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
OVERVIEW• Introduction• Literature Review• Findings and Analysis• Conclusions and Further Research MITSOT System (2011-13) 3
Introduction• Study shows – World is not only just going through economic crisis but also ethical crisis with the Corporate frauds, Accounting scandals, Mismanagement, Bribes and many more.• Present Situation• Purpose of Study• Importance of Ethics MITSOT System (2011-13) 4
Description of terms Code of Financial GAAP Conduct Statements Balance Income Cash Flow Stmt. Of Sheet Stmt. Stmt. shareholders ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY MITSOT System (2011-13) 5
Uses of FinancialStatements • Financial Position Company • Decision Making • Evaluate Risk Investors • Financial View Financi • Amount of Loan al Instituti • Interest Rate ons MITSOT System (2011-13) 6
What is manipulation Intentional omission Alteration of events, accounts… Manipulation presentation of Deliberate inadequate misapplication of disclosures accounting policies MITSOT System (2011-13) 7
Terms Used Cooking the Books Creative Accounting Window Dressing Manipulation of Financial Statements – Doing Wrong MITSOT System (2011-13) 8
Need for manipulation Meet deadlines Competition Need Tax Executive Bonus Investors happy MITSOT System (2011-13) 9
Manipulation and itseffects • Less revenue • Less TAX Expenses • More revenue • Better market position • Happy investors • More revenue • Better market position • Happy investors Income • Less revenue • Less TAX MITSOT System (2011-13) 10
Manipulation and itseffects• Investors are happy as long as Assets arehigher than liabilities.• So to make Assets > Liabilities : 1. Overstate assets than actual 2. Showing fictitious deposits in bank and also interests on it 3. Hiding your Liabilities E.g. Not showing all the loans , hiding unpaid bills MITSOT System (2011-13) 11
Literature ReviewWhat is Satyam ? SATYAM What happened ?- Company SCAM - AccountingBackground Scandal How did it happen ? Scandal Analysis MITSOT System (2011-13) 12
Literature ReviewWhat is Satyam ? SATYAM What happened ?- Company SCAM - AccountingBackground Scandal How did it happen ? Scandal Analysis MITSOT System (2011-13) 13
Company backgroundWhat is Satyam ? SATYAM- Company SCAMBackground MITSOT System (2011-13) 14
Company Background• Satyam was established in 1987.• 4th fastest growing IT company in India.• 9 % market share• 53,000 employees• Revenue $2.1 billion• First Indian company to be listed in three International Exchanges: NYSE, DOW and EURONEXT MITSOT System (2011-13) 15
ITHealthcare Automotive Software Development, ERP, Outsourcing, CRM, Consulting BankingBio-Tech and Finance Telecom and Media MITSOT System (2011-13) 16
Interesting Facts Development centers across world. Stance over 66 countries across six continents. Satyam serves Fortune 500 Companies which are 163 in number out of its 558 global companies. Exports account for almost 75.9 per cent of its total sales revenues. North America contributes around 65 per cent of the sales revenue followed by Europe. MITSOT System (2011-13) 17
Account Practices U.S. Generally Accepted Accounting Principles (USGAAP) International Financial Reporting Standards (IFRS) Complied with Indian accounting standards MITSOT System (2011-13) 18
Literature ReviewWhat is Satyam ? SATYAM What happened ?- Company SCAM - AccountingBackground Scandal How did it happen ? Scandal Analysis MITSOT System (2011-13) 19
Accounting scandal SATYAM What happened ? SCAM - Accounting Scandal MITSOT System (2011-13) 20
What happened ? Satyam board announces the Satyam decision to buy announces a Sale of Pledged stake in Maytas board meeting World Bank shares of infrastructure a on Dec 29th confirms an 8 promoters result company owned says it will year ban of in the promoter by the promoter consider buy Satyam for stake in Satyam family of Satyam back to keep data theft and coming down to for INR 65 Billion investors trust bribery less than 5% Dec 16 Dec 18 Dec 23 Jan 03 2008 2008 2008 2009 Dec 19 Dec 28 Jan 07Dec 17 2008 2008 2008 2009Satyam calls Unpaid files 4 Board Mr. Ramalingaof the Maytas motion against members resign Raju resigns anddeal as a Satyam and in wake of confesses/citesresult of promoters for Maytas financialinvestor INR 55 Billion controversy . irregularities inrevolt. claiming fraud Market the book of speculation talks accounts to the of hostile take tune of INR 71.36 over by peers Billion. MITSOT System (2011-13) 21
Literature ReviewWhat is Satyam ? SATYAM What happened ?- Company SCAM - AccountingBackground Scandal How did it happen ? Scandal Analysis MITSOT System (2011-13) 22
Scandal Analysis SATYAM SCAM How did it happen ? Scandal Analysis MITSOT System (2011-13) 23
Satyam + PwC Ramalinga Raju – CEO created INR71.36 billion in fake billing and cash PwC auditors missed cash accounts? MITSOT System (2011-13) 24
Confessions of Raju• “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.”• “Riding a tiger, not knowing how to get off without being eaten.” MITSOT System (2011-13) 25
The wealth of Satyam investors hasbeen wiped-out by the scandal. Source: Economic Times, 2009 MITSOT System (2011-13) 26
Question Raised ? Investors Board Government Invention Accounting Ethics and Code Standards of Conduct MITSOT System (2011-13) 27
Investors Investors Board Government Invention Accounting Ethics and Code Standards of Conduct MITSOT System (2011-13) 28
Investors• Investors play an important role in detecting financial position of a company.• Investors must ensure that the share value which is listed is genuine and as per its financial status.• Institutional investors should take more responsibility.• Information about the company should be latest, from trusted source, easily accessible and correct.• New regulation for information Act.• Investors should take more care before investing.• No risk involved if CEO is the founder of the company.
Board• Must monitor the ethical policies and the way they are being maintained in the company.• Accountable for the financial information being projected.• No to inactive board members.• Authority to independent board of directors.• Clear understanding of responsibility between the board and next level employees.• Qualified Board members.
Government Regulations, Policies andintervention• Government should always plays an active role in the company affairs because the company runs with the public money.• The government must frequently check the company’s performance in the market and take necessary steps in curtailing any malpractices or falsification.• Government is not taking any corrective measures in case of any violations• 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.• Government intervention must be increased to have a foolproof mechanism in the company policy matters.
Accounting Standards• Auditors main responsibility is to check fairness and trueness of financial statements.• Proper Audit Tools.• Freedom for auditors• Reputation of auditing firm/individual can’t avoid scandals.• Most of the companies involved in mega scandals were audited by reputed auditing firms.
Ethics of Individuals/Company, Definingand implementing code of conduct• Search or Nominations Committee• Proper code of conduct updated on regular basis should be implemented.• Every company should have fraud detection mechanism.• Good Corporate Governance• Good educational background doesn’t always mean individual has good ethics.• Whistle blowing policies
A Tale of Two FraudsThen : December, 2001 Now : December, 2008
Failure of Auditors Must take information directly from Bank Company in order to show increase in revenue has created fictitious debtors and in turn resulted in fictitious bank Confirmation balance. from Bank regarding balances
Role of External Auditor• The auditor did not confirm the bank balances independently• The various protocols were violated• Two set of Confirmation• No sample checking of invoices• Liability against tax not reported• Extra-ordinary payment of audit fee• Not verifying the accrue interest on fake FDs• Not verifying the TDS on accrued interest• Not doing end to end audit• Systems were found to be lax and same was not taken up for rectification
Role of Internal Auditor• The auditor did not do beginning to end transactions verification• Cash and bank balances were not verified• Fake invoices were ignored• The matter was not reported to Audit Committee• The audit plans were prepared on the basis of the approval of the promoters• Serious findings of the auditing team were ignored by the audit team leader MITSOT System (2011-13) 38