SATYAM SCANDAL Assignment

SATYAM SCANDAL
Presented by
The Gladiators
8 August 2014 Satyam Corporate Scandal 1
Group Information

Alim Al Razi
ID: 13174044

Md. Rafizul Islam Mondal
ID: 13174017

Remal Sen
ID: 12274008

Contents

Objective of study.
Introduction
Details about Satyam Scandal
Roles & Responsibility
Laws, compliance & governance.
Aftermath & Conclusion

Objective of study
Highlights of Corporate Fraud/scam.
Introduction of Satyam computers limited.
Highlight the Satyam Computers Limiteds
accounting scandal.
Roles & responsibilities of stakeholders.
Laws, compliance & governance.
Aftermath & lesions learned from Satyam
scam.
Introduction to corporate scam
Fraud/Scam involves a wide-range of illegal
practices and illegal acts involving
intentional deception or misrepresentation.
Corporate accounting fraud is a major
problem that is increasing, both in its
frequency and severity.
The typical organization loses 5% of its
revenues to fraud each year.
Annual fraud loss of more than $3.5 trillion.

Magnitude of Corporate Scam
The 2010 ACFE Report is based on 1,843
fraud cases examined by its members in
more than 100 countries between January
2008 and December 2009.

Consequences of fraudulent financial reporting
Fraudulent financial reporting can have
significant consequences for the
organization and its stakeholders, as well
as for public confidence in the capital
market.
Periodic high-profile cases of fraudulent
financial reporting also raise concerns
about the credibility of the financial
reporting process and call into question the
roles of management, auditors, regulators,
and analysts
Consequences of fraudulent financial reporting
Fraud/Scam impacts organizations in
several areas: financial, operational and
psychological.
The losses to reputation, goodwill, and
customer relations.
Employees suffer job loss or diminished
pension fund value; depositors in financial
institutions; the companys underwriters,
auditors, attorneys, and insurers; and even
honest competitors whose reputations
suffer by association..

Satyam Computer Services
Satyam means truth in the ancient Indian
language Sanskrit
Satyam was established in 1987.
4
th
fastest growing IT company in India.
9 % market share
40,000 employees
Revenue $2.1 billion
Listed in International Exchanges i.e. NYSE and
EURONEXT
Satyam won the Golden Peacock Award for the
best governed company in 2007 and in 2009.
Satyam: Timeline
1987
Incorporated as private limited company in 1987
1991
Recognized as a public limited company; debuts on
the Bombay Stock Exchange (BSE)
IPO oversubscribed by 17 times
First Fortune 500 clients
1993
Satyam signs joint venture with Dun & Bradstreet for IT
Services
Joint venture with GE announced
Satyam: Timeline
1999
Satyam Infoway (Sify) becomes the first Indian Internet
company listed on NASDAQ
Satyam forms joint venture with TRW Inc.
Presence established in 30 countries
2000
Declared one of the 100 most pioneering Technology
companies by world economic forum.
2007
Becomes the Official IT Services Provider for the FIFA World
Cups, 2010 (South Africa) and 2014 (Brazil)
Announces acquisition of UK-based Nitor Global Solutions
Limited
Becomes the first Asian company to feature in the Training
Magazines list of Top 125 companies for learning

MR. RAMALINGA RAJU & Satyam scandal
On January 7, 2009, Mr. Raju disclosed in a
letter, to Satyam Computers Limited Board
of Directors that he had been manipulating
the companys accounting numbers for
years.

Mr. Raju claimed that he overstated assets
on Satyams balance sheet by $1.47 billion.
Nearly $1.04 billion in bank loans and cash
that the company claimed to own was non-
existent.

Satyam also underreported liabilities on its
balance sheet. Satyam overstated income
nearly every quarter over the course of
several years in order to meet analyst
expectations.

Raju and his brother, B. Rama Raju, who
was the Managing Director, hid the
deception from the companys board,
senior managers, and auditors.

Mr. Raju and the companys global head of
internal audit used a number of different
techniques to perpetrate the fraud.
Ramachandran (2009) pointed out, Using
his personal computer, Mr. Raju created
numerous bank statements to advance the
fraud.
Mr. Raju falsified the bank accounts to
inflate the balance sheet with balances that
did not exist.
Inflated the income statement by claiming
interest income from the fake bank
accounts.
Mr. Raju also revealed that he created
6,000 fake salary accounts over the past
few years and appropriated the money
after the company deposited it.
The companys global head of internal audit
created fake customer identities and
generated fake invoices against their
names to inflate revenue.
The global head of internal audit also
forged board resolutions and illegally
obtained loans for the company.
It also appeared that the cash that the
company raised through American
Depository Receipts in the United States
never made it to the balance sheets.

Indian accounting scandal that analysts
have called "India's Enron.
Summary of Satyam Computers
Law and Ethics Vs Satyam Scam
The corporate governance code proposed
by the Confederation of Indian Industry is
modeled on the lines of the Cadbury
Committee (Cadbury, 1992) in the United
Kingdom.
The Confederation of Indian Industry (CII),
the Associated Chambers of Commerce and
Industry (ASSOCHAM) and the SEBI
constituted Committees to recommend
initiatives in Corporate Governance.
The main objective of it was to develop and
promote a code for Corporate Governance.

Sarbanes-Oxley Act-2002

Clause 49 of the Listing Agreement,
amendments which have come in after the
Narayana Murthy Committee report

Updated long way towards integrating
these and other concepts in the structures
and processes of Indian companies.

Legal and Ethical compliance of Satyam
Board of Directors
Independent Directors
CFO and Internal Auditors
PwC
SEBI
Charges of Indian Penal Court Against Raju
120-B -Criminal conspiracy to commit an
offence
409 -Criminal breach of trust
420 Cheating
467 -Forgery of a valuable security
468 -Forgery for the purpose of cheating
471- Using as genuine a forged documents
which is known to be forged
477 A- Falsification of accounts

Satyam Board Structure
Ramalinga Raju Founder and Chairman
Rama Raju CEO and MD. Brother of Ramalinga
Raju
Ram Mynampati Fulltime Director and interim CEO
after the Rajus Resignation
Dr Mangalam Srinivasan - Independent Director
Mendu Rammohan Rao Full Time Director
T R Prasad Independent Director
Krishna G Palepu Independent Director
Vinod K Dham Independent Director
Professor V S Raju Independent Director
Healthy with majority of Independent directors (5 out
of 9). But, there are various glaring indiscretions in
adherence of scam

Satyam Boards Role
All the directors were sponsored by B. Ramalinga
Raju
The Audit Committee members were not serious in
analyzing the financial position of the company
The directors were failed to perform their duties
The Directors got hand-sum remuneration, stock
options at Rs. 2 against the market price of Rs. 500.
The directors acted as a rubber stamp and unwilling
to oppose the fraud. Not a single not of dissent has
been recorded in the minutes of the Board meetings
Meetings were conducted in perfunctory manner
In the meetings the promoters were always present
to influence the decision
There was not open discussions

Satyam Boards Role
Unless the act or the articles of association
otherwise provide, the decision of the board are
required to be the majority decisions only.
Individual directors do not have any general
powers. Section 292(1) of the company act
provides specific power to directors.
In respect of contract with director, section 299
casts an obligation on a director to disclose the
nature of his concern or interest if any, at a
meeting of the board of directors. Every
director who fails to comply with the aforesaid
requirements as to disclosure of concern or
interest shall be punishable with fine, which
may extended to Rs. 50,000/-

Satyam Boards Role
Section 215 of company act illustrate to authenticate
and approve annual financial statement.
To prepare and place at the AGM along with the
balance sheet and profit & loss account a report on
the compnys affairs including the report of the
board of directors (Section 173, 210 &217)
Directors may also be made personally liable for
fraudulent trading for the debts or liabilities of a
company by an order of the court under section 542.
Section 542 (3) provides that every person who was
knowingly a party to the carrying on of the business
shall be punishable with imprisonment for a term
which may extend to two years, or with fine which
may extend to Rs. 50000/- or with both.
Independent Directors
Independent Director means non-executive
Director who, apart from receiving directors
remuneration, does not have any material/
pecuniary relationship or transaction with
the company, its promoters, its directors,
its senior management or its holding
company, its subsidiaries and associates,
which in judgment of the Board may affect
independence of judgment of the Director.
Independent Directors: Roles
Oversight of company financial reporting
process and disclosure of its financial
information.
Recommending to Board on the
appointment, re-appointment and if
required replacement or removal of
statutory auditor and fixation of audit fees.
Review of quarterly financial statements.

Review with management, performance of statutory
and internal auditors, adequacy of internal control
systems, adequacy of internal audit function
including their structure, frequency, reporting.
Discussing significant finding of internal auditors,
including internal investigations made by them into
areas of fraud, irregularities or major failures of
internal control systems.
Discussing with auditors on the scope of the audi.
Reviewing the whistle blower mechanism.

Section 49 of SEBI Act and Section 229A of
Companies Act of 1956 provides the conditions
and guidelines for the appointment of
Independent Directors in companies protecting
the public interests at large and the
shareholders interests in particular.
But T R Prasad, Krishna G Palepu who had no
prior experience in running similar companies.
They were here simply because they can nod
their head to the decisions of Raju making him
even more autocratic.

Regulatory failure which are linked to audit
committee, which is mandatory as per clause
49 of the listing agreement.
It is the duty of the audit committee to
effectively analyze the operations at all levels of
the company in a coordinated manner.
Coordination with CFO and ensure compliance
with financial, accounting and stock exchange
standards every quarter.
8 August 2014
Satyam Corporate Scandal
31
Serious Audit failure in Satyam

An Auditor, first and foremost has to be a
Chartered Accountant under the Chartered
Accountants Act, 1949. The Companies Act,
1956 requires that every balance sheet and
profit and loss account of a company should
give a "true and fair view"
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
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

Roles of PwC

Section 224(8) of the Act tells us about
remuneration of an auditor; in case the
auditor is appointed by the Board of directors
or the Central Government then his
remuneration is fixed by the Board or the
Government. Otherwise in all other cases
including the Government or the special kind
of Companies covered in Section 619B of the
Act, it must be fixed by the company in
general meeting.

PwCs Fees

Over a period of four years, 2004-05 to 2007-08, the
audit fee increased by 5.7 times, whereas total income
increased by 2.47 times during the same period.

0
5
10
15
20
25
30
35
40
R
s
.

i
n

M
i
l
l
i
o
n
s

Satyam's Audit Fees
Audit Fees

The Auditor May have
a lot of Illegal Money
which triggered up for
satyam scam!

But

The money drained from the bloods of
thousands of shareholders

Rajus intention was such type of inflamed to
go Acme in the Business World
SEBIs Roles
SEBI should nominate independent directors.
Involvement InD with How many companies?
Mendu Rammohan Rao, an Independent
Director on the Satyam Board, was on the board
of 7 companies as Independent Director and on
3 companies advisory board.
After a thorough probe, Sebi had imposed a
penalty of Rs 5 lakh on Jayaraman on November
29, 2011, but this order was challenged at
Securities Appellate Tribunal (SAT), which
remanded the matter for a fresh probe by the
regulator.

Furthermore

Locus standi of Shareholders to file a
lawsuit
IFRS
GAAP
Whistle blowing system
AFTERMATH of SATYAM SCAM
Bidding by Tech Mahindra and Larsen and
Turbo.
Taking Over by Tech Mahindra.
Renaming as Mahindra Satyam.
Mahindra Satyam and Tech Mahindra to
merge.
Mahindra Satyam has bright future.

What Went Wrong with Satyam?
Questionable Corporate policies and
unethical practices.

Satyam Scam as Indian Enron.

Passing of Public Accounting Reform and
Investor Protection Act 2002 known as
Sarbanes-Oxley(SOX) Act, 2002 in USA.

LEGISLATIVE SUCCESS
Swift Government Action saved Satyam.

MCA, ICAI, ICSI swift joint action.

INVESTIGATIONS
SFIO investigation.

CBI investigation.

Enforcement Department Investigation.

SEC Investigation.

SFIO failed yet to give charge-sheet.

WHISTLE BLOWER
No action for Whistle blower- Mr. Jose
Abraham, Ex-Sr. Executive.

Abraham sent Email to KG Palepu.

Palepus email to Auditors and Promotors.

CONCLUSION
Desired policy required to prevent another
Satyam.

The road ahead-Moving behind Satyam.

Lessons for Future.

Satyam Corporate Scandal

Thank You


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