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    The document discusses two cases related to corporate governance issues. In the first case, Satyam Computer Systems underwent a major fraud involving inflated financial figures. The CEO attempted to acquire two family-owned companies without shareholder approval, diverting Satyam's cash reserves. Independent directors failed to prevent this or detect the accounting fraud. In the second case, an audit of Universal Engineering Corporation found inflated sales, understated expenses, and misclassified receivables over two years, overstating profits by 40%. Top management was aware of inflated figures but not the financial impact. Both cases highlight the need for stronger internal controls and monitoring to prevent such issues.

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    The document discusses two cases related to corporate governance issues. In the first case, Satyam Computer Systems underwent a major fraud involving inflated financial figures. The CEO attempted to acquire two family-owned companies without shareholder approval, diverting Satyam's cash reserves. Independent directors failed to prevent this or detect the accounting fraud. In the second case, an audit of Universal Engineering Corporation found inflated sales, understated expenses, and misclassified receivables over two years, overstating profits by 40%. Top management was aware of inflated figures but not the financial impact. Both cases highlight the need for stronger internal controls and monitoring to prevent such issues.

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    79 views6 pages

    Corporate Governance in Satyam

    Uploaded by

    nishan_patel_3
    The document discusses two cases related to corporate governance issues. In the first case, Satyam Computer Systems underwent a major fraud involving inflated financial figures. The CEO attempted to acquire two family-owned companies without shareholder approval, diverting Satyam's cash reserves. Independent directors failed to prevent this or detect the accounting fraud. In the second case, an audit of Universal Engineering Corporation found inflated sales, understated expenses, and misclassified receivables over two years, overstating profits by 40%. Top management was aware of inflated figures but not the financial impact. Both cases highlight the need for stronger internal controls and monitoring to prevent such issues.

    Copyright:

    Attribution Non-Commercial (BY-NC)
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    Satyam Corporate Governance & Universal Engineering Corporation

    Submitted By:
    Kedarnath Aundhekar (2010202) Ketan Ghatkar (2010203) Kirti Tewari (2010205) Kshitij Varshney (2010206) Nishankumar Patel (2010213)

    CORPORATE GOVERNANCE
    Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations. A well-defined and enforced corporate governance provides a structure that, at least in theory, works for the benefit of everyone concerned by ensuring that the enterprise adheres to accepted ethical standards and best practices as well as to formal laws. To that end, organizations have been formed at the regional, national, and global levels. In recent years, corporate governance has received increased attention because of high-profile scandals involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers. An integral part of an effective corporate governance regime includes provisions for civil or crimin al prosecution of individuals who conduct unethical or illegal acts in the name of the enterprise.

    CORPORATE GOVERNANCE AT SATYAM


    It was the biggest Fraud in the nation and also in the corporate world. It is hard to believe that one of the largest IT companies, Satyam Computer Systems, underwent such a huge fraud case. Two brothers, Mr. Raju and B. Ramalinga Raju, who were the founder of Satyam Computer Systems were arrested for further investigation in the Satyam fraud case. The chief financial officer, SrinivasVadlamani, may join the two brothers in jail because he resigned just after B. Ramalinga Raju resigned after the fraud case. The two brothers have been charged for cheating, criminal breach of trust and forgery. Raju was compelled to admit to the fraud following an aborted attempt to have Satyam invest $1.6 billion in Maytas Properties and Maytas Infrastructure -- two firms promoted and controlled by his family members. Notwithstanding Raju's confession, the Satyam episode has brought into limelight the role and efficacy of independent directors. Corporate governance refers to the legal and factual framework of the management and monitoring of companies. Corporate governance regulations are geared towards transparency and thus strengthen the trust in management and control focusing on value creation. How can the attempt of CEO of Satyam computer, Ramalinga Raju, to purchase the twin company Maytas infra and Maytas properties be regarded as an attempt to made mockery of the principles of corporate gover nance? First of all, the decision was not announced taking into confidence all the stakeholders of the company. Secondly, the twin Maytas companies are being the companies run by the family members of Ramalinga Raju only and it was told that his two sons are major interested party in the twin companies. Thirdly, the deal would have made the cash reach company Satyam into a debt ridden company as its entire holding of $1.3

    billion cash would have gone to Maytas Properties (where promoters were 100 per cent holding) and in Maytas Infrastructures. Fourthly, Ramalinga Raju was holding only 8.5 per cent stake of Satyam computer so how can he take decisions of transferring its cash to a company owned by his son without asking the rest of the 91.5 per cent stake holders? Fifthly, in the name of diversification from software to entirely new area of reality why has a relatively new company Maytas been chosen when several other big players are still there? Sixthly, is it really time to go for shopping in a sector where the economic slowdown is at its severest form? However, not a single independent director blew the whistle when Raju attempted to acquire Maytas. They not only failed to guide the board on critical issues like blocking the controversial Maytas deal but also failed to protect the interest of the shareholders by turning a blind eye to Raju's wrong -doings that were being committed brazenly over several years. No wonder, after the Maytas deal fell through, the conscience of some independent directors pricked them enough to persuade them to resign rather than hold onto their positions. Some corporate governance experts pointed out that though the independent directors were responsible for good governance in companies, they themselves relied mostly on the information presented to them by the management, and that it was not possible for them to investigate such accounting frauds. The Satyam saga has also revealed that auditors can fail in their duty to check the promoter -driven agendas.

    Universal Engineering Corporation Ltd.


    This is a case about the irregularities and improprieties in the switchgear divisional operations of Universal Engineering Corporation Ltd. that came to light during a recent audit exercise. The internal audit of this NSE listed company revealed some glaring discrepancies in their financial figures, figures stretching over the last two years. They had come out with their IPO 2 years back, and during that organisational structure was revamped. A number of professional Non-Executive Directors were incorporated into the board of directors to achieve good corporate governance. The Non-Executive Director Chris Meccallum, the Head of the Switchgear Division MukundTalwalkar and the Chief Internal Auditor Krishnan Jayakumar, wanted to discuss how these happened and went on without detection for a period of two years. At the same time, they wanted to figure out what they could do to avoid the recurrence of similar instances in the future. A meeting had been called to discuss all the issues at length. Basically, during the audit, 3 major irregularities came to light: 1. Sales figures had been inflated in the last two years by about 30% each year using false revenue-recognition practices. 2. Revenue expenses had been understated in both the years by capitalising some of them. 3. Receivables had been understated to a significant level each quarter and year ends, by classifying unrealisable instruments as cash and cash cheques in hand on closing dates. When these discrepancies were first discovered, some employees were put on leave and some asked to look for other employment; they had been replaced as well. The overall impact of these irregularities on the bottom line profits was in the tune of two hundred and twenty crore rupees over both the years. This was roughly equivalent to overstating divisional profits by 40% and the company also had to incur tax liability at the marginal rate of 34% on the nonexistent profits. These issues were then discussed in detail in the special Audit Review Meeting, which was attended by the top line management group of division management. They all had a rough idea that numbers had been inflated in the annual reports, but most were not aware of the financial repercussions. In all the three cases, the board members if not unanimously, found all the three ways to be right. This however could not be conveyed convincingly to the auditor, as these practices are classified as unfair practices . In spite of their justification all of them were good managers and at a personal level, very good human beings too. It is said - an organisation is as good as its values. The corporate culture with its obsession with performance in terms of financial numbers is to blame for this fiasco. The reward and punishment structure as well as training structure needs to take this into account to avoid repetition of such incidences which affect corporate governance and are detrimental to stakeholders.

    Another issue which was troubling that this infraction had escaped notice by the corporate office in spite of regular divisional performance reviews especially in the context of the ongoing recession. Since things were going right and numbers looked good, a lot of details were overlooked. Clearly, the control system needed to be reviewed.

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