Professional Documents
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1 Student of MBA& Assistant Professor Shoolini University, Himachal Pradesh, India
1 Student of MBA& Assistant Professor Shoolini University, Himachal Pradesh, India
ABSTRACT
Satyam scam has been the greatest scam in the history of corporate world of the India.
Satyam is the fourth largest IT Company in India. The CEO of the company has made a
scam of around $2 billion; it appears that corporate accounting fraud is a major problem
that is increasing both in its frequency and severity. The Satyam scam shockwaves also
impacted the entire auditing structure of Indian Corporate world. The scam has added
to a notorious list of companies involved in fraudulent financial activities, one that
includes such names as Enron, WorldCom, Societe General, Parmalat, The increasing
rate of white-collar crimes demands stiff penalties, exemplary punishments, and effective
enforcement of law with the right spirit. The fraud committed by the founders of Satyam
in 2009, is a testament to the fact ―the science of conduct is swayed in large by human
greed, ambition, and hunger for power, money, fame and glory. In the aftermath of the
Satyam scandal, that has tested the efficacy of corporate governance norms in India; the
existing framework fails to satisfactorily address the shortcomings in the prevailing
regime. The Satyam scandal highlights the importance of securities laws and corporate
legislation in emerging markets. Indeed, Satyam fraud spurred the government of India
to tighten the corporate legislation norms to prevent recurrence of similar frauds in
future. Satyam scandal has had a deep impact on how we construe “Corporate
Governance”. Though it is well recognized that corporate governance is about
“transparency”, “efficacy” and “accountability” but now the concerns are about the
changing paradigm of corporate governance. Thus, major financial reporting frauds
need to be studied for “lessons-learned” and “strategies-to-follow” to reduce the incidents
of such frauds in the future.
1. INTRODUCTION
Satyam Computer Services, a leading Indian company that served more than a third of the
Fortune 500 companies. There has been a lot of controversy regarding the misuse of the
post by the CEO of the company. The fake number of jobs which was shown by the CEO
was an abuse of power and it was a clear violation of the prevailing laws in India. This scam
has seriously affected the corporate bodies in India. The role of an incorporated company
is to satisfy desires of investors, and to channelize their investment. But most of the time
entrepreneurs play with money of the investors. There are laws to safeguards investors’
interest but the Satyam scam has raised the question on the fundamental role of the
government and corporate governance. On 16th December, 2008 Satyam board got the
approval for acquisition of Maya’s Infrastructure and Maya’s Properties (companies owned
by his relatives). However the company could not go on with the investment plan due to
resistance by the investors. Between 25th and 28th December, 2008, independent directors
of Satyam board resigned and later on Mr. Raju confessed to fraud in the form of
misappropriation in the balance sheet of the company. The fraud scandal has adversely
impacted stocks and the currency, as the investors are worried over the damage to foreign
investment in Asia‘s third-largest economy and the once-booming outsourcing sector, a
magnet for thousands of young job seekers. It has been a 7,800 crore scam, biggest in Indian
corporate history. The scam continued for eight years and involved dual accounting books,
more than 7,000 forged invoices, and dozens of fake bank statements, thousands of
unnecessary employees and auditors who received fees several times the market rate.
1.1. History
It all started in the 1980s, this was the rise or one can say the boom in the IT sector of the Indian
Industry. Many Indian IT firms emerged as a result of rapid growth of Information Technology.
Due to adequate efforts from the Indian government the industry flourished and the IT
companies began to expand globally. Bangalore became the IT hub of the country; soon India
became a favorite place for the west for their outsourcing needs. As a result a large number of
customers were served and Indian IT industry became the largest software and services exporter
in the region. In the wake of this boom Satyam Computer Services Ltd was established in 1987
by Mr. Ramalinga Raju. The firm took a fresh start with having only 20 employees and grew
2. LITERATURE REVIEW
Winkler, D. (2010) paper provided an analysis of the Indian scandal that analysts have called
“India’s Enron.” It covered the areas of corporate history of Satyam and also provided an insight
into how the $2.7 billion scandal evaded regulators, investors, and the board of directors. He
also provided a discussion of who was responsible for the fraud, and also explained the scandal’s
effect in India and the implications for dealing with future obstacles. Finally, the author
discussed the regulatory reform following Satyam and the current status of Indian securities
markets.
Bhasin (2013) “the main objectives of this study were to: (a) identify the prominent companies
involved in fraudulent financial reporting practices, and the nature of accounting irregularities
they committed; (b) highlighted the Satyam Computer Limited’s accounting scandal by
portraying the sequence of events, the aftermath of events, the key parties involved, and major
follow-up actions undertaken in India; and (c) what lesions can be learned from Satyam scam?”
Niazi and Ali’s (2015) paper unfolds Satyam’s corporate scandal of inflated financial health,
the aroused concerns of investors about the effectiveness of CG framework in India, the long-
term effects over Indian stock market resulting from Satyam’s scam, and several suggestions
from the CG theory and practice that could have helped in preventing this debacle. Thus, an in
depth study is conducted to analyze the financial scam from a management’s perspective.
Pai and Tolleson (2015) examined the capture of government regulators using the case of
Satyam Computer Services Ltd., one of India’s largest software and services companies, which
disclosed a $1.47 billion fraud on its balance sheet on January 7, 2009. The authors reviewed
the Satyam fraud and PWC’s failure to detect Satyam’s accounting shenanigans, and also
discussed the societal implications associated with a “too big to fail” mentality and the moral
hazard of such a mindset. In addition, the paper provides suggestions to protect the public
Gupta and Gupta (2015) through a combined mode of structured questionnaires from 346
sample companies and 43 interviews with the corporate professionals, management, investors,
government offices and authorities having wide experience. They found that the regulatory
system is weak, there is dire need to redefine the role of auditors, coordination among different
regulatory authorities is poor, and after every scam, there is a blame game.”
3. METHDOLOGY
Building into a brand, with just 20 employees which later crossed thousands in numbers, takes a
great deal of commitment towards professionalism and strong ties with the industry players. Satyam
Computers Ltd did an extra-ordinary effort to be named as a brand “Satyam”. During the early days
of its glory, Satyam was known to be the rising star of the Indian IT industry and was fearless until
the day when its founder’s actions burnt it down to the ground. Let us first discuss some positive
points that the company had, which helped in making to the top and gaining trust of the investors:
Satyam computer services Ltd started with only 20 employees and in just a matter of time it started
to make it up to the top and began to be called the rising star of India. Its birth dates back to 1987 in
Hyderabad, India. In 2003, Satyam managed to get a contract in which it started providing IT support
services to The World Bank and later in 2005 it managed to secure third position in a survey lead by
Table 3.1 The Financial Performance of Infosys during 2000-2008 (INR crore)
Rs Rs Rs Rs Rs Rs Rs Rs Rs
Satyam Computers, though started from a small level managed to get a sales revenue of about $2
billion by the end of 2008. And it’s a really big thing to make a $2 billion mark within considerable
less time period as compared to Infosys or Wipro.
Table 3.2 Satyam’s Financial Performance over a Decade (INR crore) Rs.
Rs Rs Rs Rs Rs Rs Rs Rs Rs
Particulars 2000 2001 2002 2003 2004 2005 2006 2007 2008
Total Income 679.0 1,241.6 1,803.10 2,051.5 2,623.2 3,546.7 5,012.2 6,410.0 8,394.48
1 7 1 8 8 2 8
Operating Profit 252.5 466.71 652.32 646.39 774.31 971.70 1,571.4 1,710.7 2,085.74
(PBDIT) 6 2 3
Profit after tax 134.8 316.16 490.13 459.88 555.79 750.26 1,236.7 1,423.2 1,715.74
6 5 3
EPS 2.45 5.26 7.89 7.31 8.82 11.81 19.26 21.73 25.66
P/E ratio (times) 20.81 16.96 12.10 16.64 17.32 26.43 21.64 15.88
6. VICTIMS OF FRAUD
Employees of Satyam spent anxious moments and sleepless nights as they faced non‐payment of
salaries, project cancellations, layoffs and equally bleak prospects of outside employment. They
were stranded in many ways – morally, financially, legally, and socially.
Clients of Satyam expressed loss of trust and reviewed their contracts preferring to go with other
competitors. Cisco, Telstra and World Bank cancelled contracts with Satyam. ―Customers were
shocked and worried about the project continuity, confidentiality, and cost overrun.
Shareholders lost their valuable investments and there was doubt about revival of India as a
preferred investment destination. The VC and MD of Mahindra, in a statement, said that the
development had "resulted in incalculable and unjustifiable damage to Brand India and Brand IT in
particular."
Bankers were concerned about recovery of financial and nonfinancial exposure and recalled
facilities.
Indian Government was worried about its image of the Nation & IT Sector affecting faith to invest
or to do business in the country.
7. CONCLUSION
Strong financials are considered to be the key resources for an organization. Lower cost of debt and
stable financial position of a company helps a lot in outperforming the industry peers. This helps a
company to form a strong base or a foundation to withstand the decisions made by the management.
So, there is a need for an effective framework that regulates and cross checks the financial activities
of the firm. In Satyam, the corporate governance structure was excellent apparently but actually it
was not in line with the financial goals of the company. The corporate governance structure failed
to initiate the protocols regarding financial setbacks and created a loophole that ultimately leads to
a disaster. The persons responsible for corporate governance failed to make a strong link with both
the internal audit department and internal audit committee which resulted in a bond developed
between CEO and CFO to present window dressed financial statements to the stakeholders.
Transparent and ethical disclosure of information is among top priorities of the management and
Satyam’s management failed to do that. Such kind of scams cannot be stopped, but the risk could
be minimized by creating barriers set by an efficient management that creates an effective corporate
governance structure.
8. FUTURE RECOMMENDATION
It is proposed that corporations must uplift the moral, ethical and social values of its executives.
There needs to be a living conscience with company executives that will serve as a guidepost in the
best and worst circumstances. Secondly, board members need to feel the importance of the
responsibility entrusted with them. They need to be proactive and watchful in protecting the
interests of owners. There was a lack of proper and timely information in Satyam’s case. Board
members need to be careful with regards to the communication of information within the firm as
well as towards the owners. Fair and accurate information would be extremely valuable in
minimizing information asymmetry and agency problem.
9. REFRENCES
[1] Madan Lal. (2013). Corporate Accounting Fraud: A Case Study of Satyam Computers
Limited. Open Journal of Accounting, 2, 26-38.
[2] Basilico, Elisabetta, Grove, Hugh, & Patelli, Lorenzo. (2012). Asia's Enron: Satyam (Sanskrit
Word for Truth). Journal of Forensic & Investigative Accounting, 4(2).
[4] Rama chadran, S. (2009). Raju brings down Satyam, shakes India. Asia Times Online Ltd.
[5] Timmons, H. and B. Wassener. (2009). Satyam Chief Admits Huge Fraud, 2014, from
www.nytimes.com
[6] Jeffords, R, Marchant, ML, & Bridenall, PH. (1992). How useful are the treadway risk factors?
Internal Auditor, 49(3).
[7] Smith, ER. (1995). A positive approach to dealing with embezzlement. The White Paper, 17-
18.Zeigenfuss, Douglas E. (1996). State and local government fraud survey for 1995.
Managerial Auditing Journal
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Chicago: CCH Incorpo- rated,” 2003.
[9] C. E. Crutchley, M. R. H. Jensen and Marshall, “Climate for Scandal: Corporate Environments
that Contribute to Accounting Fraud,” The Financial Review, Vol. 42, No. 1, 2007, pp. 53-73.
[10] R. Jeffords, “How Useful Are the Treadway Risk Fac- tors?” Internal Auditor, Vol. 49, No. 3,
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[11] E. R. Smith, “A Positive Approach to Dealing with Em- bezzlement,” The White Paper,
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[12] D. E. Ziegenfuss, “State and Local Government Fraud Survey for 1995,” Managerial Auditing
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