Author- Maghavatpriya HG, a Student at SASTRA Deemed to be University
Abstract
The Satyam Scandal is considered as one of the biggest corporate frauds of India which created a great impact on global business. The major crisis in the Indian corporate sector was initiated by the founder and CEO of Satyam Computer Services, Ramalinga Raju, who agreed in 2009 to the falsification of his company’s records. It is due to this scam that the corporate system that exists today was formed as well as the formulation of the regulations as methods of averting the occurrence of the circumstances. The scandal of 2009 increased awareness regarding the risks created by the unchecked corporate power and the lack of transparency in the financial disclosures. This article gives detail on the occurrence of Satyam Scandal, the background, occurrence, response and consequences of the tragedy in order to give the reader a peak into the scenes behind the so-called successful financial statements. This article explores the effects of such a scam to the investors, employees, and the regulators and the legal consequences faced by the participants of the scam. The developments on the corporate governance policies and practices are the consequences of this scam in India. The regulatory reforms were done to bring back the credibility and control back in the Indian business environment.
Introduction
Satyam Scandal was one of the largest corporate frauds that occurred in India and came into light in 2009. The Founder and Chairman of the company Ramlinga Raju admitted to manipulating the company books of accounts for several years on the pretext of boosting the true revenues and assets of the company. The scam had an estimate at around $ 1, 5 billion (approximately ₹ 7,000 crores) for which the company used fabrication of bank statements, fake customers and overstating revenues. Therefore, the revelation triggered a ripple effect throughout the Indian business fraternity as well as the world market. Declining stock value across the organisations involved, massive dismissal of staffs and damaging India’s image in outsourcing business were some impacts of the events that mark the scandal. Strict rules came into effect from this incident and a mandate for auditors to rotate, to review the finances and reports and improvement of corporate governance in India. This infamous case alone, at last, led to the necessary reconsideration of internal controls, independent audits and disclosure of the necessary and sufficient to regain the investors’ confidence and to maintain the market integrity.
The Financial Fraud
The Satyam scandal in its essence was a financial fraud. The Founder B. Ramalinga Raju, along with the help of his top management team members manipulated the balance sheets of the company with respect to revenues, profits and cash balances. In order to perpetrate the fraud, they issued false invoices, accounts which did not exist and exaggerated payroll records. It went on for a few more years and successfully duped the investors, auditors and even the regulators.
The legal consequences of the fraud were massive. In India, issues of such financial frauds constitute an offence under provisions of the Indian Penal Code (IPC) and the Companies Act 1956. Similarly, there were other offences committed which fell under the provisions of IPC like cheating, conspiracy, forgery and so on. In addition, the erroneous and inflated figures in the financial statements did not only go against the company’s legal responsibilities of providing accurate information to its shareholders but also constituted an offence under provisions of the Securities Contract (Regulation) Act and the SEBI regulations which require full and fair disclosure by all listed companies.
The scam started when the company began to overstate its revenues. While, at the start of the 21st century, Satyam Computer Services looked like a rapidly growing IT company with healthy profits and global exposure to stock markets. Nevertheless, when the Founder confessed, he said that the company’s profit figures have been inflated and that Satyam never received the reported revenues. Through this action, the company defrauded the shareholders and auditors and committed a fraud that is contravening the responsibility of honesty of directors owed to shareholders under company law.
One of the bigger shocks of the fraud was that, top managers of the company and senior auditors participated in the fraud. The case threw the spotlight on corporate governance and regulatory failure in India after the Founder had admitted to having fabricated the company’s financial statements for several years.
A Failure in Accountability
The external auditors who had played a pivotal part in the Satyam scandal were from PricewaterhouseCoopers (PwC). The auditors in India have a major responsibility of making sure that the financial statements of a given company reflect the actual financial position of the company. Nevertheless, in the case of Satyam scandal, PwC was unable to identify the inconsistencies in the information provided by the company despite having an opportunity to carry out audit.
The auditors are demanded by law to exercise professional skepticism and due diligence when approving financial statements. They are supposed to detect and disclose material errors in the accounts, which can be because of fraud or by mistake. Unfortunately in the Satyam case, PwC audited and certified the companies’ accounts as genuine, without even noticing millions of dollar in completely false accounts.
In a legal perspective, it can be pinpointed that the auditors have one of the most important functions in corporate governance systems. Due to negligence of PwC for not performing the audit correctly, the fraud went on for years. This failure has led to serious worries about the standard of auditing in India and the necessity to describe the frameworks for enhancing the independence and responsibility of auditors. This scandalous failure exposed the possibility that auditors could, in some way, be accomplices of, or turn a blind eye, to corporate dishonesty instead of serving as watchdogs and ensuring corporate honesty.
Legal Repercussions
After the Satyam scandal, there were legal proceedings against the organizational management of the firm’s headquarters. B. Ramalinga Raju, together with his brother, and other senior managers were arrested and charged with number of offences under the Indian Penal Code (IPC). These offences included: cheating, foregery, conspiracy and criminal breach of trust.
Nevertheless, the legal processes took a long time. Even though the scale of the fraud was huge, it was only several years later that the trial reached any finality of sort. Ramalinga Raju was given 7 years of imprisonment which was a rather lenient term of imprisonment, but the dragging on of the judicial proceeding was a matter of concern. It gave rise to many questions regarding the credibility of the Indian legal framework in addressing corporate crimes and fraud.
Furthermore, as a regulatory agency, Securities and Exchange Board of India (SEBI) wanted to know the part played by PwC in the Satyam scandal, so it started investigations in that regard. Subsequently PwC was subjected to severe penalties apart from the fact that it ended up being tarnished in a global level. Nevertheless the firm’s senior partners avoided criminal punishment, even though they were subjected to professional sanctions.
The slow nature of justice where corporates are involved, as in the Satyam scam, make it more important for fast track courts or Tribunals with specialized technical expertise in handling and speedy trial of financial frauds that have far reaching economic consequences. Every corporate fraud case involves a lot of finance, business and legal analysis that is why such cases are very complicated and in many cases can take a lot of time.
Corporate Law Reforms
However, the Satyam scam exposed a very weak Corporate Governance structure in India which was also deemed to be inefficient earlier. Some of changes that have occurred in India in corporate governance after Satyam scandal are efforts which aim to enhance accountability, measures to ensure transparency and the prevention and correction of the weakness, thereby strengthening the corporate governance.
The Companies Act, 2013
One of the important actions taken after Satyam scandal was the widespread changes in the Companies Act of 1956. The Companies Act of 2013 brought about with changes which were aimed on enhancing the corporate governance systems. Important provisions were directed at stiffening the rules for independent directors, increasing focus on disclosures of companies’ financial results and position, and creation of the National Financial Reporting Authority (NFRA) which will be responsible for controlling and supervising auditors.
For instance, the Companies Act of 2013 had introduced more strict rules in the matters of appointment and removal of auditors. This has made it harder for the companies to manipulate the balance sheets. The Act of 2013 has also made it a mandate for business entities to implement a whistle blower policy through which employees and those with interest in the company can report corporate fraud and wrongdoing.
The Act also addressed the issue of accountability in the board of directors. The creation of new responsibilities for the independent directors was one of the main steps in improving the approach to corporate governance. Independent directors are now expected to take the answerability in ensuring that the financial statements that are presented to the shareholders bear the true state of affairs of the company.
SEBI’s Role and Market Reforms
Other than the reformation through the Companies Act, SEBI also imposed new regulations which were considerably more rigorous and strengthened after the Satyam scandal. SEBI also put into operation stricter disclosure rules by making the listed companies which traded their shares to present information on their financial status, as well as disclose any material events in future time periods. It also came up with measures that helped the auditors be more independent in their auditing practices. It was also ensured that the corporate financial statements were thoroughly examined by the auditors.
Some of the measures SEBI employed towards prevention of malpractices were inclusive of strict checks in the markets for manipulation, insider trading and creation of a protective framework for the investors’ safety. Nevertheless, critics opine that much more are to be done to enforce these regulations in a much stricter way and also in order to frame a transparent corporate culture in India.
A Shift in Corporate Governance
The Satyam scandal has brought significant impact on the corporate governance background in India. The case was a wake-up call to everyone from businesses, investors, to regulators. It brought out the implications of not following corporate governance practices and the implications of relying too much on the chief executives and auditors without sufficient internal control mechanisms.
The Satyam episode also made Indian businesses to begin to reconsider their stance on Corporate Governance because majority of them restyled their boards, brought more clarity and transparency into their activities and operations and implemented rigid financial regulation measures than before. It also brought the fact that merely relying on auditors and their reputation was also a wrong policy in order to maintain corporate sanity. It then led to the issue of who best provides independent checks on corporate management. The value of independent directors, whistle blower mechanisms and severe examinations of corporate books became vital aspects of the Indian business ethics debate.
Conclusion
Satyam fraud is one of the largest corporate frauds of India and not only because of the actual size of the deception, but also due to the impact it produced in the Indian legal, corporate, and regulatory worlds. On a purely legal note, the case brought out a need for increase in vigour in enforcement of corporate laws and the immense need for specialized mechanisms dealing with corporate frauds. It also recognized the important roles played by auditors, independent directors or the regulators in making certain companies more ethical in the way they exercise their operations.
The structural changes brought in by the Satyam scandal have set the ball rolling on good corporate governance practices in India but there is still a long way to go. While India’s corporate sector expands the Satyam case depicts an incident which serves as a reminder for requirement of vigilance, strict corporate standards and sound corporate governance measures which are vital to protect the stakeholders and maintain investor confidence, while preventing corporate fraudulence.
FAQ
- How was the fraud perpetrated?
This scheme was committed by the production of forged invoices and opening fake customer accounts; improper recognition of revenue, profits, and cash balances; preparation of false documents, assets and payroll; and manipulation of the auditors and investors by presenting fabricated financial information.
- What were the legal consequences of the Satyam Scandal?
Ramalinga Raju and other senior managers were detained and charged with numerous offences under the Indian Penal Code (IPC) such as cheating, forgery, conspiracy and criminal breach of trust. Similarly, the external auditors from PwC were not spared and had faced professional penalties. Many also said India needed quicker and more specialized trials regarding corporate fraud, which was evident having gone through the delayed legal process.
- How did the Satyam scandal affect the auditing industry?
The scandal raised serious concerns about the role of auditors in corporate governance. PwC, which signed off Satyam’s figures did not notice the fraud despite auditing the company’s financial statements and the auditors who played a role in the scam suffered severe professional repercussions. This crisis enhanced the prospect focus on auditing standards and spurred improvements to independence and supervisory responsibilities of auditors.
- Is India’s corporate governance system stronger post-Satyam?
Despite the changes such as increased independence and expertise of auditors, along with the development of new clear and clear reporting methods, critics argue that more needs to be done. While scandals such as Satyam served as a wake-up call for business, regulatory authorities and investors , constant vigilance and compliance to the new norms of corporate governance will be required in the future to prevent such frauds occurring in the future.
Sources
- https://www.5paisa.com/blog/satyam-scam
- https://cleartax.in/glossary/satyam-scam-satyam-scandal
- https://www.linkedin.com/pulse/satyam-scam-discover-what-exactly-happened-case-manshu-garg/
- https://www.thehindu.com/specials/timelines/satyam-scandal-who-what-and-when/article10818226.ece
- https://www.srcc.edu/sites/default/files/Satyam%20scam%20of%20corporate%20governance.pdf
- https://blog.ipleaders.in/case-study-satyam-fraud-case/
