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Case Study On Auditing (Satyam Computers LTD.)
Case Study On Auditing (Satyam Computers LTD.)
sorb a real-estate company in which they have a majority stake is a deadly combination pointing
prima facie to tunneling. The reason why Ramalinga Raju claims that he did it was because every
year he was fudging revenue figures and since expenditure figures could not be fudged so easily,
the gap between “actual” profit and “book” profit got widened every year. In order to close this
gap, he had to buy Maytas Infrastructure and Maytas Properties. In this way, “fictitious” profits
could be absorbed through a “self-dealing” process. The auditors, bankers, and SEBI, the market
watchdog, were all blamed for their role in the accounting fraud.
4.3. The Auditors Role and Factors Contributing to Fraud
Global auditing firm, PricewaterhouseCoopers (PwC), audited Satyam’s books from June 2000
until the discovery of the fraud in 2009. Several commentators criticized PwC harshly for failing
to detect the fraud. Indeed, PwC signed Satyam’s financial statements and was responsible for the
numbers under the Indian law. One particularly troubling item concerned the $1.04 billion that
Satyam claimed to have on its balance sheet in “non-interestbearing” deposits. According to
accounting professionals, “any reasonable company would have either invested the money into an
interest-bearing account, or returned the excess cash to the shareholders. The large amount of cash
thus should have been a ‘red-flag’ for the auditors that further verification and testing was
necessary. Furthermore, it appears that the auditors did not independently verify with the banks in
which Satyam claimed to have deposits”.
Additionally, the Satyam fraud went on for a number of years and involved both the manipulation
of balance sheets and income statements. Whenever Satyam needed more income to meet analyst
estimates, it simply created “fictitious” sources and it did so numerous times, without the auditors
ever discovering the fraud. Suspiciously, Satyam also paid PwC twice what other firms would
charge for the audit, which raises questions about whether PwC was complicit in the fraud.
Furthermore, PwC audited the company for nearly 9 years and did not uncover the fraud, whereas
Merrill Lynch discovered the fraud as part of its due diligence in merely 10 days. Missing these
“red-flags” implied either that the auditors were grossly inept or in collusion with the company in
committing the fraud. PWC initially asserted that it performed all of the company’s audits in
accordance with applicable auditing standards.
Numerous factored contributed to the Satyam fraud. The independent board members of Satyam,
the institutional investor community, the SEBI, retail investors, and the external auditor—none of
them, including professional investors with detailed information and models available to them,
detected the malfeasance. The following is a list of factors that contributed to the fraud: greed,
ambitious corporate growth, deceptive reporting practices—lack of transparency, excessive
interest in maintaining stock prices, executive incentives, stock market expectations, nature of
accounting rules, ESOPs issued to those who prepared fake bills, high risk deals that went sour,
audit failures (internal and external), aggressiveness of investment and commercial banks, rating
agencies and investors, weak independent directors and audit committee, and whistle-blower
policy not being effective.
Q3. What are the facts that lead to the Satyam scandal?
Solution: Numerous factors contributed to the Satyam fraud. The following is a list of factors that
contributed to the fraud –
Greed,
Ambitious corporate growth,
Deceptive reporting practices lack of transparency,
Excessive interest in maintaining stock prices,
Executive incentives, stock market expectations,
Nature of accounting rules,
Employee stock ownership plans issued to those who prepared fake bills,
High risk deals that went sour,
Audit failures (internal and external),
Aggressiveness of investment and commercial banks,
Rating agencies and investors,
Weak independent directors and audit committee,
whistle-blower policy not being effective etc.
Q4. In your view which parties are responsible for this? Defend your answer.
Solution: After investigate the revelation of the fraud has led to charges against several different
groups of people involved with Satyam. As far I understood the case for the fraud of Satyam
computers I found the two parties are directly responsible for the scandal. They are –
1. The independent board members of Satyam.
2. The internal and external Auditors.
In the case we found that the investigation that followed the revelation of the fraud has led to
charges against several different groups of people involved with Satyam. Indian authorities
arrested Mr. Raju, Mr. Raju’s brother, B. Ramu Raju, its former managing director, Srinivas
Vdlamani, the company’s head of internal audit, and its CFO on criminal charges of fraud. Indian
authorities also arrested and charged several of the company’s auditors (PwC) with fraud. The
Institute of Chartered Accountants of India (ICAI) ruled that “the CFO and the auditor were guilty
of professional misconduct.” So the Board of directors and the Auditors was found guilty in the
scandal of Satyam Computers fraud. Behind the fraud personal greediness and lack of transparency
was main fact.
Q5. How could a Fraud like this have been prevented?
Solution: A fraud like this can be prevented which is not as easy neither tough as a job. Firstly, a
fraud like this can be prevented by having in control our selfishness and excessive desire for more
of something if it is needed. This is one of the main cause. Secondly, fraud can be stopped by
keeping in check employee stock ownership plans issued to those who prepare fake bills. Thirdly,
make strict rules and take the toughest action against culprit and set an example so that an
employee thinks twice before doing any crime in the company.
Q6. If you were the Chief Financial Officer of Satyam, what would you have done differently if
you knew that the Fraud was going on? Keep in mind that if you chose to disclose the Fraud then
the company most likely would have been bankrupt and you would have been out of a job.
Solution: Since the enforcement of whistle-blowing act was very weak in India at that time, still I
would make an attempt to blow the whistle as an anonymous. What surprises me is that being an
accountant (or CFO), no entity can manage to cover-up such extreme degree of fraud. It might
have been possible if Satyam was conducting its operations throughout India only but when
Satyam got enlisted in NYSE the fall was inevitable. It was obvious that this situation will
eventually arise when the World Bank put a bar against Satyam. Even if I would gotten myself
involved in this fraud, the World Bank bar would be enough for me to wash my hands off.
Finally, it is of course a major concern that I might lose my job but it is very much possible that if
I get caught for conducting a fraud at this level I might remain unemployed forever. Blowing the
whistle also causes the other firm to prevent hiring that is why blowing the whistle while remaining
anonymous is the best option to consider.