Corporate governance failure at satyam case solutions.

1. Corporate Governance Failure at Satyam
1. What issues does this case pertain to?
The Satyam case is about a US$1.4 billion corporate governance fraud. Satyam
is India's fourth- largest information technology company. It offered
Information Technology (IT) services to around 690 clients, including 185
Fortune 500 companies such as GE, Nissan Motors and General Motors. By
2008, Satyam has conquered almost 37 countries all over the world.
The case is about the collapse of both Satyam and its founder, Ramalinga
Raju, who was a major celebrity in corporate India. This case can be helpful in
the process of understanding how corporate governance works and how flaws,
in this kind of governance, can lead to some scandal situations. It also helps
understanding the role of a promoter, independent directors, auditors and the
government in corporate governance failures. And most of all, this case can give
a great lead to clarifying corporate governance theories.
2.Who are the key players in the case?
Mr. Raju was clearly the first responsible for the fraud. Indian authorities
sued Mr. Raju, and other involved personalities such as the CFO, Mr. Raju's
brother, a managing director, the company's global head of internal audit with
responsibility for the fraud and filed charges against them. Satyam's auditors and
Board of Directors also bear some responsibility for the fraud because of their
failure to prevent it. The ownership structure of Indian businesses is also to
blame in the Satyam scandal.
3.What are the reasons behind inadequate corporate
governance at Satyam?
The unethical conduct was one of the main reasons
behind the inadequate corporate governance at Satyam. There was no
explicit or implicit code of ethics surrounding Satyam’s corporate culture;
bribery, corruption, and exchange of favors, within and outside the
company, appear to have occurred with frequency at various levels.

2. The case of false books showed a whole different financial status. The
investigations also detailed that the company had deliberately paid taxes on
account of the non-existent accrued interests, which was a considerable loss
for the company. These figures of accrued interest were shown in balance
sheets in order to suppress the detection of such non-existent fixed deposits on
account of inflated profits.
The independent directors should have questioned why the company was
sitting on such a huge pile of cash (as shown in the cooked books). The facts of
the Satyam’s case make it clear in spite of knowing the truth they did not raise
their voice against such malpractices. They kept watching the wrongdoing for so
many years even when it was detrimental to the interest of shareholders and
other stakeholders.
The true role of audit committee is to ensure transparency in the
company, that financial disclosures and financial statements provide a
correct, sufficient and creditable picture and that, cases of frauds,
irregularities, failure of internal control system within the organization,
were minimized, which the committee failed to carry out in Satyam’s case.
4.What are the implications for Satyam of the corporate
governance failure?
The implications for Satyam of the corporate governance failure can be
defined within a short list that concerns its difficulty in retaining clients;
Satyam couldn’t retain its contracts worth US$ 500 million and all of its major
clients moved to TCS, Satyam’s biggest competitor. The second implication is
for Corporate India. Satyam’s collapse triggered a crisis of trust and the whole
Indian industry suffered from investors who reviewed their outsourcing
programs. The third implication touched closely the credibility of international
Audit firms such as PwC, who neglected their duties and allowed inaccuracies
in Satyam’s audit. PwC was immediately replaced by auditing firms like
KPMG and Deloitte. The third implication was also a result of the Satyam
scam which led to questioning the presence of adequate laws for corporate
governance in India. Satyam’s board was blamed for allowing the Maytas
transaction, but they responded saying that the depended on PwC to present
accurate auditing which they didn’t. The last implication is about government
intervention, after that scandal exploded, the government took care of putting
in jail all major responsible in the affair and went even further by designating
new independent directors.

3. 5 Are there any lessons to be learned from the case for the future
prospects of corporate governance?
As every scandal, the Satyam’s helps learning some lessons. For instance,
companies should know that all inaccuracies should be investigated. if your
accounts are not balancing, or if something seems inaccurate, it is worth
investigating. Dividing responsibilities across a team of people makes it easier
to detect irregularities or misappropriated funds. Satyam’s situation ruined, not
only its reputation, but also the reputation of all the industry and even all of the
country. India is now pursued as a fraud land. Therefore, Indian rivals will come
under greater scrutiny by the regulators, investors and customers. The third
lesson concerns the need of a good corporate governance. Splitting up the roles,
of the CEO and the Chairman of the Board, thus, helps avoid situations like the
one at Satyam.
6. Explain the theories of corporate governance with reference to the
Satyam case.
As a worldwide scandal, the Satyam case emphasis the most common
corporate governance theories, such as the agency theory. Agency theory
illustrates the relative between a primary person, who assigns task, and the
mediator who executes that task. Agency theory concerns solving two kinds
of problems that can come up in this relationship. In this theory, it is crystal
clear to see the agent is playing a most vital part in determining the status of
an organization.
Another theory is the transaction cost theory. When companies want to
exploit a firm-specific asset abroad they will more likely invest in own facilities
rather than through, for example licensing if transaction costs are high. The
more intangible the firm-specific asset is, the greater the incentive for
internalization will be. Organizing transactions may be carried out through two
methods, the price system or hierarchy. The problem with the price system may
be that some market participants take advantage of measurement difficulties to
overprice and/or underperform. To avoid this 'cheating' behavior companies
internalize and integrate transactions.

4. most vital part in determining the status of an organization.
Another theory is the transaction cost theory. When companies
want to exploit a firm-specific asset abroad they will more likely
invest in own facilities rather than through, for example licensing if
transaction costs are high. The more intangible the firm-specific asset
is, the greater the incentive for internalization will be. Organizing
transactions may be carried out through two methods, the price system
or hierarchy. The problem with the price system may be that some
market participants take advantage of measurement difficulties to
overprice and/or underperform. To avoid this 'cheating' behavior
companies internalize and integrate transactions.