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					 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.

				
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posted:2/27/2011
language:English
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