Question

A closer look into business ethics: Please pick one of the following companies and answer the following questions with as much detail as you can based on your extensive research of the unethical practices that took place.

5. How did they get caught?

6. What were the assessed penalties?

7. List one (or a few) interesting fact s one may not know about the company or the fraud that took place.

8. What measures could the company (upper level management or employees in general) have done to prevent such fraud?

9. What kinds of internal controls would you put in place to prevent such fraud from taking place again?

10. What steps do you think the accounting profession has taken to prevent such fraudulent activities?

Please choose from the following companies: Saytam (2009)

Answer 1

5.

B Ramalinga Raju, the company’s former chairman wrote a letter to the Securities and Exchange Board of India (SEBI) and his company’s shareholders, admitting that he had manipulated the company’s earnings, and fooled investors. Nearly $1 billion or 94% of the cash on the books was fictitious.As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap.What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years

6.

The court awarded Ramalinga Raju seven years imprisonment and imposed a penalty of Rs 5 crore on him.
Ramalinga Raju and his brother and Satyam's former Managing Director B Rama Raju were also found guilty under section 409 of IPC relating to criminal breach of trust.
Eight others were declared guilty of criminal conspiracy in the country's biggest accounting fraud.

These eight accused are Ramalinga Raju's another brother, B. Suryanarayana Raju, Satyam's former chief financial officer Vadlamani Srinivas, former Price waterhouse Coopers auditors Subramani Gopalakrishnan and T. Srinivas, former employees G. Ramakrishna, D. Venkatpathi Raju and Ch. Srisailam, and Satyam's former internal chief auditor V.S. Prabhakar Gupta.

Except Raju's another brother B. Suryanarayana Raju and former internal chief auditor VS Prabhakar Gupta, all the others eight accused were found guilty under IPC sections 467, 468, 471 and 477A, relating to forgery of security, forgery for purpose of cheating and falsification of accounts, according to V Chandrashekhar, Superintendent of Police, CBI Hyderabad Zone.

The latest penalties for insider trading follows an earlier disgorgement order passed by Sebi had barred Raju and four others from the markets for 14 years and also asked them to return Rs 1,849 crore in unlawful gains with interest.

7.

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.

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.

8.

- Monitering ethical practices and the way they are incorporated in organisation.

- Clear understanding between board and next level employees.

- Fraud detection mechanism to be established.

- proper code of conduct to be updated on regular basis and it impementation to be checked upon.

- Whistle blowing policies must be adopted in the organisation.