SATYAM SCANDAL Assignment

SATYAM SCANDAL

SATYAM SCANDALPresented byThe Gladiators14 June 2013Satyam Corporate Scandal1

1Group Information Alim Al Razi ID: 13174044

Md. Rafizul Islam Mondal ID: 13174017Remal SenID: 12274008

14 June 2013

Satyam Corporate Scandal2

ContentsObjective of study.IntroductionDetails about Satyam ScandalRoles & ResponsibilityLaws, compliance & governance.Aftermath & Conclusion

14 June 2013Satyam Corporate Scandal3

Objective of studyHighlights of Corporate Fraud/scam.Introduction of Satyam computers limited.Highlight the Satyam Computers Limiteds accounting scandal.Roles & responsibilities of stakeholders.Laws, compliance & governance.Aftermath & lesions learned from Satyam scam.14 June 2013Satyam Corporate Scandal4

Introduction to corporate scamFraud/Scam involves a wide-range of illegal practices and illegal acts involving intentional deception or misrepresentation.Corporate accounting fraud is a major problem that is increasing, both in its frequency and severity.The typical organization loses 5% of its revenues to fraud each year.Annual fraud loss of more than $3.5 trillion.


Magnitude of Corporate ScamThe 2010 ACFE Report is based on 1,843 fraud cases examined by its members in more than 100 countries between January 2008 and December 2009.

14 June 2013

Satyam Corporate Scandal6

6Consequences of fraudulent financial reportingFraudulent financial reporting can have significant consequences for the organization and its stakeholders, as well as for public confidence in the capital market.Periodic high-profile cases of fraudulent financial reporting also raise concerns about the credibility of the financial reporting process and call into question the roles of management, auditors, regulators, and analysts14 June 2013Satyam Corporate Scandal7

Consequences of fraudulent financial reportingFraud/Scam impacts organizations in several areas: financial, operational and psychological.The losses to reputation, goodwill, and customer relations.Employees suffer job loss or diminished pension fund value; depositors in financial institutions; the companys underwriters, auditors, attorneys, and insurers; and even honest competitors whose reputations suffer by association..


Satyam Computer ServicesSatyam means truth in the ancient Indian language SanskritSatyam was established in 1987.4th fastest growing IT company in India.9 % market share40,000 employeesRevenue $2.1 billion Listed in International Exchanges i.e. NYSE and EURONEXTSatyam won the Golden Peacock Award for the best governed company in 2007 and in 2009. 14 June 2013Satyam Corporate Scandal9

Satyam: Timeline1987 Incorporated as private limited company in 1987 1991Recognized as a public limited company; debuts on the Bombay Stock Exchange (BSE) IPO oversubscribed by 17 timesFirst Fortune 500 clients1993Satyam signs joint venture with Dun & Bradstreet for IT Services Joint venture with GE announced 14 June 2013Satyam Corporate Scandal10

Satyam: Timeline1999Satyam Infoway (Sify) becomes the first Indian Internet company listed on NASDAQ Satyam forms joint venture with TRW Inc. Presence established in 30 countries 2000Declared one of the 100 most pioneering Technology companies by world economic forum.2007Becomes the Official IT Services Provider for the FIFA World Cups, 2010 (South Africa) and 2014 (Brazil)Announces acquisition of UK-based Nitor Global Solutions Limited Becomes the first Asian company to feature in the Training Magazines list of Top 125 companies for learning


MR. RAMALINGA RAJU & Satyam scandalOn January 7, 2009, Mr. Raju disclosed in a letter, to Satyam Computers Limited Board of Directors that he had been manipulating the companys accounting numbers for years. Mr. Raju claimed that he overstated assets on Satyams balance sheet by $1.47 billion. Nearly $1.04 billion in bank loans and cash that the company claimed to own was non-existent.


MR. RAMALINGA RAJU & Satyam scandalSatyam also underreported liabilities on its balance sheet. Satyam overstated income nearly every quarter over the course of several years in order to meet analyst expectations.

Raju and his brother, B. Rama Raju, who was the Managing Director, hid the deception from the companys board, senior managers, and auditors.


MR. RAMALINGA RAJU & Satyam scandalMr. Raju and the companys global head of internal audit used a number of different techniques to perpetrate the fraud.Ramachandran (2009) pointed out, Using his personal computer, Mr. Raju created numerous bank statements to advance the fraud.Mr. Raju falsified the bank accounts to inflate the balance sheet with balances that did not exist.Inflated the income statement by claiming interest income from the fake bank accounts.14 June 2013Satyam Corporate Scandal14

MR. RAMALINGA RAJU & Satyam scandalMr. Raju also revealed that he created 6,000 fake salary accounts over the past few years and appropriated the money after the company deposited it.The companys global head of internal audit created fake customer identities and generated fake invoices against their names to inflate revenue.The global head of internal audit also forged board resolutions and illegally obtained loans for the company.14 June 2013Satyam Corporate Scandal15

MR. RAMALINGA RAJU & Satyam scandalIt also appeared that the cash that the company raised through American Depository Receipts in the United States never made it to the balance sheets.

Indian accounting scandal that analysts have called "India's Enron.14 June 2013Satyam Corporate Scandal16

MR. RAMALINGA RAJU & Satyam scandalSummary of Satyam Computers14 June 2013Satyam Corporate Scandal17

Law and Ethics Vs Satyam Scam14 June 2013Satyam Corporate Scandal18

Law and Ethics Vs Satyam ScamThe corporate governance code proposed by the Confederation of Indian Industry is modeled on the lines of the Cadbury Committee (Cadbury, 1992) in the United Kingdom. The Confederation of Indian Industry (CII), the Associated Chambers of Commerce and Industry (ASSOCHAM) and the SEBI constituted Committees to recommend initiatives in Corporate Governance. The main objective of it was to develop and promote a code for Corporate Governance.


Law and Ethics Vs Satyam ScamSarbanes-Oxley Act-2002

Clause 49 of the Listing Agreement, amendments which have come in after the Narayana Murthy Committee report

Updated long way towards integrating these and other concepts in the structures and processes of Indian companies.


Legal and Ethical compliance of SatyamBoard of DirectorsIndependent DirectorsCFO and Internal AuditorsPwCSEBI14 June 2013Satyam Corporate Scandal21

Charges of Indian Penal Court Against Raju 120-B -Criminal conspiracy to commit an offence409 -Criminal breach of trust420 Cheating467 -Forgery of a valuable security468 -Forgery for the purpose of cheating471- Using as genuine a forged documents which is known to be forged477 A- Falsification of accounts


Satyam Board StructureRamalinga Raju Founder and ChairmanRama Raju CEO and MD. Brother of Ramalinga RajuRam Mynampati Fulltime Director and interim CEO after the Rajus ResignationDr Mangalam Srinivasan - Independent DirectorMendu Rammohan Rao Full Time DirectorTR Prasad Independent Director Krishna G Palepu Independent DirectorVinod K Dham Independent DirectorProfessor V S Raju Independent DirectorHealthy with majority of Independent directors (5 out of 9). But, there are various glaring indiscretions in adherence of scam


Satyam Boards RoleAll the directors were sponsored by B. Ramalinga RajuThe Audit Committee members were not serious in analyzing the financial position of the companyThe directors were failed to perform their dutiesThe Directors got hand-sum remuneration, stock options at Rs. 2 against the market price of Rs. 500. The directors acted as a rubber stamp and unwilling to oppose the fraud. Not a single not of dissent has been recorded in the minutes of the Board meetingsMeetings were conducted in perfunctory mannerIn the meetings the promoters were always present to influence the decisionThere was not open discussions


Satyam Boards RoleUnless the act or the articles of association otherwise provide, the decision of the board are required to be the majority decisions only. Individual directors do not have any general powers. Section 292(1) of the company act provides specific power to directors.In respect of contract with director, section 299 casts an obligation on a director to disclose the nature of his concern or interest if any, at a meeting of the board of directors. Every director who fails to comply with the aforesaid requirements as to disclosure of concern or interest shall be punishable with fine, which may extended to Rs. 50,000/-


Satyam Boards RoleSection 215 of company act illustrate to authenticate and approve annual financial statement.To prepare and place at the AGM along with the balance sheet and profit & loss account a report on the compnys affairs including the report of the board of directors (Section 173, 210 &217)Directors may also be made personally liable for fraudulent trading for the debts or liabilities of a company by an order of the court under section 542.Section 542 (3) provides that every person who was knowingly a party to the carrying on of the business shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to Rs. 50000/- or with both. 14 June 2013Satyam Corporate Scandal26

Independent DirectorsIndependent Director means non-executive Director who, apart from receiving directors remuneration, does not have any material/ pecuniary relationship or transaction with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates, which in judgment of the Board may affect independence of judgment of the Director. 14 June 2013Satyam Corporate Scandal27

27Independent Directors: RolesOversight of company financial reporting process and disclosure of its financial information.Recommending to Board on the appointment, re-appointment and if required replacement or removal of statutory auditor and fixation of audit fees. Review of quarterly financial statements.


Independent Directors: RolesReview with management, performance of statutory and internal auditors, adequacy of internal control systems, adequacy of internal audit function including their structure, frequency, reporting. Discussing significant finding of internal auditors, including internal investigations made by them into areas of fraud, irregularities or major failures of internal control systems. Discussing with auditors on the scope of the audi.Reviewing the whistle blower mechanism.


Independent Directors: RolesSection 49 of SEBI Act and Section 229A of Companies Act of 1956 provides the conditions and guidelines for the appointment of Independent Directors in companies protecting the public interests at large and the shareholders interests in particular. But T R Prasad, Krishna G Palepu who had no prior experience in running similar companies. They were here simply because they can nod their head to the decisions of Raju making him even more autocratic.


Independent Directors: RolesRegulatory failure which are linked to audit committee, which is mandatory as per clause 49 of the listing agreement. It is the duty of the audit committee to effectively analyze the operations at all levels of the company in a coordinated manner. Coordination with CFO and ensure compliance with financial, accounting and stock exchange standards every quarter.14 June 2013Satyam Corporate Scandal31

Serious Audit failure in SatyamAn Auditor, first and foremost has to be a Chartered Accountant under the Chartered Accountants Act, 1949. The Companies Act, 1956 requires that every balance sheet and profit and loss account of a company should give a "true and fair view" 14 June 2013Satyam Corporate Scandal32

Role of Internal AuditorThe auditor did not do beginning to end transactions verificationCash and bank balances were not verifiedFake invoices were ignoredThe matter was not reported to Audit Committee The audit plans were prepared on the basis of the approval of the promotersSerious findings of the auditing team were ignored by the audit team leader14 June 2013Satyam Corporate Scandal33

Role of External AuditorThe auditor did not confirm the bank balances independentlyThe various protocols were violatedTwo set of Confirmation No sample checking of invoicesLiability against tax not reportedExtra-ordinary payment of audit feeNot verifying the accrue interest on fake FDsNot verifying the TDS on accrued interestNot doing end to end auditSystems were found to be lax and same was not taken up for rectification


Roles of PwCSection 224(8) of the Act tells us about remuneration of an auditor; in case the auditor is appointed by the Board of directors or the Central Government then his remuneration is fixed by the Board or the Government. Otherwise in all other cases including the Government or the special kind of Companies covered in Section 619B of the Act, it must be fixed by the company in general meeting.


PwCs FeesOver a period of four years, 2004-05 to 2007-08, the audit fee increased by 5.7 times, whereas total income increased by 2.47 times during the same period.



The Auditor May have a lot of Illegal Money which triggered up for satyam scam!

But

The money drained from the bloods of thousands of shareholders14 June 2013Satyam Corporate Scandal38

Rajus intention was such type of inflamed to go Acme in the Business World14 June 2013Satyam Corporate Scandal39

SEBIs RolesSEBI should nominate independent directors. Involvement InD with How many companies? Mendu Rammohan Rao, an Independent Director on the Satyam Board, was on theboard of 7 companies as Independent Director and on 3 companies advisory board.After a thorough probe, Sebi had imposed a penalty of Rs 5 lakh on Jayaraman on November 29, 2011, but this order was challenged at Securities Appellate Tribunal (SAT), which remanded the matter for a fresh probe by the regulator.

14 June 2013Satyam Corporate Scandal40FurthermoreLocus standi of Shareholders to file a lawsuitIFRSGAAPWhistle blowing system14 June 2013Satyam Corporate Scandal41AFTERMATH of SATYAM SCAMBidding by Tech Mahindra and Larsen and Turbo.Taking Over by Tech Mahindra.Renaming as Mahindra Satyam.Mahindra Satyam and Tech Mahindra to merge.Mahindra Satyam has bright future.

14 June 2013Satyam Corporate Scandal42What Went Wrong with Satyam?Questionable Corporate policies and unethical practices.

Satyam Scam as Indian Enron.

Passing of Public Accounting Reform and Investor Protection Act 2002 known as Sarbanes-Oxley(SOX) Act, 2002 in USA.

14 June 2013Satyam Corporate Scandal43LEGISLATIVE SUCCESSSwift Government Action saved Satyam.

MCA, ICAI, ICSI swift joint action.

14 June 2013Satyam Corporate Scandal44INVESTIGATIONSSFIO investigation.

CBI investigation.

Enforcement Department Investigation.

SEC Investigation.

SFIO failed yet to give charge-sheet.

14 June 2013Satyam Corporate Scandal45WHISTLE BLOWERNo action for Whistle blower- Mr. Jose Abraham, Ex-Sr. Executive.

Abraham sent Email to KG Palepu.

Palepus email to Auditors and Promotors.

14 June 2013Satyam Corporate Scandal46CONCLUSIONDesired policy required to prevent another Satyam.

The road ahead-Moving behind Satyam.

Lessons for Future.

14 June 2013Satyam Corporate Scandal47Satyam Corporate ScandalThank You


SATYAM SCANDAL Assignment

Documents

Transcript of SATYAM SCANDAL Assignment