MAJOR CORPORATE SCANDALS

IN INDIA AND ABROAD

 Corporate Frauds???

Which arise with the disclosure of misdeeds by

trusted executives of large public corporations.
Such misdeeds typically involve complex methods
for misusing or misdirecting funds, overstating
revenues, understating expenses, overstating the
value of corporate assets or underreporting the
existence of liabilities.
Sometimes with the cooperation of officials in other
corporations or affiliates.
 We will Discuss…

Enron (USA)

Worldcom (USA)

Xerox (USA)

Tyco International ltd. (Republic of Ireland,)

Satyam (India)
 ENRON

 Overview (1985 – 2000s)

(2001 – Lose of more than $11 billion to shareholders)

 Enron Corporation is an energy trading, natural gas,

and electric utilities company based in Houston, Texas.

 Employed around 21,000 people more than 40

Countries by mid-2001, before it went bankrupt.

 Fraudulent accounting techniques allowed it to be

listed as the seventh largest company in the US.
 ENRON (Contd)

… Tactics used by Enron

EARNINGS/(EPS) MANIPULATION
Enron's executives and senior managers
engaged in wide-ranging profitabilty schemes
to deceive the investors.
Enron's financial results were wrongly
reported and making false and misleading
information to investors.
 ENRON (Contd)

Tactics used by Enron…

The scheme's objectives were: -

To produce that reported earnings steadily

grew by approximately 15-20% Per Annum.

To persuade the investing public that Enron's

future profitability would continue to grow.
 ENRON (Contd)

EARNING MANIPULATION
How?
 Quarterly earnings targets were imposed on each of
the company's business units based on EPS goals
and not on true forecasts.
 When the budget targets could not be met, through
results from business operations, they were
achieved through the use of fraudulent devices.
 The primary purpose was to increase the share
price which increased from $30 per share in 1998
to $80 in 2001 even after a stock split.
 ENRON (Contd)

EARNING MANIPULATION
How?
The rising stock prices enriched Enron's
senior managers in the form of: -
Salary, Bonuses, Grants of Artificially
Appreciating Stock Options, Restricted
Stock, and Phantom stock, and Prestige
within their professions and communities.
 ENRON (Contd)

 EARNING MANIPULATION
 Other Methods…
 Manipulating reserve accounts to maintain the appearance of
continual earnings.
 fraudulent manipulation of "segment reporting," and deceptive use of
reserved earnings to cover losses in one segment with earnings in
another.
 Manufacturing earnings through fraudulent inflation of asset values
and avoiding losses.
 using improper accounting techniques
 ENRON (Contd)

CONCEALMENT OF UNCOLLECTIBLE
RECEIVABLES
How?
Conceal huge receivables (valued in the
hundreds of millions of dollars), accumulated
during the California energy crisis.
Enron concluded that it should book a large
reserve for these unrecoverable receivables.
 ENRON (Contd)

At the end!

 Enron filed for bankruptcy.

 Enron has sought to salvage its business by spinning off various assets.

 Enron's core business, the energy trading arm, has been tied up in a
complex deal with UBS Warburg.

 Centrica, part of the former British Gas, has bought Enron's European
retail arm for £96.4m.

 Dynegy, a smaller rival, has won a key pipeline in the US after merger
talks fell through. The pipeline was then resold to Warren Buffet.
 WorldCom

 WorldCom, now known as MCI Inc., was founded in 1983 as

LDDS (Long Distance Discount Service).

 The telecommunications company experienced rapid growth

in the 1990s primarily due to several large acquisitions.

However, the company’s steady growth and profits came to a

halt when fraudulent financial reporting was eventually
uncovered. In early 2002, during an internal audit, it was
discovered that WorldCom had made several transfers that
were not in accordance with generally accepted accounting
principles, or U.S. GAAP
 WorldCom

In March of 2002, shortly after the internal audit, the SEC requested
documentation from WorldCom in connection to these transfers.

WorldCom had improperly accounted for 12 almost $3.8 billion in

expenses. Cash flows of $3.055 billion from 2001 and $797 million from
the first quarter of 2002 had to be taken off the books, erasing all profits
WorldCom had reported for that period (money.cnn.com).

The incorrect accounting used involved internal transfers within expense

and capital expenditure accounts, as well as large personal loans by the
company totaling around $400 million.

Had WorldCom reported these transactions correctly, the company

would have recorded a net loss for the period.
 WorldCom

The SEC officially filed fraud charges against WorldCom on

 June 26, 2002. Immediately following this news, the stock
price of WorldCom shares plummeted. Stocks had recently
been trading around $15 per share, but fell to $0.20 following
reports of the fraud charges.

Many top management officials were blamed and investigated

for the fraudulent reporting that had transpired. WorldCom
Chief Executive Officer Bernard Ebbers, who had been
President and CEO since 1985, had resigned in April of 2002 in
the midst of the SEC investigation, specifically because he was
largely involved in the $400 million of personal loans being
investigated
 XEROX

XEROX

 Xerox Corporation is an American multinational

document management corporation that produces and
sells a range of colour and black-and-white printers,
multifunction systems, photocopiers, digital production
printing presses. Xerox is headquartered in
Norwalk, Connecticut
On April 11, 2002, the U.S.
Securities and Exchange Commission filed a
complaint against Xerox.[34] The complaint alleged
Xerox deceived the public between 1997 and 2000 by
employing several "accounting irregularities,“

 the most significant of which was a change in which

Xerox recorded revenue from copy machine leases –
recognizing a "sale" when a lease contract was
signed, instead of recognizing revenue over the
entire length of the contract.
In response to the SEC's complaint, Xerox Corporation
neither admitted nor denied wrongdoing.

It agreed to pay a $10 million penalty and to restate its

financial results for the years 1997 through 2000. On June 5,
2003, six Xerox senior executives accused of securities fraud
settled their issues with the SEC and neither admitted nor
denied wrongdoing.

 They agreed to pay $22 million in penalties, disgorgement,

and interest. The company received approval to settle the
securities lawsuit in 2008
 Tyco International

Tyco International was founded in 1960 by Arthur J.

Rosenburg. The company was originally an investing and
holding company specializing in government and military
research.

In the midst of continued growth and expansion at Tyco

arose a corporate scandal. In 2002, CEO Dennis Kozlowski,
CFO Mark Swartz, and general counsel Mark Belnick were
16 indicted on charges of fraud and conspiracy. They were
suspected of conning investors out of hundreds of millions
of dollars that they had paid themselves in unauthorized
bonuses and compensation since 1992.
 Kozlowski and Swartz had also sold $430 million worth of company stock without

informing investors (lawyershop.com). Kozlowski, especially, was known for his lavish

lifestyle and habit of spending corporate funds. He reportedly held a $2 million birthday

party in Italy for his wife using company funds.

 Both Kozlowski and Swartz were for guilty of fraud, conspiracy, and grand larceny

charges in June of 2005 (nytimes.com). The jury decided that, together, the two had

defrauded shareholders of over $400 million between 1996 and 2002 by failing to

disclose loans and compensation they granted to themselves. Dennis Kozlowski was

sentenced to 25 years in prison and fined $70 million, while Mark Swartz was sentenced

to 8 1/3 years in prison and fined $35 million

 SATYAM SCANDAL

SATYAM SCANDAL
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.
Mr. Ramalinga Raju and the Satyam Scandal On
January 7, 2009, Mr. Raju disclosed in a letter, as
shown in Exhibit-2, to Satyam Computers Limited
Board of Directors that “he had been manipulating
the company’s accounting numbers for years.”
 . Raju claimed that he overstated assets on Satyam’s balance sheet by $1.47 billion and

understated liabilities to the extent of nearly $1.04 billion.

 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 6,000 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.

Ramalinga Raju and his brother Rama Raju were
arrested and charged with fraud, forgery, and
criminal conspiracy.

The scam was estimated to be worth around Rs.

14,000 crore and shook the confidence of investors,
shareholders, and stakeholders in the Indian
corporate sector.
The government introduced several reforms to
improve corporate governance and transparency,
such as The Companies Act of 1956 was repealed,
and the Companies Act of 2013 went into force.
Thanking You For Patience!