Red Flags

- Company outperformed in the relevant industry

- High revenues on increasing trend compare to competitors, Infosys and Wipro
- High cash flow
- Satyam’s sales grew tremendously from 2003 – 2008 (USD 467 million).
- Company had an annual growth rate of 35%
- Share price rise from Rs.138 to Rs.526,25 which is 300% increase
- Company’s net worth $2.1 billion
- Severe lack of objective measurement of firm’s performance
- Satyam’s entire performance was only on papers
- Group of reality should be an essential part of the objective performance
measurement
- Satyam’s founder, Ramalinga Raju confessed to have been involved in the scam of
7800 crores.

Corporate Governance issues

- Chairman and founder, Raju Ramlinga
- MD was his Brother
- Family members in board – no independency, Control was in the hand of the same
family
- CEO’s and family member’s role is huge in the scandal
- Board ignored Raju’s wrong doings and failed to perform their duties
- Separation of ownership and control is required
- Company failed to establish a sound relationship with the employees and the
shareholders
- Non-fulfillment of obligation towards various stakeholders arose corporate
governance issue at Satyam
- Failure to distinguish the roles and duties of management and the board
- CEO-duality. That is the chairman and CEO is same person
- Absence of compensation committee
- Absence of nomination committee
- Audit committee not independent. Even after whistle blower word about the fraud,
it was left for granted
- No measures were taken for shareholders’ protection
- Lack of financial expertise in BOD and Audit Committee
- Four of the six members on the board were purely academic and had lack of
industrial experience and practical knowledge required for proper stewardship
- Two directors were over occupied
- Directors were involved in operation of the company
- Absolute power of shareholders overshadows the voices of minority shareholders
- Board members had significant relationship with the company and its management
- Too much trust in auditors, this prevented board to be proactive and staying vigilant
- Lack of strong and stable oversight and monitoring mechanisms. If board was more
vigilant and proactive, the forgery could have been detected much earlier

Role of internal and external auditor

- External auditor responsibilities were questioned
 - 6000 fake employee generation could have been spotted earlier if the bridge
between internal audit and corporate governance was strong
- Fair and independent role of auditors were questioned

Internal Control issues

Why he did it?

- Greed for money, power, competition, success and prestige

Schemes
- Raju and and company’s internal audit head used number of
- Raju confessed to a $1.47 billion fraud (Bhasin, 2013)
- Manipulating company’s accounts for years
- Falsifying the financials of the company and over stated the figures to misguide the
shareholders (Ahmad, et al.,)
- Fraud saga begin by an adjustment of $100 million which was then overstated as
$1000 million in the books.
- Over stated Satyam’s balance sheet by $1.47 billion
- Nearly $1.04 billion in bank loans and cash that company claimed to own was non-
existent
- Created various bank statements using his personal computer and falsified bank
accounts to inflate the balance sheet balances
- Underreported liabilities on balance sheet
- Overstated income nearly every quarter over the course of several years in order to
meet analyst expectations
- Inflated revenue by including interest revenue income from fake bank accounts
- Ramalinga (CEO) confessed that fake employees were created and salaries were
moved into fake employees accounts (Niazi and Ali, 2015)
- Internal audit head created fake customer identities and generated fake invoices to
inflate revenue
- Internal audit head also forged board resolutions and illegally obtained loans
- Cash raised through American Depository Receipts in United States never made to
Balance sheets
- Jan 2009, SEC of India received a letter from CEO Raju Ramalinga, resigning from his
position in lieu of a huge scam on his part.
- Failure to provide transparent and ethical disclosure of financial information to
shareholders
- Fixed assets was tampered according to investigation. The management showed the
wrong figures stating the fixed assets to be about Rs. 3318.37 crore while actually
the figure was only Rs.9.96 crores
- Assets were overstated and Liabilities were understated
- Acquired two companies, Maytas Infrastructure and Maytas Properties for $1.6
billions after BOD approval which Raju had 35% and 37% stake respectively. Both
companies are owned by family members of Satyam’s chairman, Ramalinga Raju.
 Decision was later reversed after shareholders sold Satyam’s stocks and threatened
to take action against management of Satyam.
- Chairman Ramalinga Raju resigned on 7 January 2009 after notifying board members
and SEBI that accounts has been falsified.
- Inflated figures for cash and bank balances of $1.04 billion vs $1.1 billion reflected in
books
- Accrued interest income of $77.46 million which was non-existent
- Understated liabilities of $253.38 million on accounts of funds was arranged by
himself
- Overstated debtors position of $100.94 million vs $546.11 million in the books
- Recorded revenue of Rs.2700 crore and operating margin of Rs.649 crore while
actual was Rs.2112 crore and margin was Rs.61 crore

Impact
- Investors had lost over a billion dollar in the scam
- Share prices dropped more than 70% creating huge losses for investors (Bhasin)
- Awards were ripped
- Employees, clients and shareholders suffered at the hands of Ramalinga
- Raju the founder, his brother and relatives used funds to purchase land in the names
of 330 companies out of which 327 belonged to Raju’s family.

Recommendation
- Good corporate governance
- Board members should be independent
- Selected based on competence
- Ground of reality should be checked
- Audit committee members should have been rotated
-
COSO identify the five components in mitigating the risks of fraudulent financial reporting
1. Control Environment
 The organization demonstrates a commitment to integrity and ethical values
 The board of directors demonstrates independence from management and exercises
oversight of the development and performance of internal control
 Management establishes, with board oversight, structure, reporting lines, and
appropriate authorities and responsibilities in the pursuit of objectives.
 The organization demonstrate a commitment to attract, develop and return competent
individuals in alignment with objectives
 The organization holds individuals accountable for their internal control responsibilities
in the pursuit of objectives
2. Risk assessment
 The organization specifies objectives with sufficient clarity to enable the identification
and assessment of risks relating to objectives
 The organization identified the risks to achievement of its objectives across the entity
and analyze the risks as a basis for determining how the risks should be managed.
 The organization considers the potential for fraud in assessing risks to the achievement
of objectives
 The organization identifies and assess changes that could significantly impact the
system of internal control
3. Control activities
 The organization selects and develops control activities that contribute to the mitigation
of risks to the achievement of objectives to acceptable levels
 The organization selects and develops general control activities over technology to
support the achievement of objectives
 The organization deploys control activities through policies that establish what is
expected and procedures that put policies into actions

4. Information and communication

 The organization obtains or generate and uses relevant, quality information to support
the functioning of other components of internal controls
  The organization internally communicates information, including objectives and
responsibilities for internal control, necessary to support the functioning of internal
control
 The organization communicates with external parties regarding matters affecting the
functioning of other components of internal control
5. Monitoring activities
 The organization selects, develops and perform ongoing and or separate evaluations to
ascertain whether the components of internal control are present and functioning
 The organization evaluates and communicates internal control deficiencies in a timely
manner to those parties responsible for taking corrective action, including senior
management and the board of directors as appropriate