Governance Failure at Satyam

-Andrea Dsouza -Noopur Shah -Suraj Seshadri -Vivek Kar -Vinay Bansal -Vishal Gupta -Hemalkumar Maniar

Reasons of the Fraud

Diversification into construction sector because of sluggish growth of the IT business so that it can repay its debt. Overstated the profits as the profit margins were as low as 3 %. Overstated the profit to maintain the share price level. Ramalinga Raju wanted Satyam to be comparable with Infosys. Ramalinga Raju was blamed that he was using the funds of the investors for the family business.

Circumstances of the exposure

Someone claiming to be a former senior executive in Satyam wrote an anonymous email to one of the board members which contains financial irregularities and fraud. Diversification into the real estate and property business to which investors reacted negatively resulting in a 55 percent decline in Satyam ADRs . World Bank suspended Satyam for 8 years for doing business with itself because it was offering bribes to obtain lucrative contracts. Infrastructure Leasing and Financial Services Trust sold 4.41 million Satyam share at INR 139.83 in the open market. Raju and his familys stake in Satyam diluted to 5.13 % by late December, from a high of 8.65 % in September 2008. Satyams market capitalization eroded by 40 % in just two weeks in the later half of December 2008. Three more independent directors resigned from the board- Rammohan rao, Krishna Palepu, Vinod Dham. Resignation letter of B. Ramalinga Raju to the SEBI admitting the

Prevention Methods
1. Appointment and remuneration of auditors should not be left to the companies they audit

2. Forensic auditors should be used to unearth evidence of wrongdoing

3. Other than forensic audits, even investigative audit techniques could be applied wherever major weaknesses in internal controls or their implementation are found.

4. The professional firms should introduce partners audit review and partner-rotation programs. This will also ensure healthy participation on the part of the partners

5. The auditors should also ensure that the audit is conducted in accordance with the Auditing and Assurance Standards (AAS) 6. Besides these, steps can be taken to ensure that the auditors are fulfilling their general duties of getting third party evidence, identifying and assessing the risk of material misstatement in financial statement due to fraud, contacting major customers/suppliers etc. 7. These steps will bring in light fraud but wont stop them. Strong laws have never deterred criminals. But if there is a comprehensive paperwork to support it, over a period of time, it can be detected by common sense approach instead of mechanical approach.

Corporate Governance Practices

Boards and Committees Corporate Governance reports Auditing as per International Financial reporting Standards. Auditing at three levels- Internal, External and Audit Committee Frequent meetings of Audit Committee and Compensation Committee

Incorrect Practices at Satyam

Improper Disclosure to shareholders It paid twice the normal audit fee to PWC. Advance tax was not paid by the company Insider trading Suspension by World bank due to bribery Lack of supervision by SEBI.

Auditor

Liability of an auditor
Penalty for willful negligence and default Auditor to compensate members or shareholders Liable in tort for fraud and negligence in detection of errors Criminal liability who makes false or untrue statement through any document like balance sheet, profit and loss account, return, prospectus etc.

Roles and Responsibilities of Internal Auditor

Risk management, control and governance Report risk management issues and deficiencies intensified directly to audit committee Evaluates information security and associated risk exposure Evaluates regulatory compliance program with consultation from legal counsel. Evaluates organization readiness in case of business interruption Maintains open communication with management and audit committee.

Roles and responsibilities of Statutory Auditor

1. 2.

3. 4. 5. 6.

Right to inspect Duties of an auditor Duty to make certain inquiries Duty to make a report to the company on the accounts examined by him Duty to make a statement in terms of the provisions prescribed. Auditors Report Duty to report fraud Duty as to considerable accuracy Duty to detect and prevent fraud

PWC AUDIT FAILURE

PWC failed to detect Inflated billing to customers Non-existent cash and bank balances $1 billion Overstated debtors $100 million Operating margin shown at 24% in Q2 as against 3% real profit margin Manipulation from last 6 years Increased cost to justify higher levels of operation Fake Fixed Deposit receipts Factors contributing to this audit failure CA couldnt carry out audit procedure strictly Professional judgments were error Audit report with a qualified opinion was subsidized by managements representation **Fees jumped from Rs. 92 lakhs in 2004-05 to Rs. 1.69 crore next year. In 2006-07, fees shot phenomenally to Rs. 4.21 crore. In 2007-08, it saw a marginal high of Rs. 4.31 crore.

Auditing Committee
1.

Disclosure:
Review financial statements Assets, investment, profits, liabilities

2.

3.

Complaints Risk management

Evaluate the statement made by the Chairman in his resignation

It was like riding a tiger, not knowing how to get off without being eaten. Reported Cash and bank balance, in billions that was non existent. Operating margin in the quarter ended September was 3% of the revenue, instead of the reported 24 percent. The companys revenue was 21 billion rupees, 22 percent less than the inflated figure of 27 billion rupees that had been reported. Ramalinga Raju arranged 12.3 billion rupees to keep operations going at Satyam over the last two years by pledging the founders shares and raising funds from other sources

Board Of Directors

Executive
Work as Employees of the company

Non Executive
Do not work as employees of the company Can hold shares of the company

Independent
Do not work as employees of the company Cannot hold shares of the company

Roles Of Directors
Executive Directors: To design, develop and implement strategic plans for their organization in a cost-effective and time-efficient manner. Responsible for the day-to-day operation of the organization Non executive directors: They attend annual meetings of the company-take part in the Decision making Independent Director: 1. Monitor: Process of financial formation of Financial statements Performance of other director 2. Review: Review the annual financial statements before approval by the board with particular reference to Directors Responsibility Statement and changes in accounting policy. Review the structure, frequency, and reporting of auditors. Disclose shareholdings in the listed company and review the reasons if any payment is left Review the finding of internal auditors

Satyam fraud rang the bell..!!

Satyams fraud was undoubtedly the biggest scam that Indian IT came across in its glory years. It exposed glaring gaps in the way that corporate governance and internal transparency was being dealt with in the industry. Satyam acted as a wake up call not only for the industry but also for the government and the stakeholders.

Companies began to take the role of auditors and independent directors seriously.
Investors are looking at a company's compliance methods and tools before putting in their funds.

What Regulatory Measures were taken?

Getting new auditors:

Enhances the risk for a company to dictate terms to existing auditors. As the new auditor will take his time to get acquainted with the company's compliance framework, risk factors and set up, there is lesser risk of fraud. By the time some level of relationship is achieved, it will be time to bring in another auditor.

SEBI came up with stringent disclosure norms that required companies to publish yearly balance sheets. The new Take Over Code that has come into place is another positive, especially because it augurs well for minority stakeholders. Also, the Companies recognizes the institution and the role of independent directors for the first time ever The Companies Bill, 2012 dictates legislation meant to overhaul auditing, impose stiffer penalties for fraud and create more government oversight of businesses. The bill also introduces protections for whistle-blowers, class-action suits, and provisions to prevent conflicts of interest and insider trading.

Can it prevent further frauds..??

Regulatory measures imposes stringent rules, by which companies have to be more transparent. It deters companies and its board from committing frauds by imposing stiffer penalties for fraud and create more government oversight of businesses. Since the auditors keep rotating, it would be very hard for the companies to induce the audit team to approve misappropriations. Companies are well aware that they are constantly being monitored by the whistle blowers and are well aware of the protection extended to them. Also, companies are required to publish yearly balance sheets which augers well to its stakeholders, suppliers, customers and its other stakeholders. However, going forward, it is very hard to completely prevent companies from committing frauds, since in their tough times they may be compelled to default in any manner to project themselves as profitable ones.

Lessons Learnt from the Scam

The 2009 Satyam scandal in India highlighted the damaging potential of an improperly governed corporate leader.

Some lessons learnt from the scandal are as follows: Investigate All Inaccuracies Ruined Reputations
Corporate Governance Needs to Be Stronger

Thank You