Governance failure at

SATYAM
GROUP MEMBERS

Arun K S 13020841118
Akansha Mohanty 13020841064
Ankit Uttam 13020841066
Nishigandha sorte 13020841090
Siddiqui Zeeshan 13020841104
Taranpreet Kaur 13020841113
Pankaj 13020841119
 1. Circumstances for Exposure & Reasons
for fraud
 Dec 16th -17th :Maytas acquisition failure: 51% in Maytas infra(listed in BSE),
100% in Maytas Properties(unlisted) lead to negative investment failure.
 Total value of these two companies $1.6 billion. Justification given was slow
down in IT industry and diversification.
 Decline 55% in Satyam’s ADR, share price by 33%
 Dec 23rd :World Bank suspended Satyam for 8 years for bribery charges, but
denied the allegations
 Dec 26th :Mangalam Srinivasan independent director since 1991,resigned
taking responsibility for not voting against acquisition.
 Dec 28th :board meeting got postponed, IL&FS Trust sold 4.41 million shares
in open market, family stake dilution from 8.65% to 5.13
• Anonymous email to board stating financial
irregularities and lack of liquidity, three more
independent directors resigned.
• To keep up the share price, even though profit is
3%
• PwC India had failed to independently confirm cash
balances in bank accounts that supposedly rose to
over $1 billion by the time the fraud ended
• Lack of Transparency: Embezzlement of funds over
20 crore from 13000 non-existent employee’s salary
account.
 2. Could this fraud have been prevented and by
Whom?
In retrospect this scam could have been prevented,

 The buck stops with CEO at any organization, in Satyam’s case

the scam started with Raju’s mishandled ambitions

 Even though CEO acts as a gatekeeper to all the

misappropriations and creative accounting practices. But in this
case the
CFO-Srinivas Vadlamani, COO-themselves collude with CEO

 Even though PwC initially distanced them from the Scam but, as
the primary auditor of the 4th largest company of India they were
lax and on a large extent they were major partner in the scam as
per analysis.
• The BOD agreed with the Maytas without consenting with the share

holders and when the scam broke they distanced themselves from the

scam. So we understand that they should be more aligned to the

companies interest more than the CEO

• Industry associations like CII-Confederation of Indian Industry,

NASSCOM should have been proactive in implementing corporate

governance across hierarchies in the firm.

 3. Corporate Governance at
Satyam
 Satyam was one of those few companies in India that supposedly had
been doing things the right way. It allegedly had all the checks and
balances a U.S. company would want in an overseas business partner.
Its financial statements received repeated clean bills of health from a
respected outside auditor, Price Waterhouse Coopers. And still its
corporate governance rotted away from the inside. So apart from the
corporate governance point of view the important thing is that you have
to trust that your overseas partners are working honestly. Satyam is an
ugly reminder that we should keep that point very, very small.

 SEBI requires Indian publicly held companies to ensure that

independent directors make up at least half their board strength.
 The knowledge available to independent directors and even
audit committee members is inherently limited to prevent wilful
withholding of crucial information

 The reality is, at the end of the day, even as an audit committee
member or as an independent director, One would have to rely
on what the management was presenting to him.

 Satyam was one of the world’s largest implementers of SAP

systems. In an effort to compete against Satyam, HCL acquired
Axon, an SAP consulting firm, at a cost of $800 million. Any
Satyam director should have been puzzled that the company
was proposing to invest $1.6 billion in real estate at a time when
a competitor as formidable as HCL was gunning for one of its
most lucrative markets.
 Our Analysis
 “Independent directors should also (in addition to the
management) be held accountable for board decisions
and audit-related compliance practices.”

 “The concept of CEO and Board chair separation is well

accepted in Europe, and American companies are
steadily moving in that direction. This would bring a
better balance in the boardroom.”

 “Accountability and action against fraud/negligence are

major concerns. Professionals (auditors) should be
made accountable and consequences (punishment)
should follow if there are any deficiencies and slip-ups.”
 4. Responsibility of statutory audit
 Internal Audit committee- Headed by the CFO, Srinivas Vadlamani
 Statutory Audit committee- PricewaterhouseCoopers(PwC) contracted in 2000
 Audit committee of the board- Headed by independent board member.
 Under the Companies Act, an auditor is required to express an opinion as to whether
the annual accounts give a true and fair view of the company’s state of affairs and
financial position.
 PwC was paid INR430 million for auditing which was close to thrice the fees paid by
other IT companies.
 PwC should have declined the offer of such huge fees at the very first place and
should have raised a red flag that why Satyam was ready to pay so much money.
 PwC management should have questioned its own employees who were auditing
Satyam.
 It should have verified the cash and bank balances properly and fairly.
 The auditors have to perform an essential function of fraud prevention and
deterrence.
 Auditors should not have neglected the misrepresented amounts, fake invoices etc.

But PwC failed in all the aspects in Satyam case.

5. Analysis of Resignation Letter

FINANCIAL ANALYSIS

 He inflated the cash and bank balances of Rs 5040 crore.

 Interest of 376 crore was not shown in the books.
 He understated the liability of RS. 1230 crore
 He overstated the debtors position by 490 crore
 For the September quarter he showed the revenues as
2700crore and operating margin as 649crore but in reality
these figures were 2112crore and 61 crore
 Apart from the Financial Analysis, there were some other important
points in the letter.
 The only reason why he confessed his crime was because of his
inablility to fill the marginal gap between the actual operating profit
and the one reflected in books that had attained unmanageable
proportions as the size of the company operations grew
significantly.
 In his resignation letter he also stated that the MAYTAS deal was
the last attempt to fill that gap but as this didn’t happen hence the
gap could not be filled
 In the conclusion he also recommended the board about some
merging opportunities and also requested for the restatement of the
accounts and also apologized to all the stakeholders and
satyamites and requested them to stand by the company in this
hour of crisis
 6. ROLE OF BOARD OF
DIRECTORS IN CORPORATE
GOVERNANCE
 BOD- ROLES & CG
The principal role of the board of directors –is to oversee the
function of the organization and ensure that it continues to
operate in the best interests of all stakeholders.
 Strategic asset for the company
 Promoting a transparent culture that promotes effective
dialogues among the directors, senior management, and
various function and risk managers
Boards of directors in large public companies is that the board
tends to have more de facto power.
Issue of fundamental importance in economics
 BOD responsible for the strategic aspect of the firm.
 This implies that the underlying management strategy
comes under the purview of their roles and responsibilities.
 Includes the control of the same.
 SATYAM & BOD
 Saytam revealed that it did not have a financial expert on the board
during 2008
 Board of Directors’ lack of independence
 The Board first came under fire on December 16, 2008 when it
approved the Maytas Deal. The Board rescinded the approval after
shareholders and investors went against it.
 Krishna Palepu, Rommohan Rao, and Vinod Dham all resigned from
the Board within two days of the rescission of the transaction.
 The botched transaction provided the investors with the impression
that the Board was not actively monitoring Satyam. Furthermore, the
Board should have caught some of the same red flags that the
auditor, PWC, missed.
 Additionally, the Board of Directors should have been concerned
with the knowledge that Mr. Raju decreased his holdings of Satyam
significantly over the three years leading up the disclosure of the
fraud.
 Points out to not efficient policy administration , faulty procedures
and systems
 7. Regulatory Changes is the
Answer?

 To some extent…. Yes. Enforcement of regulations

definitely plays the key.

 Absence of stringent Laws : ‘‘White-Collar Crime

Penalty Enhancement Act of 2002’’ provides for the
penalty for such crimes. In fact section 906 of this
Act provides for 20 years of imprisonment

Whereas in India, the Company’s Act (1956),

Section 628 provides for 2 years imprisonment
only.
 Regulatory Changes after Satyam Scandal

• The new companies bill proposes fundamental changes in the

way companies are run in India.

1. In Company Act 2013, Independent Directors constitute at

least one-third of the BOD in every public limited company.
2. Mandatory disclosure of Pledged Securities
3. Increased Financial Accounting Disclosures
4. Adoption of IFRS (International financial reporting standards)
5. Strict civil and criminal laws
6. Rotation of audit partners every five years.
7. Constitution of Serious Fraud Investigation Office(SFIO).
 Negatives of excess regulations

 It is not clear that more paperwork is the answer,

consider Sarbanes-Oxley, which did nothing to
prevent the current scams in the US.

 More regulation, especially in bureaucrat-heaven

India, will probably just choke businesses to death,
suffocating, License Raj – which, incidentally, did
enrich those that had the right contacts.
 8. Lessons Learnt
 Improvement required in Law regulatory systems
 Rotation of auditing firms
 Strengthening of quality review
 Criteria for remuneration to key personnel
 Education on ethical values
 Empowering whistle blowers.

However, One must understand no matter how strong a

regulatory systems is, it cannot always prevent fraud.
There are limits to legislations as a lot depends on the
integrity and ethical values of various corporate players.

The key lies in management decisions and its

commitment to establish and follow rigorous systems.