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Satyam scam
1. Business Ethics and Corporate Governance explained Through
Satyam Scam
Submitted To : Dr. Vijayendra Gupta
Date : 3rd March 2014
2.
3. “SATYAM COMPUTER SERVICE LIMITED”
•Satyam Computer Services Limited was founded in
1987 by Mr. B Ramalinga Raju.
•The company offers consulting and information
technology services spanning various sectors,
including engineering and product development,
supply chain management, client relationship
management, business process management and
business intelligence.
4. • The company was listed with New York stock
exchange, National stock exchange, and the
Mumbai stock exchange. In June 2009, the company
unveiled its new brand identity “Mahindra Satyam”
5. Who is B. Ramalinga Raju?
• Ramalinga Raju was born on September 16, 1954.
A traditional agricultural family of the KSHATRIYA
(RAJU) Community of Andhra Pradesh.
• He founded Satyam Computers and was its
Chairman until January 7, 2009 when he resigned
from the Satyam board after admitting to corporate
fraud.
6. • Satyam was until recently perceived to be amongst
the top Indian IT vendors.
• Raju has admitted to overstating the company's
cash reserves by USD$ 1.5 billion. Later, a person
involved in the investigation of the company said
that the company's assets were not inflated, but
instead siphoned off by Ramalinga Raju.
• Raju is currently held in Hyderabad's Chanchalguda
jail on criminal charges including fraud, forgery,
cheating, embezzlement and insider trading.
7. People Behind This Scam
• Ramalinga Raju : Satyam former chairman
• B Rama Raju : Brother of Ramalinga Raju
Former Managing Director
• V Srinivas : Ex-Chief financial officer
• S Gopalakrishnan: Price Waterhouse Auditor
• Talluri Srinivas : Price Waterhouse Auditor
8. “Career of B. Ramalinga Raju”
• He was first businessman in the field of
construction and textiles.
• Raju founded Satyam in 1987.
• He started an satyam computers with 20 employees
in 1987.
• Satyam was listed in INDIAN STOCK EXCHANGE in
1991.
• Listed in NEW YORK STOCK EXCHANGE in 2001.
• Satyam was listed in UNESCO(amsterdum) in 2008.
• There were 53,000 employees working in Satyam
in september 2008.
9. The Scam
• On 7 January 2009, company’s previous Chairman
Ramalinga Raju resigned after notifying board
members and the Securities and Exchange Board
of India (SEBI) that Satyam's accounts had been
falsified.
Raju confessed that Satyam's balance sheet of 30
September 2008 contained:
1. Inflated figures for cash and bank balances of
Rs 5,040 crores as against Rs 5,361 crore
reflected in the books.
10. The Scam (Contd.)
2. An accrued interest of Rs. 376 crore which was non-
existent.
3. An understated liability of Rs. 1,230 crore on
account of funds was arranged by himself.
4. An overstated debtors' position of Rs. 490 crore (as
against Rs. 2,651 crore in the books.)
5. On 22nd January 2009, CID told in the court that the
actual number of employees is only 40,000 and not
53,000 as reported earlier and that Mr. Raju had been
allegedly withdrawing INR 20 crore rupees every month
for paying these 13,000 non existent employees.
18. Reasons for Satyam Scam:-
1. Raju wanted to take over his MAYTAS INFRA and
MAYTAS PROPERTIES.(company of his sons).
2. He was blamed that he was using the funds of the
investors for the family business.
3. World bank had banned the satyam to take any
services for 8 years (due to illegal profit and lack of
essential document).
19. “CONSEQUENCES”
• Before the scandal it’s share price was Rs 300 in
oct 2008. Just after this scandal the share price go
down to Rs 6.30.
• On 10 January 2009, the Company Law Board
decided to bar the current board of Satyam from
functioning.
• Bank of America and State Farm Insurance
terminated its engagement with the company.
• Job of over 40,000 technocrats were at risk.
• The GDP fell by 0.4%
20. • SEBI, the stock market regulator, also said that, if
found guilty, its license to work in India may be
revoked.
• The New York Stock Exchange has halted trading in
Satyam stock
• India's National Stock Exchange has announced that
it will remove Satyam from its S&P CNX Nifty 50-
share index.
• Satyam's shares fell to 11.50 rupees on 10 January
2009, their lowest level since March 1998,
compared to a high of 544 rupees in 2008.
• IT sector suffered a downturn.
• India’s global image was tarnished.
21. • Satyam was the 2008 winner of the coveted Golden
Peacock Award for Corporate Governance under
Risk Management and Compliance Issues, which
was stripped from them in the aftermath of the
scandal.
• Present time it’s share price is 107.89. Mahendra
Satyam’s market growth is 7,800crore.
• Before the scandal Satyam was the 4th ranked
among IT companies of India and on 9th jan2009 it
became least valuable IT company in India.
• Country’s booming economy was at risk.
22. “IMPACT OF SATYAM SCAM ON INDIAN ECONOMY”
• Although several companies are trying to have a
bite into Satyam Computers, according to Gartner
study, the company is likely to exist in its current
form. It is expected to discontinue some of its
businesses, service lines or cease to exist in certain
geographies.
• Huge losses to investors aside, the Satyam scandal
has caused “serious damage” to India Inc’s
reputation as well as the country’s regulatory
authorities outside.
23. • The Government certainly cannot remain aloof and
allow Satyam to die off especially when it provides
occupation to 53,000 odd people and indirectly
supports more than a million Indians.
• The Satyam scam effect has started its infectious
presence. U.S. listed stocks of other Indian
companies have started taken a severe beating.
• Indian firms are looking into methods to avoid
scenarios of such scams within their companies.
25. The Promoters
• Since the
promoters, in this
case, held only about
8 percent
shares, their idea to
push through the
Maytas acquisition
deal was defeated by
an angry lot of
shareholders.
26. Directors & Independent Directors
• The Satyam board, including its five independent
directors had approved the founder's proposal to
buy 51 per cent stake in Maytas Infrastructure and
all of Maytas Properties, owned by the family
members of Satyam chairman B Ramalinga Raju.
• Despite the shareholders not being taken into
confidence, the directors went ahead with the
management's decision.
• The decision of acquisition
was, however, reversed 12 hours later after
investors dumped Satyam's stock and threatened
action against the management.
27. Role of auditors, in light of Satyam scam
This fraud was not committed overnight; it was
building up continuously from over years. The role
of Satyam’s auditors is under scanner. They ignored
some of the obvious indications of embezzlement
and thus failed to catch on the massive scam, which
could have been caught much before it acquired the
‘massive’ status.
28. Satyam’s Auditors : Price Waterhouse
Coopers
• This fraud was not committed overnight; it was
building up continuously from over years. The role
of Satyam’s auditors is under scanner. They ignored
some of the obvious indications of embezzlement
and thus failed to catch on the massive scam,
which could have been caught much before it
acquired the ‘massive’ status.
• PwC has written a letter to the BOD of Satyam that
its audit may be rendered "inaccurate and
unreliable" due to the disclosures made by
Satyam's (ex) Chairman..
29.
30. The Bankers
• If the auditors were
conned, it means that
either the bank
statement and
certificates were
forged
• Satyam's banks -- ICICI
Bank, HDFC Bank, Bank
of Baroda, etc
31. The SEBI
• The SEBI had in
December given a
clean chit to
Satyam in the
probe on violation
of corporate
governance law.
32. The Government
• The government too
is equally guilty in
not having managed
to save the
shareholders, the
employees and
some clients of the
company from
losing heavily.
35. New Board Appointed
• On 11 January 2009, the government
nominated noted banker Deepak
Parekh, former NASSCOM chief Kiran Karnik
and former SEBI member C Achuthan to
Satyam's board.
37. Mahindra Satyam
• Tech Mahindra paid Rs1757 Crore
for a 31% stake in the company, at Rs 58 per
share.
• Satyam Computer Services zoomed 15% to Rs
54.20 ahead of the announcement of the
highest bidder for the company on April 13,
2009.
• In India this moment was full of praise for the
manner and speed with which the
reconstituted board of Satyam Computer
Services found a strategic investor .
41. • Not following corporate governance norms.
• Tampering with Financial Data (Creative
Accounting).
• Misleading the shareholders funds.
• Putting self interest at the expense of share
holder’s interest.
• Fraud, Forgery and Cheating.
42.
43. Recommendations for
Corporate Governance
• In addition to the present statutory requirement, companies
should be required to institute sufficient internal
management controls.
• Management should ensure that the internal audit staffs are
able to prevent and detect financial statement fraud.
• Companies whose shares are publicly traded should be
required to have audit committees to monitor the internal
control system and provide important links to the internal
audit staff.
• Sanctions against the perpetrators of financial statement
fraud should be increased by imposing fines and other
deterrent measures like barring from corporate office.
However, in this case, there is a need to prevent innocent
managers from being too risk averse.
44. Suggestions towards Auditors
• Evaluate the potential for fraud in a given audit
engagement.
• Be obliged to utilise tests that provide reasonable
assurance of detection of fraud
• Evaluate the strength of the overall control
environment
• Facilitate the identification of areas of high audit risk by
reviewing the procedure analytically
• Communicate their role and responsibilities to all those
who rely on their work (ie nature and limitation of
audit)
• Report directly to the public any material irregularities
and illegal acts discovered during an audit.
45. • There is a need to clarify the duties of external
auditors.
• The management should formulate appropriate
policies and procedures which would reduce such
risks.
• The audit report should include ‘a letter from the
Chairman of the audit committee discussing the
committee's responsibilities and activities during
the year.
46. Theories Related to our Topic
• Creative Accounting
• Whistle Blowing
• Corporate Governance
• Objectives of Corporate Governance
• Need of Corporate Governance
• Role of Corporate Governance
• Merits of Corporate Governance
• Demerits of Corporate Governance
47. Creative Accounting
• A term used to describe the practice of
applying inappropriate accounting policies or
entering into complex or “special purpose”
transactions with the objective of making a
company’s financial statements appear to
disclose a more favourable
position, particularly in relation to the
calculation of certain ‘key’ ratios.
• Undesirable as it is intended to mislead users
of financial statements.
48. Creative Accounting is Used To :
• Hide a particularly bad year for the company.
• Force an exceptionally good year.
• Smooth out results to give an impression of
stability or sustained improvement
• Boost assets to avoid take-over.
49. Creative Accounting
Methods/Categories
• Allow company to choose between different
accounting methods such as writing of
development costs or amortizing it.
• Certain entries in the account involve
unavoidable degree of estimation, judgment and
prediction.
• Artificial transactions can be used to manipulate
balance sheet and move profits between
accounting periods.
50. Is Creative Accounting Ethical?
• Difficult to draw an ethical line on creative
accounting because
– GAAP often allow multiple accounting methods that a
company can choose from.
– Estimates are employed.
• Technically not illegal but could fall into unethical
area if the true values are grossly misrepresented
and inflating the performance.
51. Whistle Blowing
• Whistle blowing in its most general form involves
calling(public)attention to wrong doing, typically
in order to avert harm.
• Whistle blowing is an attempt by a member or
former member of an organization to disclose
wrong doing in or by the organization.
52. Criteria For Justifiable WB
• There are three conditions that must hold for
whistle-blowing to be morally permissible, and two
additional conditions that must hold for it to be
morally obligatory. The three conditions that must
hold for it to be morally permissible are:
1. The firm through its product or policy will do
serious and considerable harm to the
public, whether in the person of the user of its
product, an innocent bystander, or the general
public.
53. Criteria (Contd.)
2. Once an employee identifies a serious threat to the
user of a product or to the general public, he or she
should report it to his or her immediate superior and
make his or her moral concern known. Unless he or
she does so, the act of Whistle blowing is not
justifiable.
3. If one's immediate superior does nothing effective
about the concern or complaint, the employee should
exhaust the internal procedures and possibilities
within the firm. This usually will involve taking the
matter up the managerial ladder, and if necessary and
possible to the board of directors.
54. Two Additional Conditions
1. Whistleblower must have accessible documented
evidence that would convince a reasonable,
impartial observer that one's view of the situation
is correct, and that the company's product or
practice posses a serious and likely danger to the
public or to the user of the product.
2. The employee must have good reason to believe
that by going public the necessary changes will be
brought about. The chance of being successful
must be worth the risk one takes and danger to
which one is exposed.
55. Corporate Governance
• Corporate governance is concerned with set of
principles, ethics, values, morals, rules
regulations, & procedures etc. Corporate
governance establishes a system whereby
directors are entrusted with duties and
responsibilities in relation to the direction of the
company’s affairs.
• The term “governance” means control i.e.
controlling a company, an organization etc or a
company & corporate governance is governing or
controlling the corporate bodies i.e.
ethics, values, principles, morals.
57. Need of Corporate Governance
• Low Performance of Economy
• Failure of PSUs – Disappearance of Companies
• The number of Scams and Frauds
• Growing role of market in the world
• Integration with foreign market
• New business opportunities
• New Capital formation – FII, FDI
• Demand of High Performance by Investor
• Increased competition due to commencement of
MNC
58. Role Of Corporate governance
1. Value based corporate culture: For any
organization to run in effective way, it needs to
have certain ethics, values. Long run business
needs to have based corporate culture. Value
based corporate culture is good practice for
corporate governance.
2. Holistic view: This holistic view is more or less
godly, religious attitude which helps in running
organization. It is not easier to adopt it, it needs
special efforts and once adopted it leads to
developing qualities of nobility, tolerance and
empathy.
59. Role of CG (Contd.)
3. Compliance with laws: Those companies which really
need progress, have high ethical values and need to run
long run business they abide and comply with laws of
Securities Exchange Board Of India (SEBI), Foreign
Exchange Regulation Act, Cyber Laws, Banking Laws etc.
4. Disclosure, transparency, and accountability:
Disclosure, transparency and accountability are
important aspect for good governance. Timely and
accurate information should be disclosed on the
matters like the financial position, performance etc.
Transparency is needed towards corporate bodies so
that due to tremendous competition in the market
place the customers having choices don’t shift to other
corporate bodies.
60. Role of CG (contd.)
5. Corporate Governance and Human Resource
Management: For any corporate body, the
employees and staff are just like family. For a
company to be perfect the role of Human
Resource Management becomes very vital, they
both are directly linked. Every individual should
be treated with individual respect, his
achievements should be recognized.
6. Innovation: Every Corporate body needs to take
risk of innovation i.e. innovation in products, in
services and it plays a pivotal role in corporate
governance.
61. Merits of Corporate Governance
• Relationship with Share holders : Relationship
helps to sustain business for a longer period.
• Management : Assesses to outsider on how well
CG is being governed.
• Transparency : Attaining the trust of
stakeholders, improving access to capital and
financial market.
• Benefits to Shareholders : Shareholders have
greater security on investment they have made.
• Benefits to National Economy : Good flow in
capital, Important factor to bring in investment.
62. Demerits of Corporate Governance
• Corporations live & die by decisions of its BOD : -
Sentimental business decision.
• Family owned Companies influence the decision
(Eg. Satyam)
• Easily corruptible :- Lack of govermental
oversight.
• Cost of Monitoring :- Need to pour money to stay
in power.
