Question

Identify one (1) real-life ‘financial reporting accounting fraud’ that occurred post 1990 (i.e. in the last 30 years), in any country, and answer the following questions:
a) Summarise the key facts about your chosen ‘financial reporting accounting fraud’
b) Explain which of Positive Accounting Theory’s (PAT’s) hypotheses predicted the practice(s) of the parties involved in your chosen accounting fraud.
c) Discuss what specific accounting regulations were violated?
d) What valuable lessons can the accounting community (incl. reporting entities and regulators), learn from the outcomes of your chosen accounting fraud?
e) Provide two (2) recommendations to the Australian financial reporting regulators, to prevent accounting frauds from happening in the future.

Answer 1

1. Accounting Fraud involving Satyam Corporation which was uneartherd in 2008 is most scandalous fraud even perpetrated in any country ever. This scam led to imprisonment of the Managing Director of the Company and its auditors. Government of India had to step in and rescue the Company and the Company was taken over by the Tech Mahindra.

2. Unfortunately this fraud was not predicted by any accounting theory. The fraud came to light when its Board of Directors oopossed the merger plan of Satyam and one of the Company controlled by the MD. This became catalyst for its MD to openly come out and confess about the scandal.

3. Following accounting were violated-

a. Revenue were recognised using false invoices

b. Salary cost was recognised for the ghost employees

c. Non Existen cash and cash equivalents were carried in the financial statement.

4. Following were learning for the accounting community-

1. Controls to be monitored, strengthened

2. Seggregation of duty

3. Management override to be considered as serious matter

4. Direct and Indepedent confirmations should be used

5. Banks not to hadover the check, passbook etc. for a new employee to HR or any other person other than employee himself

6. Never share PAN Card, Certificates etc. for an interview

7. Independence of auditors to be strenghthened

5. Following shall be two recommendations to the Board-

a. Mandatory audit rotation and independence to be strenghthened

b. Internal Control Audit to be mandatory requirement by statutory audits