Author: Akanksha, A Student at Amity University Jharkhand
COMPANY’s BACKGROUND
Ramalinga Raju established Satyam Computer Services in 1987. Software development, engineering design, ERP solutions, software integration into systems, consulting, IT outsourcing, electronic commerce, customer relationship management, and system maintenance were among Satyam’s primary offerings. The company served more than 270 businesses worldwide with information technology services, and it operated in 45 different countries.
Satyam’s quick rise to prominence as a leading IT company in India was made possible by the skill of its workforce, which resulted in cooperation agreements with 76 Fortune 500 businesses. The foundation of Satyam’s explosive expansion was its commitment to excellence, entrepreneurship, customer focus, and faith in people. In order to supply IT services, Satyam and the World Health Organisation (WHO) inked a partnership agreement in 2003. After two years, Global Institutional Investors gave the company a high ranking for its outstanding corporate governance. Satyam received the World Council for Corporate Governance’s 2008 “Global Peacock Award.” The irony of Satyam’s corporate responsibility award came a few months after the company’s unethical corporate governance was exposed in India’s largest scandal.
SCANDAL IN BRIEF
The Central Bureau of Investigation (CBI) claims that Satyam’s strategy to increase its yearly growth in 1999 is what started the controversy. Financial statement falsification was the primary growth method. There were two reasons why financial accounts were changed. Initially, the chairman aimed to maintain the company’s high share price on all the stock markets where it was traded. An elevated share price signified the company’s strong financial performance. Conversely, it was a tactic to boost investors’ faith in the business. Raju also desired to increase the market valuation of the business to draw in other investors.
This tactic was successful since Satyam received recognition for its outstanding corporate governance and growth from numerous organisations. 2009 saw the controversy come to light when the company’s Ramalinga Raju, the chairman, disclosed that he had altered bank accounts totaling $1.47 billion. According to Raju, there was initially only a little discrepancy between the company’s reported operating profit and the figures in the account books. In order to inflate the company’s financial performance, raise its name in the IT industry, and draw in additional business, the company manufactured fictitious clients, projects, and invoices between 2003 and 2008. Satyam fabricated sales figures in 2009, reporting Rs. 5200 crore as opposed to the actual Rs. 4100 crore. Furthermore, profits increased from 3% to 24%.
The 2009 financial numbers that were made public were greatly exaggerated. For example, operating profits were overstated by 97% while quarterly revenues were inflated by 75%. Over time, the marginal disparity grew larger, and the chairman admitted to using dishonest accounting techniques when it became too big to ignore. Raju claims that the manipulation was carried out out of concern that the business’s performance would prompt a hostile takeover. The promoters’ tiny ownership stake in the business was insufficient to improve its financial results. The chairman was no longer able to conceal the company’s dismal financial performance as the company expanded and the marginal discrepancies widened.
Raju declared on December 16, 2008, that the business intended to acquire Maytas Properties Limited and Maytas Infrastructure Limited, two of Maytas’s subsidiaries. Satyam’s investors turned down the plan as Raju’s family owned both businesses. Both Raju’s management style and the corporate governance of the company disappointed investors. To Satyam’s amazement, the World Bank suspended their business relationship and cancelled all of their transactions. The bank charged Satyam with bribing workers and giving them unapproved benefits, which raised questions about unethical corporate governance. The corporation was also charged with stealing data that it uses to enhance its operations.
The suspension resulted in a further 14% drop in share price, marking the lowest level Satyam had seen in more than 4 years. The stock price declines made the company’s precarious financial status clear. Raju consequently resigned as chairman and disclosed the financial malfeasance. He revealed that purchasing the two Maytas businesses was his final effort to change the financial records of the business by substituting actual assets for imaginary ones. He was attempting to hide his immoral behaviour. Following the fraud’s revelation, the government seized control of the business and started looking into the controversy.
PriceWaterhouseCoopers disclosed that its auditors had submitted a fabricated audit report, seven days after Raju had entered into an admission of falsifying financial records. The management team of Satyam had given the auditors falsified financial accounts. Due to the fact that Satyam’s head of global audit manufactured fictitious invoices to inflate the company’s profitability, forged board resolutions, and obtained loans without following the law, the auditors were heavily involved in the fraud. Since the funds were never included on Satyam’s balance sheet, they were misappropriated when they were obtained through American Depository Receipts in the US.
The company’s promoters were also heavily involved in the scam. For instance, they exploited gullible investors by selling their shares at exorbitant rates. In 2001, the promoters’ interest in the company was 25.6%; by 2008, it was 8.74. This decrease in ownership demonstrated that the parties meant to steal money from investors and that the scam was premeditated.
The corporation utilised a sizable portion of the money it had obtained to purchase land in order to capitalise on the booming real estate market. After that, Maytas Properties and Maytas Infrastructure, two businesses owned by Raju’s family, were given control of the site. There was not much money left over from these profitable acquisitions for Saytam to employ for regular business expenses. Because a sizable portion of the funds and bank balances displayed on the balance sheet were fake, the company was doomed to fail.
The Serious Fraud Investigation Office claims that Satyam paid Rs. 186.91 crores in taxes over a seven-year period for fake fixed deposit accounts that high-ranking executives had opened in order to embezzle money from the business. System administrators and software developers at the organisation also had a little part in the scam. For instance, Satyam’s financial account information was kept under two distinct Internet Protocol (IP) addresses. Due to their creation of fictitious invoices and bills for the balance sheet, the company’s IT specialists took part in the fraud. They generated fake bills and invoices using sophisticated software.
The auditors’ job was to make sure Satyam wasn’t using any improper accounting techniques. But even though they examined the company’s books for many years, they never found any instances of unethical behaviour, which made their contribution crucial. They acknowledged that they only trusted the financial statements that Satyam’s management provided them after the theft was uncovered. Their inattention was shocking.
CONCLUSION
The biggest fraud case in Indian history is the Satyam accounting fraud. It was carried out over around ten years by the chairman of the corporation and other senior managers. The previous discussion makes it clear that Satyam’s management disregarded the rules and code of ethics that control the accounting industry. To give a misleading impression of the financial performance of their company, they inflated their financial accounts. Merrill Lynch made the affair public after identifying irregularities in Satyam’s financial accounts. Investors lost $2.2 billion, the company’s share price plummeted, the chairman and other senior executives resigned, and a board was tasked by the government to oversee the crisis. After being purchased by Tech Mahindra, the business amalgamated to become Mahindra Satyam. Years of financial account manipulation meant to mislead investors and the general public into thinking Satyam was doing well financially led to the Satyam accounting scandal. By upholding business ethics, accounting ethics, and encouraging accountability and openness within organisations, such incidents can be prevented.
In September 2013, the Companies Act of India underwent significant amendments. The introduction of class action litigation, which allows investors to sue a company, its directors, and its auditors in certain situations, the requirement that auditors report frauds, the imposition of criminal liability on auditors for financial statement fraud, and the requirement that audit firms rotate every ten years are all noteworthy features of the new law. One may argue that Satyam was the catalyst for these significant legal reforms. Furthermore, proxy advice businesses have just lately surfaced in India. It would be fascinating to investigate further whether these legal and other governance-related developments have a significant impact on how Indian audit committees operate.
This study has significant ramifications for India’s ongoing changes in accounting and auditing. The International Financial Reporting Standards (IFRS) and Indian accounting standards are becoming more similar. While Indian GAAP primarily relies on historical costing, IFRS bases its calculations on fair value. It takes much more judgement and higher technical expertise on the part of a company’s managers, directors, and auditors to prepare financial statements under IFRS. Even though IFRS can improve oversight and financial decision-making, organisations with inadequate corporate governance frameworks might not be able to provide reliable, excellent IFRS financial statements. It’s interesting to note that Satyam was the first Indian business to create financial statements using IFRS. Before switching to IFRS, the government and SEBI should consider stepping up enforcement and developing technical competence, especially forensic accounting capabilities.
