CF-II Govt. Failure at Satyam

PRESENTED BY C6
MEGHA JHA (22PGDM156)

HARSH BHURA(22PGDM144)
LAKSH SINGHAL (22PGDM153)
SANNIV DUTTA (22PGDM172)
ROHIT KUMAR (22PGDM168)
SAKET RAWAT (22PGDM171)
Summary
In 2009, Satyam Computer Services, a leading Indian IT company, was hit by a major corporate scandal
when its founder and chairman, Ramalinga Raju, admitted to committing a $1.5 billion accounting
fraud.
Raju had inflated the company's profits and assets for several years, using falsified bank statements,
fictitious invoices, and forged documents. The fraud was eventually uncovered when Satyam
attempted to acquire two companies and the due diligence process revealed discrepancies in the
financial statements.
The fraud had a significant impact on the Indian IT industry and led to a loss of trust and credibility for
Satyam. The Indian government took swift action and appointed a new board to oversee the company's
operations and protect the interests of its stakeholders.
Several investigations were launched, and Raju, along with several other senior executives, were
arrested and charged with fraud and other offenses. Raju eventually confessed to his crimes and was
sentenced to seven years in prison.
The case highlighted the need for stronger corporate governance practices in India and prompted
regulatory reforms, including the establishment of a new framework for auditors and the
strengthening of corporate governance norms for listed companies. The case also underscored the
importance of transparency, accountability, and ethical behavior in corporate leadership.
Q1. Discuss the circumstance under which the Satyam’s fraud was exposed. What
do you think the reasons for the fraud? Could this fraud have been prevented?
There were several reasons for the fraud at Satyam. One of the main reasons was the pressure
from investors to maintain high growth rates and profits, which led to the manipulation of
financial statements. Additionally, there was a lack of proper governance, and the board of
directors failed to provide sufficient oversight of the company's financial reporting.
The fraud could have been prevented if there had been proper corporate governance in place,
including independent directors and auditors who were not beholden to management.
Additionally, if there had been a stronger internal control system, such as regular audits and
checks, the fraud might have been detected earlier.
The case of Satyam's fraud is a clear example of the importance of good corporate governance
and the need for checks and balances to prevent such frauds. It also highlights the importance of
transparency in financial reporting, which is essential for maintaining investor confidence and
ensuring the smooth functioning of the corporate sector.
Q2. Examine the role of the internal controls in the prevention
of fraud.
Lack of segregation of duties:
This meant that the company's founder and chairman, Ramalinga Raju, had too
much control over the company's finances and was able to manipulate the
financial statements without detection.
Lack of independent oversight:

Internal controls was the lack of independent oversight. The company's board of
directors was dominated by Raju's family members and close associates, who
failed to exercise their oversight responsibilities effectively. The auditors also
failed to detect the fraud because they relied too heavily on management
representations and did not perform adequate testing of the company's financial
records.
Importance of effective internal controls:

Companies should establish a system of checks and balances that includes proper
segregation of duties, independent oversight, and rigorous auditing procedures.
Without these controls in place, companies are vulnerable to fraud and other
governance failures that can have serious consequences for their stakeholders.
Q3. Critically evaluate the corporate governance mechanisms adopted by Satyam.
Lack of independent directors:
Satyam's board of directors did not have a sufficient number of independent directors who
could provide effective oversight and challenge the decisions of the management. Only three out
of ten directors were independent, which is below the recommended level of one-third for
Indian companies.
Weak internal controls:
Satyam's internal controls were not effective in preventing the fraudulent activities of Raju and
his associates. The auditors did not identify any material weaknesses in the internal controls,
which suggests that they were not sufficiently robust.
Conflict of interest:
Raju had a significant conflict of interest as he was both the chairman and the CEO of the
company. This meant that he had unchecked power and could manipulate the company's
financial statements without being detected.
Lack of transparency:
Satyam's financial statements were not transparent, and the company did not disclose the true
state of its financial affairs. The auditors also failed to identify the fraud, indicating a lack of
transparency in the auditing process.
Inadequate whistleblower mechanisms:
Satyam did not have effective whistleblower mechanisms to encourage employees to report any
fraudulent activities. This meant that employees who were aware of the fraud were less likely to
report it.
Q4. Asses the responsibility of audit committees as well as internal and statutory auditors in
relation to the Satyam’s scandal.
Audit Committees:
The audit committee is responsible for overseeing the financial reporting process and ensuring the
accuracy and reliability of the company's financial statements. In the case of Satyam, the audit
committee failed to carry out its duties effectively. The committee did not question the
management's decisions, and it did not perform its oversight role properly. The committee did not
ensure that the company's internal controls were effective, and it did not adequately scrutinize the
company's financial statements.
Internal Auditors:
Internal auditors are responsible for assessing the effectiveness of the company's internal controls
and risk management processes. In the case of Satyam, the internal auditors failed to detect the
fraud despite conducting regular audits. The internal audit function did not detect the fictitious
invoices and bank statements, which were the primary means through which the fraud was
committed. The internal audit team did not carry out their duties diligently, which allowed the
fraud to go undetected for several years.
Statutory Auditors:
Statutory auditors are responsible for expressing an opinion on the accuracy and completeness of a
company's financial statements. In the case of Satyam, the statutory auditors failed to carry out
their duties diligently. They did not perform sufficient audit procedures to detect the fraud. They
did not verify the authenticity of the bank statements and other financial documents, which were
submitted by the management. The statutory auditors did not question the unusual transactions
and did not report the irregularities to the shareholders or the regulatory authorities.
Q5. Evaluate the statements made by the chairmen in his
resignation.
"It was like riding a tiger, not knowing how to get off without being eaten."
"The balance sheet carries as of September 30, 2008, a non-existent cash and bank
balance of Rs. 5,040 crore."
"Every attempt to eliminate the (balance sheet) gap failed."
"I am now prepared to subject myself to the laws of the land and face consequences
thereof."
Q6. What characteristics of the board of directors play a role in preventing financial
statement fraud?
Independence:
The board of directors should consist of independent members who have no affiliations or
personal interests in the company, and who are capable of exercising independent
judgment. This can help ensure that the board provides objective oversight and can detect
and prevent financial statement fraud.
Expertise:
The board of directors should consist of members who have relevant expertise and
experience in finance, accounting, and audit, so that they can effectively understand and
evaluate financial statements, and provide guidance to management.
Oversight:
The board of directors should provide effective oversight of the company's financial
reporting and internal controls, and ensure that the company's audit committee is
functioning effectively.
Transparency:
The board of directors should ensure that the company has a culture of transparency and
accountability, and that there are clear communication channels for reporting concerns or
potential fraud.
Q7. Do you think that making regulatory changes would help in preventing
such frauds?
The Satyam scandal was a major corporate scandal that shook the Indian corporate world in
2009. The Satyam scandal was a classic case of corporate governance failure, and it highlighted
the need for stronger regulatory oversight. In response to the Satyam scandal, the Indian
government introduced several regulatory changes to prevent similar frauds in the future. These
changes included the Companies Act of 2013, which introduced new provisions for corporate
governance, such as the mandatory appointment of independent directors, greater transparency
in financial reporting, and stricter penalties for non-compliance.

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PRESENTED BY C6

MEGHA JHA (22PGDM156)

Lack of independent oversight:

Importance of effective internal controls:

balance of Rs. 5,040 crore."

"Every attempt to eliminate the (balance sheet) gap failed."

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