BPSM

ASSIGNMENT - II

KARTHIKA SASIKUMAR

BATCH A
1. Violations done by Mr. Ramalinga Raju and reasons for down fall of Satyam.

Raju resigned from the Satyam board after Satyam Scandal, admitting to falsifying revenues, margins
and over ₹5,000 crore of cash balances as the company. The Indian affiliate of
PricewaterhouseCoopers, the company's auditors, appears to have certified the company had $1.1
Billion in cash when the real number was $78 million.

Just a few months before the scandal broke out, Raju tried to persuade investors by claiming that the
company is sound and that past October he surprised analysts with better-than-expected results,
claiming that "the company had achieved this in a challenging global macroeconomic environment,
and amidst the volatile currency scenario that became reality"

A botched acquisition attempt involving Maytas in December 2008 led to corporate governance
concerns among Indian investors and plunge in the share price of Satyam. In January 2009, Raju
indicated that Satyam's accounts had been falsified over a number of years. Total assets on Satyam's
balance sheet tripled during 2003-07 to $2.2 billion. He confessed to an accounting fraud to the tune
of ₹7,000 crore or $1.5 billion and resigned from the Satyam board on 7 January 2009. Satyam was
purchased by Tech Mahindra in April 2009 and renamed Mahindra Satyam.

In his letter, Raju explained his modus operandi to something that started as a single lie but led to
another as "What started as a marginal gap between actual operating profit and the one reflected in the
books continued to grow over the years. It has attained unmanageable proportions as the size of the
company's operations grew over the years.". Raju described how an initial cover-up for a poor
quarterly performance escalated: "It was like riding a tiger, not knowing how to get off without being
eaten." Raju had also used dummy accounts to trade in Satyam's shares, violating the insider trading
norm
The problem started when the Ramalinga Raju, Satyams computers chairman announced the decision
taken by board members to buy 51% stake in Maytas infrastructure and 100% stake in Maytas
properties. The Maytas infra structure and Maytas properties are the companies run by family
members of Ramalinga Raju. This decision is taken without share holders considerations. It was the
big surprise to share holders world wide and the ADR fell by 50% on the same day in the American
market and the stock fell by 30% in the indian stock market on next day.

Then the Ramalinga Raju taken decision immediately to withdraw the idea of purchasing the Maytas
infra and Maytas properties.

Then again it was fell by 20% after the resignation of its directors.

Later it was raised from Rs.118 to Rs. 185/- with the news that the L&T capital was purchasing the
shares from the market.

On 7th morning at about 11 O'clock the news came that the Ramalinga Raju The Chairman of Satyam
Computers Services limited resigned to his chairman post. He also confessed that the accounts shown
in the quarter ending 30th September, 2008 were wrong and the amount of net income to be shown as
Rs. 600 Crores instead of 60 crores. This means the profits of Satyam Computer Services for the
quarter is only 60 creres and hence the stock has fallen 80% based on its actually earnings. Experts
say it may even fall to 20%.
2. Role of audit firms in corporate governance and CSR in PWC failing to do its duties with
regard to Satyam Computer Services.

Following are the common governance problems, which have been noticed in the collapse of
Satyam:
Unethical conduct
In Satyam’s case, for its founder B.Ramalinga Raju, honesty was not something that he wanted to
pursue as hard as profits. He wanted to make money any which way by avoiding paying taxes,
cooking books, and pay offs. He on January 7, 2009 revealed some alarming truths that he
wasconcealing for a long period by confessing to a fraud of Rs 7800 crores ($1.47 billion) on
Satyam’s balance sheet.
A case of insider trading
Investigations into Satyam scam by the Crime Investigation Department (CID) of the State Police
and Central agencies have established that the promoters indulged in nastiest kind of insider trading
of the company’s shares to raise money for building a large land bank. The funds collected by the
former chairman B. Ramalinga Raju, his brother Rama Raju and their relatives were used to
purchase lands in the names of 330 companies and about 30 individuals.
A case of false books and bogus accounting
According to the findings of SFIO, Satyam’s balance sheet as on September 7, 2008 carried an
accrued interest of Rs. 376 crore, which was non-existent. These figures of accrued interest were
shown in balance sheets in order to suppress the detection of such non-existent fixed deposits on
account of inflated profits. The investigations also detailed that the company had deliberately paid
taxes of about 186.91 crores on account of the non-existent accrued interests of Rs 376 crores,
which was a considerable loss for the company. SFIO report clearly states that the company had
created a false impression about its fixed deposits summing to be about Rs 3318.37 crore while they
actually held FDRs of just about Rs 9.96 crores
Lax board
The Satyam Board was composed of ‘chairman-friendly’ directors who failed to question
management's strategy and use of leverage in recasting the company; they were also extremely
slow to act when it was already clear that the company was in financial distress. The Board ignored,
or failed to act on, critical information related to financial wrongdoings before the company ultimately
collapsed. It was only when Ramalinga Raju in the December, 2008 announced a $1.6 billion bid for
two Maytas companies32 i.e. Maytas Infra and Maytas Properties, and while the share market
reacted very strongly against the bid and prices plunged by 55 % on concerns about Satyam’s
corporate governance, that some of the independent directors came into action by announcing their
withdrawal from the Board, by than it was too late. Satyam board’s investment decision to invest 1.6
billion dollars to acquire a 100 percent stake in Maytas Properties and in 51 percent stake in Maytas
Infrastructure, the two real estate firms promoted by Raju's sons, was in gross violation of the
Companies Act 1956, under which no company is allowed without shareholder’s approval to acquire
directly or indirectly any other corporate entity that is valued at over 60 percent of its paid-up
capital. Yet, Satyam's directors went along with the decision, raising only technical and procedural
questions about SEBI's guidelines and the valuation of the Maytas companies
Unconvinced role of independent directors
The Satyam episode has brought out the failure of the present corporate governance structure that
hinges on the independent directors,33 who are supposed to bring objectivity to the oversight function
of the board and improve its effectiveness. They serve as watchdogs over management, which
involves keeping their eyes and ears open at Board deliberations with critical eye raising queries
when decisions scent wrong. Stakeholders place high expectations on them but the Satyam’s case
reveals such expectations are misplaced.
Questionable role of audit committee
The true role of audit committee in précis is to ensure transparency in the company, that financial
disclosures and financial statements provide a correct, sufficient and creditable picture and that,
cases of frauds, irregularities, failure of internal control system within the organization, were
minimized, which the committee failed to carry out. The timely action on the information supplied by
a whistleblower to the chairman and members of the audit committee (an e-mail dated December
18, 2008 by Jose Abraham), could serve as an SOS to the company, but, they chose to keep silent
and did not report the matter to the shareholders or the regulatory authorities. The Board members
on audit committee who failed to perform their duties alertly be therefore tried out under the
provisions of the Securities Contracts (Regulation) Act, 1956.
Fake audit
PricewaterhouseCoopers (PwC)’s audit firm, Price Waterhouse, was in the auditor for Satyam and
have been auditing their accounts since 2000-01. The fraudulent role played by the
PricewaterhouseCoopers (PwC) in the failure of Satyam matches the role played by Arthur
Anderson in the collapse of Enron. S Goplakrishnan and S Talluri, partners of PwC according to the
SFIO findings, had admitted they did not come across any case or instance of fraud by the company.
However, Ramalinga Raju admission of having fudged the accounts for several years put the role of
these statutory auditors on the dock. The SFIO report stated that the statutory auditors instead of
using an independent testing mechanism used Satyam’s investigative tools and thereby
compromised on reporting standards. The last straw of deficiencies in statutory standards was
despite having observed control deficiencies in the Information Systems and the risk of exposure to
frauds, PwC chose to keep silent and did not report the matter to the shareholders. The Statutory
auditors also failed in discharging their duty when it came to independently
verifying cash and bank balances, both current account and fixed deposits. Ideally, if the company
claims it has cash on its hand, that should be enough signal for auditors to check whether that cash
in hand is available or not; whether bank balance has been invested properly of not; whether internal
control mechanisms are in place. There needs to be a physical verification of assets owned by the
company rather than simply relying on the books prepared by the company. Hence, it was required
that the auditors (PwC) independently checked with the banks on the existence of fixed deposits, but
this was not done for as large as a sum of Rs. 5040 crore. Thus, the statutory auditors on whom the
general public relied on for accurate information not only failed in their job but themselves played a
part in perpetrating fraud by preparing a clean audit report for fudged, manipulated and cooked
books.

3. Case of ‘Enron’ scandal

Enron scandal, series of events that resulted in the bankruptcy of the U.S. energy, commodities, and
services company Enron Corporation and the dissolution of Arthur Andersen LLP, which had been
one of the largest auditing and accounting companies in the world. The collapse of Enron, which held
more than $60 billion in assets, involved one of the biggest bankruptcy filings in the history of the
United States, and it generated much debate as well as legislation designed to improve accounting
standards and practices, with long-lasting repercussions in the financial world.
Enron was founded in 1985 by Kenneth Lay in the merger of two natural-gas-transmission companies,
Houston Natural Gas Corporation and InterNorth, Inc.; the merged company, HNG InterNorth, was
renamed Enron in 1986. After the U.S. Congress adopted a series of laws to deregulate the sale of
natural gas in the early 1990s, the company lost its exclusive right to operate its pipelines. With the
help of Jeffrey Skilling, who was initially a consultant and later became the company’s chief
operating officer, Enron transformed itself into a trader of energy derivative contracts, acting as an
intermediary between natural-gas producers and their customers. The trades allowed the producers to
mitigate the risk of energy-price fluctuations by fixing the selling price of their products through a
contract negotiated by Enron for a fee. Under Skilling’s leadership, Enron soon dominated the market
for natural-gas contracts, and the company started to generate huge profits on its trades.

Skilling also gradually changed the culture of the company to emphasize aggressive trading. He hired
top candidates from MBA programs around the country and created an intensely competitive
environment within the company, in which the focus was increasingly on closing as many cash-
generating trades as possible in the shortest amount of time. One of his brightest recruits was Andrew
Fastow, who quickly rose through the ranks to become Enron’s chief financial officer. Fastow
oversaw the financing of the company through investments in increasingly complex instruments,
while Skilling oversaw the building of its vast trading operation.
The bull market of the 1990s helped to fuel Enron’s ambitions and contributed to its rapid growth.
There were deals to be made everywhere, and the company was ready to create a market for anything
that anyone was willing to trade. It thus traded derivative contracts for a wide variety of
commodities—including electricity, coal, paper, and steel—and even for the weather. An online
trading division, Enron Online, was launched during the dot-com boom, and the company invested in
building a broadband telecommunications network to facilitate high-speed trading. As the boom years
came to an end and as Enron faced increased competition in the energy-trading business, the
company’s profits shrank rapidly. Under pressure from shareholders, company executives began to
rely on dubious accounting practices, including a technique known as “mark-to-market accounting,”
to hide the troubles. Mark-to-market accounting allowed the company to write unrealized future gains
from some trading contracts into current income statements, thus giving the illusion of higher current
profits. Furthermore, the troubled operations of the company were transferred to so-called special
purpose entities (SPEs), which are essentially limited partnerships created with outside parties.
Although many companies distributed assets to SPEs, Enron abused the practice by using SPEs as
dump sites for its troubled assets. Transferring those assets to SPEs meant that they were kept off
Enron’s books, making its losses look less severe than they really were. Ironically, some of those
SPEs were run by Fastow himself. Throughout these years, Arthur Andersen served not only as
Enron’s auditor but also as a consultant for the company.

The severity of the situation began to become apparent in mid-2001 as a number of analysts began to
dig into the details of Enron’s publicly released financial statements. An internal investigation was
initiated following a memorandum from a company vice president, and soon the Securities and
Exchange Commission (SEC) was investigating the transactions between Enron and Fastow’s SPEs.

As the details of the accounting frauds emerged, the stock price of the company plummeted from a
high of $90 per share in mid-2000 to less than $1 by the end of November 2001, taking with it the
value of Enron employees’ 401(k) pensions, which were mainly tied to the company stock. Lay and
Skilling resigned, and Fastow was fired two days after the SEC investigation started.

On December 2, 2001, Enron filed for Chapter 11 bankruptcy protection. Many Enron executives
were indicted on a variety of charges and were later sentenced to prison. Arthur Andersen came under
intense scrutiny and eventually lost a majority of its clients. The damage to its reputation was so
severe that it was forced to dissolve itself. In addition to federal lawsuits, hundreds of civil suits were
filed by shareholders against both Enron and Andersen.
The scandal resulted in a wave of new regulations and legislation designed to increase the accuracy of
financial reporting for publicly traded companies. The most important of those measures, the
Sarbanes-Oxley Act (2002), imposed harsh penalties for destroying, altering, or fabricating financial
records. The act also prohibited auditing firms from doing any concurrent consulting business for the
same clients.

4. Measures to be taken to stop scandals in corporate field

Principle 1: Gain a thorough understanding of the actual situation

Companies should correctly grasp the current state of their own compliance system in terms of both
rules and substance. In doing so, companies should pay attention not only to their compliance with
written laws and regulations but also to their sincere, honest responses to stakeholders, including
business partners, customers, and employees, and the credibility of their business operations in light
of broader social norms. In this context, companies should not take their long-standing in-house
customs and industry practices for granted. They should also be keenly aware of the changing social
perceptions of the norms over time. Companies should ensure that its systems for understanding
actual conditions function on a continuous, autonomous basis.
Principle 2: Fulfill responsibilities with a sense of mission
Company management should commit to the compliance effort and continually publicize itsdedication
thereto. In addition, management should set business goals and conduct business in line with the
company’s real capabilities and the market situation so as not to induce non-compliance. disciplining
function and should act proactively based on the necessary and sufficient information and objective
analysis and evaluation. Companies should give due consideration to the appropriate organizational
design and the resource
allocation to ensure the steady functioning of the above.
Principle 3: Encourage two-way communication
Companies should encourage two-way communication between workforce and management,
enabling both parties to share a sense of compliance. In this context, the awareness and behavior of
middle management is highly crucial in collecting opinions from workforce and conveying them to
top management. Such enhanced communication will help detect cases of non-compliance at an early
stage.
Principle 4: Detect non-compliance early and respond swiftly
Companies should detect cases of non-compliance at an early stage and respond to them swiftly in
order to prevent individual cases from developing into serious corporate scandals.
Companies should establish this cycle of early detection, swift response, and subsequent corrective
action and embed the process into their corporate culture.
Principle 5: Execute consistent business management throughout the entire corporate group
Companies should execute effective business management throughout the entire corporate group.
When building its management structure, companies must pay sufficient attention to the importance
of each group company and the potential risks involved in line with its overall structure and
characteristics. Overseas subsidiaries and acquired subsidiaries, in particular, require highly effective
management in accordance with their individual characteristics.
Principle 6: Be accountable in view of the relevant supply chain
Companies should be aware of their positions in the relevant supply chains so that they are prepared
to fulfill their due responsibilities when a serious problem occurs at their outsourcing contractors,
suppliers, or distributors.