business

1. Corporate Governance Failure at
Satyam
Fait par: KADDOURI
Nabil
Question 1 : What issues does this case pertain to?
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Corporate
Governance
Failure at
SATYAM

2. Corporate Governance Failure at
Satyam
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 an 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.
Question2 : 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 are also to blame in the Satyam
scandal.
Question 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.
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
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3. Corporate Governance Failure at
Satyam
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.
Question 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 form 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.
Question 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.
Question 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
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4. Corporate Governance Failure at
Satyam
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 internalisation will be. Organising 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' behaviour companies internalise and integrate transactions.
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