FACULTY OF ACCOUNTANCY

UITM SHAH ALAM

REPORT ON CASE STUDY

SATYAM SCANDAL ROCKS OUTSOURCING INDUSTRY

Prepared By:
No Name Matric Number
3 Nur Emelia Aniza Binti Rahmat 2013948343

Class : ACB11BLB

Submission Date: 10 December 2017

TABLE OF CONTENT

1
Content Page Number
Case Study
a) Satyam scandal rocks outsourcing industry 3-8
b) Reference case study 9

Question and Answer

a) Given the definition of earnings management 10-11
b) Discuss in what instance is earnings management
acceptable and in what instance is it not acceptable? 11-12
Analyze the case and answer the following question :
a) Discuss the earnings management techniques or
method employed by management of Satyam 12-13
b) In your opinion, why do the managers of Satyam want
to manage their earnings a subsequently be engaged 13-14
in fraudulent activities?

c) What were the consequences that befell the

managers upon the discoverty of the financial
statement fraud ?
14
d) In your opinion, what the stategies that the accounting
profession can take to curb the abuse in earnings
management ?
15

2
India January 7, 2009, 9:15AM EST text size: TT

India's Madoff? Satyam Scandal Rocks

Outsourcing Industry
The info tech outsourcer shocks investors with a letter
outlining balance-sheet misdeeds. Rival firms may benefit if
customers still trust them
On the morning of Jan. 7, Ramalingam Raju, the chairman of troubled Indian IT outsourcing
company Satyam Computer Services (SAY), sent a startling letter to his board and the Securities
& Exchange Board of India. Raju acknowledged his culpability in hiding news that he had
inflated the amount of cash on the balance sheet of India's fourth-largest IT company by nearly
$1 billion, incurred a liability of $253 million on funds arranged by him personally, and
overstated Satyam's September 2008 quarterly revenues by 76% and profits by 97%. After
submitting his resignation, Raju ended his letter by apologizing for his inability to close what
began as a "marginal gap between operating profits and the one reflected in the books of
accounts" but grew unmanageable. "I am now prepared to subject myself to the laws of the land
and face the consequences thereof," he wrote.

The letter shocked and angered corporate India, which has looked to IT executives as role
models for a new breed of Indian entrepreneur. The benchmark Sensex stock index dropped
7.3% and Satyam shares fell nearly 78% on the day as investors fled in droves. Goldman Sachs
(GS) suspended its recommendations on Satyam "because there is not currently a sufficient basis
for determining an investment rating or price target for this company," Goldman analysts Julio
Quinteros Jr. and Vincent Lin told investors. Earnings per share, warned JPMorgan (JPM)
analysts in a report, "may be 70%-80% lower than reported numbers and consensus estimates for
'09-'10." Satyam had become "India's Enron," said CLSA India analyst Bhavtosh Vajpayee,
calling the case "an accounting fraud beyond imagination [and] an embarrassing and shocking
episode in Indian corporate governance."

As executives at other Indian outsourcing companies nervously assess what impact the scandal
will have on them, many industry observers now argue that the Satyam case will damage India's
reputation as a reliable provider of IT services. Because of the Satyam scandal, they say, Indian
rivals will come under greater scrutiny by regulators, investors, and customers. "The bubble is
going to burst in terms of trust," says a fund manager in Hong Kong who has followed Satyam
3
closely. Doubts about the reliability of Indian outsourcers are especially important, since
customers often allow the Indian companies access to sensitive systems. "This industry doesn't
just make widgets," the manager explains. "It's an intimate relationship." Certainly, says Gartner
(IT) analyst Diptarup Chakraborti, "there will be caution in the short term, skepticism, and
questioning." After all, "no one wants to do business with a known fraudster."

Investors Want Answers

Industry executives are desperately trying to contain the fallout. "The decline in governance and
institutions represents a serious challenge to India," says Rajeev Chandrashekhar, president of
the Federation of Indian Chambers of Commerce and Industry. Wipro Technologies (WIT) Chief
Financial Officer Suresh Senapaty, went on TV to say that Satyam's actions should not infect the
entire Indian IT industry. And Mohandas Pai, head of human resources at Infosys (INFY) and the
company's former chief financial officer, argued Satyam's behavior is atypical. "We wish the
regulators will investigate and punish the guilty," he says. "But this is not representative of our
industry." John McCarthy, vice-president of Forrester Research, allays some fears. "I look at
Satyam as an isolated case, and don't think the developments would have any impact upon
India's No. 1 position as an offshore location."

Still, investors and clients are going to want answers. For instance, they're demanding to know
how Satyam's auditor, PricewaterhouseCoopers, endorsed the company's accounts. "Auditors'
complicity in what seems to be a multiyear misstatement of financials will also be explored,"
said CLSA's Vajpayee in his Jan. 7 report. Already, India's Registrar of Companies had begun a
probe into a failed acquisition last month by Satyam of companies run by Raju's two sons. Now
the country's securities regulator will add its weight by investigating the PwC audit. PwC issued
a statement saying it was examining the issue.

Raju's confession is the latest in a rocky ride for Satyam, its shareholders, and its stakeholders
over the past year. The company's clients include multinationals such as Nestl, General Motors
(GM), and General Electric (GE). But in September, the World Bank banned Satyam from doing
any of its work after it found Satyam employees had hacked into its system and gained access to
sensitive information. It also did not renew their five-year contract. Satyam denied any
wrongdoing. Then came a fresh blow on Dec. 16, when Raju announced the company would
spend $1.6 billion to buy two infrastructure companies run by this sons, only to reverse the
decision a few hours later under shareholder pressure. Satyam ADRs lost 50% of their value
overnight. December also brought news of pending litigation by a former client, online mobile-
payments service Upaid Systems, which filed a case of intellectual fraud and forgery against
Satyam in 2007; a Texas court is scheduled to conduct a hearing on the case Jan. 7.

Tip of the Iceberg

In India, the Raju family's non-IT activities had already been viewed with some suspicion, in
particular a free emergency ambulance service Raju began in Hyderabad, where Satyam is based.
Last year, public-interest activists filed a petition challenging the lack of transparency and
arbitrariness in the award of ambulance-services contracts in 12 Indian statesall of which had

4
been awarded to Raju's operation. In November the Supreme Court of India questioned the
contracts and demanded an explanation, which could result in the contracts being canceled.

With Satyam's management focused elsewhere, business suffered. Clients complained about lack
of attention, and many professional managers began to leave.

Angry Satyam investors' reaction to the botched acquisition led to talk of Satyam being a
takeover target. A deal might have been interesting since, as Gartner's Chakraborti says, Satyam
had been undergoing a "crisis of confidence, rather than a crisis of revenues." Before the
shocking confession today from Raju, there was a long list of reported suitors for Satyam. They
included HCL Technologies, Wipro, IBM (IBM), Hewlett-Packard (HPQ), Larsen & Toubro
Infotech, Cognizant (CTSH), Cap Gemini (CAPP.PA), and even private equity players KKR and
TPG. By Jan. 6, the Indian press added a new oneTech Mahindra, a Pune-based software-
services company focused on the telecom industry in which British Telecom (BT.L) has a 31%
stake. Although most companies denied the rumors, on Jan. 6 an executive of a rival company
told BusinessWeek that Satyam's value should be between $2.6 billion and $3 billion.

Competition Will Jump In

Now, just a day later, Satyam's value has plummeted. Tech Mahindra made a public statement
that it would not be interested in acquiring Satyam "in the current environment." CLSA India
valued the company, minus its debt, at $600 million. "What happens to Satyam now?" asked
Mumbai-based research firm First Global in a note on Jan. 7. "With Satyam's operations failing
to generate the required amount of cash, we believe that it will be impossible for the company to
continue its operations." Satyam clients are likely to shift to other companies, First Global
predicted, as Satyam's stock price continues to fall.

That leaves Ram Mynampati, the Satyam president whom Raju has appointed as interim chief
executive, the difficult task of boosting morale. In a letter to Satyam's 53,000 employees,
Mynampati reminded them that Satyam had top-notch clients and was acknowledged as one of
the three best employers in India by both Hewitt (HEW) and Mercer (MERC), the international
human resources firms. But "this quarter will be tumultuous for us," he said. "Rumors will
abound and it would be fair to assume that competition will try and leverage it to their
advantage."

The competition sure is trying. Already, Satyam customers are getting calls from other Indian IT
providers offering their services. And life could get tough for Satyam's thousands of engineers
and employees. Despite their valuable skills, IT companies are hiring fresh college grads over the
more expensive, experienced hands. Still, with the IT business already suffering from the global
downturn, a large competitor out of the way could mean more deals for Satyam's rivalsif they
can overcome new doubts about the reliability of the country's IT industry.

Satyam scandal
5
From Wikipedia, the free encyclopedia

The Satyam Computer Services scandal was publicly announced on 7 January 2009, when
Chairman Ramalinga Raju confessed that Satyam's accounts had been falsified.

Details
On 7 January 2009, company Chairman Ramalinga Raju resigned after notifying board members
and the Securities and Exchange Board of India (SEBI) that Satyam's accounts had been falsified
[1][2][3]
.

Raju confessed that Satyam's balance sheet of 30 September 2008 contained:

inflated figures for cash and bank balances of Rs 5,040 crore (US$ 1.07 billion) as against
Rs 5,361 crore (US$ 1.14 billion) crore reflected in the books.
an accrued interest of Rs. 376 crore (US$ 80.09 million) which was non-existent.

an understated liability of Rs. 1,230 crore (US$ 261.99 million) on account of funds was arranged
by himself.

an overstated debtors' position of Rs. 490 crore (US$ 104.37 million) (as against Rs. 2,651 crore
(US$ 564.66 million) in the books).

Raju claimed in the same letter that neither he nor the managing director had benefited
financially from the inflated revenues. He claimed that none of the board members had any
knowledge of the situation in which the company was placed.[4][5]

He stated that

"What started as a marginal gap between actual operating profit and the one reflected in the
books of accounts continued to grow over the years. It has attained unmanageable proportions as
the size of company operations grew significantly (annualised revenue run rate of Rs 11,276
crore (US$ 2.4 billion) in the September quarter of 2008 and official reserves of Rs 8,392 crore
(US$ 1.79 billion)). As the promoters held a small percentage of equity, the concern was that
poor performance would result in a takeover, thereby exposing the gap. The aborted Maytas
acquisition deal was the last attempt to fill the fictitious assets with real ones. It was like riding a
tiger, not knowing how to get off without being eaten.***

Aftermath
6
Raju had appointed a task force to address the Maytas situation in the last few days before
revealing the news of the accounting fraud. After the scandal broke, the then-board members
elected Ram Mynampati to be Satyam's interim CEO. Mynampati's statement on Satyam's
website said:

"We are obviously shocked by the contents of the letter. The senior leaders of Satyam stand
united in their commitment to customers, associates, suppliers and all shareholders. We have
gathered together at Hyderabad to strategize the way forward in light of this startling revelation."

On 10 January 2009, the Company Law Board decided to bar the current board of Satyam from
functioning and appoint 10 nominal directors. "The current board has failed to do what they are
supposed to do. The credibility of the IT industry should not be allowed to suffer." said
Corporate Affairs Minister Prem Chand Gupta. Chartered accountants regulator ICAI issued
show-cause notice to Satyam's auditor PricewaterhouseCoopers (PwC) on the accounts fudging.
"We have asked PwC to reply within 21 days," ICAI President Ved Jain said.

On the same day, the Crime Investigation Department (CID) team picked up Vadlamani Srinivas,
Satyam's then-CFO, for questioning. He was arrested later and kept in judicial custody[6].

On 11 January 2009, the government nominated noted banker Deepak Parekh, former
NASSCOM chief Kiran Karnik and former SEBI member C Achuthan to Satyam's board.

Analysts in India have termed the Satyam scandal India's own Enron scandal.[7]. Some social
commentators see it more as a part of a broader problem relating to India's caste-based, family-
owned corporate environment (http://kafila.org/2009/02/13/the-caste-of-a-scam-a-thousand-
satyams-in-the-making/).

Immediately following the news, Merrill Lynch now a part of Bank of America and State Farm
Insurance terminated its engagement with the company. Also, Credit Suisse suspended its
coverage of Satyam.[citation needed]. It was also reported that Satyam's auditing firm
PricewaterhouseCoopers will be scrutinized for complicity in this scandal. SEBI, the stock
market regulator, also said that, if found guilty, its license to work in India may be revoked.[8][9][10]
[11][12]
Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate
Governance under Risk Management and Compliance Issues,[13] which was stripped from them
in the aftermath of the scandal.[14] The New York Stock Exchange has halted trading in Satyam
stock as of 7 January 2009.[15] India's National Stock Exchange has announced that it will remove
Satyam from its S&P CNX Nifty 50-share index on 12 January.[16] The founder of Satyam was
arrested two days after he admitted to falsifying the firm's accounts. Ramalinga Raju is charged
with several offences, including criminal conspiracy, breach of trust, and forgery.

Satyam's shares fell to 11.50 rupees on 10 January 2009, their lowest level since March 1998,
compared to a high of 544 rupees in 2008[17]. In New York Stock Exchange Satyam shares
peaked in 2008 at US$ 29.10; by March 2009 they were trading around US $1.80.

7
The Indian Government has stated that it may provide temporary direct or indirect liquidity
support to the company. However, whether employment will continue at pre-crisis levels,
particularly for new recruits, is questionable [18].

On 14 January 2009, Price Waterhouse, the Indian division of PricewaterhouseCoopers,

announced that its reliance on potentially false information provided by the management of
Satyam may have rendered its audit reports "inaccurate and unreliable"[19].

On 22 January 2009, CID told in 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 [20].

Roots
Prof. Sapovadia, in his study, shows that in spite of there being a strong corporate governance
framework and strong legislation in India, top management sometimes violates governance
norms either to favour family members or because of jealousy among siblings. He finds that
there is a lack of regulatory supervision and inefficiency in prosecuting violators. He investigates
in detail the recent governance failure at India's 4th largest IT firm, Satyam Computers Services
Limited, and considers possible reasons underlying such large failures of oversight. [21]

New CEO and special advisors

On 5 February 2009, the six-member board appointed by the Government of India named A. S.
Murthy as the new CEO of the firm with immediate effect. Murthy, an electrical engineer, has
been with Satyam since January 1994 and was heading the Global Delivery Section before being
appointed as CEO of the company. The two-day-long board meeting also appointed Homi
Khusrokhan (formerly with Tata Chemicals) and Partho Datta, a Chartered Accountant as special
advisors [22][23].

References
1. ^ Satyam Chairman Fraud Confession - SlideShare
2. ^ Satyam_Computer_Services_Ltd_070109.pdf (Facsimile of Resignation) filed with bseindia.com

8
 3. ^ The Hindu Business Line : Text of Mr Ramalinga Rajus statement - Wednesday, 7 January 2009

4. ^ Satyam Chairman Resigns After Falsifying Accounts (Update5) - By Harichandan Arakali ( 7

January 2009 12:03 EST) - Bloomberg.com: Worldwide

5. ^ "Letter from Raju to SEBI and Stock Exchange accepting the fraud". Economic times. 01-07-
2009. http://economictimes.indiatimes.com/photo.cms?msid=3946287. Retrieved 2009-01-07.

6. ^ Satyam ex-CFO Vadlamani Srinivas sent to judicial custody till Jan 23

7. ^ Satyam scandal could be 'India's Enron' - World business- msnbc.com (updated 11:42 a.m. ET
Jan. 7, 2009)

8. ^ Satyam scandal rattles confidence in accounting Big Four

9. ^ ICAI to seek explanation from Satyams auditor PwC

10. ^ Satyam auditor says examining chairman's statement

11. ^ What happens to PWC, The Auditor For Satyam?

12. ^ Satyam: Auditors' body to pull up PwC ICAI to seek explanation from Satyams auditor PwC

13. ^ Grand Jury meeting of GOLDEN PEACOCK AWARDS 2008 - 8th September 2008, New Delhi
Announcement of results

14. ^ Satyam stripped off Golden Peacock Global Awards - Software-Infotech-The Economic Times (8
Jan 2009, 0118 hrs IST, PTI)

15. ^ NYSE halts trading in Satyam stock - (Wednesday, 7 January 2009, 23:02) Sify.com

16. ^ Satyam Computer Services Ltd (SAY.N) Key Developments (Stocks) Reuters.com

17. ^ Indian IT scandal boss arrested - 9 January 2009 - Business - BBC NEWS

18. ^ Ready to bail out Satyam, if required: Govt

19. ^ Price Waterhouse says its Satyam audits relied on company information, could be wrong [dead link]
- 14 January 2009 - Associated Press

20. ^ Satyam fudged FDs, has 40,000 employees: Public prosecutor

21. ^ [1]

22. ^ Satyam Names Murty as CEO to Replace Arrested Founder - (05 February 2009, 1813 hrs IST)
Satyam Names Murty as CEO to Replace Arrested Founder

23. ^ A S Murty appointed as Satyam CEO - (05 February 2009, 1816 hrs IST) A S Murty appointed as
Satyam CEO

C.P Gurnani is the new chairman of SATYAM replacing A.S Murty

9
 QUESTION

Given the definition of earnings management.

What is 'Earnings Management'

Earnings management is the use of accounting techniques to produce financial reports that
present an overly positive view of a company's business activities and financial position. Many
accounting rules and principles require company management to make judgments. Earnings
management takes advantage of how accounting rules are applied and creates financial
statements that inflate earnings, revenue or total assets.

BREAKING DOWN 'Earnings Management'

Companies use earnings management to smooth out fluctuations in earnings and present more
consistent profits each month or year. Large fluctuations in income and expenses may be a
normal part of a company's operations, but the changes may alarm investors who prefer to see
stability and growth. A company's stock price often rises or falls after an earnings
announcement, depending on whether the earnings meet or fall short of expectations.

How Managers Feel Pressure

Management can feel pressure to manipulate the company's accounting practices to meet
financial expectations and keep the company's stock price up. Many executives receive bonuses
based on earnings performance, and others may be eligible for stock options that generate a
profit when the stock price increases. Many forms of earnings manipulation are eventually
uncovered, either by a CPA firm performing an audit or through required SEC disclosures.

Examples of Manipulation

One method of manipulation is to change an accounting policy that generates higher earnings in
the short term. For example, assume a furniture retailer uses the last-in, first-out (LIFO) method
10
to account for the cost of inventory items sold, which means the newest units purchased are
sold first. Since inventory costs typically increase over time, the newer units are more
expensive, and this creates a higher cost of sales and a lower profit. If the retailer switches to
the first-in, first-out (FIFO) method, the company sells the older, less-expensive units first. FIFO
creates a lower cost of sales expense and a higher profit so the company can post higher profits
in the short term.

Another form of manipulation is to change company policy so more costs are capitalized rather
than expensed immediately. Capitalizing costs as assets delays the recognition of expenses and
increases profits in the short term. Assume, for example, company policy dictates that every
expense under $1,000 is immediately expensed and costs over $1,000 may be capitalized as
assets. If the firm changes the policy and starts to capitalize far more assets, expenses decrease
in the short term and profits increase.

Factoring in Accounting Disclosures

A change in accounting policy, however, must be explained to financial statement readers, and
that disclosure is usually stated in a footnote to the financial reports. The disclosure is required
because of the accounting principle of consistency. Financial statements are comparable if the
company uses the same accounting policies each year, and any change in policy must be
explained to the financial report reader. As a result, this type of earnings manipulation is usually
uncovered.

Discuss in what instance is earnings management acceptable and in what instance is it not
acceptable ?

Although earnings management is generally seen as a bad thing, the facts that Generally
Accepted Accounting Principles (GAAP) allows certain adjustments that directly impact
earnings. So this shows that earnings management is acceptable in the certain situations. For
instance, implementation of a decision to improve the entitys credit and collection activities
may legitimately support reducing the estimate of bad debt expenses. These are acceptable
earnings management practice whose consequences are accounted for in conformity with
GAAP. The other acceptable earnings management practice is the activities that involve
legitimate discretionary choices of when to enter into transactions that require accounting
recognition. For instance, advertising expenditures, which generally should be expensed when
incurred, may be accelerated in the fourth quarter if the entity is exceeding its earnings target
or deferred if it is failing to meet that target.

11
As for the unacceptable earnings management practice is when the managers intentionally
manipulate the earnings figures and not complying with the standards such as recording non-
existent sales, backdating sales invoices and overvaluing assets. For instance, in Satyam case the
company had created the accrued interest account which was non-existent. Other than that,
earnings management will be considered as unacceptable if the effect of the alteration is very
material that it will indicate false implication of the companys financial situation to the users of
the financial statement. This is because false impression will cause the users such as the
investors to make a wrong decision in making their investment. Other than that, Satyam also
had inflated its cash and bank balances figures to increase the revenue of the company.

Analyze the case and answer the following question :

a) Discuss the earnings management techniques or method employed by management of

Satyam

Earning management or creative accounting is referred to the manipulation or

misrepresentation of the companys financial earnings in order to achieve stable and positive
financial position. This was achieve through directly or indirectly use of the accounting
methods. Even though the manipulation may follow all the accounting standards and laws, they
may go opposite of what the standards and laws were originally trying to establish. Therefore,
earning management is often considered materially misleading and referred to a fraudulent
activity.

Satyam Computer Services is a leading Indian outsourcing company which provides a wide
range of information technology services. However, this company was involved in earning
management where in 7 January 2009 it was publicly announced that the Chairman, Ramalinga
Raju confessed that Satyams accounts had been falsified.

By referring to the Satyam case, one of the earning management technique used by the
management of Satyam is off-balance sheet financing which an asset or debt was not disclose in
the companys balance sheet. This can hide the company's true financial state. In Satyam case,
Ramalinga Raju had understated the companys liability of US$ 261.99 million on account of
funds and he had also overstated the debtors position of US$ 104.37 million as against US$
564.66 million. The amount was so significant that the financial statement was not showing the
true position of the company.

The other technique employed by Satyam is through income recognition where Raju had
adjusted the profit figures from one year to another year resulting into inflated profits. As in the
Rajus letter, he had confessed that he was manipulating the reported revenue for September
12
quarter of Rs 2,700 crore as against the actual revenues of Rs 2,112 crore. Raju manipulated this
revenue figures in order to increase the companys profit figures and show a better financial
performance. However the gap between actual operating profit and the one reflected in the
books of account continued to grow over the years and Raju finally failed to eliminate this gap.

Satyam had also created the fictitious revenue in order to manipulate his profit figures so that
he can meet the shareholders expectation. This earning management technique was applied by
creating a non-existent accrued interest of US$ 80.09 million to the books of account of Satyam.
When this amount created, the revenue of the company will increase and finally boost up the
companys operating profit and shows a good company performance to the users of their
financial statement. Satyam also created a fictitious asset in his earning management. The cash
and bank figures amounted to US$ 1.07 billion had been created to inflate their financial
statement.

The other earning management technique used is by using corporate takeover where in this
case, Satyam wanted to acquire Maytas Properties and Maytas Infrastructure to cover up
Satyams inflated cash. Raju, the Chairman of Satyam was siphoning the money from Satyam to
Maytas for the past 6 years. Unfortunately, his last attempt to fill the fictitious assets with the
real ones failed.

b) In your opinion, why do the managers of Satyam want to maage their earniongs a
subseqently be engaged in fraudulent activities ?

In my opinion, Satyam want to manage their earnings and subsequently be engaged in

fraudulent activities because of the pressure to meet the investors expectations. It was started
with the company cooking up false numbers so that the profit expectations could be met but
slowly and steadily, things had blow out of proportion. It is managements responsibility to
direct the organizations operations with a goal to achieve targeted result set by the
shareholders. This had created a pressure to Raju because he needs to meet financial target to
avoid decrease of share price and short of capital. Because of the pressure situation, he finally
decided to come into decision to manipulate the companys earnings and engaged in fraudulent
activities.

The other factor that motivated Satyam to manage their earnings is due to the need to maintain
a competitive position within the financial market. Satyam Computer Services is among of the
top leading company in Indian IT industry. If Satyam fails to shows that company is operating in
profitable manner and he discloses the real loss of the company it will cause the investors and
public loss confidence in them. Therefore, they will not be able to place the companys name as
the leading company of IT services and unable to compete with the other top leading IT
companies. Because of this reason, Ramalingam Raju had engaged in fraudulent activities.

In addition, factors that may motivate managers of Satyam want to manage their earnings is
13
because of their personal gains such as bonus and they might be belief that the laws and
regulations can be easily be bypassed. The managers will be rewarded with bonus if the
company shows a high profit. So in order to get the bonus Satyam was motivated to commit
fraud. Since earning management was a complex techniques that are not easily to trace, this
make Satyam feel confident that involving in earning management will not be caught. But as the
consequences, due to too much gap between the real earnings figures with the reported
earnings figures, Satyam was not be able to hide the fraud anymore and Raju finally be caught
due to his guilt.

c) What were the consequences that befell the managers upon the discoverty of the
financial statement fraud ?

Among the consequences that befell the company upon the discovery of the fraudulent
activities is the investors will lost their confidence towards the company. Investors are the most
important people in the company because they are the person that provides funds to ensure
that company can operate. Since the company involved in fraudulent activities, the investors will
no longer invest in Satyam and they will also withdrew their funds invested in Satyam because
they do not want to bear the risk of loss of investment. This will cause the company not able to
operate because they do not have the sufficient funds.

Banks are the other important bodies that can provide funds to the organization. Upon the
discovery of the fraudulent activities, the banks will also hesitate to give any loans to Satyam
because they are not certain whether Satyam have the ability to pay back its loan. Therefore,
Satyam will face difficulties in obtaining funds from the banks and subsequently it will not be
able to operate the business due to lack of funds. It was found that Satyam had a drop by at
least 25% in the supply of funds or loans during the two years following the fraud discoveries.

Upon discovery of the Satyam fraudulent activities, the employees are among the most affected
parties. When the company not be able to operate at his normal level production due to lack of
funds, many workers and employees will be unemployed by the company. Therefore, many
employees will lost their job and income and subsequently increase the number of
unemployment in India. Other than that, the related parties who involved directly in managing
the earnings and commit fraud will be faced with civil and criminal penalties. Ramalingam Raju
is the person that had been convicted with the fraud guilt.

14
In your opinion, what the stategies that the accounting profession can take to curb the abuse
in earnings management ?

In my opinion, if the accounting profession doesn't take the necessary strategies to curb the
abuses in earnings management, it will lead to a bad reputation of the professional accountants.
In the eyes of public, the accounting profession should provide a reliable accounting framework
that can prevent fraudulent activities. If the abuses in earnings management that resulted in
fraudulent activities keep occurring, this will give the impression to the public that accounting
profession cannot provide reliable services.

The other impact is it will lead to inappropriate perception toward the misuse of earnings
management. There will be a possibility that managers will think that misuse of earnings
management is rational and will not suffer any penalties because there are many other
managers abuses this technique but not suffering any bad effects or be convicted into guilt by
the law. So there will be more managers that will involve in the fraudulent activities.

15