SATYAM - A CASE OF FAILURE OF CORPORATE GOVERNANCE The word SATYAM means TRUTH but the company did not live up to its name. Satyam failure is not a case of a company involving in fraud it is a COLLECTIVE FAILURE OF CORPORATE GOVERNANCE. By that what I mean all the agencies including ministries, auditors, banks and credit rating agencies are responsible. As is the case with all ministries, who have insulated themselves from acting tough. When the deed is done, the Ministry of Company Affairs (MCA) has woken up and called the Satyam fraud a shameful act. The SECURITY AND EXCHANGE BOARD OF INDIA (SEBI) has termed the fraud as horrifying and promises to take all actions as per the law. PriceWaterHouseCoopers were the auditors for the company. What kind of audits have they done in the preceding two years indicates that the auditors were also glove in hand with the company in conducting the fraud. Next comes the BANKERS to the company. Bank of Baroda, BNP Paribas, ICICI, HDFC, CITIBANK, HSBC all big players in the Indian banking sector. How come none of them scrutinize the balance sheet of their big customer? What about the CREDIT RATING AGENCIES? Even they have been giving thumbs up to Satyam for a long time. This collective failure of governance did not happen overnight. What did Ramalinga Raju do? • Inflated revenues and profits. • Inflated cash and bank balance by Rs 5040 crores. • Claimed interest of Rs 376 crores on a non-existent investment. • Understated liabilities of Rs 1230 crores on account of funds arranged by him. • Overstated clients (Debtors) by 490 crores. • The fraudulent entries add up to Rs 7136 crores As Raju's stake in the company had dwindled to 3.6 per cent and that of Foreign Institutional Investors increasing. Raju was under pressure to protect stock prices to retain the investors. The route he took: show non-existent cash and inflated profits. Why did he confess? • He had created fake accounts and assets. The gap between the fake accounts and the real one was expanding too quickly. • As his stake fell in the company, he realized the company was going to become a takeover target. This would create problems: If a buyer goes through the company’s books the faulty accounts could be revealed. How did he get away for so long? • Auditors pricewater house coopers did not scrutinize the accounts vigorously. • Independent directors of the boards didn’t grill the management. • Institutional shareholders didn’t complain as long as market was booming and the returns were good. • He has kept his own executives in the dark. Impact of Satyam fraud • Market credibility and reputation affected. • Loss of customer & investor confidence due to failure in management & corporate governance. • The National Stock Exchange removed Satyam from its benchmark index Nifty. • It has left lakhs of investors and 53,000 employees, auditors, banker out in cold. Raju’s Confessions “It was like riding a tiger, not knowing how to get off without being eaten”. 1. That neither myself, nor the managing director (including our spouses) sold any shares in the last 8 years – excepting for a small portion declared and sold for philanthropic purposes. 2. That in the last 2 years a net amount of Rs 1230 crores was arranged to Satyam to keep the operation going by pledging all the promoters share. 3. That neither me nor the managing director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results. 4. None of the board member past or present, managing director, family member had any knowledge of the situation in which the company is placed. “ I am now prepared to subject myself to the laws of the land and face the consequences.” Glorious Record By Satyam • Golden Peacock Award for excellence in corporate governance (2008) Satyam becomes world’s first ISO 9001- 2000 certified IT company in 2001 • UK Trade & investment India Business Award for corporate social responsibility. • Best investors relations website in Asia pacific & Africa regions from MZ consult. • Asian M.A.K.E Award (Most Admired Knowledge Enterprise) from Teleos, in association with know Network. Famous Last Word… From PriceWaterCoopers audit report on April 21, 2008 • The balance Sheet, Profit & Loss A/c, Cash Flow Statement comply with the accounting standard. • An internal audit system commensurate with its size and nature of business. • No accumulated loss as on March 31 2008. No Cash losses in the immediately preceding Financial Year • During the course of auditing we have neither came across any instance of fraud on or by the company. WEAK LINKS IN THE AUDITING CHAIN? When the bulk of the auditing work involves junior auditors, trouble can’t be to far behind. WORK BREAK-UP JOB DESCRIPTION DONE WHO DOES IT Sampling Identifying selected 10 % Junior Auditor (graduates, CA items for verification. articled) Voucher Checking all 30 % -----DO------ checking expenses and sales vouchers for errors . Ledger Verifying voucher 20 % -----DO------ checking amounts with postings in ledger A/c. Physical Physically 10 % -----DO------ Verification authenticate assets. Trial balance Tally the balances 10 % Audit & of P&L a/c and manager Reconciliation balance sheet Auditing Final assessment 20 % Engagement based on the Manager & accounting Partner standards BIG TASK, SMALL PAY The stipend paid to juniors appears too little. Semester ICAI fixed Local Big Four stipend auditors (Salary) (salary) FIRST YEAR 1,000 2,500-3000 5,000-6000 SECOND YEAR 1,250 4000-5000 7000- 10000 Third year 1,500 6000-7000 12000-16000 Views Given By Experts “ Investor sentiment has been badly dented in the wake of the scandal. There was panic selling after the disclosures on fear that Satyam may cease to exist” - Ambareesh Baliga (Vice President, Karvy Broking) “ The finance ministry’s move, a year ago, to allow boards of director of all banks to select their own auditors makes it a highly risk prone system.” - Ved Jain (Former President, ICAI) “ This is a setback to india’s flagship IT Sectors. We have been promoting corporates and entrepreneur as Brand India and then one shows deplorable behavior” -Nandan Nilekani, (Co-Chairman Infosys) “ Every customer who has outsourced work to Satyam will be weighing the risks, reviewing their contracts. After all it is not easy to transfer work to new vendors” - Som Mittal, (President Nasscom) CONCLUSION & RECOMMENDATION Ethical and responsible decision making is not only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. So, Auditors should maintain an attitude of professional skepticism, recognizing the possibility of fraud, not withstanding past experiences of a management’s honesty. • They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. • Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information. There should be complete accountability of these companies towards the government. Market regulators should be more proactive and strict in their approach. Financial crises, bank failures, and the meltdown of giant corporations are increasing, with devastating economic and social consequences. Unfortunately, these are failures resulting from gaps in collective governance. Therefore, to prevent future frauds from being committed by corporates, we need a well- defined and strictly enforceable code of conduct, and effective governance from all agencies.