Corporate Ethics


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  • Parmalat – Italian milk producer and its links to Cayman Islands based mutual fund group Epicurum and related family held football and tourism businesses – CEO Calisto Tanzi sentenced to ten years in prison – CFO did not have access to some of the books related to debt – Source Wikipedia
  • In the case of Satyam Computer Services Limited, a point which gives rise to the criticism is the practice of paying huge amounts as fees to the independent directors of their company varying from INR 1.24 million to INR 9.948 millions. This was in the form of commission, sitting fees and professional fees. This practice of paying them well could lead to falsifications of the records because they have soft view towards the financial matters. Since, Satyam is a service oriented company, the exports which were shown also has increased by 35%. The increase would be by fictitious exports because the company in order to show the financial position in profits would have increased the exports.
  • Instituational shareholders should try to satisfy themselves that the investee company’s board and sub-committee structures are effective; that independent directors provide adequate oversight; and maintain a clear audit trail of their meetings and of votes cast on company resolutions, in particular contentious issues.
  • Major differences between these two historic scandals lies in the complexity and public understanding of the scandal and the role of the auditor.What is AndersenEnron involved a public company with millions of investors and a large international accounting firm – Arthur AndersenMadoff involved thousands of wealthy investors and a $50 billion Ponzi scheme and a small auditing firm operated by a sole practitioner, David Friehling of New York.The public and press did not understand the complexities of trading energy futures & manipulating markets but they did understand shredding of documents by AndersenIn Madoff’s case, the public understands Ponzi schemes and thus looks no further. Even though the auditor, David Friehling will be facing 105 years in jail
  • Todo revisit
  • Richard Nielsen at Boston College that a major cause of corruption in business organizations is “managerial isolation” - moral courage becomes more practicable if people have allies – tone at the top – ethics training & discussionPhoto – Time,8599,1877181,00.html
  • Corporate Ethics

    1. 1. Corporate Ethics: <br />Satyam Accounting Scandal<br />Raghu Kasturi<br />MBA<br />Stevens Henager College<br />July 1, 2009<br />
    2. 2. Overview<br />Introduction<br />Literature Review<br />Research Methodology<br />Findings and Analysis<br />Conclusions and Further Research<br />
    3. 3. Introduction<br />Research Statement<br />World is not only just going through economic crisis but also ethical crisis with the Corporate frauds, Accounting scandals, Mismanagement, Ponzi schemes, Bribes and many more.<br />Present Situation<br />Purpose of Research<br />Importance of Ethics<br />
    4. 4. Description of terms<br />Code of Conduct<br />GAAP<br />
    5. 5. Uses of Financial Statements<br />
    6. 6. What is manipulation<br />
    7. 7. Terms Used<br />
    8. 8. Need for manipulation<br />
    9. 9. Types of Manipulation<br />Manipulating timing<br />Early Recognition<br />Postponing<br />Falsifying entries<br />Fictitious revenues<br />Manipulating liabilities and expenses<br />Valuing assets<br />
    10. 10. Literature Review<br />Historical Context<br />Why Satyam?<br />What is Satyam ? - Company Background<br />What happened ? - Accounting Scandal<br />How did it happen ? - Scandal Analysis<br />
    11. 11. Historical Overview of Ethics<br />Somewhere 470-399B.C.<br />“A set of principles of right conduct”<br />“A system of moral principles applied in the commercial world” also known as morality in business.<br />The term “corporate ethics” was first coined around the 1970’s.<br />
    12. 12. Corporate Ethics<br />
    13. 13. Enron<br />“As strongly as I believe in a new role for government in the new economy, government action alone cannot provide most of the answer. That’s because what happened at Enron wasn’t just a failure of regulations and law, it was a failure of corporate culture, a failure of values, a failure of heart.”<br />Senator Carl Levin D-Michigan<br />Commenting on his Planned Bill of Rights for Shareholders<br />Ken Lay convicted of 6 counts<br />Faced 165 years in prison – but died of <br />Heart attack before going to jail<br />Source : Hood, 2009<br />
    14. 14. Enron<br />&quot;Acts of bad character must have real consequences. And already we&apos;re seeing that as financial markets punish companies that have displayed an inability to shoot straight. ... Every CEO in America now must realize that accounting gimmickry is a ticket to destruction.“<br />- Dave Kansas - WSJ<br />Jeff Skilling convicted of 19 out of 29 counts and received a 24 year sentence<br />Source : Hood, 2009<br />
    15. 15. Worldcom<br />&quot;A business run with character and integrity will receive rewards from the market,&quot; Kansas writes. &quot;A business run around the edges, whether within the letter of the law or not, will risk joining Adelphia, Global Crossing, Arthur Andersen, Enron and WorldCom on the scrapheap of history.“<br />- Dave Kansas – WSJ reporter<br />Bernard Ebbers convicted of $11 billion fraud – sentenced to 25 years in prison<br />Scott Sullivan CFO got five years<br />Source : Hood, 2009<br />
    16. 16. Tyco<br />Private company owners and public company management often try to run their companies as if there were no one with any outside interests. Any company that has a bank loan, an outside shareholder, or a supplier has people who have a vested interest in the company. Even those companies without any of those listed items have employees whose livelihood may be dependent on the company’s continues existence. Public companies and not-for-profit organizations have a higher degree of responsibility to protect those outside interests. Yet so many treat their organizations as their private fiefdoms. <br /> -Art Berkowitz - ENRON<br />Dennis Kozlowski convicted of $400 million fraud – sentenced to eight years in prison<br />Mark Swartz CFO got five years<br />Source : Hood, 2009<br />
    17. 17. Other Corporate Scandals & Accounting Frauds<br />Enron – WorldCom Era<br />Adelphia - Cable<br />Rite Aid – Drug stores<br />HealthSouth – Health<br />AOL Time Warner<br />Xerox<br />Bristol-Myers-Squibb<br />Classic Cases<br />Equity Funding – (Insurance & Mutual Funds) 1973<br />ZZZZ Best – (Carpet Cleaning & Restoration) - Mark Minkow - 1984<br />ESM Government Securities – 1985<br />Lincoln Savings & Loan - Charles Keating – CEO - 1989<br />
    18. 18. Current Scandals<br />Parmalat – Europe’s Enron (2003)<br />Satyam – India’s Enron (2008)<br />Madoff – World’s largest Ponzi Scheme<br />+ 35 other scandals so far totaling $37 Billion<br />
    19. 19. Bernard Madoff<br />Law of Intractable Systemic Corruption<br />Any significant breach of a syndrome’s integrity (Government & Commerce) – usually by adopting an inappropriate function – causes some normal virtues to convert automatically to vices, and still others to bend and break for necessary expedience. <br />Over the course of time, corrupted organizations accumulate in society. Without correction, the accompanying rancid cooperation blurs more than the afflicted organizations. <br />-Jane Jacobs – Systems of Survival<br />Ponzi scheme of $ 50 billion<br />Facing 150 years in prison<br />Source : Hood, 2009<br />
    20. 20. Madoff’s auditor<br /><ul><li> Sole Practitioner
    21. 21. Accused of issuing audits of Madoff Securities
    22. 22. Lied on AICPA membership renewal about peer review</li></ul>David Friehling, CPA faces 105 years in prison<br />For issuing false audit reports<br />Source : Hood, 2009<br />
    23. 23. Satyam + PwC<br />Ramalinga Raju – CEO created INR71.36 billion in fake billing and cash <br />PwC auditors missed cash accounts?<br />Source : Associated Press and Hood, 2009<br />
    24. 24. What went wrong in 21st century<br />
    25. 25. Satyam was established in 1987.<br />4th fastest growing IT company in India.<br />9 % market share<br />53,000 employees<br />Revenue $2.1 billion <br />First Indian company to be listed in three International Exchanges: NYSE, DOW and EURONEXT<br />Company Background<br />
    26. 26.
    27. 27. Interesting Facts<br /><ul><li>Development centers across world.
    28. 28. Stance over 55 countries across six continents.
    29. 29. Satyam serves Fortune 500 Companies which are 163 in number out of its 558 global companies.
    30. 30. Exports account for almost 75.9 per cent of its total sales revenues.
    31. 31. North America contributes around 65 per cent of the sales revenue followed by Europe. </li></li></ul><li>Awards and Recognitions<br /><ul><li>UK Trade and Investment India Business Award forCorporate Social Responsibility
    32. 32. Golden Peacock Global Award for Excellence in Corporate Governancefrom World Council for Corporate Governance
    33. 33. Best Investors Relations website in Asia pacific and Africa Regionfrom MZ Consult
    34. 34. Asian Most Admired Knowledge Enterprise (MAKE) Awardfrom Teleos, in association with KNOW Network</li></li></ul><li>Account Practices<br /><ul><li>U.S. Generally Accepted Accounting Principles (USGAAP)
    35. 35. International Financial Reporting Standards (IFRS)
    36. 36. Complied with Indian accounting standards</li></li></ul><li>What happened<br />Satyam board announces the decision to buy stake in Maytas infrastructure a company owned by the promoter family of Satyam for INR 65 Billion<br />Satyam announces a board meeting on Dec 29th says it will consider buy back to keep investors trust<br />Sale of Pledged shares of promoters result in the promoter stake in Satyam coming down to less than 5%<br />World Bank confirms an 8 year ban of Satyam for data theft and bribery<br />Dec 16 2008<br />Dec 18 2008<br />Dec 23 2008<br />Jan 03 2009<br />Dec 28 2008<br />Dec 17 2008<br />Dec 19 2008<br />Jan 07 2009<br />Unpaid files motion against Satyam and promoters for INR 55 Billion claiming fraud<br />Satyam calls of the Maytas deal as a result of investor revolt.<br />4 Board members resign in wake of Maytas controversy . Market speculation talks of hostile take over by peers<br />Mr. Ramalinga Raju resigns and confesses/cites financial irregularities in the book of accounts to the tune of INR 71.36 Billion.<br />
    37. 37. Confessions of Raju<br />“The scam of INR 71.36 billions in the company’s balance sheet was a result of small manipulation of accounts done many years back.”<br />“riding a tiger, not knowing how to get off without being eaten.”<br />
    38. 38. Shareholding in the company<br />Source: Jan 14 2009, The Hindu<br />
    39. 39. The wealth of Satyam investors has been wiped-out by the scandal. <br />Source: Economic Times, 2009<br />
    40. 40.
    41. 41.
    42. 42. Differences in Account Book<br />Cash and Bank Balance<br />Liability<br />Interest<br />Debtors position<br />71.36 Billion<br />
    43. 43. New Balance Sheet<br />Based on Raju’s confessions, if prepared a new balance sheet, then the statement will show the following effects:<br />Reserve will reduce by INR 71.36 billions<br />Net current asset will reduce by INR 71.36 billions.<br />Then, the book value of Satyam shares will be INR 20.67 but in turn the current market price is hovering around INR 45-50 which clearly shows the range of financial fiasco.<br />
    44. 44. Actual Profits Vs Profits in Books<br />
    45. 45. Research Methodology<br />Available Research Tools<br />Selecting Research Tool<br />Research Questions<br />Selection of participants<br />Procedure and Technology<br />
    46. 46. Categorizing Questions<br />
    47. 47. Investors<br />What are the responsibilities of institutional investors?<br />What are the rights of investors?<br /> How can investors detect fraud before it occurs?<br />Should investors take more care before investing? If so, what should they do or not do?<br />What are the risks involved when a CEO/Founder has a good percentage of stakes in the company?<br />
    48. 48. Board<br />How can boards and board members be made more responsible and accountable?<br />Is there a clear understanding of responsibility which differentiates what the board can do and what manager and employees can do?<br />How does the board ensure that members are suitable and what are the qualifications needed to become a member?<br />
    49. 49. Government Regulations, Policies and intervention<br />How can governments and regulators ensure effective corporate governance? <br />In the case of violation of rules and regulations, is the government taking corrective measures? If so, what? If not, what should they be doing?<br />Do you think there is too much government intervention as it relates to policy matters of private sector companies?<br />
    50. 50. Ethics of Individuals/Company, Defining and implementing code of conduct<br />Does the organization have a search or nominations committee which is responsible for selecting Board members?<br />Does the organization have rules and guidelines that insure members will contribute to the organization’s objectives?<br />How would you rate your company’s ability to not only detect fraud, but to eliminate it before it occurs?<br />Is there a Code of Conduct and proper implementation at all levels?<br />If there is a resigning of a board of directors in a crisis situation, what kind of signals do you think this sends to corporate India?<br />
    51. 51. Selection and Technology<br />Selection<br />Employees and Ex-Employees from Satyam<br />Business Analyst<br />Financial Experts/Analysts<br />Technology<br />Telephonic Interviews<br />Web Video Conference<br />Email Interviews<br />
    52. 52. Sample Size, Time and Cost<br />Sample Size<br />17 interviews<br />Time<br />Average – 30 minutes<br />Minimum – 15 minutes<br />Maximum – 56 minutes<br />Cost<br />~ USD 75<br />
    53. 53. Findings and Analysis<br />Collecting Findings<br />Description of Findings<br />Analysis of Findings<br />
    54. 54. Collection and Description<br />Collected seventeen different responses.<br />Recorded most of the findings.<br />Fifteen responses were considered for the analysis.<br />Analysis of findings are discussed<br />
    55. 55. Investors<br />Investors play an important role in detecting financial position of a company.<br />Investors must ensure that the share value which is listed is genuine and as per its financial status. <br />Institutional investors should take more responsibility.<br />Information about the company should be latest, from trusted source, easily accessible and correct.<br />New regulation for information Act.<br />Investors should take more care before investing.<br />No risk involved if CEO is the founder of the company.<br />
    56. 56. Board<br />Must monitor the ethical policies and the way they are being maintained in the company.<br />Accountable for the financial information being projected.<br />No to inactive board members.<br />Authority to independent board of directors.<br />Clear understanding of responsibility between the board and next level employees.<br />Qualified Board members.<br />
    57. 57. Government Regulations, Policies and intervention<br />Government should always plays an active role in the company affairs because the company runs with the public money. <br />The government must frequently check the company’s performance in the market and take necessary steps in curtailing any malpractices or falsification.<br />Government is not taking any corrective measures in case of any violations<br /> If the auditor do their work sincerely then any balance sheet and income statements would show the fair value of the company’s financial records. <br />Government intervention must be increased to have a foolproof mechanism in the company policy matters.<br />
    58. 58. Accounting Standards<br />Auditors main responsibility is to check fairness and trueness of financial statements.<br />Proper Audit Tools.<br />Freedom for auditors<br />Reputation of auditing firm/individual can’t avoid scandals.<br />Most of the companies involved in mega scandals were audited by reputed auditing firms.<br />
    59. 59. Ethics of Individuals/Company, Defining and implementing code of conduct<br />Search or Nominations Committee <br />Proper code of conduct updated on regular basis should be implemented.<br />Every company should have fraud detection mechanism.<br />Good Corporate Governance<br />Good educational background doesn’t always mean individual has good ethics.<br />Whistle blowing policies <br />
    60. 60. Conclusions and Further Work<br />Analysis of Scandal<br />Auditors Role and Responsibility<br />Suggestions for fair auditing<br />Failure of Code of Conduct and Ethics<br />Fraud Detection<br />Further Work<br />
    61. 61. A Tale of Two Frauds<br />Then : December, 2001<br />Now : December, 2008<br />
    62. 62. Analysis of Scandal<br />Falsification of financial statements<br />The auditor must, however, dig-out such fraud and give the true value of the company<br />The auditor’s main responsibility is to detect fraud which PwC failed to do so.<br />There was no government audit.<br />
    63. 63. Failure of Auditors<br />
    64. 64. Auditors Role and Responsibility<br />Financial statements should be examined and evaluated in an unbiased manner.<br /><ul><li>Independence, moral character, judgment, imagination, tact and willingness to accept responsibility when auditing.</li></ul>The role of auditors is confined only to the “truth and fairness” of the financial statements.<br />
    65. 65.
    66. 66. Regulations to prevent fraud<br /><ul><li>Board preparedness and balance of power
    67. 67. Reforms in Auditing
    68. 68. CEO’s must follow simple business rules
    69. 69. Business leaders must walk the talk
    70. 70. The world should adopt a uniform global accounting standard
    71. 71. Bring moderation to CEO’s salaries, bonuses and perks</li></ul>As USA Replaced SAS 82 with SAS 99<br />
    72. 72. Contd…<br />Broader market reforms<br />Ensure ‘responsible governance’<br />Performance is the best defense against corporate takeovers<br />Create a strong climate of opinion in favor of respectability<br />Institute global awards for good corporate behavior<br />
    73. 73. Transparency & Accountability<br />“Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”<br />- Supreme Court Justice Louis Brandeis<br />Source : Hood, 2009 and Wired magazine 17.03 March, 2009 <br />
    74. 74. The Whistleblowers<br />“All that is necessary for evil to triumph is for good men to do nothing.”<br /> – Edmund Burke<br />Harry Markopolis – Madoff<br />Sherron Watkins – Enron<br />Cynthia Cooper – WorldCom<br />Board of Directors - Satyam<br />Source : Hood, 2009<br />
    75. 75. Result of scandal<br />
    76. 76. 7 Steps to Greater Ethical Behavior<br />Avoid Conflicts of Interest<br />Stand Up for What You Believe is Right<br />Support Others Who Speak Up<br />Disclose, Disclose, Disclose<br />Carry a Big Stick<br />Use Punishment Sparingly<br />Recognize the Difference Between What is Legal & What is Right<br />Source: Enron – A Professional’s Guide to the Events, Ethical Issues and Proposed Reforms by Arthur L. Berkowitz<br />
    77. 77. Further Research<br />How to design an effective code of conduct.<br />Regulate policies in implementing code of conduct.<br />Investigation other loopholes which give rise to accounting scandals.<br />
    78. 78. Raghu Kasturi<br />(801)897-2149<br />E-mail:<br />
    79. 79. References<br />Images: Retrieved June 18, 2009, from Google Images Web site: <br />Hood, T (2009). Fraud - Salsibury University Accounting Students. Slide Share, Retrieved June 18, 2009, from <br />C.P, Chandrasekhar (2009, Febraury, 13). System failure. The Hindu, 26, Retrieved June 14, 2009, from <br />Worrells, (2008, June 24). Common Financial Statement Frauds. Retrieved April 28, 2009, from Worrells Web site:<br />
    80. 80. Questions and Discussion<br />