Corporate Accounting Scandal at Satyam Computer Services Limited

1. Corporate Accounting
Scandal at Satyam Computer
Services Limited
Case Study of India’s Enron  OshiaAnna Fen Raju
 Corporate Governance

2. About Satyam?
Ramalinga Raju, a management graduate from
Ohio University, founded Satyam Computer
Services Ltd., a Hyderabad-based software
Company in 1987.
It catered to the IT needs of various sectors like
Healthcare, Bio-Tec.,Telecommunication and
Media, Automotive Banking & Finance, etc.
Prior to the year 2009, the Company was one of
the few fastest growing companies in India,
generating $ 2.1 billion revenue and having about
9% of the market share.
It had 53000 employees and perhaps was the first
Indian Company to be listed on three
International Exchanges, i.e., NYSE, DOW and
EURO NEXT.
This Company had development centers in about
66 Countries, and its export accounted for about
76% of total sales revenue

3. Ramalinga Raju, founder, and CEO of
Satyam Computers announced on January 7,
2009, that his company had been falsifying
its accounts for years, overstating revenues
and inflating profits.
Prior to that Raju made an attempt to have
Satyam invest about Rs. 7000 Crore in
Maytas Properties and Maytas Infrastructure
— two firms promoted and controlled by his
family members.
On December 16, 2008, Satyam’s Board
cleared the investment, but investors
opposed it.The Board of Satyam, later on,
was reconvened the same day and called off
the proposed investment.
Genesis of the Satyam
Scandal
Policemen carry a trunk box containing legal documents relating to the Satyam Computer
Services Ltd. fraud case, in Hyderabad, India,Tuesday, April 7, 2009.TheCentral Bureau of
InvestigationTuesday submitted original documents of bank transactions and other
documents while filing a charge in the Satyam fraud case against the company's founder B
Ramalinga Raju and eight others, according to a news agency.

4. Thereafter resignations followed from
Satyam’s non-executive Directors.
Resigning as Satyam’s chairman and CEO,
Raju said in a letter addressed to his Board,
the stock exchanges and the market
regulator, Securities & Exchange Board of
India (SEBI)
that Satyam’s profits were inflated over
several years to “unmanageable
proportions” and that it was forced to
carry more assets and resources than its
real operations justified.
He took sole responsibility for those acts. He
further stated that “it was like riding a tiger,
not knowing how to get off without being
eaten,”
 “The aborted Maytas acquisition was the
last attempt to fill the fictitious assets with
real ones.
Genesis of the Satyam
Scandal

5. Raju acknowledged that Satyam’s Balance
Sheet included Rs. 7,136 crore in non-
existent cash and bank balances, accrued
interest and misstatements.
It had also inflated its 2008 second quarter
revenues by Rs. 588 crores to Rs. 2,700
crores and actual operating margins were
less than a tenth of the stated Rs. 649 crore.
The company’s fixed deposits documents
were forged, diverting Rs 1,250 crore at the
rate of Rs 20 crore per month over a period
of many years.
It held more than 400 Benami land
transactions of thousands of acres.
The Company claimed that the strength of
the company was 53,000 against actual
employee strength of only 40,000.
Genesis of the Satyam
Scandal

6. On January 8, 2009,Citibank freezes
Satyam’s 30 accounts.
On January 9, 2009, Ramalinga Raju and his
younger brother B. Rama Raju were
arrested.The Central Government dissolved
Satyam’s Board and appointed seventeen
directors.
On January 10, 2009, Satyam’s former CFO
SrinivasVadlamani and awarded.
On January 11, 2009, the Government
appointed Deepak Parekh, Kiran Karnik and
C. Achuthan to the Satyam Board.
On February 2009,CBI took over the
investigation, goes on to file three charge
sheets.
March 6, 2009, Satyam gets the SEBI nod for
bidding process to select investor.
On April 22, 2009,Tech Mahindra makes an
open offer to Satyam shareholders at Rs.
58/share.
Events that Followed on
Disclosure of Scandal

7. On June 22, 2009, Mumbai:Tech Mahindra
Ltd merged Satyam Computer Services Ltd
with itself, buying the remaining stake in the
Hyderabad-based firm in an all-stock
transaction worth Rs 5,150 crore and
creating a new entity Mahindra Satyam.
On October 28, 2013, Enforcement
Directorate files a criminal complaint against
47 persons and 166 corporate entities
headed by Ramalinga Raju.
April 9, 2015, CBI special Court found all the
ten accused guilty.
CBI special court found B. Ramalinga Raju,
founder and CEO of Satyam Computers
along with nine others guilty of criminal
conspiracy and cheating among other
offenses and awarded 7 years
imprisonment.The trial Court also imposed
a fine of 5.5 crores on B. Ramalinga Raju and
his brother Rama Raju.
Events that Followed on
Disclosure of Scandal
Anand Mahindra, chairman of Indian telecommunications outsourcing firmTech Mahindra,
left, addresses a press conference as Chief ExecutiveOfficerVineet Nayyar looks on in
Mumbai, India, Monday, April 13, 2009.Tech Mahindra has bought a controlling stake in
Satyam Computer Services, the outsourcing giant nearly brought down in a $1 billion fraud

8. Corporate governance refers to the set of
systems, principles, and processes by which
a company is governed.They provide
guidelines as to how the company can be
directed or controlled such that it can fulfill
its goals and objectives in a manner that
adds to the value of the company and is also
beneficial for all stakeholders in the long-
term.
Stakeholders, in this case, would include
everyone ranging from the Board of
Directors, management, shareholders to
customers, employees, and society.The
management of the company assumes the
role of a trustee for all the others. Good
corporate governance means conducting the
business in a transparent manner with
integrity and fairness.
What is Corporate
Governance?

9. It involves a commitment to conduct
business in an ethical manner by complying
with all the laws of the land and be
accountable to all the stakeholders. Good
corporate governance is one of the
important criteria for the Investors including
foreign investors for taking an investment
decision in the company.Companies with a
clean image can source capital at more
reasonable costs.
 Good corporate governance makes sure
that all shareholders get a voice at general
meetings and are allowed to take an active
part. Even non-shareholder stakeholder’s
interest needs to be taken care off.A code of
conduct regarding ethical decisions is
established for all the Board members.
Business transparency should be the key to
promoting shareholder trust.
What is Corporate
Governance?

10. Satyam Scandal in effect was an accounting
scandal.Various accounting and financial
statements were manipulated and forged by
intentional omissions, inadequate
disclosures and by intentional
misapplication of accounting policies.
Assets were overstated than actual,
fictitious deposits were shown in the Bank
and also interest on it. It is not only an
example of bad governance but also of
dishonest governance to (or “intending to”)
siphon off public funds from the Company
by manipulating data and accounts in
connivance with the external auditors.
Satyam Scandal is an
Accounting Scandal
Police officers stand outside the gate of Chanchalguda jail, where former chairman of Satyam
Computer Services Ramalinga Raju is being held, in the southern Indian city of Hyderabad
February 4, 2009.The government-appointed board of Satyam has extended its meeting to
Thursday and there would be no statement from it onWednesday, the company said

11. After the scandal, the Confederation of
Indian Industries set up a task force to
suggest reforms.
NationalAssociation of Software and
Services Companies established a corporate
governance and ethics committee headed
by Narayana Murthy.
This Committee suggested reforms relating
to audit committees, shareholder rights, and
whistleblower policy.
SEBI’s committee on disclosure and
accounting standards issued a discussion
paper in 2009 to deliberate on
♠ the voluntary adoption of international
financial reporting standards;
♠ the appointment of chief financial officers
by audit committees based on
qualifications, experience, and background;
and
♠ the rotation of auditors every five years so
that familiarity does not lead to corporate
malpractice and mismanagement..
Resulting Effect of the Satyam
Scandal on Changes in Corporate
Governance Strategies in India

12. The Ministry of Corporate Affairs in 2009,
issued a set of voluntary guidelines for
corporate governance on the following issues:
The Independence of Directors
The roles and responsibilities of audit
committees
The roles and responsibilities of the Boards of
companies
Whistleblower policies
The separation of the offices of the chairman
and the CEO to ensure independence.
A system of checks and balances.
Terms and conditions of appointment of
Directors such as their tenures, remuneration,
evaluation, the issuance of a formal letter of
appointment, and placing limits on the number
of Companies in which an individual can be a
Director.
In 2010, SEBI amended the ListingAgreement
to include the provision dealing with the
appointment of a chief financial officer
Resulting Effect of the Satyam
Scandal on Changes in Corporate
Governance Strategies in India

13. In 2013, the IndianCompany Law was
amended, and it incorporated the following
provisions:-
It clearly defined the responsibility and
accountability of independent Directors.
It clearly defined the responsibility and
accountability ofAuditors.
It provided for the compulsory rotation of
auditors and audit firms. It prescribed a
statutory cooling off period of five years
following one term as an auditor.
An auditor cannot perform non-audit services
for the company and its holding and subsidiary
companies.This provision is added to ensure
that there is no conflict of interest, which may
arise if an auditor performs other functions for
the same company such as accounting and
investment consultancy services.
It provides for the duty of Auditors to report
fraudulent acts noticed by them during the
performance of their duties.
Resulting Effect of the Satyam
Scandal on Changes in Corporate
Governance Strategies in India

14. It provides for having independent Directors on
the Board of the Companies. (Independent
Directors means, Directors who do not have a
material or pecuniary relationship with a
company).
Independent Directors have been barred from
receiving stock options and are not entitled to
receive remuneration for their services, except
for reimbursement. At least one-third of the
Board of a company has to consist of
independent Directors.
Audit committee has to accommodate a
majority of independent Directors. One
independent director is required to be a
member of the remuneration committee also.
Additional disclosure norms are – providing for
the formal evaluation of the performance of the
Board of Directors, filing returns with the
Registrar of Companies with respect to any
change in the shareholding positions of
promoters and the top ten shareholders, have
also been mandated.
Resulting Effect of the Satyam
Scandal on Changes in Corporate
Governance Strategies in India

15. Thus corporate governance after Satyam scandal has to be in conformity with the
amended CompaniesAct and other guidelines.This scandal has also exposed the role
of dishonest external auditors and has forced the Government to provide for checks
and balances.

16. Thank You