Corporate frauds are unlawful, and they are usually done by the betrayal of
trust by those who have a fiduciary responsibility with the corporation. The
Satyam Scam is a classic example which covers the area of corporate fraud. This
project will cover the every aspect and the entire scheme, i.e. the purpose for
the fraud, and how the fraud was perpetrated. Also the project will be
describing the efforts taken by various agencies to prevent such frauds in the
Fraud is an act that occurs in practically every industry. Corporate frauds are
illegal and usually involve the violation of trust of those who have a fiduciary
connection with the firm. Fraud is also described as those activities that aim
to generate such misinformation in the sight of a third party that might be
fatal to a corporation in the long term, as well as providing illicit benefits
to the perpetrator. The firm will make every effort to combat fraud and to
prevent all situations that might lead to fraudulent activity in the workplace.
It must also design methods and mechanisms for monitoring functionalities and
detecting any unlawful or illegal activities within the system. Fraud can occur
at the administrative level, which is referred to as "managerial fraud," or at
the employee level, which is referred to as "fraud by employee association." The Satyam Scam, which occurred in India in 2002, is the subject of this paper. The
paper provides an insight on to analyse the complexities, motives for committing
such crimes, orders issued by various agencies in the case, and improvements in
corporate governance as a result of the case.
SATYAM was a smart fraud. Deceptive reporting techniques, a lack of
transparency, excessive interest in stock values, a lack of basic accounting
regulations, insufficient independent directors, an ineffective audit committee,
and other issues all led to the fraud. Satyam Computers used to be the
centrepiece of the Indian IT sector, but it was brought to its knees in 2009 by
its founders due to financial fraud. The Satyam crisis sparked a debate
regarding the CEO's role in propelling a firm to new heights of success, as well
as the CEO's relationship with the board of directors and key committees.
Consequences Of Fraudulent Financial Reporting
What is fraud?
Fraud is a major problem affecting people from all backgrounds of life and all
areas of the economy. Fraud is a broad term that refers to a variety of illegal
activities and behaviours involving intentional deceit or misrepresentation.
According to the Association of Certified Fraud Examiners (ACFE), fraud is "a
deceit or misrepresentation made by an individual or entity knowing that the
deception may result in some illegal gain to the individual, entity, or other
Fraud affects organisations of all shapes and sizes. Financial reporting fraud
has occurred in a number of significant public corporations over the last few
decades, causing upheaval in the capital markets, a loss of shareholder value,
and, in some circumstances, the company's collapse.
Financial statement fraud is
often committed by three types of businesspeople. Senior management (CEO and CFO),
middle and lower-level management, and organisational criminals are among them.
Accounting fraud is committed by CEOs and CFOs to hide genuine corporate
performance, retain personal position and control, and keep personal income and
Financial reporting fraud may have serious implications for a firm and its
stakeholders, as well as public trust in the capital markets. Furthermore, fraud
has a number of negative consequences for businesses, including financial,
operational, and psychological consequences. While the financial loss caused by
fraud is considerable, the overall impact of fraud on a company may be enormous.
In reality, the damage to a company's reputation, goodwill, and customer
relations can be severe.
When financial reporting is falsified, major
repercussions follow. Because fraud may be committed by any person within an
organisation or by individuals from the outside, it is critical to have a strong
fraud management programme in place to protect your company's assets and image.
As a result, the business must take the lead in preventing and detecting fake
Recent corporate accounting scandals, and the ensuing demand for openness and
honesty in reporting, have undoubtedly resulted in two dissimilar but natural
results. For starters, forensic accounting skills have become increasingly
important in deciphering the complex accounting manoeuvres that have clouded
financial accounts. Second, public pressure for reform and subsequent regulatory
action have changed the corporate governance (CG) landscape. As a result, a
growing number of corporate executives and directors are subject to ethical and
legal scrutiny. In reality, both of these movements share the purpose of
resolving investors' worries about the financial reporting system's
Genesis of scandal at Satyam Computer Services Limited
Mr. Ramalinga Raju established Satyam Computer Services Limited in 1987. The
business provided outsourcing services in both information technology and
business processes. This was a Hyderabad-based corporation that grew to become a
global brand, with a reputation for innovation, governance, and responsibility.
It also provided outsourcing services for corporate processes. The corporation
operated on a global scale, with offices in more than 55 countries and more than
30,000 workers serving more than 500 subsidiaries. A total of 150 firms were
included in the Fortune 500. With efficiency and goodwill, the firm grew to
become a worldwide IT behemoth, with a market capitalization of 2.1 billion
dollars by 2008.
Mr. Ramalinga Raju stepped down on January 9, 2009, and notified the board of
directors by letter, confessing to years of accounting figure manipulation.
Through this confession, it was revealed that the corporation owed approximately
$ 1.04 billion in bank loans and cash that was supposed to be claimed was
non-existent. In addition, the liabilities were assessed lower than the real
value. SCSL inflated its income every quarter in order to match analyst
expectations, culminating in a massive amount of fraud. Mr. Raju set up many
bank accounts and utilised them to inflate the balance sheets with fictitious
Mr. Raju fabricated bank accounts in order to inflate the balance sheet
with fictitious funds. By claiming interest income from the fictitious bank
accounts, he inflated his income statement. Mr. Raju further said that over the
last five years, he created 6000 false pay accounts and took the money when the
corporation deposited it. To exaggerate revenue, the company's worldwide head of
internal audit established phoney customer identities and made fraudulent
invoices in their names.
In addition, the company's worldwide head of internal
audit faked board decisions and received financing unlawfully. He decided to
purchase MaytasProperties and Maytas Infra, believing that this was the only way
to get out of the situation and mitigate the deception he had perpetrated. The
transaction was designed such that the firms would be acquired solely on paper,
with no real financial transaction, resulting in a balance of the sums
previously recorded in the books of accounts. SCSL's board of directors decided
and sanctioned the acquisition of enterprises without shareholder approval.
issue arose once more when the purchase angered investors, resulting in a sharp
drop in the company's stock price. SCSL was also the subject of a lawsuit, which
resulted in a 55 percent drop in its stock on the NYSE. The mounting pressure
was the last nail in Mr. Raju's coffin, and he admitted to manipulating books of
accounts and committed fraud in front of the Securities Exchange Board of India.
The government promptly created a new board of directors for the firm, and
Mahindra eventually purchased 51 percent of SCSL shares, renaming it "Mahindra
Satyam." As a result, it amalgamated with the Mahindra company and is now known
as 'Tech Mahindra.'
The probable reason
On the one hand, obtaining high stock values would allow the promoters to enjoy
benefits that would allow them to earn actual riches outside of the company,
allowing them to extract money to acquire huge holdings in other companies.
There might be a reason why Raju's family accumulates stock and then sells it
when the time comes. The money obtained was utilised to buy thousands of acres
of property across Andhra Pradesh in order to profit from the state's expanding
real estate sector. It became a major issue since facts had to be doctored in
order to keep reporting good profits for Satyam, which was expanding in size and
scope. Every attempt to close the distance ended in failure. . The final factor
was the sale of Maytas Infrastructure and Maytas Properties to Satyam for an
estimated Rs. 7,800 crore.
Accountants And Auditors Play In Satyam Scam
Because the scam stayed unnoticed for such a long period, many people assume
chartered accountants are engaged in the Satyam Scam, i.e. Price Waterhouse
(hence referred to as PWC) India. The SFIO investigation also claimed that the
accountants were careless in completing their statutory obligations and
reporting requirements since they employed Satyam's tools instead of independent
The accountants in this case not only failed to present a
clear image to the public, but they also committed fraud by giving the
corporation a clean chit and portraying the accuracy of the books of accounts. Satyam's situation demonstrates the flaws in managing and determining auditors'
conduct. Regrettably, PWC has been overseeing the company's accounting for the
past nine years and has yet to uncover such a massive fraud. Apart from
auditors, a number of other variables contributed to the financial fraud,
including independent directors, the institutional investor community, SEBI,
retail investors, and professional investors, all of which have access to the
company's models and extensive information.
Issue of law
The defendants were charged under several articles of the Indian Penal Code,
including Sections 120 B, 406, 420, 467, 471, and 477 A,
for breaking different income tax rules
Role Of SEBI And SAT
In 2014, SEBI ordered Mr. Ramalinga Raju and four others to be disqualified from
trading in the markets for 14 years, as well as a sum of Rs. 1,849 crores in
illegal earnings, plus interest. With effect from the day on which Mr. Raju
made such a confession concerning the fraud and manipulation of the books of
accounts, interest was assessed at a rate of 12% per annum. The money, plus
interest, was intended to be deposited within 45 days of the order's date. The (SEBI)
has given Satyam Computer Services permission to choose a strategic investor to
buy 51 percent of the firm through a global competitive bidding procedure, which
resulted in Tech Mahindra purchasing Satyam Computer Services.
The Securities Appellate Tribunal was constituted under Section 15 (K) of the
Securities and Exchange Board of India Act, 1992, as a statutory entity. Its
primary function is to handle appeals against SEBI or any adjudicating officer's
orders made under the SEBI Act, as well as to exercise the jurisdiction, powers,
and authority given on the Tribunal by or under this Act or any other
legislation in effect at the time.
It has restricted all PwC network firms from auditing publicly traded
corporations and brokersfor a period of two years after being found guilty
in the Satyam fraud. SEBI ruling stated that they were not following auditing
norms and did not reveal such a large gap growing in Satyam's financial
statements, and that PwC, along with the other primary players implicated in the
largest corporate fraud, were deceptive. Section 11 of the SEBI Act and the
Prevention of Fraudulent and Unfair Trade Practices Act were used to issue the
order against PwC. (UFTP). SEBI has the jurisdiction to issue orders in favour
of investors under Section 11 of the SEBI Act.
Regulatory Cg Reforms In India And Lessons Learned At Satyam
The exposure of such a massive accounting fraud has caused a slew of issues in
India. Reluctance and a drop in India's appeal for foreign investment in the IT
services industry was the major and most destructive impact of the scandal,
which was foreseen. Furthermore, Satyam's stock fell to its lowest point of 30
and lost 77 percent of its worth. Such frauds and failures act as cautions
to investors and the general public to be cautious before investing in almost
Satyam Computers Services Ltd's Corporate Governance Fails:
- The Concept of Independent Auditors Fails:
When the concept of corporate
governance was first implemented, SEBI emphasised the role of independent
directors in the presentation of financial figures to the government, claiming
that independent directors would present a true and fair view of financial
figures and participate more actively in the audit process of companies than
traditional directors. However, in this case, this concept was a complete
The SEBI is exploring a number of recommendations, including requiring
enhanced due diligence on deals and raising board members' personal liabilities.
If present reform trends continue, shareholders will be able to sue corporate
officials and directors more easily under the 1956 Companies Act. To safeguard
shareholders, the SEBI is contemplating requiring publicly traded businesses to
buy director and officer liability insurance.
- Failure of the Audit Committee:
The Satyam Computers Audit Committee played a
little role in preventing financial distortion of facts.In this scenario,
another fundamental foundation of Corporate Governance has been broken. The SEBI
has suggested that corporations be required to declare their balance sheet
situations twice a year. Prior to Satyam, the requirements only required balance
sheet positions to be disclosed once a year. Investors will have greater
information on the soundness of a company's financial condition when balance
sheets are reported more often. Increased disclosure frequency and detail will
aid in providing a more comprehensive market check.
- Failure of the CEO/role: CFO's:
The concept of Corporate Governance states
that the CEO/CFO of the company certifies the truthfulness and fairness of the
company's financial statements, but in this case, the CEO/CFO of the company,
Mr. Ramlinga Raju/ Srinivas Vadlamani, has certified the company's incorrect
- Failure to include the true report on corporate governance compliance in
the financial statements of the company: In the case of Satyam Computers, the Annual
Report contained a report on corporate governance compliance, but almost none of
the facts in that report were accurate in the real sense.
Failure of SEBI in timely detection of this Finance Scam: -The Security Exchange
Board of India is the government's most powerful regulatory organisation, with
complete authority to intervene in any company's financial affairs, including
the presentation of financial figures and insider trading.
The value of Satyam
Computers' stock has soared dramatically, yet SEBI has failed to discover or
even detect any bad governance. As a result of all of this insider trading, the
Company's promoters have gained millions of dollars by falsifying financial
numbers, inflating the market value of the shares and selling them at those
higher prices, resulting in the depreciation of the company's worth of the
finances of ordinary individuals who have invested in Satyam Computers shares
based on the company's financial statements.
Though the Indian corporate governance (subsequently referred to as ICG) took
the necessary steps, the Federation of Indian Chambers of Commerce and Industry
(hereinafter referred to as FICCI) furthermore made a notice discussing the
problem and asserting that the scam was an exceptional situation and that
investors should not be concerned about India's accounting standards and
The scandal also brought to India's attention a number of
flaws in the ICG guidelines, including as non-disclosure of important data to
stakeholders, insider trading, unethical behaviour, and false accounting. To
address these issues in the ICG, the Confederation of Indian Industries
established a task force, and the Ministry of Corporate Affairs (hereafter
referred to as MCA) produced optional guidelines for Corporate Governance in
2009 based on the task force's recommendations. The National Association of
Software and Services Companies also formed a Corporate Governance and Ethics
Committee, which recommended changes to audit committees, shareholder rights,
and whistleblower procedures.
The previous corporate governance rules were also revised by SEBI. The Listing
Agreement was also amended to guarantee that such fraudulent acts were not
carried out. SEBI also passed the SEBI (Listing Obligation and Disclosure
Regulation) (hence referred to as LODR), 2015, which applies to all public firms
and establishes strict regulations and procedures for the disclosure of material
events and financial statements.
The government also took essential steps by enacting the Companies Act of 2013
(hence referred to as Act), which places a strong emphasis on stakeholders'
interests. Corporate fraud was likewise made a crime under the Act. It
established explicit procedures for cost accountants, business secretaries, and
auditors to follow when reporting fraud. It also established a system of checks
and balances in the Act, assuring effective corporate governance and management
in the country.
It also included a condition requiring the company's individual
auditors to rotate every five years and auditing companies to rotate every ten
years. Furthermore, when doing their tasks, accountants are required to report
any type of fraud perpetrated by the organisation or anyone associated with it.
Recent corporate scams, as well as public demand for greater openness and
honesty in reporting, have resulted in two consequences. For starters, forensic
accounting abilities have become increasingly important in interpreting the
complex accounting practises that have obscured financial accounts. Second,
public pressure for reform, followed by regulatory action, has changed the
Corporate Governance landscape throughout the world. In addition, the Corporate
Governance framework needs to be first of all strengthened and then implemented
in letter as well as in right spirit.
Even though corporate governance
mechanisms cannot prevent unethical activity by top management completely, but
they can at least act as a means of detecting such activity before it is too
late. When an apple is rotten there is no cure, but at least the rotten apple
can be removed before the infection spreads and infects the whole
basket.This is really what effective governance is about. The Satyam case is
just another illustration of why improved corporate governance is required.
it comes to appointing CEOs and top-level managers, all public firms must be
cautious. These are the people that establish the tone for the firm; if there is
corruption at the top, it will inevitably spread throughout the organisation.
Separate the roles of CEO and Chairman of the Board of Directors. As a result,
dividing the jobs helps to avoid situations like the one at Satyam. The Satyam
founders' deception demonstrates how "the science of behaviour" is swayed in
great part by human ego, ambition, and the desire for power, money, fame, and
glory. To limit the risk of future accounting fraud, PwC should always involve a
The presence of a third party raises the likelihood of error-free
financial statements. In the absence of a third party, a client business can
more easily fake its assets. Even while engaging a third party may take extra
resources from an auditing company, it is ultimately in the auditors' best
interests. The chance of failing to discover a client's accounting fraud is
reduced when a third party is involved. In their job, auditors must adhere to
the notion of professional scepticism.
Auditors must evaluate the information
they get from their clients since the clients have an incentive to portray the
data in the most advantageous light possible. By taking a suspicious stance to
client-driven information and engaging with a third party, the auditors may have
lessened the severity of the scam.
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Association of Certified Fraud Examiners, 2010. www.acfe.com
- D. L. Crumbley, L. E. Heitger and G. S. Smith, "Forensic and
Investigative Accounting Chicago: CCH Incorporated," 2003.
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Corporate Environments that Contribute to Accounting Fraud," The Financial
Review, Vol. 42, No. 1, 2007, pp. 53-73.
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Online Ltd., 2009. www.a.times.com
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How the Fraud Story Unfolded?, https://www.scirp.org/journal/PaperInformation.aspx?PaperID=70827
- 1[120B. Punishment of criminal conspiracy:
- Whoever is a party to a criminal conspiracy to commit an offence
punishable with death, 2[imprisonment for life] or rigorous imprisonment for
a term of two years or upwards, shall, where no express provision is made in
this Code for the punishment of such a conspiracy, be punished in the same
manner as if he had abetted such offence.
- Whoever is a party to a criminal conspiracy other than a criminal
conspiracy to commit an offence punishable as aforesaid shall be punished
with imprisonment of either description for a term not exceeding six months,
or with fine or with both.]
- 406. Punishment for criminal breach of trust.�Whoever commits criminal
breach of trust shall be punished with imprisonment of either description
for a term which may extend to three years, or with fine, or with both.
- 420. Cheating and dishonestly inducing delivery of property.�Whoever
cheats and thereby dishonestly induces the person de�ceived to deliver any
property to any person, or to make, alter or destroy the whole or any part
of a valuable security, or anything which is signed or sealed, and which is
capable of being converted into a valuable security, shall be punished with
imprisonment of either description for a term which may extend to seven
years, and shall also be liable to fine.
- 467. Forgery of valuable security, will, etc.�Whoever forges a document
which purports to be a valuable security or a will, or an authority to adopt
a son, or which purports to give authority to any person to make or transfer
any valuable security, or to receive the principal, interest or dividends
thereon, or to receive or deliver any money, movable property, or valuable
security, or any document purporting to be an acquittance or receipt acknowledging the
payment of money, or an acquittance or receipt for the delivery of any movable
property or valuable security, shall be punished with 1[imprisonment for life],
or with imprisonment of either description for a term which may extend to ten
years, and shall also be liable to fine.
- 471. Using as genuine a forged 1[document or electronic record].�Whoever
fraudulently or dishonestly uses as genuine any 1[document or electronic
record] which he knows or has reason to believe to be a forged 1[document or
electronic record], shall be punished in the same manner as if he had forged
such 1[document or electronic record].
- [477A. Falsification of accounts
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scam?Hindustan Times, 11th January 2018
- Satyam case: Price Waterhouse moves SAT against Sebi ban, Live mint, 17th
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of Pennsylvania, https://knowledge.wharton.upenn.edu/article/scandal-at-satyam-truth-lies-and-corporate-governance/
- Maher, N. (211, April 6). http://www.internationalaccountingbulletin.com/news/pwc-to-pay-75m-for-satyam-audit-failures
- Susmit Pushkar and Susanah Naushad,What changed in the legal landscape
post-Satyam scam, https://www.moneycontrol.com/news/business/companies/what-changed-in-the-legal-landscape-post-satyam-scam-2480623.html.
- Jim Solomon and Aris Solomon (2004), "Corporate Governance and
Accountability", John Wiley & Sons Ltd, England, page 42