Stock Exchange announced a new governance plan
in June 2002, which was accepted by the Securities and Exchange Commission in November 2003.

8. FAILURE OF CORPORATE GOVERNANCE IN ENRON
 Domineering CEO
Lay and, in particular, Skilling encouraged in all Enron employees the desire to drive up the stock price to the exclusion of all else. Signing
up deals had been in a distant second place to delivering long-term satisfaction from a sustainable client base.
 Poor management
Skilling had a very clear picture, at least at first, of what he intended Enron to achieve as a McKinsey consultant expert in strategy. He wasn't
interested in management in general, so he let operational management wither.
 Lack of transparency
Enron's early concentration on profitability and share price growth, as well as the associated financial incentives, resulted in a required lack
of transparency as the statistics were manipulated. One might argue that Enron felt a strong sense of responsibility to its stockholders for
providing consistently above-average market capitalization growth.
 Flaws on Audit
The esteemed Arthur Andersen let fee greed override its founder's strong business ethics heritage, causing it to bend and suspend its
professional standards, with disastrous consequences.

9. SUMMARY OF SATYAM
 Ramalinga Raju and Rama Raju, brothers, formed Satyam Computer Services Ltd in Hyderabad in 1987. The company started
with 20 people and provided IT and BPO services to a variety of industries. The company's first success led to it being listed
and choosing for an IPO on the BSE in 1991. Following this, Deere and Company became the company's first Fortune 500
client. This allowed the company to expand quickly and become one of the market's leading competitors. After TCS, Wipro, and
Infosys, Satyam quickly rose to become the industry's 4th largest IT software exporter. Satyam had over 50,000 employees and
was active in over 60 countries during the height of its prosperity. Satyam had become the poster child for an Indian success
tale. Its financials were also flawless. In 2003, the company was valued at $1 billion. Satyam rapidly exceeded the $2 billion
milestone in 2008.
 Satyam had become a role model for other businesses. MZ Consult awarded it the ‘Golden Peacock Award' for Corporate
Accountability in 2008 for being a ‘leader in Indian Corporate Governance and Accountability. Mr. Raju was also well-known
in the sector for his business skills, and in 2008 he received the Ernest and Young Entrepreneur of the Year Award

10. • Suddenly, The World Bank issued one of the highest penalties on an Indian outsourcing company. Satyam was accused by
the World Bank of failing to maintain documentation to justify fees charged to its subcontractors and of providing illegal
benefits to bank employees. This took confusion all over the economy as Satyam was considered as India’s crown jewel and
two days later accused by world bank.
• On January 7th, 2009, the markets got Mr. Raju's resignation, coupled with a confession that he had manipulated accounts
worth Rs. 7000 crores, as investors were still dealing with the failed acquisition of Maytas and claims by the World Bank.
Investors and clients from all across the world were shocked.

11. LIST OF FRAUDS
 INFLATED FINANCIALS
INFLATED VALUE IN
CRORES (IN INR)
ACTUAL VALUE IN
CRORES (IN INR)
NET FRAUD IN
CRORES (IN INR)
Cash and bank balance 5,361 321 5,040
Accrued interest 376 0 376
Liability
Debtors
Understated (1230)
2,651 2,161
1,230
490
By all this he made a fraud of total 7,136 crores

12. Dummy employees
Crime investigation department (CID) told in court that the actual number of employees were only 40,000 and not 53,000
as reported earlier and that Mr. Raju had been allegedly withdrawing rupees. So, he drawn 20 crore every month for
paying these 13,000 non-existent employees.
Fake invoices
He did all of these frauds by creating fake invoices and bills which was created using software applications to inflate the
revenues. The bank figures were even manipulated and never showed true figures.
Acquisition of lands
Ramalinga Naidu saw the prospective growth in Hyderabad. He assumed that the Hyderabad, whatever is the land is
going to be the next currency. So, he started to acquire as much of land as possible in Hyderabad and once the land prices
shoot up, he decides to sell. At first, he acquired the land with the money left in his hands and later when no money left,
his greed developed and he started acquiring the land with fake invoices and fake sales.

13. Access to metro route map
He had the inner information about the metro plan, which was about to come in Hyderabad. Satyam had an access to metro
plan and he started acquiring land as per the map. This again falls in fraud. Mr. E. Sreedharan, an Indian engineer and whistle
blower suspected that the Satyam company had access to the inside information on planning much before its
conceptualisation. He said that, "it helped company to buy vast stretches of land at a much lower price around the metro
route, so that it could be sold at a price multiple times higher and make huge profit.
Last resort on Maytas company
Regardless, Raju had a last resort. A buyout of Maytas by Satyam was part of the strategy, which would close the gap that
had grown over time. The fresh financials would prove that the money had been spent on Maytas. This strategy, however,
was failed due to shareholder opposition.
Raju was obliged to place himself at the mercy of the law as a result of this.

14. PUNISHMENTS
 On directors
The court awarded Ramalinga Raju of 7 years Imprisonment and imposed a penalty of rupees 5 crore each on him and his brother,
and eight others with rupees 25 lakh each.
 Auditor's negligence
The Indian arm of PwC was fined $6 million by the SEC (Securities and Exchange Commission) in US for not following the code
of conduct in the performance of its duties related to the auditing of the accounts of Satyam computer services.
SEBI (Securities and Exchange Board of India) barred PwC from auditing any listed company in India for 2years. SEBI also
ordered disgorgement of over 13 crore wrongful gains along with interest@12%.
 Removal of board
On 10th January 2009, the Company Law Board decided to bar the current board of Satyam from functioning and appointed 10
nominal directors.

15. AFTERMATH
 Share price cash
Satyam' s shares fell to 11.50 rupees on 10th January 2009, their lowest since March 1998, compared to a high of 544 rupees in 2008
after his confession.
 CII by Naresh Chandra
In 2009, the Confederation of Indian Industries (CII) established a task group under the leadership of Naresh Chandra to suggest
corporate governance changes. A Committee for Corporate Governance Reforms was established in 2002 under the same leadership
as Naresh Chandra, however the report received little attention. Another committee, chaired by Narayan Murthy, was formed by the
National Association of Software and Services to create corporate governance and ethics for the firm.
 Committee by SEBI
SEBI also regulated its transparency and accounting standards committee, which examined the necessary modifications in the Audit
Committee, Shareholder Rights, Whistle blower Policy, and other areas.

16. • Guidelines by Ministry of Corporate Affairs
The Ministry of Corporate Affairs published optional recommendations for Corporate Governance in 2009 on the
following topics:
• Non-Executive Directors (NEDs) and Independent Directors should get formal letters of appointment from their
companies. The letters should include the terms and conditions of the directors' appointment, such as their fiduciary
obligations, limitations, ethics, pay, and so on. The letter must be made public and made available to shareholders.
• To prevent concentrating power in the hands of a single person and to create balance, there must be a clear
difference between the functions and responsibilities of the Chairman of the Board and the Managing Director/Chief
Executive Officer.
• The company may organize a Nomination Committee made up of Independent Directors to evaluate and
recommend Executive Director appointments, among other things.
• The Board's roles and responsibilities, such as director training, enabling quality decision-making, risk
management, and so on, were established.
• There were also standards for the Board's Audit Committee. The rules outlined its makeup, powers, functions, and
responsibilities.
• The procedures for appointing auditors, rotating audit partners and firms, obtaining a certificate of independence,
and appointing internal auditors were all covered in the recommendations.
• The guidelines also established the idea of secretarial audit and the establishment of a mechanism for
whistleblowing.

17. Changes in Companies Act, 2013
 Board of directors – sec 149 and
Sebi clause 49 for independent directors
 Committees of the Board
Under the Companies Act of 2013, the Board of Directors must establish four committees,
Audit Committee-Section 177
Committee on Stakeholder Relations - Section 178(5)
Committee on Nomination and Remuneration - Section 178
Committee on Corporate Social Responsibility (CSR Committee)
 Auditors
The Satyam Scam was caused by a number of flaws in the Companies Act of 1956 relating to the provisions for auditors. Many
business professionals believe that the fraud might have been averted if there had been strict and clear regulations for the role of
auditors at the time.

18. The Auditors' tasks and responsibilities were defined precisely in the Companies Act of 2013. It also determined the
Auditors' accountability. According to Section 139(2) of the Act, auditors and audit firms must rotate on a regular basis. It
established a five-year statutory cooling-off period after one term as an auditor. The Auditor was subjected to specific
limitations in order to avoid injustice and any conflicts of interest. Non-audit services for the firm, its subsidiaries, and
holding companies are not permitted by the company's auditor.
In addition to the fines imposed on auditors, the Companies Act of 2013 established criminal penalties for auditors' officers
who engage in fraudulent acts.
 Transactions involving related parties
Transactions involving Key Managerial Persons or Directors and their relatives are referred to as Related Party Transactions.
The Satyam Scam is the most well-known example of fraud perpetrated through Related Party Transactions. To avoid a
repeat of this blunder, the Companies Act of 2013 included Section 188, which stipulates that, specific requirements must be
met in order to conduct business with related parties.

19.  Class Action suits
A class action suit allows a group of people with a common grievance to file a lawsuit against an organisation as a whole. It
gives minority investors the right to sue the organisation and its management in the National Company Law court (NCLT).
Section 245 of the Companies Act of 2013 allows a lawsuit to be filed against the company's directors, executives, inspectors,
and anybody else who is accountable for a deceptive, illegal, or unfair act.
 Serious Fraud Investigation Office (SFIO)
There was no provision for the SFIO in the Companies Act of 1956. It used to function autonomously at the Ministry of
Corporate Affairs' request. However, under Sections 211 and 212 of the Companies Act 2013, it was given Statutory Provision.
The Central Government created the SFIO to investigate company-related frauds. It is led by the director and includes a variety
of specialists from many areas.
The only reason for the formation of the SFIO was to defend the interests of investors. Although investors are the true
proprietors of a corporation, the Board of Directors has control over its management. Few directors of the business have the
potential to misuse their authority, such as by defrauding the company.

20.  The CEO's and CFO's roles
The Satyam Scam case highlighted concerns about the CEO and CFO's roles and responsibilities. Instead of working for
the company's best interests, the CEO and CFO collaborated on a fraud and so failed to fulfil their fiduciary obligations.
Between the two, there were no checks and balances. As a result, specific requirements for the CFO are included in the
Companies Act of 2013. Furthermore, the regulations are designed in such a way that there will be no power overlap and
no possibility of collaboration between the two.
 Present status of Satyam
On 13th April 2009, via a formal public auction process, a 46% stake in Satyam was purchased by tech Mahindra.
Effective on July 2009, Satyam rebranded its services under the new Mahindra management as ‘Mahindra satyam’. As
time passed by, tech Mahindra announced its merger with Mahindra Satyam. The companies are merged legally on 25
June 2013.

21. FAILURE OF CORPORATE GOVERNANCE IN SATYAM
 Domineering CEO/CFO
Satyam had issues with the CEO and CFO's roles. The company's CEO/CFO ensures the integrity and honesty of the
company's financial statements, according to corporate governance norms. Regrettably, Satyam's CEO Raju and CFO
Vadlamani failed to fulfil their responsibilities. Because of their unlawful conduct, which led in the concealment of
actual financial data, Satyam's investors, stakeholders, and clients were completely unaware of the disastrous
situation.
 Poor management
 Independent directors played a big part in Satyam's collapse. These individuals were in charge of overseeing the
company's operations. They showed little interest in or concern about the situation in Satyam, though. The company's
independent directors should have questioned why it had so much cash on hand, but they didn't. Instead, they
remained silent for years despite knowing that their actions may hurt the company's stakeholders and partners.

22. Lack of transparency and disclosure
One of the cornerstones to corporate success is ensuring transparency and disclosure of the company's materials so that the
true condition of operations may be viewed and assessed. By stating these values, the corporation displays its capacity or
inability to do business, and stakeholders may assess its prospects. In the case of Satyam, there was no transparency or
disclosure. Raju's statistics did not reflect the true state of affairs, resulting in investors losing large sums of money without
even thinking. All of the information supplied to stakeholders was false, and no one knew what was really going on inside
the company.
Flaws on Audit
Price Waterhouse Coopers (PwC), their auditor, failed miserably. PwC was the company's external auditors, and it was their
job to look over the financial records and make sure they were correct. After nearly 9 years of auditing Satyam, it's
remarkable that they didn't find 7561 fraudulent bills. There were a number of red flags that the auditors should have noticed.
First, the bills were not legitimate, and the cash sums were exaggerated, according to a simple check with the banks. Second,
any corporation with as large cash reserves as Satyam would at the very least invest them in an account that pays interest.

23. COMPARATIVE ANALYSIS
 Fall of companies
Enron Corporation, located in Houston, Texas, was an American energy business. It was formerly one of the world's most successful producers
of power, natural gas, pulp & paper, and communications before going bankrupt in 2001. Satyam Computer Services, on the other hand, was
formed in 1987 and is fundamentally a very competent and lucrative Indian corporation with activities and partnerships all over the world.
Both firms appeared to be hugely profitable at first, but in order to maintain that level of prosperity, they turned to illegitimate techniques.
 Accounting Techniques
The techniques employed in the Satyam and Enron scams were substantially different. Satyam generated fake bills and invoices, whereas
Enron employed the mark to market technique. Furthermore, the two companies employed the SPVs for distinct objectives. Satyam utilised
them to steal funds, but Enron used them to disguise its loss-making assets. Both Enron and Satyam were victims of accounting fraud, which
led to their demise. Enron and Satyam, on the other hand, were victims of accounting scams brought on by greed, which led to the collapse of
both business giants.

24. Directors and Auditors role
The directors and auditing firms at both Enron and Satyam failed or ignored to do their obligations. Both of them are responsible
for keeping an eye on the company's operations in order to safeguard the interests of investors. However, as a result of the
scandals, shareholders suffered huge losses due to corporate governance failures.
Management system
These crises had a chance to arise because of the companies' top management's bad decision making and the directors' misguided
trust in them. Even though the goals were different, Enron and Satyam created multiple partnerships to engage in unethical
business practises.

25. COMMENTS
 After examining both companies and their consequent scandals, we can infer that the Satyam and Enron scams
were substantially the same at the grassroots level. The accounting fraud that was perpetrated at both the
companies was based on the same principles. The scandals made the authorities realize the importance of ethics
and internal control in the business enterprises. Majority of scams can be avoided if the auditing firm is honest,
management is better, SEBI plays an active role and periodic review of legal compliance by independent directors.
The good news is that, as a result of these crises, corporate governance rules in both India and the United States
have undergone major changes. Only time will tell how effective these are in preventing future frauds.