KARNAVATI UNIVERSITY

UNITEDWORLD SCHOOL OF LAW

ACCOUNTING FOR LAWYERS

(Legal Consequences of Accounting Scandals: Lessons Learned

and Regulatory Responses.)

SUBMITTED BY:

DIYA PATEL (20220401054)

BBA LLB, SEC- B

SUBMITTED TO:

CA CS Nitesh Nanavati

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 TABLE OF CONTENTS

S NAME P NO.
NO.
1 Introduction 3
2 The Scandal Story 3
3 Regulatory changes thereafter 4
4 Timeline of events 5
5 Lessons Learned 5
6 Literature review 6
7 Summary
8 Bibliography

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 INTRODUCTION
In a layman language, Accounting means keeping a record of the financial transaction of a
business which ultimately reflect the financial position of the firm. Accounting is one of the
most important aspect when it comes to running a business as it reflects the position of
business on its assets and liabilities. There are many rules and bodies that regulate accounting
and these bodies and rules vary in different countries and different industries. However, there
are many loopholes that businessmen exploit and try to manipulate the accounts to portray a
“Good” image of their business. Such exploitation and manipulation lead to Accounting
Scandal just like the one explained in this paper. The aim of this paper is to analyse THE
SATYAM SCANDAL and examine its legal consequences.

THE SCANDAL STORY

The company was a IT company based in Hyderabad and formed by B Rama Raju and
Ramalinga Raju aka Raju Brothers in the year 1987. It was a very successful company as it
also got listed in the Bombay Stock Exchange and New York Stock Exchange by 1991-92. It
also became the 4th largest IT company in India after TCS, Infosys and Wipro. In 2003 the
firm was valued at $1billion which increased to $2billion in 2008. It even received multiple
awards for being the fastest growing company. However, this growth was artificially
portrayed and there was no “Growth” as such for the company. However, there was
“Growth” for the CEO of the company i.e. Mr. Raju who cooked the books of the company
and inflated the share price of his company in stock exchanges for his own good.

At that time, Real estate price in Hyderabad were on a rise. Mr. Raju took this as an
opportunity to make money and hence started buying land in the name of 2 companies that he
started in 1988 namely Matyas Infra and Matyas properties. He also bought land in the name
of his family members. For buying such property he needed money. He tried to get money
out of the company by inflating his sales via creating fake invoices. This was his main modus
operandi. This increased sales depicted by Mr. Raju drew attention of investors and slowly
investors developed interest in the company. Because of increased investment the share price

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kept on increasing in the share market. When the share price peaked, Mr. Raju sold some of
his shares or kept them as a collateral in the market and earned profit which was later
invested in Real Estate. (Shome, 2021)

Mr. Raju very intelligently defrauded the stakeholders by creating fake invoices of fake sales,
fake increase in the number of customers, fake bank deposits, and fake cash in the firm. All
throughout this process the auditors also failed to figure out the well planned blunder. Mr.
Raju started to falsify the accounts in 2003 to show a profitable image of the company. He
caught auditors, investors, stakeholders and analysts in his web of deception for 6years.
During these years the share price jumped drastically making Satyam one of the most
valuable firms in the nation in IT sector. Ironically it also received social responsibility and
corporate governance awards in 2008. (Jaiswal, 2023)

All this started to go towards the end when B Ramalinga Raju confessed via a letter to the
Board of Directors. In this letter he confessed about inflating the company’s profit, valuation
of assets, sales etc by billions of dollars. (Gandhi, 2023). After the confession, the share price
of Satyam dropped from Rs.542 to Rs.6.30. The Indian Government made attempts to sell the
company as soon as possible and around 2009 Tech Mahindra bought Satyam for Rs.58 per
share. Mr. Raju was charged breach of trust, forgery and criminal conspiracy. Charges were
formed not only against him but also against the company’s MD, CFO and head of internal
audit, auditors of several companies etc. (Banerji, 2022) CBI raded the house of Raju sibling
and found 112 sale deeds of different lands and 13,000 fake employee records. The scam was
of around Rs.7000 Crore and experts also called it India’s own ENRON. (Almeida, 2023)

REGULATORY CHANGES THEREAFTER

The Satyam Scandal was a wakeup call for India to change its Corporate Governance
regulations and establish a systematic regulation for the listed company. After this scam,
Companies Act was introduced and SEBI i.e. Securities and Exchange board of India was
established as the regulator for the listed companies. Companies Act made appointment of
independent Directors mandatory. It also mandates separating roles of chairman and CEO. As
a result of establishment of SEBI transparency in the trading of shares of listed companies
increased and there was better enforcement of rules and regulations when it came to auditing,
corporate governance etc. (Test book , 2023)

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 TIMELINE OF EVENTS LEADING TO THE SATYAM SCAM

Time Event
January 1987 Satyam Computers was launched in Hyderabad
1991 Makes a debut in Bombay Stock Exchange with an IPO oversubscribed
17 times
2001 Gets listed on NYSE
2008 Revenue of the company crosses $1 bn
23rd World bank banned the co. from conducting business
December
2008
2nd January The promoters’ stake decreased from 8.64 percent to 5.13 percent
2009
7th January Ramalinga Raju had to resign after confessing to inflating the
2009 company’s financial statistics
11th January The Indian government intervened and appointed three persons to a
2009 newly appointed Board of Directors in an attempt to save the company.
(Test book , 2023)

LESSONS LEARNED

1. Closely monitor the Institutional investors and promoters.

Institutional investors and promoters are the people who have invested highly in the
company and are also closely related to the company. As a result of this, they become
aware of any unusual activity taking place within the company earlier than a layman.
Hence, one should closely monitor the shareholding pattern of such investors in the
company. In this case, in March 2001, shareholding of Mr. Raju’s family was 25.06%
which came down to 8.61% in 2008. However, reduction in investment by such
shareholders do not necessarily mean failure of the company. (Bajaj, 2015)

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2. Importance of independent auditors.
Auditing is an important process to ensure the reliability of the accounts prepared by
the firm. For this, independence of auditors is important. Same can also be understood
after studying Enron scam. In the event of dependence of auditors on the firm, be that
financial or not, there is a conflict of interest which might result negatively and
impact the transparency.

3. Strengthening Corporate Governance.

Satya Scam was a wakeup call for the regulators to bring in new regulations to ensure
a better corporate governance policy for the businesses in India and ensure that there
is a checks and balance system in the organisation which reduces the scope for such
scams. (Khanna, 2023)

4. Whistle blower Protection.

Satyam scam also brought into light the need for a policy for protection of the whistle
blower. This would aid in encouraging employees and other inside people to report
and fraudulent and illegal activities without the fear of being counterattacked.
(Khanna, 2023)

LITERATURE REIEW

1. ETHICS OF AUDITORS – A CASE COMMENTARY ON SATYAM SCAM is a

research paper written by By Ramya. S. R. This paper focuses on the roles of different
gatekeepers of the securities market and the changes in regulations after the scam.
After Satyam scam many regulations were changed and many new laws and bodies
were made but along with that there has been a significant increase in the role and
responsibility of auditors, Investment bankers, independent directors etc. This was
done because it was the duty of the financial gate keepers to stop any unusual activity
because once a scam like this happens, investigation might take a long time.

2. SEVEN YEARS AFTER THE SATYAM COMPUTER FRAUD is written by

Alvarez and Marshal. This paper talks about the 7 changes that have affected the
financial crime environment in the 7years after Satyam fraud. The 7 changes that have
affected the financial crime since Satyam scam are changes in corporate governance,

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 change in technology, Cybercrime, Intellectual property theft, greater auditor
independence and accountability, increased monitoring in banking sector and class
action suits.

3. ROLE OF FORENSIC ACCOUNTING IN SATYAM SCANDAL is written by

Revati Raman Singh Rathore. This paper explains the significance of forensic
accounting in investigation of Satyam Scam. As forensic auditors are trained to
identify fraudulent activities and financial irregularities by using their investigative
skills in examining financial records, invoices and books of accounts of Satyam. They
examined the company’s internal control system and interview employees. This study
revealed that the books and valuation of assets were manipulated and overstated. This
investigation resulted in recovery of some assets and led to arrests.

SUMMARY

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