Ironically, Satyam means “truth” in the ancient Indian language “Sanskrit”. Satyam won the “Golden Peacock Award” for the best-governed company in 2007 and in 2009. From being India’s IT “crown jewel” and the country’s “fourth-largest” company with high-profile customers, the outsourcing firm Satyam Computers has become embroiled in the nation’s biggest corporate scam in living memory. Mr. Ramalinga Raju (Chairman and Founder of Satyam; henceforth called “Raju”), who has been arrested and has confessed to a $1.47 billion (or Rs.7800 crore) fraud, admitted that he had made up profits for years. According to reports, Raju and his brother, B. Rama Raju, who was the Managing Director, “hid the deception from the company’s board, senior managers, and auditors”. The case of Satyam’s accounting fraud has been dubbed as “India’s Enron”. In order to evaluate and understand the severity of Satyam’s fraud, it is important to understand the factors that contributed to the “unethical” decisions made by the company’s executives.

First, it is necessary to detail the rise of Satyam as a competitor within the global IT services market-place. Second, it is helpful to evaluate the driving-forces behind Satyam’s decisions: Ramalinga Raju. Finally, attempt to learn some “lessons” from Satyam fraud for the future.

Greed for money, power, competition, success, and prestige compelled Mr. Raju to “ride the tiger”, which led to the violation of all duties imposed on them as fiduciaries—the duty of care, the duty of negligence, the duty of loyalty, the duty of disclosure towards the stakeholders.

“The Satyam scandal is a classic case of negligence of fiduciary duties, the total collapse of ethical standards, and a lack of corporate social responsibility. It is human greed and desire that led to fraud. This type of behavior can be traced to greed overshadowing the responsibility to meet fiduciary duties; fierce competition and the need to impress stakeholders especially investors, analysts, shareholders, and the stock market; low ethical and moral standards by top management; and, greater emphasis on short‐term performance” [28]. According to CBI, the Indian crime investigation agency, the fraud activity dates back from April 1999, when the company embarked on a road to double-digit annual growth. As of December 2008, Satyam had a total market capitalization of $3.2 billion dollars.

Global auditing firm, PricewaterhouseCoopers (PwC), audited Satyam’s books from June 2000 until the discovery of the fraud in 2009. Several commentators criticized PwC harshly for failing to detect the fraud. Indeed, PwC signed Satyam’s financial statements and was responsible for the numbers under the Indian law. One particularly troubling item concerned the $1.04 billion that Satyam claimed to have on its balance sheet in “non-interest-bearing” deposits. According to accounting professionals, “any reasonable company would have either invested the money into an interest-bearing account, or returned the excess cash to the shareholders. A large amount of cash thus should have been a ‘red-flag’ for the auditors that further verification and testing were necessary. Furthermore, it appears that the auditors did not independently verify with the banks in which Satyam claimed to have deposits”.

( Corporate Accounting Fraud: A Case Study of Satyam Computers Limited

Madan Lal Bhasin Bang , KIMEP University, Almaty, Republic of Kazakhstan

Open Journal of Accounting, 2013, 2, 26-38

http://www.scirp.org/journal/ojacct)

Required:-

1. What were the strategies adopted by Mr. Ramalinga Raju to boost the stock price, cover the loss, and attract more investment? How had he cooked the books to inflate profit and cash flows? (5 marks)

1. Discuss the punishments that Satyam, its executives, PW India, and PW India auditors faced. State and justify whether these punishments were appropriate, too harsh, or too light. (5 marks)

2. Discuss the role of auditors and the board composition of ‘Satyam Computers Limited’ before its crises. (5 marks)