Project Report

(Submitted for the Degree of B.Com Honours in Accounting & Finance under the
University of Calcutta)

TITLE OF THE PROJECT:

“CORPORATE ACCOUTNING FRAUD WITH SPECIAL

REFERENCE TO SATYAM SCAM”

SUBMITTED BY
Name of the Candidate:

C.U.Registration No:

C.U.Roll No.:

College Roll no. :

SUPERVISED BY
Name of the Supervisor:

Name of the College:

YEAR OF SUBMISSION

1
SUPERVISOR’S CERTIFICATE
This is to certify that ____________, a student of ___________________ of
______________________ under the University of _________ has worked under my
supervision and guidance for his/her Project Work and prepared a Project Report with the title
CORPORATE ACCOUNTING FRAUD, A Case Study on” SATYAM COMPUTERS”.

This project which he/she is submitting is his/her genuine and original work to the best of my
knowledge.

Signature:
Name:

Designation:

Name of the College:

Place:

Date:

2
STUDENT’S DECLARATION
I hereby declare that the Project Work with the title CORPORATE ACCOUTING FRAUD , A
Case Study on “ SATYAM COMPUTERS” submitted by me for the partial fulfilment of the
degree of B.Com. Honours in Accounting & Finance under the University of Calcutta is my
original work and has not been submitted earlier to any other University /Institution for the
fulfilment of the requirement for any course of study.

I also declare that no chapter of this manuscript in whole or in part has been incorporated in this
report from any earlier work done by others or by me. However, extracts of any literature which
has been used for this report has been duly acknowledged providing details of such literature in
the references.

Signature:

Name:

C.U. Registration No.:

C.U.Roll No.

College Roll No.:

Place:

3
ACKNOWLEDGEMENT
I would like to express my deepest appreciation to all those who provided me the possibility to
complete this report and whose contribution in stimulating suggestions and encouragement,
helped me to coordinate my project.

I am using this opportunity to express my gratitude to everyone who supported me throughout

this project. I am thankful for their aspiring guidance, invaluably constructive criticism and
friendly advice during this project work. I am sincerely grateful to them for sharing their truthful
and illuminating views on a number of issues related to the subject.

Many thanks goes to the supervisor of my project, _____________ who has invested his full
effort in guiding me in achieving the goal .

4
CHAPTER NO. TOPICS PAGE NO.
1. INTRODUCTION

 Background of the project 7

 Need of the project. 8

9
 Review of literature. 10
10
 Objectives of the study.
11
 Research methodology 11

 Limitations of the study.

 Chapter planning.
2. CONCEPTUAL FRAMEWORK

 Overview of the proposed framework. 13

13-14
 National scenario. 14-15

 International scenario.

3. PRESENTATION OF DATA, ANALYSIS AND FINDINDS

 Analysis and presentation. 17

18-27
 A case study on Satyam Computers.

4. CONCLUSION AND RECOMMENDATIONS

 Conclusion. 29
29-30
 Recommendations.

BIBLIOGRAPHY 32

CHAPTER -1

INTRODUCTION

5
 1.1 BACKGROUND OF THE PROJECT
Frauds or Scandals are often the “tip of the iceberg”. They represent the “visible”
catastrophic failures. In public companies, this type of ‘creative’ accounting leading to fraud and
investigations are , therefore, launched by the various governmental oversight agencies. The
accounting fraud nowadays is a testament to the fact that “science of conduct is swayed in large
by human greed, ambition, and hunger for power, money, fame, and glory.” Scandals have
proved that “there is an urgent need for good conduct based on strong corporate governance,
ethics and accounting& auditing standards”.

6
 Thus, major financial reporting frauds need to be studied for
‘lessons-learned’ and ‘strategies-to-follow’ to reduce the incidents of such frauds in the future.
The increasing rate of white-collar crimes demands stiff penalties, exemplary punishments and
effective enforcement of law with the right spirit.One of such white collar crimes is “THE
CORPORATE FRAUDS.”

1.2 NEED OF THE PROJECT

It is always right to deduct a fraud and to perceive a folly but it is very often wrong to
expose either .A man of business should always have his eyes open but most often they seem to
have them shut. Thus, the need of this project is to highlight that there is a urgent need for good
conduct based on “ strong corporate governance , ethics and accounting and auditing standards.”

While many improvements have been made to fraud prevention tactics over the years,
significant research advances are needed to understand and combat fraud . The development of
these research advancements ,and the multidisciplinary initiative that will help turn academic
achievements into real world improvements ,is the goal of this center. In addition, the CG
framework needs to be strengthened , implemented both in “letter as well as in right spirit”,and
enforced vigorously to curb white collar crimes.

7
 1.3 REVIEW OF LITERATURE
Starting in the late 1990s , a wave of corporate frauds in the United States occurred with
Enron’s failure perhaps being the emblematic example.

Jeffords(1992) examined 910 cases of frauds submitted to the “Internal Auditor” during the
nine-year period from 1981 to 1989 to assess the specific risk factors cited in the Tread way
Commission Report. He concluded that “approximately 63 percent of the910 fraud cases are
classified under the internal control risks.”

Calderon and Green(1994) made an analysis of 114 actual cases of corporate frauds
published in the “internal auditor” during 1986-1990. They found that limited separation of
duties, false documentation, and inadequate control accounted for 60 percent of the fraud cases.

,Ziegenfuss(1996) performed a study to determine the amount and type of fraud occurring in
state and local governments. His study revealed that most frequently occurring types of frauds
are misappropriation of assests,theft,false representation,and false invoice.

8
Sharma and Brahma(2000)have emphasized on ‘bankers’ responsibility on frauds;bank
frauds could crop up in all spheres of bank’s dealing.Major cause for perpetration of fraud s
laxity in observance in laid down systems and procedures by supervising staffs.

Schrand and Zechman (2007) relate executive over-confidence to the commitment of

fraud. Firms operating in this environment seem more likely to tip over the edge into frauds if
there are fewer outsiders on the audit committee and outside directors appear over-committed.

Bhasin(2008) examined the reason for check frauds, the magnitude of frauds in Indian banks,
and the manner in which the expertise of internal auditors can be integrated in order to detect and
prevent frauds in bank.

1.4 OBJECTIVES OF THE STUDY

Recently ,the accounting fraud of Satyam rocked the world ;some even named it as Indian Enron.
Satyam fraud is India’s biggest corporate scandal since the early 1990s and its first high profile
casualty since the start of the global financial crisis. The main objectives of the study are to :

1. To understand the volume of scam in India since independence.

2. To know the effect on the Indian Economy.
3. To give some line of actions to curb this malpractises.
4. Finally,to highlight the SATYAM COMPUTERS LTD’S accounting scandals by
potraying the sequence of events, the aftermath of events,the key parties involved,and the
major follow up actions undertaken in India.

1.5 RESEARCH METHODOLOGY

9
Research Methodology is a way to find out the result of a given problem on a specific matter or
problem that is also referred as research problem .In methodology researcher uses different
criteria for solving the given research problem.

We are choosing the secondary data collection method given the various limitations and
constraints of our project because primary data cannot be collected.

The different methodologies that I used to collect data from different places are:

 I used different websites, newspapers, magazines etc, to collect the

information.

 I also got the secondary data from official sites.

1.6 LIMITATIONS OF THE STUDY

In every project work there is some kind of limitation which affects the accuracy of work. Same
in this project work some of the limitations which were faced by us are as follows:

 Since the source of primary data could not be availed, our project is based on research
methodology of secondary data collection. The reason being, we were unable to have any
direct contact with the managers, officers, employees of the companies, which formed the
main limitation of our project.
 Since the accounting data and the key information of each company in this dissertation
are secondary source, there may be a possibility that the data in annual reports might have
a little bias due to the potential creative accounting techniques.
 The topic, I have selected is very vast in respect of scope in the corporate sector and the
word limit of our study project is limited thus limiting the wide scope to a smaller extent
which could otherwise have been done.

1.6 CHAPTER PLANNING

10
Planning is the first step to undergo any kind of work effectively and efficiently.Planning of this
project is divided into five chapters.They are:

 Chapter 1: “INTRODUCTION” refers to the blueprint of the project.

 Chapter 2: “CONCEPTUAL FRAMEWORK” refers to the short description of
the keywords and national and international scenario of corporate fraud.
 Chapter 3: “PRESENTATION OF DATA ANALYSIS AND FINDINGS” is
quite comprehensive and exhaustive ,dealing with the relevant fact and figures.
 Chapter 4: “CONCLUSION AND RECOMMENDATION” refers to the analysis
drawn from the study and the recommendation derived thereof.
 Chapter: “BIBLIOGRAPHY” refers to the list of books,journals and extracts
helpful as resources.

CHAPTER -2
CONCEPTUAL FRAMEWORK

11
2.1 OVERVIEW OF THE PROPOSED FRAMEWORK
According to Oxford dictionary,a fraud is defined as , “the use of false representations to gain
unjust advantage and criminal deception.

According to the Intermal Resource Service (IRS) Department of the treasury, “A corporate
fraud is violation of the Internal Revenue Code (IRC) and related statutes committed by
large,publicly traded corporations,and or by their senior executives.”

TOP FIVE FRAUD RISKS:

 Data or information theft and IP infringement.

 Bribery and corruption.
 Fraud by senior management and conflict of interest.
 Vendor fraud or kickbacks.
 Regulatory non-compliance.

TOP FIVE FACTORS FACILITATING BRIBERY AND CORRUPTION:

 Weak law enforcement.

 Numerous government.
 Complicated taxes and licensing system.
 Lack of will for making an effort in getting permission in the right way.
 To get unfair advantage in business.

12
 2.2 NATIONAL SCENARIO
Economic Crime continues to be pervasive threat for Indian companies ,with 35 percent of
the organization’s reporting having experienced fraud in the past two years. The survey
covering 152 organisations in India concluded as : “There is a dramatic drop in the
percentage of companies that reported to be victims of fraud in 2005 survey, where 54 % of
respondents reported suffering from economic crime. However in most categories of fraud,
the respondents’s perception of fraud was substancially higher than the actual incidents
reported.” This mismatch may imply that incidents of fraud are going unreported .According
to Indian findings :

 Corruption and bribery continues to be the most common type of fraud reported by 20%
of the respondents;
 The average direct financial loss to companies was INR 60 million (US$ 1.5 million)
during the two year period. In addition the average cost to manage economic crime in
India wasINR40 million (US$ 1 million);
 In 36% of cases companies took no action against the perpetrators of fraud; and
 In 50% the cases frauds were detected by chance.
Some of the top corporate frauds in INDIA are:

Scam Year
SARADHA GROUP FINANCIAL 2013
SCANDAL
SPEAK ASIA SCAM 2011
INDIAN COAL ALLOCATION SCAM 2012
2G SPECTRUM SCAM 2008

2.3 INTERNATIONAL SCENARIO

Corporate frauds has manifested itself in diverse forms repeatedly around the world
.From indentifying thefts and insider trading to more sophisticated e-crimes and
misrepresentation of financial information, the spectrum of fraudulent activities is huge and
hence a tough challenge to overcome.

13
 Corporate fraud is a multi-national global phenomenon.. One in five companies in
Western Europe highlighted a significant increase in fraud in 2010.A similar pattern was
observed in Latin America and the Middle East and Africa .

TOP 5 "HOT SPOTS" FOR FRAUD

18%
16%
14%
12%
TOP 5
10%
8%
6%
4%
2%
0%
CUBA PHILIPPINES LIECHTENSTEIN INDIA UNITED KINGDOM

Some of the well known international corporate scams are :

Scam Year
ENRON (USA) 2001
SUBPRIME MORTGAGE (USA) 2008
DAEWOO GROUP (SOUTH KOREA) 2005
WORLDCOM (USA) 2002

14
 CHAPTER -3
PRESENTATION OF DATA,
ANALYSIS AND FINDINGS

15
3.1 ANALYSIS AND PRESENTATION
Corporate fraud has manifested itself in diverse forms repeatedly around the world . from
identify theft and insider trading to more sophisticated e-crime and misrepresentation of financial
information, the spectrum of fraudulent activities is huge and hence a tough challenge to
overcome . Today, even as corporations ramp up fraud –detection efforts, the incidence of
various frauds has been on the rise

Corporate fraud is multi-industry global phenomenon. One in five companies in Western

Europe highlighted a significance increase in fraud in 2010. A similar pattern was observed in
Latin America and Middle East and Africa. On the other side of the world, Asia is reported to
have the highest number of employees who donot know what to classify as misconduct , clearly
deterring the expansion plan of western firms into the emerging markets . Further, the 2010
annual report of reserve bank of India indicates a near doubling in the two yearly average of cost
of fraud incurred between 2007-2008 and 2009-10.

cost incurred in frauds (INR crores)

2000
1800
1600
1400
cost incurred in frauds (Inr
1200 crores)
1000
800
600
400
200
0
2007 2008 2009 2010

16
3.2 A CASE STUDY ON SATYAM
COMPUTERS (INDIA’S ENRON)

BACKGROUND

THE RISE OF SATYAM

1987 : Satyam Computers Pvt Ltd born.

1991 : June-First Fortune 500 client.

August- Converted into Public Ltd Co.

1994 : The Big Break-Allies with Dun and Bradstreet Corp.

2000 : Declared one of the 100 most pioneering technology companies

by World Economic Forum.

2002 : Dataquest IT Man of the year award.

17
 Satyam scam has been the greatest scam in the history of the corporate world of the
India. The case of Satyam’s accounting fraud has been dubbed as “India’s Enron”. In order to
evaluate and understand the severity of Satyam’s fraud, it is important to understand factors
that contributed to the “unethical” decisions made by the company’s executives.

 First, it is necessary to detail the rise of Satyam as a competitor within the global IT
services market-place.
 Second, it is helpful to evaluate the driving-forces behind Satyam’s decisions:
Ramalinga Raju.

Finally, attempt may be made to learn some “lessons” from Satyam fraud for
the future so that our country can minimize the rate and size of accounting frauds in the
Indian capital markets.

Ironically, Satyam means “truth” in the ancient Indian language “Sanskrit”. Satyam won
the “Golden Peacock Award” for the best governed company in 2007 and in 2009. From
being India’s IT “crown jewel” and the country’s “fourth largest” company with high-
profile customers, the outsourcing firm Satyam Computers has become embroiled in the
nation’s biggest corporate scam in living memory . Mr. Ramalinga Raju (Chairman and
Founder of Satyam; henceforth called “Raju”), who has been arrested and has confessed
to a $1.47 billion (or Rs. 7800 crore) fraud, admitted that he had made up profits for
years. According to reports, Raju and his brother, B. Rama Raju, who was the Managing
Director, “hid the deception from the company’s board, senior managers, and auditors.”

Emergence of Satyam Computer Services Limited

Satyam Computer Services Limited was a “rising-star” in the Indian “outsourced” IT-
services industry. The company was formed in 1987 in Hyderabad (India) by Mr. Ramalinga
Raju. The firm began with 20 employees and grew rapidly as a “global” business. It offered IT
and business process outsourcing services spanning various sectors. Satyam was as an example
of “India’s growing success”. Satyam won numerous awards for innovation, governance, and
corporate accountability. “In 2007, Ernst & Young awarded Mr. Raju with the ‘Entrepreneur of

18
the Year’ award. On April 14, 2008, Satyam won awards from MZ Consult’s for being a ‘leader
in India in CG and accountability’. In September 2008, the World Council for Corporate
Governance awarded Satyam with the ‘Global Peacock Award’ for global excellence in
corporate accountability” .In June 2009, the Company unveiled its new brand identity
“MAHINDRA SATYAM”.It also caused the formation of a number of subsidiary companies
such as the Satyam Renaissance, Satyam Info way,Satyam Spark Solutions and Satyam
Enterprise Solutions.

By 2003, Satyam’s IT services businesses included 13,120 technical associates servicing

over 300 customers worldwide. At that time, the world-wide IT services market was estimated at
nearly $400 billion, with an estimated annual compound growth rate of 6.4%. “The markets
major drivers at that point in time were the increased importance of IT services to businesses
worldwide; the impact of the Internet on eBusiness; the emergence of a high‐quality IT services
industry in India and their methodologies; and, the growing need of IT services providers who
could provide a range of services”. To effectively compete, both against domestic and global
competitors, the company embarked on a variety of multi‐pronged business growth strategies.

18000
16000
14000
12000 2003-04
10000 2004-05
8000 2005-06
6000 2006-07
4000 2007-08
2000
0
Net profit

From 2003-2008, in nearly all financial metrics of interest to investors, the company
grew measurably. Satyam generated Rs. 25,415.4 million in total sales. By March 2008, the
company had grown by over three times. The company demonstrated “an annual compound
growth rate of 35% over that period”. Operating profits averaged 21%. Earnings per share
similarly grew, from $0.12 to $0.62, at a compound annual growth rate of 40%. Over the same
period (2003‐2009), the company was trading at an average trailing EBITDA multiple of 15.36.
Finally, beginning in January 2003, at a share price of 138.08 INR, Satyam’s stock would peak at

19
526.25 INR—a 300% improvement in share price after nearly five years. Satyam clearly
generated significant corporate growth and shareholder value. The company was a leading star—
and a recognizable name—in a global IT marketplace. The external environment in which
Satyam operated was indeed beneficial to the company’s growth. But, the numbers did not
represent the full picture. The case of Satyam accounting fraud has been dubbed as “India’s
Enron”.

People behind this Scam

 Ramalinga Raju : Satyam former chairman

 B Rama Raju : Brother of Ramalinga Raju
 V Srinivas : Ex-Chief Financial Officer
 S Gopalakrishnan : Price Waterhouse Auditor
 Talluri Srinivas : Price Waterhouse Auditor

Mr. Ramalinga Raju and the Satyam Scandal

On January 7, 2009, Mr. Raju disclosed in a letter to Satyam Computers Limited Board
of Directors that “he had been manipulating the company’s accounting numbers for years”. Mr.
Raju claimed that he overstated assets on Satyam’s balance sheet by $1.47 billion. Nearly $1.04
billion in bank loans and cash that the company claimed to own was non-existent. Satyam also
underreported liabilities on its balance sheet. Satyam overstated income nearly every quarter
over the course of several years in order to meet analyst expectations. For example, the results
announced on October 17, 2009 overstated quarterly revenues by 75 percent and profits by 97

20
percent. Mr. Raju and the company’s global head of internal audit used a number of different
techniques to perpetrate the fraud. “Using his personal computer, Mr. Raju created numerous
bank statements to advance the fraud. Mr. Raju falsified the bank accounts to inflate the balance
sheet with balances that did not exist. He inflated the income statement by claiming interest
income from the fake bank accounts. Mr. Raju also revealed that he created 6000 fake salary
accounts over the past few years and appropriated the money after the company deposited it. The
company’s global head of internal audit created fake customer identities and generated fake
invoices against their names to inflate revenue. The global head of internal audit also forged
board resolutions and illegally obtained loans for the company” . It also appeared that the cash
that the company raised through American Depository Receipts in the United States never made
it to the balance sheets. Greed for money, power, competition, success and prestige compelled
Mr. Raju to “ride the tiger”, which led to violation of all duties imposed on them as fiduciaries—
the duty of care, the duty of negligence, the duty of loyalty, the duty of disclosure towards the
stakeholders. According to CBI, the Indian crime investigation agency, the fraud activity dates
back from April 1999, when the company embarked on a road to double-digit annual growth. As
of December 2008, Satyam had a total market capitalization of $3.2 billion dollars. Satyam
planned to acquire a 51% stake in Maytas Infrastructure Limited, a leading infrastructure
development, construction and project management company, for $300 million. Here, the
Rajus’s had a 37% stake. The total turnover was $350 million and a net profit of $20 million.
Raju’s also had a 35% share in Maytas Properties, another real-estate investment firm. Satyam
revenues exceeded $1 billion in 2006. In April, 2008 Satyam became the first Indian company to
publish IFRS audited financials. On December 16, 2008, the Satyam board, including its five
independent directors had approved the founder’s proposal to buy the stake in Maytas
Infrastructure and all of Maytas Properties, which were owned by family members of Satyam’s
Chairman, Ramalinga Raju, as fully owned subsidiary for $1.6 billion. Without shareholder
approval, the directors went ahead with the management’s decision. The decision of acquisition
was, however, reversed twelve hours after investors sold Satyam’s stock and threatened action
against the management. This was followed by the law-suits filed in the US contesting Maytas
deal. The World Bank banned Satyam from conducting business for 8 years due to inappropriate
payments to staff and inability to provide information sought on invoices. Four independent
directors quit the Satyam board and SEBI ordered promoters to disclose pledged shares to stock

21
exchange. Investment bank DSP Merrill Lynch, which was appointed by Satyam to look for a
partner or buyer for the company, ultimately blew the whistle and terminated its engagement
with the company soon after it found financial irregularities . On 7 January 2009, Saytam’s
Chairman, Ramalinga Raju, resigned after notifying board members and the Securities and
Exchange Board of India (SEBI) that Satyam’s accounts had been falsified. Raju: 1) inflated
figures for cash and bank balances of US $1.04 billion vs. US $1.1 billion reflected in the
books; 2) an accrued interest of US $77.46 million ; 3) an understated liability of US
$253.38 million on account of funds was arranged by himself; and 4) an overstated debtors'
position of US $100.94 million vs. US $546.11 million in the books. Raju claimed in the same
letter that “neither he nor the managing director had benefited financially from the inflated
revenues, and none of the board members had any knowledge of the situation in which the
company was placed”. The fraud took place to divert company funds into real-estate investment,
keep high earnings per share, raise executive compensation, and make huge profits by selling
stake at inflated price. The gap in the balance sheet had arisen purely on account of inflated
profits over a period that lasted several years starting in April 1999. “What accounted as a
marginal gap between actual operating profit and the one reflected in the books of accounts
continued to grow over the years. This gap reached unmanageable proportions as company
operations grew significantly”, Ragu explained in his letter to the board and shareholders. He
went on to explain, “Every attempt to eliminate the gap failed, and the aborted Maytas
acquisition deal was the last attempt to fill the fictitious assets with real ones. But the investors
thought it was a brazen attempt to siphon cash out of Satyam, in which the Raju family held a
small stake, into firms the family held tightly”. The following Table depicts some parts of the
Satyam’s fabricated ‘Balance Sheet and Income Statement’ and shows the “difference” between
“actual” and “reported” finances.

22
 Fabricated balance sheet and income statement of Satyam: as of
September 30, 2008.

ITEMS (rupees in ACTUAL REPORTED DIFFERENCE

crores)
Cash and Bank 321 5361 5040
Balances
Accrued Interest on NIL 376.5 376
Bank Fixed Deposits
Understated Liability 1230 NONE 1230
Overstated Debtors 2161 2651 490
TOTAL NIL NIL 7136
Revenues(FY 2009) 2112 2700 588
Operating Profits 61 649 588

8000
7000
6000
5000
4000
3000
2000 actual
1000 reported
0 difference

Fortunately, the Satyam deal with Matyas was “salvageable”. It could have been saved only if
“the deal had been allowed to go through, as Satyam would have been able to use Maytas’ assets
to shore up its own books”. Raju, who showed “artificial” cash on his books, had planned to use
this “non-existent” cash to acquire the two Maytas companies. As part of their “tunneling”
strategy, the Satyam promoters had substantially reduced their holdings in company from 25.6%
in March 2001 to 8.74% in March 2008. Furthermore, as the promoters held a very small
percentage of equity (mere 2.18%) on December 2008, as shown in the Table
23
Promoters shareholding pattern in Satyam from 2001 -2008

AS ON PROMOTER’S
HOLDING IN %
MARCH 2001 25.6
2002 22.26
2003 20.74
2004 17.35
2005 15.67
2006 14.02
2007 8.79
2008 8.74
DECEMBER 2008 2.18

promoter's share holding pattern

30

25

20

15 promoter's share holding

pattern
10

9 51 02 03 04 05 06 07 08 83
36 20 20 20 20 20 20 20 39
7

the concern was that poor performance would result in a takeover bid, thereby exposing the gap.
It was like “riding a tiger, not knowing how to get off without being eaten”. The aborted Maytas
acquisition deal was the final, desperate effort to cover up the accounting fraud by bringing some
real assets into the business. When that failed, Raju confessed the fraud.

CONSEQUENCES

Before the scandal it’s share price was Rs.300 in Oct 2008. Just after this scandal the share price
go down to Rs.6.30

24
On 10 Jan 2009, the Company Law Board decided to bar the current board of Satyam from
functioning.

Bank of America and State Farm Insurance terminated its engagement with the Company.

Credit Suisse suspended its coverage of Satyam the Credit Suisse Group AG (SIX: CSGN,
NYSE: CS) is a Swiss Multinational Financial Services Company Headquartered in Zurich,
Switzerland.

The Auditors Role and factors Contributing Fraud

Global auditing firm, PricewaterhouseCoopers (PwC), audited Satyam’s books from June
2000 until the discovery of the fraud in 2009. Several commentators criticized PwC harshly for
failing to detect the fraud. PwC audited the company for nearly 9 years and did not uncover the
fraud, whereas Merrill Lynch discovered the fraud as part of its due diligence in merely 10 days.
Missing these “red-flags” implied either that the auditors were grossly inept or in collusion with
the company in committing the fraud. PWC initially asserted that it performed all of the
company’s audits in accordance with applicable auditing standards.

Numerous factored contributed to the Satyam fraud. The independent board members of
Satyam, the institutional investor community, the SEBI, retail investors, and the external auditor
—none of them, including professional investors with detailed information and models available
to them, detected the malfeasance. The following is a list of factors that contributed to the fraud:
greed, ambitious corporate growth, deceptive reporting practices—lack of transparency,
excessive interest in maintaining stock prices,stock market expectations, nature of accounting
rules, ESOPs issued to those who prepared fake bills, high risk deals that went sour, audit
failures (internal and external), aggressiveness of investment and commercial banks, rating
agencies and whistle-blowers not being effective.

Role of Internal Auditor

 The auditor did not do beginning to end transactionsverification.

25
  Cash and Bank balances were ignored.
 Fake invoices were ignored.
 The matter was not reported to Audit committee.
 The audit plans were prepared on the basis of the approval of the promoters.

Role of External Auditor

 The auditor did not confirm the bank balances independently.

 The various protocols were violated.
 No sample checking of invoices.
 Lack of end to end audit.
 Extraordinary payment of audit fees.

Suggestions towards Auditors

 Evalutate the potential for fraud in a given audit engagement .

 Be obliged to utilize tests that provides reasonable assurance of detection of fraud.
 Facilitate the identification of areas of high audit risk by reviewing the procedures analytically .
 Report directly to the public any material irregularities and illegal acts discovered during an audit.

How These Scams Can Be Controlled

 Companies should be required to institute sufficient internal management controls along

with present statutory requirements.
 Management should ensure that the internal audit staffs are able to prevent and detect
financial statement fraud.
 Companies whose share are publicly treated should be required to have audit committees
the internal control system.
 The management should formulate appropriate policies and procedures which would
reduce such risks.

26
 CHAPTER – 4
CONCLUSION

and

RECOMMENDATIONS

27
 4.1 CONCLUSION
A corporation is a collection of various stakeholders, namely, customers, employees,
investors, vendor partners, government and society. A corporation should be fair and transparent
to its stakeholders in all its transactions. This has become imperative in today’s globalized
business world where corporations need to access global pools of capital, need to attract and
retain the best human capital from various parts of the world, need to live in harmony with the
community. Unless a corporation embraces and demonstrates ethical conduct, it will not be able
to succeed.

 Whenever a scam raises, Indian government is dealing with scam rather than reason
behind it.
 Loopholes in system need to be corrected in order to avoid these scams .If these are not
dealt properly so many scams are on the way for us.
 A perfect policy making and new blood in political veins only can help India to be out of
scam era .

More scandals like SATYAM can be avoided if :

1. Auditing Firm is honest.

2. SEBI plays an active role.
3. Periodic review of legal compliance reports by independent directors.

4.2 RECOMMENDATIONS

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 The SATYAM scandal makes it imperative that corrective measures need to be taken at
the earliest to stem the root.
 Laws protecting whistleblowers are imperative. The likelihood of people coming forth to
willingly provide information will be a lot higher if they are provided with basic
assurances. Safety from political threat and job security can ensure more people will be
willing to volunteer information and increase transparency in Indian corporate sector.
 There is a need for judicial reform in India because our judicial system’s slow moving
course causes needless delays and allows corporate violators to find underhand methods
to evade justice. Corporate cases need to be fast tracked to reach resolution quickly so
violators can be dealt severe and immediate consequences.
 There should be a investor education program, so that people do not fall in trap of such
scam. They should be encouraged to opt for state run chit companies and go with firms
with a long record and financially sound promoters.
 Federal and market regulators need a greater level of power than they presently enjoy.
The reserve bank of India, SEBI and other regulators can only be efficient provided their
work is not directed by political influences.

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 BIBLIOGRAPHY

Books :

 INDIAN FINANCIAL SYSTEM AND FINANCIAL MARKET OPERATIONS BY

BHOLE.
 FINANCIAL MARKEWT OPERATIONS BY Y.M.KHAN.

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  MISHRA GIRISH,PANDEY BRAJ KUMAR (1998), WHITE COLLAR CRIMES,
NEW DELHI.

Journals:
1. Sutherland E (1941). ‘White collar criminality’, American Sociology Review.
Vol-V No.1
2. Thomas W. Golden, Steven L. Skalak, and Mona M. Clayton, “The Corporate
Fraud Cycle: How to break the chain?
3. Radhesyam (2007). ‘Corporate Frauds’, Amicus Books. Vol-I PP 70-89

WEB REFERENCES
 www.google.com
 www.wikipedia.com
 www.satyam.com
 www.msnbc.msn.com
 www.economictimes.indiatimes.com
 www.bizblock.wordpress.com

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