Satyam Scam - Business Ethics

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Business Ethics and Corporate Governance explained ThroughSatyam Scam

Submitted To : Dr Vijayendra GuptaDate : 3rdMarch 2014


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SATYAM COMPUTER SERVICE LIMITEDSatyam Computer Services Limited was founded in1987 by Mr. B Ramalinga Raju.

The company offers consulting and information

technology services spanning various sectors,including engineering and product development,

supply chain management, client relationship

management, business process management andbusiness intelligence.


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The company was listed withNew York stockexchange, National stock exchange, and the

Mumbai stock exchange.In June 2009, the company

unveiled its new brand identity Mahindra Satyam


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Who is B. Ramalinga Raju?

Ramalinga Raju was born on September 16, 1954.

A traditional agricultural family of the KSHATRIYA

(RAJU) Community of Andhra Pradesh.

He founded Satyam Computers and was its

Chairman until January 7, 2009 when he resignedfrom the Satyam board after admitting to corporate

fraud.


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Satyam was until recently perceived to be amongst

the top Indian IT vendors.

Raju has admitted to overstating the company's

cash reserves by USD$ 1.5 billion. Later, a person

involved in the investigation of the company said

that the company's assets were not inflated, but

instead siphoned off by Ramalinga Raju.

Raju is currently held in Hyderabad's Chanchalguda

jail on criminal charges including fraud, forgery,

cheating, embezzlement and insider trading.


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People Behind This Scam

Ramalinga Raju : Satyam former chairman

B Rama Raju : Brother of Ramalinga Raju

Former Managing Director V Srinivas : Ex-Chief financial officer

S Gopalakrishnan: Price Waterhouse Auditor

Talluri Srinivas : Price Waterhouse Auditor


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Career of B. Ramalinga Raju

He was first businessman in the field of

construction and textiles. Raju founded Satyam in 1987.

He started an satyam computers with 20 employees

in 1987. Satyam was listed in INDIAN STOCK EXCHANGE in

1991.

Listed in NEW YORK STOCK EXCHANGE in 2001. Satyam was listed in UNESCO(amsterdum) in 2008.

There were 53,000 employees working in Satyamin september 2008.


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The Scam

On 7 January 2009, companysprevious ChairmanRamalinga Raju resigned after notifying board

members and the Securities and Exchange Board

of India (SEBI) that Satyam's accounts had been

falsified.

Raju confessed that Satyam's balance sheet of 30

September 2008 contained:

1. Inflated figures for cash and bank balances of

Rs 5,040 crores as against Rs 5,361 crore

reflected in the books.


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The Scam (Contd.)

2. An accrued interest of Rs. 376 crore which was non-existent.

3. An understated liability of Rs. 1,230 crore on

account of funds was arranged by himself.

4. An overstated debtors' position of Rs. 490 crore (as

against Rs. 2,651 crore in the books.)

5. On 22nd January 2009, CID told in the court that the

actual number of employees is only 40,000 and not

53,000 as reported earlier and that Mr. Raju had been

allegedly withdrawing INR 20 crore rupees every month

for paying these 13,000 non existent employees.


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5,040 + 376+ 490 (Rs.

Cr)

Rs.1 230

CrRs. 7 136

Cr


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Confession letter by Mr. Raju


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CONSEQUENCES

Before the scandal its share price was Rs 300 in

oct 2008. Just after this scandal the share price godown to Rs 6.30.

On 10 January 2009, the Company Law Board

decided to bar the current board of Satyam fromfunctioning.

Bank of America and State Farm Insurance

terminated its engagement with the company. Job of over 40,000 technocrats were at risk.

The GDP fell by 0.4%

SEBI th t k k t l t l id th t if


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SEBI, the stock market regulator, also said that, iffound guilty, its license to work in India may berevoked.

The New York Stock Exchange has halted trading inSatyam stock

India's National Stock Exchange has announced that

it will remove Satyam from its S&P CNX Nifty 50-share index.

Satyam's shares fell to 11.50 rupees on 10 January2009, their lowest level since March 1998,

compared to a high of 544 rupees in 2008. IT sector suffered a downturn.

Indiasglobal image was tarnished.

h f h d ld


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Satyam was the 2008 winner of the coveted Golden

Peacock Award for Corporate Governance under

Risk Management and Compliance Issues, which

was stripped from them in the aftermath of thescandal.

Present time its share price is 107.89. Mahendra

Satyamsmarket growth is 7,800crore.

Before the scandal Satyam was the 4th ranked

among IT companies of India and on 9th jan2009 it

became least valuable IT company in India. Countrysbooming economy was at risk.


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IMPACT OF SATYAM SCAM ON INDIAN ECONOMY

Although several companies are trying to have a

bite into Satyam Computers, according to Gartnerstudy, the company is likely to exist in its current

form. It is expected to discontinue some of its

businesses, service lines or cease to exist in certaingeographies.

Huge losses to investors aside, the Satyam scandal

has caused serious damage to India Incsreputation as well as the countrys regulatory

authorities outside.


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The Government certainly cannot remain aloof and

allow Satyam to die off especially when it provides

occupation to 53,000 odd people and indirectly

supports more than a million Indians.

The Satyam scam effect has started its infectious

presence. U.S. listed stocks of other Indian

companies have started taken a severe beating.

Indian firms are looking into methods to avoid

scenarios of such scams within their companies.


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The Guilty


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The Promoters

Since the promoters,

in this case, held only

about 8 percent

shares, their idea topush through the

Maytas acquisition

deal was defeated byan angry lot of

shareholders.


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Directors & Independent Directors

The Satyam board, including its five independentdirectors had approved the founder's proposal tobuy 51 per cent stake in Maytas Infrastructure andall of Maytas Properties, owned by the family

members of Satyam chairman B Ramalinga Raju. Despite the shareholders not being taken into

confidence, the directors went ahead with themanagement's decision.

The decision of acquisition was, however,reversed 12 hours later after investors dumpedSatyam's stock and threatened action against themanagement.


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TheBankers

If the auditors wereconned, it means thateither the bank

statement andcertificates wereforged

Satyam's banks -- ICICIBank, HDFC Bank, Bankof Baroda, etc


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The SEBI

The SEBI had in

December given a

clean chit to

Satyam in theprobe on violation

of corporate

governance law.


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The Government

The government too

is equally guilty in

not having managed

to save theshareholders, the

employees and

some clients of thecompany from

losing heavily.


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SATYAM

Shareholders

Directors

Customers

Employees

Competitors

Public


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Mahindra Satyam

Tech Mahindra paid Rs1757 Crorefor a 31% stake in the company, at Rs 58 pershare.

Satyam Computer Services zoomed 15% to Rs54.20 ahead of the announcement of thehighest bidder for the company on April 13,2009.

In India this moment was full of praise for themanner and speed with which thereconstituted board of Satyam ComputerServices found a strategic investor .


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Conclusion


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Not following corporate governance norms.

Tampering with Financial Data (Creative

Accounting).

Misleading the shareholders funds.

Putting self interest at the expense of share

holdersinterest.

Fraud, Forgery and Cheating.


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Recommendations for


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Recommendations for

Corporate Governance

In addition to the present statutory requirement, companiesshould be required to institute sufficient internalmanagement controls.

Management should ensure that the internal audit staffs areable to prevent and detect financial statement fraud.

Companies whose shares are publicly traded should berequired to have audit committees to monitor the internalcontrol system and provide important links to the internalaudit staff.

Sanctions against the perpetrators of financial statementfraud should be increased by imposing fines and otherdeterrent measures like barring from corporate office.However, in this case, there is a need to prevent innocentmanagers from being too risk averse.

S i d A di


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Suggestions towards Auditors

Evaluate the potential for fraud in a given auditengagement.

Be obliged to utilise tests that provide reasonableassurance of detection of fraud

Evaluate the strength of the overall controlenvironment

Facilitate the identification of areas of high audit risk byreviewing the procedure analytically

Communicate their role and responsibilities to all thosewho rely on their work (ie nature and limitation ofaudit)

Report directly to the public any material irregularitiesand illegal acts discovered during an audit.

There is a need to clarify the duties of external


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There is a need to clarify the duties of external

auditors.

The management should formulate appropriate

policies and procedures which would reduce such

risks.

The audit report should include a letter from the

Chairman of the audit committee discussing the

committee's responsibilities and activities during

the year.


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Theories Related to our Topic

Creative Accounting

Whistle Blowing

Corporate Governance

Objectives of Corporate Governance

Need of Corporate Governance

Role of Corporate Governance Merits of Corporate Governance

Demerits of Corporate Governance


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Creative Accounting A term used to describe the practice of

applying inappropriate accounting policies or

entering into complex or special purpose

transactions with the objective of making a

companys financial statements appear todisclose a more favourable position,

particularly in relation to the calculation of

certain keyratios. Undesirable as it is intended to mislead users

of financial statements.


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Creative Accounting is Used To :

Hide a particularly bad year for the company.

Force an exceptionally good year.

Smooth out results to give an impression of

stability or sustained improvement

Boost assets to avoid take-over.

C i A i


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Creative Accounting

Methods/Categories

Allow company to choose between different

accounting methods such as writing of

development costs or amortizing it.

Certain entries in the account involveunavoidable degree of estimation, judgment and

prediction.

Artificial transactions can be used to manipulatebalance sheet and move profits between

accounting periods.


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Is Creative Accounting Ethical?

Difficult to draw an ethical line on creative

accounting because

GAAP often allow multiple accounting methods that a

company can choose from. Estimates are employed.

Technically not illegal but could fall into unethicalarea if the true values are grossly misrepresented

and inflating the performance.


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Whistle Blowing

Whistle blowing in its most general form involves

calling(public)attention to wrong doing, typically

in order to avert harm.

Whistle blowing is an attempt by a member or

former member of an organization to disclose

wrong doing in or by the organization.


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Criteria For Justifiable WB

There are three conditions that must hold forwhistle-blowing to be morally permissible, and two

additional conditions that must hold for it to be

morally obligatory. The three conditions that must

hold for it to be morally permissible are:

1. The firm through its product or policy will do

serious and considerable harm to the public,

whether in the person of the user of its product,

an innocent bystander, or the general public.


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Criteria (Contd.)2. Once an employee identifies a serious threat to the

user of a product or to the general public, he or sheshould report it to his or her immediate superior andmake his or her moral concern known. Unless he orshe does so, the act of Whistle blowing is not

justifiable.

3. If one's immediate superior does nothing effectiveabout the concern or complaint, the employee should

exhaust the internal procedures and possibilitieswithin the firm. This usually will involve taking thematter up the managerial ladder, and if necessary andpossible to the board of directors.


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Objectives Of Corporate Governance

Transparency

Efficiency

Monitoring

Accountability

Equitable Treatment of Shareholders

Self Evaluation Increasing Shareholders Wealth



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Low Performance of Economy

Failure of PSUsDisappearance of Companies

The number of Scams and Frauds

Growing role of market in the world

Integration with foreign market

New business opportunities

New Capital formationFII, FDI

Demand of High Performance by Investor

Increased competition due to commencement of

MNC

Role Of Corporate governance


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Role Of Corporate governance1. Value based corporate culture: For any

organization to run in effective way, it needs to

have certain ethics, values. Long run businessneeds to have based corporate culture. Valuebased corporate culture is good practice for

corporate governance.2. Holistic view: This holistic view is more or less

godly, religious attitude which helps in runningorganization. It is not easier to adopt it, it needs

special efforts and once adopted it leads todeveloping qualities of nobility, tolerance andempathy.


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Role of CG (contd.)


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Role of CG (contd.)5. Corporate Governance and Human Resource

Management: For any corporate body, the

employees and staff are just like family. For a

company to be perfect the role of Human

Resource Management becomes very vital, they

both are directly linked. Every individual shouldbe treated with individual respect, his

achievements should be recognized.

6. Innovation:Every Corporate body needs to takerisk of innovation i.e. innovation in products, in

services and it plays a pivotal role in corporate

governance.

Merits of Corporate Governance


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Merits of Corporate Governance

Relationship with Share holders : Relationship

helps to sustain business for a longer period. Management : Assesses to outsider on how well

CG is being governed.

Transparency : Attaining the trust of stakeholders,improving access to capital and financial market.

Benefits to Shareholders : Shareholders have

greater security on investment they have made. Benefits to National Economy : Good flow in

capital, Important factor to bring in investment.

Demerits of Corporate Governance


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Demerits of Corporate Governance Corporations live & die by decisions of its BOD : -

Sentimental business decision.

Family owned Companies influence the decision

(Eg. Satyam)

Easily corruptible :- Lack of govermental

oversight.

Cost of Monitoring :- Need to pour money to stay

in power.

T


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Presented By

Punjabi VinalSakariya Yashdas

Shroff Shehzad

Tilala Trupti

Toorawa Suhel

Vaghani Kalpesh

Date post:	03-Jun-2018
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Satyam Scam - Business Ethics

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