Question

Find an article on a company that has experienced financial fraud. What are some of the key points of the article? What did you learn after reading this article?

Explain to us what the company should have done differently. Be sure to reference the website and the company

Answer 1

Satyam Scandal

Satyam Computer Services was an Indian IT Services and back-office accounting firm based out of Hyderabad, India. In 2009,It was discovered that the company had inflated revenues by $1.5 Billion, Making one of the largest accounting scandals . On 7 January 2009, the chairman of Satyam, Byrraju Ramalinga Raju, resigned, confessing that he had manipulated the accounts of $18.7 Billion crore in several forms. The global corporate community was said to be shocked and scandalised.

PricewaterhouseCoopers affiliates served as independent auditors of Satyam Computer Services when the report of scandal in the account books of Satyam Computer Services broke. The Indian arm of PwC was fined $6 million by the SEC (US Securities and Exchange Commission) for not following the code of conduct and auditing standards in the performance of its duties related to the auditing of the accounts of Satyam Computer Services. In 2018, SEBI (Securities and Exchange Board of India) barred Price Waterhouse from auditing any listed company in India for 2 years, saying that the firm was complicit with the main perpetrators of the Satyam fraud and did not comply with auditing standards. SEBI also ordered disgorgement of over $1.7 Million wrongful gains from the firm and 2 partners. PwC announced their intent to get a stay order.

An investigation by India’s Central Bureau of Investigation revealed that founder and chairman Ramalinga raju has falsified revenues, Margins, and Cash balances. During the investigation raju admitted to the fraud in a letter to the companies board of directors. Although Raju and his brother were charged with breach of trust, conspiracy, fraud and falsification of records, they were released when the Central Bureau of Investigation failed to file charges on time.

Is this an accounting fraud, a market manipulation/fraud or both?

It is a fraud, which misled the market and other stakeholders by lying about the company’s financial health. Even basic facts such as revenues, operating profits, interest liabilities and cash balances were grossly inflated to show the company in good health.

What I have Learned by reading the article?

1. From the reported Scandal it is revealed that the entity had made a financial fraud by misappropriating the assets of the entity as well as they have over valued the assets of the entity which misled the market and other stakeholders by lying about the company’s financial health.

2. Even basic facts such as revenues, operating profits, interest liabilities and cash balances were grossly inflated to show the company in good health. The promoters are primary culprits, although it is almost impossible to misrepresent such facts without the connivance of the auditors and some executive board members. Independent directors, it seems, were kept in the dark about the actual books of accounts.

3. The role of external third party auditors, who were tasked to ensure that no financial bungling is undertaken to carry out promoters’ interest or hide facts, have also been brought to question.

4. The promoters are primary culprits, although it is almost impossible to misrepresent such facts without the connivance of the auditors and some executive board members. Independent directors, it seems, were kept in the dark about the actual books of accounts.

How they have manipulated?

1. Details of accounts from 2002 till January 7, 2009 – the day Raju came out with his dramatic, five-page confession - were stored in two separate Internet Protocol (IP) addresses.

2. Fake invoices and bills were created using software applications such as 'Ontime' that was used for calculating hours put in by an employee

3. A secret programme was allegedly planted in the source code of the official invoice management system creating a user id 'Super User' with the power to hide or show the invoices in the system.

4. A web of 356 investment companies was used to allegedly divert funds from Satyam.

5. These companies had several transactions in the form of inter-corporate investments, advances and loans within and among them.

What the Company should have done?

1. From the above it is very clear that the companies internal control system was so week in detection and prevention of fraud in the financial statements. The company should implement and see whether such internal controls are active and the same is working as planned. It should be such that no one can override the controls. (But its difficult to prevent such frauds which were committed by the top management and those charged with governance since the internal controls are implemented by them only).

2. Watch and verifying all the investments and Assets – In this scam the company had over valued their investments and assets in very high. So there should be a strict system to verify and valuing the investments.

3. Safeguarding the Information – Un authorized access to the system should be prohibited by implementing controls.

4. Internal Audit Function – The company should have implemented a strong internal audit function to prevent such frauds early.

References

1. https://en.wikipedia.org/wiki/Satyam_scandal

2. Hindustantimes.com

3. https://economictranscript.wordpress.com/2017/02/28/the-satyam-scandal/

4. https://corporatefinanceinstitute.com/resources/knowledge/other/top-accounting-scandals/

Thank You