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.

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

9.

The 2009 Satyam scandal in India highlighted the nefarious potential of an improperly governed corporate leader. As the fallout continues, and the effects were felt throughout the global economy, the prevailing hope is that some good can come from the scandal in terms of lessons learned [35]. Here are some lessons learned from the Satyam Scandal:

• Investigate All Inaccuracies: The fraud scheme at Satyam started very small, eventually growing into $276 million white-elephant in the room. Indeed, a lot of fraud schemes initially start out small, with the perpetrator thinking that small changes here and there would not make a big difference, and is less likely to be detected. This sends a message to a lot of companies: if your accounts are not balancing, or if something seems inaccurate (even just a tiny bit), it is worth investigating. Dividing responsibilities across a team of people makes it easier to detect irregularities or misappropriated funds.

• Ruined Reputations: Fraud does not just look bad on a company; it looks bad on the whole industry and a country. “India’s biggest corporate scandal in memory threatens future foreign investment flows into Asia’s third largest economy and casts a cloud over growth in its once-booming outsourcing sector. The news sent Indian equity markets into a tail-spin, with Bombay’s main benchmark index tumbling 7.3% and the Indian rupee fell”. Now, because of the Satyam scandal, Indian rivals will come under greater scrutiny by the regulators, investors and customers.

• Corporate Governance Needs to Be Stronger: The Satyam case is just another example supporting the need for stronger CG. All public-companies must be careful when selecting executives and top-level managers. These are the people who set the tone for the company: if there is corruption at the top, it is bound to trickle-down. Also, separate the role of CEO and Chairman of the Board. Splitting up the roles, thus, helps avoid situations like the one at Satyam.

The Satyam Computer Services’ scandal brought to light the importance of ethics and its relevance to corporate culture. The fraud committed by the founders of Satyam is a testament to the fact that “the science of conduct” is swayed in large by human greed, ambition, and hunger for power, money, fame and glory.

10.

a) Independent Directors: The Satyam scandal reinforced the Indian regulators commitment to continue

the process of CG reform. Even before the Satyam scandal broke, India was in the process of updating its

1956 Companies Act, which sets out key Indian CG rules. The SEBI is considering several proposals ranging

from mandating increased due diligence on transactions to increasing personal liability of board

members. If reform continues on its current course, reform within the 1956 Companies Act will make it

easier for shareholders to sue officers and directors of corporations. The SEBI is also considering making

publicly listed companies carry director and officer liability insurance to protect shareholders from

damages. Additionally, the SEBI proposed creating a law that provides whistle-blowers with protection

for reporting fraudulent activity. Finally, the SEBI revised takeover regulations to increase disclosure in

takeovers.

(b) Disclosure of Pledged Securities: After Satyam, the SEBI increased disclosure obligations of

promoters and controlling shareholders. Before the Satyam scandal, promoters and controlling

shareholders were not required to disclose to investors if they had pledged their stock. Two weeks after

Satyam’s collapse, the SEBI made it mandatory for controlling shareholders to disclose any share

pledges.

(c) Increased Financial Accounting Disclosures: The SEBI also recently proposed requiring companies to

disclose their balance sheet positions twice a year. Pre-Satyam, the regulations only required disclosure

of balance sheet positions once a year. The increased reporting of companies’ balance sheets will provide

investors with more information on the stability of a company’s financial position. Increasing both the

frequency and detail of disclosure will help provide for a more robust market check—e.g. investors will

be able to police companies better and pay more attention to accounting irregularities. For example,

increased frequency of disclosure of Satyam’s balance sheet could have led to an investor discovering,

and pressing the board to investigate, the claimed large cash deposits in non-interest bearing accounts

more quickly.

(d) IFRS (Adoption of International Standards): Satyam strengthened India’s commitment to adopting

International Financial Reporting Standards (IFRS) by 2011. Currently, Indian Generally Accepted

Accounting Practices (GAAP) and the IFRS differ significantly. Globally, more and more countries are

moving towards IFRS, as currently more than 100 countries require, permit, or are converting to IFRS.

Adopting IFRS will facilitate investor comparisons of financial performance across country lines and will

increase confidence in the accounting numbers