Fraud- Satyam Computers Limited, India - Research Paper Example

Fraud- Satyam Computers Limited, India Fraud is a global phenomenon affecting all the continents and economy sectors. It includes all the illegal and illicit practices that involve intentional misrepresentation and deception. In essence, fraud is ‘misrepresentation or deception that an entity or an individual makes with the knowledge that misrepresentation would result in illegal benefit to an individual, entity or other parties1. Satyam, which means “truth”, was one of the largest IT Company in India up to 2009. Previously, the company received various awards like the Golden Peacock Award in 2007 for showing outstanding performance and governance. From being the fourth largest IT Company, with high profile, the outsourcing company has been embroiled for having the biggest scam in history. Formed in 1987 by Ramalinga Raju, the company grew and become a ‘rising star’ in Indian ‘outsourced’ computer service industry. With the rising importance of IT in the market, the company realized an estimated compound growth rate of 6.4% by 2007. The company attracted a lot of investors and it grew significantly. Raju, the managing director, attracted up to 300 customers worldwide and 13, 120 technical associates. A year later, the company had shown a compound growth rate of 35% and earnings per share rose from $0.12 to $0.622. On the other hand, Satyam’s stock tripled to 300%. The company further generated a significant growth as well as increased shareholder value. In 2009, Raju, through a letter to the company, disclosed that he had been manipulating the accounting numbers of the company for several years. He further claimed that he had overstated the assets on the company’s balance sheet by $1.47 billion and to make the matters worse, almost $1.04 billion cash and bank loans claimed by the company was non-existent3. The company had underreported all the liabilities on the balance sheet and overestimated the income for several years so as to meet the expectation of the analyst. For instance, the results showed 97% profits and 75% revenue increase. The director and the firm’s global head of the internal audit used various schemes to perpetrate the fraud. Raju used his personal computer to develop several bank statements and falsified the accounts so as to inflate the non-existent balance sheets. In fact, he inflated income statements by making interest claims using fake bank accounts. As the scam revealed further, it was evident that Raju had created over 6000 counterfeit salary accounts and directed the money there anytime the company make deposits. On the other hand, his counterpart, the global head of internal audit developed fake customer identities and creates counterfeit invoices against their identities so as to inflate the revenue. He further forged the board resolutions and acquired the loans for the company illegally. With the combined efforts of the two executives, they managed a “successful” scam for several years, but their days came to an end4. Aftermath of the Satyam scandal Immediate the news of the scam broke out, Merrill Lynch (Bank of America) terminated its cooperation with the company, Credit Suisse also suspended its engagement and PricewaterhouseCoopers (PwC), the auditing organization of Satyam, was screened and its license revoked. The coveted awards which had previously been won by the company and the executive management were all stripped from the firm. As a result, the shares of the company fell from 544 to 11.5 rupees. In the stock exchange market, the company shares which had inflated up to $29.10 fell to $1.805. Therefore, all the investors lost up to $2.82 billion to the company. Regrettably, Satyam had significantly escalated its revenue and assets for several years and rolling down the country’s stock markets putting the entire company in turmoil. Legal charges were brought against the fraudsters, Raju and global head of internal audit, including: breach of trust, forgery and criminal conspiracy. After the revelation of Raju concerning the accounting forge, a new board of directors was appointed who began working towards a paramount solution to save the company from permanent collapse. All the employees were suspended from their operation until new management took over. However, the new board proposed the sale of the company within 100 days. Bidders came in and after legal consultations, company shares were sold, but at a lower cost as previous operations. All the involved parties of the fraud were sentenced to jail waiting for their judgments, including Raju, Raju’s brother, and the PwC6. Nevertheless, the fraud could have been prevented by: Government participation in the management and operation of the company affairs- Leaving the entire management to the stakeholders may result in misappropriation and mismanagement. Government interventions help to protect the interests of investors while safeguarding the credibility of the country’s image globally. The company could have also taken time to elect executives and top managers who are competent and visionary. This is a team that sets the company tone: in case of corruption at the top, they can air out quickly. Lastly, the company could have split the roles of various executives: CEO to the lowest management staff to have his/her distinct role. Division of duties and splitting of roles could help curb situations of fraud because everybody plays his/her role. Fraud requires joint effort, which is not easy when everybody has a unique role to play. Bibliography Anjum, Zafar. The Resurgence of Satyam. ND: Random House India, 2012. Bhandari, Bhupesh. The Satyam Saga. New Delhi: Business Standard Books, 2009. Read More