GOVERNANCE FAILURE AT SATYAM

1. Discuss the circumstances under which the Satyam scam was exposed. What according to you were the reasons of the fraud? A. The failure of the Maytas acquisition led to the scam being exposed. The deal, according to RamalingaRaju, was a last-ditch attempt by him to correct the financial irregularities in Satyam. Maytas was owned by his immediate family. He planned to raise debt money from the market to finance the deal. The money would then be used in Satyam via Maytas, and the debt would be paid back over a long term. Reasons of the fraud: Raju claimed that he orchestrated the fraud to cover for the low profit margin, and maintain the share price of the company in the market, to ward off any chance of a hostile takeover. He also claimed to have made not even a single rupee from the scam. However, a look at Satyams peer companies such as Infosys, Wipro & TCS showed that they had healthy profit margins. Satyam also boasted having 165 of the Fortune 500 companies as its clients. His rationale does not fit into the picture. On the outset, it appears that he did make money from the fraud, as no other plausible explanation exists.

2. Could this fraud have been prevented? Who could have prevented it? A. Of course the fraud could have been prevented. With all the praises heaped at Satyam for its corporate governance practices, in reality, the company severely lacked internal controls. The Board of the Directors, the most powerful body in any company, could have prevented it. It comprised of 9 members, out of 2 were Raju and his brother, 5 were independent directors from outside, 1 was a consultant and 1 was an employee. The board looked weak in composition. It did not even effectively perform a job as simple as checking whether the huge bank balance claimed was accurate. The board might have been compromised at least partially.

3. Critically evaluate the corporate governance mechanisms adopted by Satyam? A. Satyam had won Golden peacock Global Award for excellence in corporate Governance given by World Council for corporate governance in 2002 and 2008 just before three months before scandal. They had been rated as the best corporate governance practices by the IRGR for 2006 and 2007. Satyam was the first Indian company to post its audited results for 2007-08 financial years in accordance with the IFRS. Satyam was named a Web Business 50/50 award winner for its corporate intranet. Satyam had also won the national HRD for its outstanding HRD efforts. Dataquest,a leading IT magazine, named Raju as IT Man of the year for 2000. These awards and honors were clear reflections of Satyams prestige and reputation amongst their clients, employees and society and showing best corporate governance in general. Satyam had also five independent members on its board.

4. Assess the responsibility of the audit committee as well as internal and statutory auditors in relation to Satyams scandal. A. It was the auditors responsibility to verify the various assets and liabilities claimed in the balance sheet. Having failed to perform even their basic tasks, one cannot help but question the integrity of the auditors. Investors trust an auditors report, and it is on the basis of this trust that they invest in companies. It is a gross breach of trust on the part of auditors towards not just investors, but also customers, employees and society in general. The main role of audit committee is to oversee the companys financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. The audit committee shall have power to investigate any activity within its terms of reference. To seek information from any employee, to obtain outside legal or other professional advice and to secure attendance of outsiders with relevant expertise, if it considers necessary. More active and vigilant Increase substantially the coverage and intensity of internal audit and, sometimes, even an investigative audit may be required.

5. Evaluate the statement made by the Chairman in his resignation. A. Ramalinga Raju, the chairman, in his resignation letter, made it seem like it was a fraud which he could not help but commit. He claimed to have done it for the good of the company initially, but later on got sucked into owing to the numerical magnitude of the cover up. His reasons for perpetrating it looked illogical. It cannot be imagined why a person would do such things for selfless reasons. Even after revealing the scam, he had the courage to take liberty to recommend future courses of action. He made sure to absolve his family from any knowledge of the fraud. Overall, the letter was composed in such a way so as to soften the blow, and make him look more like a victim of circumstances rather than a mastermind fraudster.

6. What characteristics of the board of directors play a role in preventing financial statement fraud? A. Board of Directors must monitor the ethical policies and the way they are being maintained in the company.

They should be Accountable for the financial information being projected. There should be no inactive board of directors. There must be given authority to independent Board of Director. There must be a clear understanding of responsibility between the board and the next level employees.

There must be a qualified Board of Directors.

7. Do you think that making regulatory changes would help in preventing the fraud? In addition to the present statutory requirement, companies should be required to institute sufficient internal management controls. Management should ensure that the internal audit staffs are able to prevent and detect financial statement fraud. Companies whose shares are publicly traded should be required to have audit committees to monitor the internal control system and provide important links to the internal audit staff. Sanctions against the perpetrators of financial statement fraud should be increased by imposing fines and other deterrent measures like barring from corporate office. However, in this case, there is a need to prevent innocent managers from being too risk averse. 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 committees responsibilities and activities during the year.

8. What is the lesson learned from this case? A. Importance of Corporate Governance

Corporate governance is vital for long term growth of a company and the market will punish bad corporate governance. Satyam won many awards on corporate governance but in the end it was not the real scenario. Family businesses have lower level of corporate governance and hence chances for frauds and scams increase. Regulations to stop such frauds

Regulations by SEBI and other authorities are vital to keep tab on multiple levels and Satyam broke regulations on multiple levels. Till the time World bank didnt ban Satyam due to bribing its staff Indian authorities didnt take notice. 3 fold audit team failed

Even though there were 3 audit teams a) Internal auditors b) External auditors-PwC c) Regulatory auditors The company was able to show fake accounts and forge its accounts books, which was very surprising Despite having 5 independent directors failure to catch fraud

Independent directors are supposed to take unbais judgments and make sure such situations dont take place. Satyam had 5 independent directors but due to it being a family business and bad governance they failed to take the right decisions and overlooked such monumental frauds. Lack of governance at multiple levels The board The bank SEBI Auditors