Satyam Scandal

SATYAM SCANDAL

1.Summery:

The case is about accounting frauds worldwide in different forms along with its consequences. The case focuses on two parts in which the first part demonstrates the holistic observation of fraud whereas; the second part portrays the fraud that took place in Satyam Computers, India.

The definition of frauds is manipulating any accounting data or information in an unethical way and any sort of cheating to all the entities related to the company. Fraud invokes massive devastating wave in the business. Myriad scholars developed their theories on fraud and published their findings on recognition, anticipation and defensive agenda on fraud. Frauds lead a number of companies to liquidity bankruptcy and shut down. Lack of supervision and translucency in accounting statements, poor corporate surveillance, recruitment of dishonest employees, failure of directors, and lack of accounting knowledge are underlying causes for fraud.

In the case Satyam company is compared with Enron in context of fraud. The chairman of Satyam Mr. Rama, Raju was involved in manipulating financial statements of nine years. With dominating market share, growth rate, discernable success rate, Satyam become reputed company in India but the fraud by the chairman leads the company to auction. Satyam commenced the fraud in 1999 by a small mount but the constant growth made the amount over $1 billion dollar.  The fraud was done by Mr. Raju and auditing farm PwC in the first palace but latter the fraud got enlarged and Mr. Raju was unable to regulate the gap caused by the fraud. As a consequence he confessed the crime he did to the board of directors and resigned. The board took all the attempts to adjust the gap but failed. Mr. Raju utilized the money he gained by fraud in another business named Maytas Real Estate. Latter they try to form a coalition between Maytas and Satyam but failed. Hence, they decided to sell the company and elected DSP Merrill Lynch to get a buyer. The DSP Merrill Lynch found their fraud and acted as the whistle blower. The Satyam confronted their ultimate result. Mr. Raju and other indulged parties got arrested share price went down heavily all the awards received by Satyam were taken away and India portrayed a negative image in front of the world.

At the end indian government impose strong rules & regulation for the company as any other company can’t do anything like satyam.

2. Fraud in Accounting:

According to the Association of Certified Fraud Examiners, fraud is “a deception ormis representation that an individual or entity makes knowing thatmisrepresentation could result in some unauthorized benefit to the individual or to the entity or some other party.”

In other words, mistakes are not fraud. Indeed, infraud, groups of unscrupulous individuals manipulate, or influence the activities of a target business with the intention of making money, or obtaining goods through illegal or unfair means. Fraud cheats the target organization of its legitimate income and results in a loss of goods, money, and even goodwill and reputation.

The IFAC’s International Audit Standards-240 defines two types of fraud relevant for the auditor:

(a) Falsifications that are caused by the misrepresentation of the assets.

(b) Falsifications that are caused by the fraudulent financial reporting.

Meaning the basic action that has provoked a falsification of the financial situations was done intentionally or/and unintentionally. Financial statement fraud is also known as fraudulent financial reporting, and is a type of fraud that causes a material misstatement in the financial statements. It can include deliberate falsification of accounting records; omission of transactions, balances or disclosures from the financial statements; or the misapplication of financial reporting standards.

3. Facts that lead Satyam to the scandal:

Poor management system: Satyam co. Scandal’s one of the main fact is poor management system. After the scandal the entire management tries to save themselves & no one take any responsibilities. It proves the weakness of Satyam’s management system.

Increase the market share:

                                                                           Actual                  Reported                 Difference

Cash and Bank Balances                                      321                         5,361                           5,040

Accrued Interest on bank FDs                              Nil                          376.5                             376

Understated Liability                                         1,230                         None                           1,230

Overstated Debtors                                            2,161                          2,651                             490

Total                                                                      Nil                             Nil                           7,136

Revenues (Q2 FY 2009)                                    2,112                          2,700                             588

Operating Profits                                                    61                             649                              588

Showing these income statement Satyam increase their share price & tried to get higher growth rate.

To get more loan from bank: Satyam change their income statement to grt more loan from bank because income statement shows Satyam making huge profit in every year but the truth is Satyam was in loss for many years.

Money making tendency: Satyam’s CEO Mr. Raju tries to make more money in a very short time so he make fake income statement to get more money. By doing that fraud Mr. Raju invest the money in a other business named Maytas Real Estate.

Competition: Satyam planned to acquire a 51% stake in Maytas Infrastructure Limited, a leading infrastructure development, construction and project management company, for $300 million. Here, the Rajus’s had a 37% stake. The total turnover was $350 million and a net profit of $20 million. Morever, Satyam wants to pass their competitive in a very quick time so they choose the path of fraud.