Analysis of SATYAM Scandal

Company Profile: Brief History

Satyam Computer Services Limited was formed by MrRamalingaRaju in the year 1987. The company was offering outsourcing services both in the field of Information Technology and Business processing. This was a Hyderabad based company which gradually became a global name, the company was known worldwide for its innovation, governance and accountability. With its efficiency and goodwill, the company became an IT giant in the global market and by the year2008, it gained a worth of 2.1 billion dollars.[1] Over the time the founder and former chairman of the company received many honours for his work and corporate governance.

 The Accounting Scandal of the Company

The fraud was unveiled when the founder and former Chairman Mr R. Raju disclosed about such practices to the Board of Directors of the company through a letter in which he had stated that “he has been manipulating the accounting numbers of the company for several years.”

The timeline of the Scandal is provided below;[2]

  1. 07/01/2009: Mr Raju disclosed his fraud in front of the Board of Directors and confessed he has committed a fraud of rupees Seven Thousand One Hindered and Thirty-Six (7,136) crore.
  2. 08/01/2009: Citibank froze Satyam’s thirty accounts.
  3. 09/01/2009: R. Raju and his brother got arrested and Central Government appointed its ten directors. And Satyam was removed from the Sensex and Nifty.
  4. 10/01/2009: S. Vadlamani, the former CFO of Satyam got arrested.
  5. 11/01/2009: Deepak Parekh, KiranKarnik and C. Achuthan got appointed to Satyam’s Board by Government.
  6. February 2009: CBI filed three charge sheets basing on the investigation.
  7. 06/03/2009: SEBI allowed the bidding process for selection of investor.
  8. 22/04/2009: Tech Mahindra made an offer to Satyam
  9. 22/06/2009: Tech Mahindra took over Satyam and unveiled its new identity as Mahindra Satyam.
  10. The year 2010: Mr Raju alleged that the charges made by CBI are false.
  11. 02/11/2011: On the failure of CBI in filing the charge sheet on time, the Supreme Court granted bail.
  12. 28/10/2013: A criminal complaint was filed by Enforcement Directorate, against 46 persons and 166 corporate entity headed by R. Raju
  13. 08/12/2014: R. Raju along with three others were awarded six months term of imprisonment by SFIO.
  14. 23/12/2014: The announcement of verdict got postponed owing to the voluminous documents.
  15. 09/03/2015: Special court deferred the verdict till 9thApril
  16. 09/04/2015: All the ten accused persons were held guilty.

The reason behind this fraud as confessed by Mr Raju was that by generating revenue through this practice he was planning to divert the funds generated into real estate investments, high earning shares and make huge profits by selling the stake at an inflated price. And the gap in the balance sheet of the company was due to this inflated profit earned. With time the gap kept on increasing and ultimately when the company could not acquire the Matyas Infrastructure and the Matyas Properties, there was no hope of bridging the gap, left and following to which Mr Raju confessed about the fraudulent accounting numbers to the Board of Directors of the company.[3]

Factors which Contributed to this Accounting Fraud.[4]

There were various factors which contributed to the fraud, some of these factors were; deceptive reporting practices, lack of transparency, excessive interest in stock prices, lack of proper accounting rules, weak independent directors, inefficient audit committee etc.

After the accounting scandal was revealed, the auditors and the directors of the company were heavily criticized. Had the external auditors been more vigilant and would have audited the reports with due diligence and valid documents, then the accounting numbers could not have been tampered with. While the directors of the company are responsible for the propergovernance of the company, in this case, they failed to do so. It’s their responsibility to protect the interest of the minority shareholders and ensure that the company is being lawfully and efficiently governed, had they been more observant about the corporate affairs then probably this could have been prevented.

Conclusion

The unfolding of the Satyam accounting scam worked like an eye opener for the corporate houses across the globe. The importance of vigilant corporate governance was one prime lesson which the corporates houses learnt and few others were,proper investigation of any inaccuracy of the accounting numbers, such frauds mars the reputation of the company for life thereby affecting future investments and overall future of the company. As Lord Acton has rightly said “power tends to corrupt”, so it is very much necessary for everyone to be vigilant and contribute to a stronger corporate governance mechanism and only then it can be made possible to prevent further occurrence of such frauds or scandals thereby protecting the economy both national and global from being adversely affected. Along with the stakeholders of the company the country’s legal system also has a great rolein controlling and preventing such scandals or frauds. Ethical and reasonable measures must be taken by both the stakeholders of the company and the government to fight the menace of corporate frauds and to protect the economy.

[1]MadanLalBhasin, Corporate Accounting Fraud: A case study of Satyam Computers Limited, Open Journal for Accounting, (April 2013) available at: https://file.scirp.org/pdf/OJAcct_2013042509481787.pdf (last visited on July 17, 2018)

[2]Internet Desk,All you neeed to know about the Satyam Scandal, The Hindu, (May 20, 2015) available at: https://www.thehindu.com/specials/in-depth/all-you-need-to-know-about-the-satyamscandal/article7227938.ece (last visited on July 17, 2018)

[3]Manu Balachandran, Satyam Scandal: How India’s biggest corporate fraud unfolded, Quartz IndiaApril 8, 2015) available at: https://qz.com/379877/the-satyam-scandal-how-indias-biggest-corporate-fraud-unfolded/ (last visited on July 17, 2018)

[4]Supra 1

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