Case 2.3: Satyam Computer Services Ltd.

Updates to the case:

Satyam fraud was biggest ever corporate accounting scandal the country had ever
seen. Financial fraud to the tune of 7000 crore was committed and shockingly the
companys auditors, PricewaterhouseCoopers did not notice this. In the aftermath of
the scandal both, the role of independent directors in an organization has been
fiercely questioned and their ability to keep a check on the promoters activities
have been debated along with the authenticity and accountability of an auditing
firm in such scandals.
Glaring loopholes in the regulatory and legal framework were brought to light
caused by the scale of the scandal and the auditing firms neglect. Such loopholes
dealt with the directors and the auditors of companies. Eventually, all of this led to
changes in the law.
Before Satyam, The companies Act, 1956 neither contained any provisions for
independent directors nor any stringent obligations on auditors. In the aftermath of
the scandal, CII set up a task force to identify the reforms needed and NASSCOM
established a corporate governance and ethics committee under Narayana Murthy.
This report addressed reforms pertaining to audit committees, shareholder rights
and whistleblower policy. In 2010, SEBI amended the Listing Agreement to include
the provision dealing with the appointment of a CFO.
The 2013 Company Law incorporated such reform suggestions from the above
committees, thereby clearly establishing the responsibility and accountability of the
independent directors and auditors. It also provided for compulsory rotation of
auditors.
B Ramalinga Raju, his two brothers and seven others have been sentenced to seven
years in prison for their role in the Satyam fraud case. Also a fine of 5 crore is
imposed on Ramalinga Raju. In a fresh order, SEBI has asked 10 entities linked with
the case including Ramalinga Raju to return over 1800 crore worth of illegal gains.
Just as the US needed Enron scandal to clean up its act, perhaps India needed the
Satyam scandal to bring about changes to its financial reporting system. It will not
be farfetched to say the Satyam Scandal brought about better corporate
governance, helped to plug the loopholes and bring about efficiency and
accountability in the system.