Business Ethics and Corporate Governance explained Through Satyam Scam Submitted To : Dr.

Vijayendra Gupta

Date : 3rd March 2014

SATYAM COMPUTER SERVICE LIMITED

Satyam Computer Services Limited was founded in 1987 by Mr. B Ramalinga Raju. The company offers consulting and information technology services spanning various sectors, including engineering and product development, supply chain management, client relationship management, business process management and business intelligence.

 The company was listed with New York stock exchange, National stock exchange, and the Mumbai stock exchange. In June 2009, the company unveiled its new brand identity Mahindra Satyam

Who is B. Ramalinga Raju?

Ramalinga Raju was born on September 16, 1954. A traditional agricultural family of the KSHATRIYA (RAJU) Community of Andhra Pradesh. He founded Satyam Computers and was its Chairman until January 7, 2009 when he resigned from the Satyam board after admitting to corporate fraud.

 Satyam was until recently perceived to be amongst the top Indian IT vendors. Raju has admitted to overstating the company's cash reserves by USD$ 1.5 billion. Later, a person involved in the investigation of the company said that the company's assets were not inflated, but instead siphoned off by Ramalinga Raju.

Raju is currently held in Hyderabad's Chanchalguda jail on criminal charges including fraud, forgery, cheating, embezzlement and insider trading.

People Behind This Scam

Ramalinga Raju : Satyam former chairman B Rama Raju : Brother of Ramalinga Raju Former Managing Director V Srinivas : Ex-Chief financial officer S Gopalakrishnan: Price Waterhouse Auditor Talluri Srinivas : Price Waterhouse Auditor

Career of B. Ramalinga Raju

He was first businessman in the field of construction and textiles. Raju founded Satyam in 1987. He started an satyam computers with 20 employees in 1987. Satyam was listed in INDIAN STOCK EXCHANGE in 1991. Listed in NEW YORK STOCK EXCHANGE in 2001. Satyam was listed in UNESCO(amsterdum) in 2008. There were 53,000 employees working in Satyam in september 2008.

The Scam
On 7 January 2009, companys previous Chairman Ramalinga Raju resigned after notifying board members and the Securities and Exchange Board of India (SEBI) that Satyam's accounts had been falsified. Raju confessed that Satyam's balance sheet of 30 September 2008 contained: 1. Inflated figures for cash and bank balances of Rs 5,040 crores as against Rs 5,361 crore reflected in the books.

The Scam (Contd.)

2. An accrued interest of Rs. 376 crore which was nonexistent. 3. An understated liability of Rs. 1,230 crore on account of funds was arranged by himself. 4. An overstated debtors' position of Rs. 490 crore (as against Rs. 2,651 crore in the books.)
5. On 22nd January 2009, CID told in the 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.

ACTUAL DEBT WAS 2161. OVERSTATED 490 CRORES.

5,040 + 376 + 490 (Rs. Cr)

Rs. 1,230 Cr

Rs. 7,136 Cr

Confession letter by Mr. Raju

Reasons for Satyam Scam:1. Raju wanted to take over his MAYTAS INFRA and MAYTAS PROPERTIES.(company of his sons). 2. He was blamed that he was using the funds of the investors for the family business. 3. World bank had banned the satyam to take any services for 8 years (due to illegal profit and lack of essential document).

CONSEQUENCES Before the scandal its share price was Rs 300 in oct 2008. Just after this scandal the share price go down to Rs 6.30. On 10 January 2009, the Company Law Board decided to bar the current board of Satyam from functioning. Bank of America and State Farm Insurance terminated its engagement with the company. Job of over 40,000 technocrats were at risk. The GDP fell by 0.4%

 SEBI, the stock market regulator, also said that, if found guilty, its license to work in India may be revoked. The New York Stock Exchange has halted trading in Satyam stock India's National Stock Exchange has announced that it will remove Satyam from its S&P CNX Nifty 50share index. 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. IT sector suffered a downturn. Indias global image was tarnished.

 Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate Governance under Risk Management and Compliance Issues, which was stripped from them in the aftermath of the scandal. Present time its share price is 107.89. Mahendra Satyams market growth is 7,800crore. Before the scandal Satyam was the 4th ranked among IT companies of India and on 9th jan2009 it became least valuable IT company in India. Countrys booming economy was at risk.

IMPACT OF SATYAM SCAM ON INDIAN ECONOMY Although several companies are trying to have a bite into Satyam Computers, according to Gartner study, the company is likely to exist in its current form. It is expected to discontinue some of its businesses, service lines or cease to exist in certain geographies. Huge losses to investors aside, the Satyam scandal has caused serious damage to India Incs reputation as well as the countrys regulatory authorities outside.

 The Government certainly cannot remain aloof and allow Satyam to die off especially when it provides occupation to 53,000 odd people and indirectly supports more than a million Indians. The Satyam scam effect has started its infectious presence. U.S. listed stocks of other Indian companies have started taken a severe beating. Indian firms are looking into methods to avoid scenarios of such scams within their companies.

The Guilty

The Promoters
Since the promoters, in this case, held only about 8 percent shares, their idea to push through the Maytas acquisition deal was defeated by an angry lot of shareholders.

Directors & Independent Directors

The Satyam board, including its five independent directors had approved the founder's proposal to buy 51 per cent stake in Maytas Infrastructure and all of Maytas Properties, owned by the family members of Satyam chairman B Ramalinga Raju. Despite the shareholders not being taken into confidence, the directors went ahead with the management's decision. The decision of acquisition was, however, reversed 12 hours later after investors dumped Satyam's stock and threatened action against the management.

Role of auditors, in light of Satyam scam

This fraud was not committed overnight; it was building up continuously from over years. The role of Satyams auditors is under scanner. They ignored some of the obvious indications of embezzlement and thus failed to catch on the massive scam, which could have been caught much before it acquired the massive status.

Satyams Auditors : Price Waterhouse Coopers

This fraud was not committed overnight; it was building up continuously from over years. The role of Satyams auditors is under scanner. They ignored some of the obvious indications of embezzlement and thus failed to catch on the massive scam, which could have been caught much before it acquired the massive status. PwC has written a letter to the BOD of Satyam that its audit may be rendered "inaccurate and unreliable" due to the disclosures made by Satyam's (ex) Chairman..

The Bankers
If the auditors were conned, it means that either the bank statement and certificates were forged Satyam's banks -- ICICI Bank, HDFC Bank, Bank of Baroda, etc

The SEBI
The SEBI had in December given a clean chit to Satyam in the probe on violation of corporate governance law.

The Government
The government too is equally guilty in not having managed to save the shareholders, the employees and some clients of the company from losing heavily.

Stakeholders Affected

Shareholders

Public

Directors

SATYAM

Competitors

Customers

Employees

New Board Appointed

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.

The Takeover of Satyam

Mahindra Satyam
Tech Mahindra paid Rs1757 Crore for a 31% stake in the company, at Rs 58 per share. Satyam Computer Services zoomed 15% to Rs 54.20 ahead of the announcement of the highest bidder for the company on April 13, 2009. In India this moment was full of praise for the manner and speed with which the reconstituted board of Satyam Computer Services found a strategic investor .

Conclusion

 Not following corporate governance norms. Tampering with Financial Data (Creative Accounting). Misleading the shareholders funds. Putting self interest at the expense of share holders interest. Fraud, Forgery and Cheating.

Recommendations for Corporate Governance

In addition to the present statutory requirement, companies should be required to institute sufficient internal management controls. Management should ensure that the internal audit staffs are able to prevent and detect financial statement fraud. Companies whose shares are publicly traded should be required to have audit committees to monitor the internal control system and provide important links to the internal audit staff. Sanctions against the perpetrators of financial statement fraud should be increased by imposing fines and other deterrent measures like barring from corporate office. However, in this case, there is a need to prevent innocent managers from being too risk averse.

Suggestions towards Auditors

Evaluate the potential for fraud in a given audit engagement. Be obliged to utilise tests that provide reasonable assurance of detection of fraud Evaluate the strength of the overall control environment Facilitate the identification of areas of high audit risk by reviewing the procedure analytically Communicate their role and responsibilities to all those who rely on their work (ie nature and limitation of audit) Report directly to the public any material irregularities and illegal acts discovered during an audit.

 There is a need to clarify the duties of external auditors. The management should formulate appropriate policies and procedures which would reduce such risks. The audit report should include a letter from the Chairman of the audit committee discussing the committee's responsibilities and activities during the year.

Theories Related to our Topic

Creative Accounting Whistle Blowing Corporate Governance Objectives of Corporate Governance Need of Corporate Governance Role of Corporate Governance Merits of Corporate Governance Demerits of Corporate Governance

Creative Accounting
A term used to describe the practice of applying inappropriate accounting policies or entering into complex or special purpose transactions with the objective of making a companys financial statements appear to disclose a more favourable position, particularly in relation to the calculation of certain key ratios. Undesirable as it is intended to mislead users of financial statements.

Creative Accounting is Used To :

Hide a particularly bad year for the company. Force an exceptionally good year. Smooth out results to give an impression of stability or sustained improvement Boost assets to avoid take-over.

Creative Accounting Methods/Categories

Allow company to choose between different accounting methods such as writing of development costs or amortizing it. Certain entries in the account involve unavoidable degree of estimation, judgment and prediction. Artificial transactions can be used to manipulate balance sheet and move profits between accounting periods.

Is Creative Accounting Ethical?

Difficult to draw an ethical line on creative accounting because
GAAP often allow multiple accounting methods that a company can choose from. Estimates are employed.

Technically not illegal but could fall into unethical area if the true values are grossly misrepresented and inflating the performance.

Whistle Blowing
Whistle blowing in its most general form involves calling(public)attention to wrong doing, typically in order to avert harm. Whistle blowing is an attempt by a member or former member of an organization to disclose wrong doing in or by the organization.

Criteria For Justifiable WB

There are three conditions that must hold for whistle-blowing to be morally permissible, and two additional conditions that must hold for it to be morally obligatory. The three conditions that must hold for it to be morally permissible are: 1. The firm through its product or policy will do serious and considerable harm to the public, whether in the person of the user of its product, an innocent bystander, or the general public.

Criteria (Contd.)
2. Once an employee identifies a serious threat to the user of a product or to the general public, he or she should report it to his or her immediate superior and make his or her moral concern known. Unless he or she does so, the act of Whistle blowing is not justifiable. 3. If one's immediate superior does nothing effective about the concern or complaint, the employee should exhaust the internal procedures and possibilities within the firm. This usually will involve taking the matter up the managerial ladder, and if necessary and possible to the board of directors.

Two Additional Conditions

1. Whistleblower must have accessible documented evidence that would convince a reasonable, impartial observer that one's view of the situation is correct, and that the company's product or practice posses a serious and likely danger to the public or to the user of the product. 2. The employee must have good reason to believe that by going public the necessary changes will be brought about. The chance of being successful must be worth the risk one takes and danger to which one is exposed.

Corporate Governance
Corporate governance is concerned with set of principles, ethics, values, morals, rules regulations, & procedures etc. Corporate governance establishes a system whereby directors are entrusted with duties and responsibilities in relation to the direction of the companys affairs. The term governance means control i.e. controlling a company, an organization etc or a company & corporate governance is governing or controlling the corporate bodies i.e. ethics, values, principles, morals.

Objectives Of Corporate Governance

Transparency Efficiency Monitoring Accountability Equitable Treatment of Shareholders Self Evaluation Increasing Shareholders Wealth

Need of Corporate Governance

Low Performance of Economy Failure of PSUs Disappearance of Companies The number of Scams and Frauds Growing role of market in the world Integration with foreign market New business opportunities New Capital formation FII, FDI Demand of High Performance by Investor Increased competition due to commencement of MNC

Role Of Corporate governance

1. Value based corporate culture: For any organization to run in effective way, it needs to have certain ethics, values. Long run business needs to have based corporate culture. Value based corporate culture is good practice for corporate governance. 2. Holistic view: This holistic view is more or less godly, religious attitude which helps in running organization. It is not easier to adopt it, it needs special efforts and once adopted it leads to developing qualities of nobility, tolerance and empathy.

Role of CG (Contd.)
3. Compliance with laws: Those companies which really need progress, have high ethical values and need to run long run business they abide and comply with laws of Securities Exchange Board Of India (SEBI), Foreign Exchange Regulation Act, Cyber Laws, Banking Laws etc. 4. Disclosure, transparency, and accountability: Disclosure, transparency and accountability are important aspect for good governance. Timely and accurate information should be disclosed on the matters like the financial position, performance etc. Transparency is needed towards corporate bodies so that due to tremendous competition in the market place the customers having choices dont shift to other corporate bodies.

Role of CG (contd.)
5. Corporate Governance and Human Resource Management: For any corporate body, the employees and staff are just like family. For a company to be perfect the role of Human Resource Management becomes very vital, they both are directly linked. Every individual should be treated with individual respect, his achievements should be recognized. 6. Innovation: Every Corporate body needs to take risk of innovation i.e. innovation in products, in services and it plays a pivotal role in corporate governance.

Merits of Corporate Governance

Relationship with Share holders : Relationship helps to sustain business for a longer period. Management : Assesses to outsider on how well CG is being governed. Transparency : Attaining the trust of stakeholders, improving access to capital and financial market. Benefits to Shareholders : Shareholders have greater security on investment they have made. Benefits to National Economy : Good flow in capital, Important factor to bring in investment.

Demerits of Corporate Governance

Corporations live & die by decisions of its BOD : Sentimental business decision. Family owned Companies influence the decision (Eg. Satyam) Easily corruptible :- Lack of govermental oversight. Cost of Monitoring :- Need to pour money to stay in power.

T H A N K Y O U

Presented By Punjabi Vinal Sakariya Yashdas Shroff Shehzad Tilala Trupti Toorawa Suhel Vaghani Kalpesh