satyam case study corporate governance ppt

A business journal from the Wharton School of the University of Pennsylvania

Scandal at Satyam: Truth, Lies and Corporate Governance

January 9, 2009 • 18 min read.

When terrorists attacked Mumbai last November, the media called it "India's 9/11." That tragedy has been succeeded by another that has been dubbed "India's Enron." In one of the biggest frauds in India's corporate history, B. Ramalinga Raju, founder and CEO of Satyam Computers, India's fourth-largest IT services firm, announced on January 7 that his company had been falsifying its accounts for years, overstating revenues and inflating profits by $1 billion. According to experts from Wharton and elsewhere, the Satyam debacle will have an enormous impact on India's business scene over the coming months. The most significant questions, however, will be asked about corporate governance in India, and whether other companies could follow Satyam's Raju in revealing skeletons in their own closets.

• Finance & Accounting

When terrorists attacked Mumbai last November, the media called it “India’s 9/11.” That tragedy has been succeeded by another that has been dubbed “India’s Enron.” In one of the the biggest frauds in India’s corporate history, B. Ramalinga Raju, founder and CEO of Satyam Computers, India’s fourth-largest IT services firm, announced on January 7 that his company had been falsifying its accounts for years, overstating revenues and inflating profits by $1 billion. Ironically, Satyam means “truth” in Sanskrit, but Raju’s admission — accompanied by his resignation — shows the company had been feeding investors, shareholders, clients and employees a steady diet of asatyam (or untruth), at least regarding its financial performance. ( Editor’s note : Satyam is a corporate sponsor of India Knolwedge@Wharton.)

Raju’s departure was followed by the resignation of Srinivas Vadlamani, Satyam’s chief financial officer, and the appointment of Ram Mynampati as the interim CEO. In a press conference held in Hyderabad on January 8, Mynampati told reporters that the company’s cash position was “not encouraging” and that “our only aim at this time is to ensure that the business continues.” A day later, media reports noted that Raju and his brother Rama (also a Satyam co-founder) had been arrested — and the government of India disbanded Satyam’s board. Though control of the company will pass into the hands of a new board, the government stopped short of a bailout — it has not offered Satyam any funds. Meanwhile, a team of auditors from the Securities and Exchange Board of India (SEBI), which regulates Indian public companies, has begun an investigation into the fraud. Since Satyam’s stocks or American Depository Receipts (ADRs) are listed on the Bombay Stock Exchange as well as the New York Stock Exchange, international regulators could swing into action if they believe U.S. laws have been broken. At least two U.S. law firms have filed class-action lawsuits against Satyam, but given the company’s precarious finances, it is unclear how much money investors will be able to recover.

According to experts from Wharton and elsewhere, the Satyam debacle will have an enormous impact on India’s business scene over the coming months. The possible disappearance of a top IT services and outsourcing giant will reshape India’s IT landscape. Satyam could possibly be sold — in fact, it had engaged Merrill Lynch to explore “strategic options,” but the investment bank has withdrawn following the disclosure about the fraud. It is widely believed that rivals such as HCL, Wipro and TCS could cherry pick the best clients and employees, effectively hollowing out Satyam. Another possible impact could be on the trend of outsourcing to India, since India’s IT firms handle sensitive financial information for some of the world’s largest enterprises. The most significant questions, however, will be asked about corporate governance in India, and whether other companies could follow Satyam’s Raju in revealing skeletons in their own closets.

‘Riding a Tiger’

Raju was compelled to admit to the fraud following an aborted attempt to have Satyam invest $1.6 billion in Maytas Properties and Maytas Infrastructure (“Maytas” is Satyam spelled backwards) — two firms promoted and controlled by his family members. On December 16, Satyam’s board cleared the investment, sparking a negative reaction by investors, who pummeled its stock on the New York Stock Exchange and Nasdaq. The board hurriedly reconvened the same day and called off the proposed investment.

The matter didn’t die there, as Raju may have hoped. In the next 48 hours, resignations streamed in from Satyam’s non-executive director and Harvard professor of business administration Krishna Palepu and three independent directors — Mangalam Srinivasan, a management consultant and advisor to Harvard’s Kennedy School of Government; Vinod Dham, called the “father of the Pentium chip” and now executive managing director of NEA Indo-US Ventures in Santa Clara, Calif.; and M. Rammohan Rao, the dean of the Indian School of Business in Hyderabad (ISB). Rao had chaired both December 16 board meetings. On January 8, he resigned his position as the ISB dean. In a letter to the ISB community, he explained: “Unfortunately, yesterday’s shocking revelations, of which I had absolutely no prior knowledge, mean that we are far from seeing the end of the controversy surrounding Satyam Computers. My continued concern and preoccupation with the evolving situation are impacting my role as dean of ISB at a critical time for the school. Given that my term with ISB anyway ends in a few months, I think that this is an appropriate time for me to step down.”

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. “It was like riding a tiger, not knowing how to get off without being eaten,” he said. “The aborted Maytas acquisition was the last attempt to fill the fictitious assets with real ones.”

Specifically, Raju acknowledged that Satyam’s balance sheet included Rs. 7,136 crore (nearly $1.5 billion) in non-existent cash and bank balances, accrued interest and misstatements. It had also inflated its 2008 second quarter revenues by Rs. 588 crore ($122 million) to Rs. 2,700 crore ($563 million), and actual operating margins were less than a tenth of the stated Rs. 649 crore ($135 million).

Satyam’s auditor PricewaterhouseCoopers issued a terse statement: “Over the last two days, there have been media reports with regard to alleged irregularities in the accounts of Satyam…. Price Waterhouse are the statutory auditors of Satyam. The audits were conducted by Price Waterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence. Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities. Price Waterhouse will fully meet its obligations to cooperate with the regulators and others.”

Impact on ‘Brand India’

The outrage over Raju’s admission of systematic accounting fraud has broadened to wider concern about the potential damage to India’s appeal for foreign investors and the IT services industry in particular. Immediately following Raju’s confession, Satyam’s shareholders took a direct hit as the company’s share price crashed 77% to Rs. 30 (approximately 60 cents), a far cry from its 52-week high of Rs. 544 ($11.35) last May.

“If there were one or two more such accounting scandals in the next six months, it would make international investors more wary,” says Wharton management professor Michael Useem . “One example would put people on guard; several examples would be enough to tell big investment money managers that they have to be especially careful working in that environment.”

Jitendra Singh , a Wharton management professor who is currently dean of the Nanyang Business School in Singapore, believes Satyam is an “outlier” and that there is no reason to think that “problems of this kind may be much more extensive than one company or a handful of companies.” However, he adds, “foreign investors will look a little more askance at accounting data from India. And that may not be a bad thing.”

Useem also warns against overreacting. “Don’t assume other firms are guilty,” he says. But he considers the situation to be an “alerting call” for investors to check where their money is, and for auditors and independent directors in all major firms to take a look at the books.

Corporate India has tried to contain the damage so far. Rajeev Chandrasekhar, president of the Federation of Indian Chambers of Commerce and Industry, called upon regulators “to move quickly to demonstrate that this is an exceptional case among corporations, and that investors need not worry about Indian corporate governance and accounting standards.” Suresh Surana, founder of RSM Astute Consulting Group, said in a statement that the Satyam development is “a major eye opener and will bring into renewed and critical focus the role of independent directors, auditors, company management, [the] CFO and other key persons involved.”

“When you have companies that are ostensibly growing their top lines at 30%, 40% or 50%, it is possible to paper over things,” Singh says. “Satyam was doing it by boosting sales and profits; Bernie Madoff was doing it by boosting rates of return. When growth rates slow down, you are unable to hide the financial reality of how much cash you actually have. It is possible that during this slowdown period, more scandals will come to light.” (U.S. financier Madoff last month admitted to running a $50 billion Ponzi scheme to keep his hedge fund afloat.)

Singh adds that companies with “the bluest of blue-chip reputations [such as] Infosys and TCS” could actually gain in the current environment, because of a potential “flight to quality” among client companies. “The third-tier and weaker companies will probably undergo a lot more scrutiny,” he says.

According to Ravi Aron , senior fellow at the Mack Center for Technological Innovation at Wharton, the Satyam fallout could affect India’s IT offshoring and outsourcing firms in several ways. An immediate impact could be skepticism on the part of clients about whether Indian IT firms can be entrusted with sensitive financial information. “Clients could begin to ask, ‘How much do I know about this IT company and its governance?'” says Aron. “Is the IT service provider doing anything that could jeopardize the client’s compliance with FASB, Sarbanes Oxley, Basel II or other financial regulations?”

Aron recommends that before other IT companies get blackballed because of Satyam’s problems, “they should act swiftly to demonstrate that their own operations are squeaky clean.” Indian IT companies have always had exceptionally high standards of accounting, and they should ensure that they do not face any spillover effect, he adds. This has already begun to happen. On the day that Raju came clean, N. R. Narayana Murthy, chief mentor at Infosys, was on Indian television — distancing Infosys and the rest of the IT industry from Satyam’s practices. Similarly, Vineet Nayar, CEO of HCL, e-mailed a personal letter to the company’s clients and associates. Describing Satyam’s disclosures as “unfortunate,” the letter added that Nayar would “reaffirm our commitment that we [will] focus on creating value for our customers with the same passion that we have demonstrated in the past while maintaining the highest ethical and governance standards.”

Mauro Guillen , a Wharton management professor who has studied corporate governance in emerging economies, believes that Indian business has an advantage in arguing that the problem is limited to Satyam and is not systemic. “India is not perceived like Russia — it is neither everyone’s darling nor the plague,” he says. “This works to the country’s advantage because it deflects the blame of such occurrences to the way governance works in emerging economies rather than to India. What regulators in India need to do in response to Satyam is to find out quickly if other companies have been doing similar things. The proper response is to deal with and defuse the problem as soon as possible.”

Guillen notes that what makes Satyam’s case unusual is that it had listed its ADRs on the NYSE. “Companies in emerging economies have trouble raising capital at low costs. The literature shows that is the reason they want to list in the U.S., where they accept a higher level of governance in order to raise capital at a lower cost. The fact that Satyam listed its ADRs in the U.S. but still had such serious governance problems makes this case particularly disturbing.”

Guillen adds, though, that India has several well-regarded IT companies. “If one or two of them don’t make the grade, it should not shake investor confidence. It shows that investing in emerging markets is risky. Investors always balance risks and rewards. If the IT sector in India continues to remain competitive, the Satyam episode will just be a footnote in India’s business story. If the sector becomes uncompetitive, then that would create a serious problem.”

Saikat Chaudhuri , a management professor at Wharton, believes the Satyam episode reveals that the pressure on companies to maintain their financial performance is immense. “Satyam always wanted to keep up with the Big Three of Indian IT companies — TCS, Infosys and Wipro,” he notes. “At a time when the IT industry was booming and companies were growing rapidly, it was easy for Satyam to argue that the company was doing well and that it had good governance.” The involvement of the board, Chaudhuri adds, was at the “strategic level; in companies like Satyam, it is the owner/promoter/founder who runs the show. It has to do with the ownership structure.” In Chaudhuri’s view, auditors such as PricewaterhouseCoopers, who signed off on the bogus accounts at Satyam, have a lot more to answer for than the board of directors. “This is a serious lapse on their part. They should have probed.”

Chaudhuri’s advice to other Indian IT firms is to distance themselves from the Satyam fallout through prompt action. “Honesty and transparency will alleviate investor concerns,” he says. “I don’t believe the sector will come crashing down. Perhaps Indian IT companies will face more scrutiny in the coming months; they may have to answer a few more questions, but India Inc. will pull through.” NASSCOM, the National Association of Software and Services Companies, could play a role in helping communicate that “the Satyam episode, though it shocked everyone, is an isolated instance,” he adds. 

WorldCom and Tyco, Again

Useem says that if one were to take an inference from recent high-profile scandals outside of India, “there would be a redoubled effort [in India] on the part of investors and independent directors at other companies to ensure that nothing like what happened at Satyam happens under their noses.”

Useem draws a parallel between what occurred at Satyam with the scandals at WorldCom and Tyco, rather than at Enron. “At WorldCom, the CFO and the CEO were knowingly misstating the accounting and financials of the firm; at Tyco, the CEO and the CFO were knowingly taking money from the company for personal purposes,” he says. “Satyam’s disaster has a parallel to these acts of malfeasance.”

Useem recalls the CEO and promoter of a Chinese solar panel company who “wanted his company to be extremely well governed” and therefore listed it on the New York Stock Exchange. “He wanted a great board of directors and thus listed the company fully on the NYSE — not as an ADR — for the sole purpose … of forcing himself to be disciplined in the governance policies his company pursues.”

If it survives, Satyam may be able to redeem itself with new management and governance codes, Useem says. He recalls working as a consultant a couple of years ago with Tyco, where the company’s new CEO Ed Breen systematically went about cleaning up after the departure of disgraced CEO Dennis Kozlowski, instituting strong corporate governance practices. Tyco is one of the best examples of a corporate governance turnaround, Useem notes.

Singh adds that the Satyam scandal doesn’t necessarily warrant more regulation. “There is no need to strengthen corporate governance regulations [in India],” he says. “The issue is really more one of leadership at the board level. The tone gets set by the chairman of the board; it’s much more a matter of culture within the board room, of the group dynamics within the board.”

Truth in Numbers

Notwithstanding Raju’s confession, the Satyam episode has brought into sharp relief the role and efficacy of independent directors. SEBI requires Indian publicly held companies to ensure that independent directors make up at least half their board strength.

The knowledge available to independent directors and even audit committee members is inherently limited to prevent willful withholding of crucial information, Singh notes. “The reality is, at the end of the day, even as an audit committee member or as an independent director, I would have to rely on what the management was presenting to me,” he says, drawing upon his experience as an independent director and audit committee member at Fedders, a publicly held company in the U.S. that filed for bankruptcy last year. “It is the auditors’ job to see if the numbers presented are accurate.”

Singh says he drew “a level of confidence” from the accounting rigor and governance mechanisms at Infosys, where he was an independent director from 2000 to 2003. He recalls how T.V. Mohandas Pai, the company’s then-chief financial officer (now a director overseeing human resources) “would take so much time going into accounting details.”

Even if outside directors were unaware of the true state of Satyam’s finances, some red flags should have been obvious. According to Aron, Satyam is one of the world’s largest implementers of SAP systems. In an effort to compete against Satyam, HCL recently acquired Axon, an SAP consulting firm, at a cost of $800 million. ( Editor’s note : See interview with HCL CEO Vineet Nayar .) Aron notes that any Satyam director should have been puzzled that the company was proposing to invest $1.6 billion in real estate at a time when a competitor as formidable as HCL was gunning for one of its most lucrative markets. “IT is a highly capital-intensive business, especially in India,” says Aron. “What on earth would compel Satyam to invest $1.6 billion in real estate at a time when competition with HCL was about to grow more intense? That is what the directors should have been asking.” Instead, he adds, like the dog that didn’t bark in the Sherlock Holmes story, the matter was allowed to slide.

How effective independent directors can be is mainly a factor of the “dynamics inside the board room once the doors are closed,” according to Singh. “There is an attitude in some Indian companies that the board members actually work for the people who have brought them onto the board. This is a completely misguided attitude. It looks like this may have been a problem at Satyam…. The real strength of a healthy board is when a consensus gets overturned by a dissenting view.”

Even if the proposed investment in the two Maytas firms appeared to be ethical on first sight, Singh notes that he would have expected the independent directors to be extra careful. “Given the fact that there is a family connection involved, as an independent board member I would be looking very hard at whether this is the right decision for the company,” he says. “Also, quite aside from issues of governance, everything we know about unrelated diversification [deals] from management literature is that, as a general matter, they are not a good idea; they don’t seem to make strategic sense.”

Independent Defectors

Useem wonders if the Satyam directors who resigned actually did the right thing. “The leadership dictum is that you need to stay the course, stay in the game, face the problem and solve the problem,” he says. “Did the four directors who resigned have an option of banding together, staying on the board and changing governance?” Useem adds that “it is often very hard to stay the course. I am empathetic with people who have difficulty [making that decision].”

Media reports quoted former independent director Srinivasan as saying she accepted “moral responsibility” for failing to cast a dissenting vote on the Maytas proposal. Some of the other directors who resigned have cited difficulties in attending frequent board meetings. Useem says it can indeed prove challenging for independent directors to go through reams of documents and attend frequent board meetings that companies in distress typically have.

In a written response to Knowledge at Wharton, Palepu, Satyam’s former non-executive director, stated that he was not present at the board meetings where the Maytas investment proposals were discussed. “As a result, under Indian law, I was not eligible to vote on the proposals,” he said. Palepu earned nearly Rs. 1 crore (about $200,000) from Satyam in 2007, according to regulatory filings, most of it for rendering “professional services.” He declined comment, but those services were essentially leadership development and consulting for Satyam’s top management, according to Archana Muthappa, the company’s head of media relations.

SEBI and India’s registrar of companies have launched an investigation into Satyam. Citing the Indian Securities Contract Regulation Act of 1956, a report in The Economic Times says SEBI is empowered to award penalties of up to Rs. 25 crore and imprisonment of up to 10 years to directors and management executives “for violating the listing agreement by making false and inaccurate disclosures in the company’s quarterly and annual results.”

Singh says it is important to remember who the ultimate victims are in cases like Satyam. “This is a real tragedy; the people who will be left holding the bag will be the shareholders.”

Even as Raju is widely blamed for unleashing “India’s Enron,” Chaudhuri points to a major difference between Enron and Satyam. “At Enron, the CEO stonewalled, while whistle-blowers came out with the truth,” he says. “At Satyam, there were no whistle-blowers. The CEO blew the whistle on himself.” In that sense, Raju did — ultimately — tell the truth and perhaps live up to the “Satyam” name. Unfortunately for him, the company, and India’s IT industry, by then it was much too late.

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Corporate Governance Failure at Satyam

By: Vanita Yadav, C. V. Baxi

This case is about a US$1.4 billion corporate governance fraud at India's fourth-largest information technology company: Satyam Computer Services. The company offered IT outsourcing services to…

• Length: 22 page(s)
• Publication Date: Sep 14, 2010
• Discipline: General Management
• Product #: HKU889-PDF-ENG

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This case is about a US$1.4 billion corporate governance fraud at India's fourth-largest information technology company: Satyam Computer Services. The company offered IT outsourcing services to around 690 clients, including 185 Fortune 500 companies such as GE, Nissan Motors and General Motors. By 2008, Satyam was a global company operating in 37 countries. The case traces the rise and fall of both Satyam and its founder, Raju, who was an important celebrity in corporate India. The case offers an opportunity to understand the various aspects of corporate governance and can be used to study the reasons behind corporate governance failures at a firm and the risks that it might face post-scandal. It will help students understand the role of a promoter, independent directors, auditors and the government in corporate governance failures. The case can also be used as a vehicle for teaching the theories of corporate governance.

Learning Objectives

Understand the fundamental concepts of corporate governance.

Discuss the reasons behind the corporate governance failure at Satyam.

Analyze the implications of corporate governance failures.

Examine the role of independent and non-executive directors.

Analyze the future prospects for corporate governance.

Sep 14, 2010

Discipline:

General Management

Geographies:

University of Hong Kong

HKU889-PDF-ENG

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Satyam Scandal and Corporate Governance Failure Case Study

Introduction, the most important facts surrounding the case, the key issues, alternative courses of action, evaluation of each course of action, the best course of action recommended: government intervention.

The concept of corporate governance has been practiced in India for nearly twenty years. However, several examples of disastrous corporative conduct indicate that the country’s corporate governance framework is not developed effectively and adequately enough. The most recent scandal concerns the case with Satyam Computer Services Ltd (“Satyam”) – the company that used to be India’s fourth-largest computer services firm.

Because of crucial mistakes in the governance system, Satyam turned out to be a huge failure, causing a lot of losses and trouble to its managerial team, stakeholders, and partners. The present analysis of the Satyam case study aims at identifying the most important facts surrounding the case, discussing the key issues concerned with it, suggesting the alternative courses of action and evaluating them, and recommending the most suitable course of action.

The essential facts associated with the case are as follows:

• On 27 June 1987, Ramalinga Raju founded Satyam Computer Services along with his brother-in-law. At first, there were as little as twenty employees, but the organization determined itself as a large-scale player in the country’s IT sector, concentrating on the services concerned with software outsourcing.
• In 1991, the company made a successful first public appearance on the Bombay Stock Exchange. In four years, the company launched Satyam Infoway (“Sify”) that suggested back-office outsourcing services to a variety of customers in the US and Europe. In 1999, Sify was operating in thirty countries and became the first company from India to be listed in NASDAQ (National Association of Securities Dealers Automated Quotations).
• Raju was getting on good terms with Indian business and political leaders. In 2000, during the US President’s visit to Hyderabad, Raju shared the podium with him. He built friendly relationships with many other leaders and important people.
• In 2007, Satyam was appointed the official IT service provider for the FIFA World Cup in 2010 in South Africa and the FIFA World Cup 2014 in Brazil. In the same year, Raju was awarded the Ernst and Young Entrepreneur of the Year award for expanding his IT company to more than 50,000 employees. Raju was regarded to be one of the most successful Indian businessmen in many countries of the world.
• In 2008, the company’s revenues exceeded $2 billion, and Satyam won many distinguished awards. In November, Raju co-chaired the World Economic Forum Summit that took place in New Delhi, India. At the summit, Raju announced his firm’s outstanding performance and promised to find a way out for Satyam in the global economic crisis.
• The company’s downfall started at the end of 2008, after Raju’s shocking confession about inflating the data concerning the company’s performance. On 23 December, Satyam became blacklisted for eight years by the World Bank on the basis of bribing the bank officials and data theft. The beginning of 2009 was marked by the fall of the company, preceded by Raju’s shocking confession about numerous manipulations and fraudsters in Satyam. After the confession letter, the company’s drop in share price was 78%.
• The actual cash and bank balance of Satyam were $65 million, while the inflated balance was $1.03 billion. The inflated accrued interest was $7.7, whereas, in fact, there was none. The actual liability was undisclosed, while the inflated liability was $252 million. Moreover, the actual number of employees was 10,000 smaller than the number reported by Raju – there were 40,000 employees instead of 50,000 mentioned. Raju used made-up names to redirect $4 million monthly out of the company’s accounts.

There were four major issues that led to Satyam’s disgraceful collapse: including the independent directors in the company’s board committee, drawbacks in audit, problems with disclosure and transparency, and the failure in CEO/CFO role.

Failure of Independent Directors

The failure of Satyam was closely associated with the role played by independent directors. These people were supposed to control the company’s activity. However, they did not express either interest or anxiety with the state of things in Satyam. The independent directors had to inquire why the company had so much cash at its disposal, but they never raised such a question. On the contrary, they continued to keep silent for several years while knowing that such a way of conduct could be harmful to the company’s stakeholders and partners.

The way in which Satyam’s independent directors behaved may be called carelessness at best. In fact, this negligence bordered on fraudster, since keeping silence about such a major crime almost equals participating in the crime.

Drawbacks in Audit

The main role of an audit committee in any company is to make sure that its activity is transparent and clear to all stakeholders. In the case with Satyam, however, the audit committee did not perform its functions. Such actions led to the failure of the company’s control system and did not present a true picture of the financial matters at Satyam. The audit committee did not perform the necessary role in restricting false information about the financial matters in Satyam.

The failure of the audit committee to provide the board with realistic facts negatively affected the organization’s performance.

Problems with Disclosure and Transparency

One of the keys to success in business is providing the transparency and disclosure of the company’s materials so that the real state of things could be seen and evaluated. By providing these principles, the organization demonstrates its capability or incapability of doing the business, and its prospects can be seen by the stakeholders. In the case with Satyam, neither transparency nor disclosure was provided. The data provided by Raju did not reflect the real state of things, which led to investors losing huge sums of money without even guessing it. All the data provided to stakeholders was fabricated, and no one suspected what was actually happening within the organization.

Therefore, the norms of disclosure and transparency existing in Satyam greatly undermined the access to realistic data.

Failure in CEO/CFO Role

Finally, Satyam had problems with the role played by CEO and CFO. The rules of corporate governance presuppose that the company’s CEO/CFO guarantees the accuracy and honesty of the company’s financial statements. Unfortunately, Satyam’s CEO Raju and CFO Vadlamani did not perform their functions properly. Because of their illegal activity that resulted in hiding the true financial data, the company’s investors, stakeholders, and clients did not even guess about the catastrophic situation with the matters in Satyam.

The company’s strategy and performance suffered from such wrongdoing of the major people in the organization. The whole strategy was built in a wrong way because no one knew that the numbers were not true, and no one could plan any actions aimed at improving the situation.

Failures of Satyam’s operations at various levels require a thorough reconsideration of the company’s work and finding possible ways of saving the situation. The following three alternative courses of action at Satyam seem plausible, dividing the responsibilities, inviting independent supervisors, and government intervention. By dividing the responsibilities, the company would have avoided the concentration of power and access to information in one or a few people’s hands.

Inviting independent supervisors would have eliminated the fraud schemes as independent curators are interested not in personal profit but in finding flaws in the organization’s work. Government intervention would have shown to the company that there is always a higher power than the company’s management. If the government had demonstrated its interest and control, Raju would not have felt so powerful and would not have been able to perform so many illegal operations in Satyam.

Dividing the Responsibilities

The first suggested solution is concerned with sharing the duties between the members of a company as opposed to concentrating the majority of the power in the hands of just one person or a few people. If several people know that they have to cooperate and evaluate the organization’s results at regular periods of time, they will feel an increased responsibility and dedication to a highly objective assessment. Moreover, if a person planning any illegal actions knows that his or her actions will be observed and analyzed by others, the plans to perform fraudster might be reconsidered.

For instance, if Raju had known that people other than him would be able to notice the discrepancies in financial papers, he would have had no desire or, at least, opportunity to lead to such disastrous outcomes. The costs of such a course of action are not as high as the people can be chosen from the managing team or other subordinates. However, the benefits are rather good – everyone within the organization will know that there is no way of performing any illegal actions as several people will be responsible for different parts of the process, and they will regularly compare and contrast the numbers.

Inviting Independent Supervisors

This course of action is a little bit more time- and cost-consuming. Still, the benefits of such an approach would outnumber the costs. If Satyam had invited independent supervisors, the intricate scheme of hiding huge sums of money would have been impossible. People from the outside would not have had any personal preferences, and they would have been rather objective in their judgments. Also, it would have been difficult to bribe such supervisors, as the company’s manager could not have known beforehand what people would be assigned to check the financial data.

Government Intervention

The third suggested solution also requires additional resources, but it could have saved the company from the disaster. As the experience with Satyam shows, not only the organization but also the whole country became a symbol of a fraudster and lost the trust and support of many ex-partners all over the world. Therefore, it is crucial that the government should control such huge companies. If there had been some government interventions, it would have been possible to notice the problems at Satyam at the initial stages and find solutions to save the situation.

Although government intervention is probably the most time- and cost-consuming out of the suggested solutions, it seems the most productive one. The other two alternatives also have some good points, but they do not suggest the same level of control. And as the case of Satyam shows, the lack of control was the major cause of such a disastrous end of the company.

The feasibility of government intervention is lower than that of dividing the responsibilities. However, from a technical and operational standpoint, it is quite reachable. Compared to inviting independent supervisors, government intervention suggests more control and requires nearly the same expenses. Therefore, taking into consideration all risks and benefits, this course of action is the most suitable one.

The sad story of one of the most successful Indian computer software companies gives several lessons to be learned. Due to crucial errors in the corporate governance system at Satyam, the organization’s CEO was able to perform a huge number of illegal operations and remain undiscovered for several years. There were drawbacks in Satyam’s audit, problems with transparency and disclosure, and failures of independent directors and is CEO/CFO roles.

Taking into consideration the scale of losses to which such deficiencies led, it seems necessary to reconsider the ways in which large companies organize their governance system. Independent supervision shared responsibilities, and government control are necessary to eliminate the appearance of similar disasters in the future. While such measures may require extra resources, the outcomes will be rather productive for the companies, their employees, and the country whose reputation these companies should support.

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IvyPanda. (2024, February 3). Satyam Scandal and Corporate Governance Failure. https://ivypanda.com/essays/satyam-scandal-and-corporate-governance-failure/

"Satyam Scandal and Corporate Governance Failure." IvyPanda , 3 Feb. 2024, ivypanda.com/essays/satyam-scandal-and-corporate-governance-failure/.

IvyPanda . (2024) 'Satyam Scandal and Corporate Governance Failure'. 3 February.

IvyPanda . 2024. "Satyam Scandal and Corporate Governance Failure." February 3, 2024. https://ivypanda.com/essays/satyam-scandal-and-corporate-governance-failure/.

1. IvyPanda . "Satyam Scandal and Corporate Governance Failure." February 3, 2024. https://ivypanda.com/essays/satyam-scandal-and-corporate-governance-failure/.

Bibliography

IvyPanda . "Satyam Scandal and Corporate Governance Failure." February 3, 2024. https://ivypanda.com/essays/satyam-scandal-and-corporate-governance-failure/.

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Case Study on Satyam Computers “The Perspective of Corporate Governance”

Oct 29, 2014

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Case Study on Satyam Computers “The Perspective of Corporate Governance”. Presented to: Prof. Abhay Singh By: MMS II – Div B – Group I. Group Members. Flow of Presentation. Introduction. Introduction to Satyam Computers. Icon among the IT companies and ranked 4 th

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St. Francis Institute of Management & Research

Case Study on Satyam Computers“The Perspective of Corporate Governance” Presented to: Prof. Abhay Singh By: MMS II – Div B – Group I St. Francis Institute of Management & Research

Group Members St. Francis Institute of Management & Research

Flow of Presentation St. Francis Institute of Management & Research

Introduction St. Francis Institute of Management & Research

Introduction to Satyam Computers • Icon among the IT companies and ranked 4th • Founded on 24th June, 1987 by B. Ramalinga Raju in Hyderabad • The company offers information technology (IT) services spanning various sectors, and is listed on the New York Stock Exchange and Euronext • Satyam's network covers 67 countries across six continents • Employs 40,000 IT professionals across the globe • Serves over 654 global companies, 185 of which are Fortune 500 corporations • Has strategic technology and marketing alliances with over 50 companies • Owns development centres in India at Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, Kolkata, Bhubaneswar & Visakhapatnam St. Francis Institute of Management & Research

Introduction to Satyam Computers • In 1991 it was recognized as a public limited company and got its first Fortune 500 client, Deere and Co. • In 90s it started Satyam Renaissance, Satyam Infoway, Satyam Spark Solutions and Satyam Enterprise Solutions • Satyam Infoway became the first Indian internet company to be listed on the NASDAQ • The company signed contracts with various international players like Microsoft, Emirates, TRW, i2 Technologies and Ford • International Move - Offices in Singapore, Dubai and Sydney St. Francis Institute of Management & Research

Introduction to Satyam Computers • The company had had various achievements like- • becoming the first ISO 9001:2001 company in the world, • certified by BVQI, • winning the Frost & Sullivan Award for Competitive Strategy in ASP in 2001, etc • Selected by the Switzerland-based World Economic Forum and World Link magazine as one of India's most remarkable and rapidly growing entrepreneurial companies • Received the National HRD award - 2000 for outstanding contributions to HRD • Role Model for IT companies across the Globe. St. Francis Institute of Management & Research

Introduction to Maytas Infra & Maytas Properties • Started by Ramalinga Raju & run by Sons of Raju - Teja Raju & Rama Raju • 35% stakes was owned by Raju & his immediate family members • Overloaded Project book • Huge land banks • Merger with Satyam  Sudden fall in Land Prices  to hide the Satyam Scam St. Francis Institute of Management & Research

The Corporate Governance At Satyam St. Francis Institute of Management & Research

The Corporate Governance at Satyam Corporate Governance is given lots of importance in its Annual Report and website St. Francis Institute of Management & Research

The SCAM St. Francis Institute of Management & Research

The scam • Satyam Computers had on  December 16, 2008,  announced that it will acquire two group firms - Maytas properties and Maytas Infra • The BOD of Satyam had approved the founder’s proposal to buy 51 per cent stake in Maytas Infrastructure and 100 % in Maytas Properties • The total outflow for both the acquisitions was expected to be US$ 1.6 bn comprising of US$ 1.3 bn for the 100% stake in Maytas Properties and US$ 0.3 bn for the 51% stake in Maytas Infra • This is the move that sparked a row over alleged violation of corporate governance laws. • This deal is not profitable for investors . So after this announcement they started to raise their voices against the deal St. Francis Institute of Management & Research

The scam Satyam’s justification for Maytas buy-out deal: • de-risk the core business • the integrated organization would be stronger and more diversified to deal with the uncertainty of the market. • feeling that in the recent times it is difficult to make a strategic deal with other IT companies. However….. • Satyam’s share prices drastically came down in U.S.A. after the bid was announced. • The interrogation by investors forced Raju to reconsider his decision, which he pulled off within hours. • World Bank, one of Satyam’s esteemed customers banned it from providing service for next 8 years. • The aborted buy-out deal and the ban indicated that something seriously went wrong at the board level. St. Francis Institute of Management & Research

The scam • Satyam’s image in front of its customers, investors, and more importantly, the entire nation got dented. • Share prices tumbled even further by about 16% • Valuation of Maytas turned out to be fraudulent • Merrill Lynch was hired to advise on alternatives to the failed acquisition. But they resigned the engagement • All of the four firms, including Merrill Lynch and JP Morgan denied having done any valuation St. Francis Institute of Management & Research

The scam • The move sparked row between the institutional investors from across the world and Satyam’s board members. • One of company’s two independent directors Mr. T.R. Prasad defended the decision of buy-out believing it to be increasing share value. • Another director Mr. Shrinivasan quit before it was too late. • Mr. Vinod Dham (founder of Pentium) was also one of the non-executive directors of Satyam who later resigned in the wake of controversy. St. Francis Institute of Management & Research

The Confession….. St. Francis Institute of Management & Research

The confession • It is not a mere coincidence that MaytaS is SatyaM spelt in reverse way. • As spelled out in Raju’s letter it was an effort to cover-up Satyam Fiasco. • Raju wanted to acquire Maytas in order to cover up the scam he was cooking, but failed miserably. • He tried to fill the gap between the actual profits of the company and the profits that were shown in records, balance sheets etc. and also tried to cope up the situation till last minute. • But the situation were beyond his hands and therefore he confessed the frauds (on Jan 7, 2009) made by him by showing inflated profits in the balance sheet. • According to the ‘confessional’ statement of Mr. Raju, the balance sheet shortfall was more than Rs.7000 crore. St. Francis Institute of Management & Research

What Went Wrong ??? • Satyam’s financial statements for years were totally false, cooked up and...  Never had Rs 5064 crores (US$ 1.05 Billion) shown as cash for several years.  Its liability was understated by $ 1.23 Billions  The Debtors were overstated by 400 millions plus.  The interest accrued and receivable by 376 Millions never existed St. Francis Institute of Management & Research

CURRENT ASSESTS ACTUAL CASH IN BANK WAS 321 INFLATED 5040cr 2651.6 5312.62 ACTUAL DEBT WAS 2161 OVERSTATED 490 Cr 376 NO ACCRUED INTEREST 376 Cr LIABILITIES UNDERSTATED LIABILITY 1230 Cr which was arranged by Mr.Raju ARTIFICIALLY ADDED 588 OPERATING PROFIT ADDED 588 INCREASING THE CASH RESERVE ONLY FOR Q2 ALONE TO 588 5040+376+1230+ 490= 7136 St. Francis Institute of Management & Research

ACTUAL OPERATING MARGIN 61 Cr REPORTED-649 Cr( CREATED AN ARTIFICIAL REVENUE OF 588) GROWTH IN THE OPERATING PROFIT St. Francis Institute of Management & Research

INFLATING THE PROFIT AND REVENUE St. Francis Institute of Management & Research

People Involved in Scam St. Francis Institute of Management & Research

The Promoters • Mr. Raju is by far the father of this fraud. • With only 9% stake in company the guy tried to transfer $1.5bn of cash to the completely unrelated business. • Raju’s perception on Satyam-Maytas deal: “Combined entity would deliver greater shareholder value” • Correct perception: “Maytas promoters are getting benefited at the cost of Satyam's shareholders” St. Francis Institute of Management & Research

The Auditors St. Francis Institute of Management & Research

The Auditors “Satyam's financial statements are the responsibilities of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.” St. Francis Institute of Management & Research

The Auditors "We have neither come across any instance of fraud on or by the company (Satyam), noticed or reported during the year, nor we have been informed of such case by the management." St. Francis Institute of Management & Research

The Auditors "We conducted our audit in accordance with the auditing standards in India. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements" St. Francis Institute of Management & Research

The Auditors • Auditors do bank reconciliation to check whether the money has indeed come or not. They check bank statements and certificates. • There may be an argument that the audit firm was defrauded as well. • There is complicity, incompetence or both with either the auditors or their customers or both. Inadequate procedures over confirmation indicates that the auditors missed something really big. St. Francis Institute of Management & Research

The Auditors • PwC gave wrong PAN to Satyam, as it turns out. • PWC gave their Bangalore PAN Number to Satyam instead of New Delhi. PwC Hyderabad falls in New Delhi jurisdiction • As per Satyam's accounts, vetted by Price Waterhouse, auditors were paid Rs 3.73 crore during 2007-08 as against Rs 3.67 crore in the previous fiscal. St. Francis Institute of Management & Research

The Board of directors • “A company filing returns in the US according to (its) Security Exchange Commission (SEC) guidelines could not have done this without the cognizance of key executives,” • It’s impossible to go by the claim that none of the board members had any clue about the inconsistencies in Satyam’s balance sheet; if the fraud went on for ’several years’, it won’t be wrong to rule out that most of them, if not all, had some idea about the happenings. • Satyam's CFO Srinivas Vadlamani has been arrested. St. Francis Institute of Management & Research

The Independent directors • Independent directors of Satyam Computers, who agreed to the company's proposal of buying out two promoter-related companies, failed to be independent in ‘spirit’. • The Satyam board, including its 5 independent directors had approved the founder's proposal to buy 51 % stake in Maytas Infrastructure and 100 % in Maytas Properties • The role of Satyam's independent directors is termed as ‘unpardonable’, since they acted against the interest of larger shareholders especially when the promoters themselves owned a little more than 9% stake in the company and institutional investors owned more than 45 %. • All independent directors voted in favour of Satyam-Maytas proposal. St. Francis Institute of Management & Research

The BANKERS • If the auditors were conned, it means that the bank statements and certificates were forged • Satyam's banks - ICICI Bank, HDFC Bank, Bank of Baroda, etc St. Francis Institute of Management & Research

The SEBI • The Stock Exchange Board of India had in December given a clean chit to Satyam in the probe on violation of Corporate Governance Law. St. Francis Institute of Management & Research

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. • There was lack of Regulation on part of Government for not keeping in check such frauds. St. Francis Institute of Management & Research

The New Beginning St. Francis Institute of Management & Research

Government intervention • The scam affected the reputation of Satyam Computers as well as the whole of IT industry in India. • Govt. of India was very concerned about it’s image in International Market especially IT , as it is also main source of foreign exchange for the country and drives economic growth of the country. • The IT industry contributes 5.7 % to the GDP of India. In value terms, in 2007-08, it was around $ 40 billion. • Also the Govt. wants to give a clear message to the International Clients that the problem will be taken care-off and it will not be repeated in future and they can continue their engagements with Indian companies without suspicion. St. Francis Institute of Management & Research

Government intervention • Also to safeguard the interest of small investors, so that faith can be restored in the market again. • Small investors are the largest number of buyers in the Capital Market. If they will go away it would be difficult for other companies to raise money through Public Issues. • Also to take care of the employees working in Satyam, as it was never their fault for whatever happened. Their job has to be secured by the Govt. that too in economic recession time. • Also to give the message to the people and to investors that the guilty will be punished and will not go scot free as it used to happen earlier. That’s the only reason why Mr. Raju is still behind the bars and not able to secure a bail till now. St. Francis Institute of Management & Research

Government intervention Steps Taken After Satyam Fraud : • Introduction of new rules by the stock market regulator, making it compulsory for promoters of companies to disclose the percentage of shares pledged by them to lenders • Appointment of Independent Auditors and Company Secretary by Company Law Board to conduct Audit of any private organization. • Set-up of 5 member Committee to suggest how to implement effective compliance and Corporate Governance in private sector by CLB. St. Francis Institute of Management & Research

Steps taken by Management • Change the name of the company. • Reconstitution of the board : Restore the management of the company and appoint some reputed people as the board of directors. • Try building confidence in the clients to get back the lost projects. • The image of the company could be revived by a series of press conferences highlighting the ongoing contracts with the clients. • It could also be merged with any other software company. St. Francis Institute of Management & Research

Mahindra - satyam • Tech Mahindra paid Rs1757 crore for a 31% stake in the company, or Rs 58 per share. • Satyam Computer Services has now 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 . • This would send a strong signal globally that the country can respond well and fast to financial crisis. St. Francis Institute of Management & Research

Important areas of corporate culture St. Francis Institute of Management & Research

Corporate governance • The Corporate Governance in India is in a very rotten state due to vicious promoter-politician nexus endemic across different sectors of the economy. • It would be naive to believe in the comments by select industry leaders and select politicians that the Satyam case is one-off and that the entire Indian IT sector (or for that matter, the entire Indian business fraternity) cannot be tarred by the same paintbrush. • Satyam most certainly is not a only one-off high profile situation that India has been forced to face. It is not the first one and will certainly not be the last of the high profile ones. • It should be a "principle-based" system rather than being "rule-based” St. Francis Institute of Management & Research

Role of Independent Directors • Independent directors need to be more active and need to maintain their independent spirit. • In instances of larger issue of change in the entire business focus of the company, the Independent Director should take the decision to the shareholders before approving. • Independent directors need to be vigilant in protecting minority interest and be ‘brave’ enough to take adequate steps. • It is cumulative responsibility of the independent directors to protect the interest of shareholders and strategy of the organisation. • There is no point in having independent directors if they can't guide the management on critical issues. St. Francis Institute of Management & Research

Investor Activism St. Francis Institute of Management & Research

Investor Activism • In the past, institutional investors in this country haven't really spoken up against corporate misbehaviour. The promoters were enriching themselves, at the cost of minority shareholders. • There have been numerous other instances, admittedly of smaller consequence. • But now it's time institutional shareholders got together to show promoters that they simply cannot get away with this kind of behaviour. • Now, in case of Satyam, the same institutional shareholders have found their tongues. This time, their stake is big. • In India it only needs a 10 % stake to call an EGM. The shareholders need to use this provision. • Managements should be asked to take shareholders into confidence for any unrelated diversification, with the definition of 'unrelated' clearly spelt out. St. Francis Institute of Management & Research

Satyam & Business Ethics St. Francis Institute of Management & Research

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SATYAM SCANDAL AND CORPORATE GOVERNANCE FAILURE CASE STUDY – Mohit Mandloi

The Satyam Computer Services Ltd. scandal in India serves as a stark reminder of the critical importance of effective corporate governance. This case study delves into the heart of the matter, highlighting key facts surrounding the scandal, identifying the central issues that led to its catastrophic failure, and proposing alternative courses of action to prevent such incidents in the future.

Founded in 1987, Satyam initially appeared as a promising player in India’s IT sector, growing rapidly and even being listed on NASDAQ in 1999. The company’s downfall, however, began in 2008 when its CEO, Ramalinga Raju, shockingly confessed to inflating the company’s financial data. This revelation triggered a cascading series of events, including being blacklisted by the World Bank and a 78% drop in share prices.

The key issues at the heart of Satyam’s collapse were the failure of independent directors, audit committee shortcomings, issues with transparency and disclosure, and the failure of the CEO/CFO to fulfill their roles effectively. Independent directors neglected their duty to investigate the company’s questionable financial practices, while the audit committee failed to ensure accurate financial reporting. Additionally, the lack of transparency and disclosure misled stakeholders, resulting in significant financial losses.

Three alternative courses of action were proposed: separating responsibilities, engaging independent supervision, and government intervention. While each had its merits, government intervention emerged as the recommended course of action due to its potential to provide the necessary oversight and control over large enterprises. This approach, although resource-intensive, would address the fundamental flaws that contributed to Satyam’s downfall.

In conclusion, the Satyam scandal underscores the need for robust corporate governance practices. It serves as a cautionary tale for companies worldwide, emphasizing the critical role of transparency, accountability, and ethical leadership in preserving trust and preventing corporate disasters. By implementing measures such as government intervention and upholding corporate governance principles, companies can mitigate the risks associated with unethical behavior and financial misconduct.

INTRODUCTION

Corporate governance has been implemented in India for about two decades. Nonetheless, several examples of disastrous corporate behaviour demonstrate that the country’s corporate governance framework must be more effectively and appropriately created. Satyam Computer Services Ltd (“Satyam”), India’s 4th-largest computer services firm, was the most recent occurrence.

Satyam was a big failure due to critical faults in the governance system; because of its management personnel, stakeholders, and partners, it has caused several losses and challenges. The current examination of the Satyam case study aims to find the most essential facts, investigate the critical issues involved, propose several courses of action, assess them, and recommend the most suitable activity. [1]

The Most Important Facts Surrounding the Case

The essential facts associated with the case are as follows:.

• On 27 June 1987, Ramalinga Raju founded Satyam Computer Services along with his brother-in-law. At first, there were as few as twenty employees. Still, the organisation determined itself as a large-scale player in the country’s IT sector, concentrating on the services concerned with software outsourcing.
• 1991, the company made a successful first public appearance on the Bombay Stock Exchange. The company launched Satyam Infoway (“Sify”) four years ago and suggested back-office outsourcing to US and European customers. In 1999, Sify operated in thirty countries and became the first company from India to be listed in NASDAQ (National Association of Securities Dealers Automated Quotations).
• Raju was on good terms with Indian business and political leaders. In 2000, during the US President’s visit to Hyderabad, Raju shared the podium with him. He built friendly relationships with many other leaders and influential people.
• In 2007 Satyam was appointed the official IT service provider for the FIFA World Cup in 2010 in South Africa and the FIFA World Cup 2014 in Brazil. The same year, Raju was awarded the Ernst and Young Entrepreneur of the Year award for expanding his IT company to more than 50,000 employees. Raju was regarded to be one of the most successful Indian businessmen in many countries of the world.
• In 2008, the company’s revenues exceeded $2 billion, and Satyam won many distinguished awards. Raju co-chaired the November World Economic Forum Summit in New Delhi, India. At the summit, Raju announced his firm’s outstanding performance and promised to find a way out for Satyam in the global economic crisis.
• The company’s downfall started at the end of 2008, after Raju’s shocking confession about inflating the data concerning the company’s performance. On 23 December, Satyam was blocked for eight years by the World Bank based on bribing bank officials and data theft. The beginning of 2009 was marked by the company’s fall, preceded by Raju’s shocking confession about numerous manipulations and fraudsters in Satyam. After the confession letter, the company’s drop in share price was 78%.
• Satyam’s actual cash and bank balance were $65 million, while the inflated balance was $1.03 billion. The excessive accrued interest was $7.7, whereas there was none. The actual liability was undisclosed, while the exaggerated penalty was $252 million. Moreover, the exact number of employees was 10,000 more minor than the number reported by Raju – there were 40,000 employees instead of the 50,000 mentioned. Raju used made-up names to redirect $4 million monthly from the company’s accounts.” [2]

The Key Issues

Satyam’s disastrous collapse was driven by four major factors: a lack of independent members on the company’s board committee, problems in audit, challenges with disclosure and openness, and a failure in the CEO/CFO function.

Failure of Independent Directors

Satyam’s demise was inextricably intertwined with the function of independent directors. These individuals were supposed to manage the company’s activities. On the other hand, they needed to show more interest or care about the state of affairs at Satyam. The corporation’s independent directors should have investigated why it was keeping so much cash on hand, yet they have yet to do so. On the contrary, knowing that such behaviour may harm the company’s stakeholders and partners, they kept silent for several years.

The acts of Satyam’s independent directors are, at best, imprudent. This negligence bordered on deception because keeping silent regarding a significant crime is essentially the same as participating.

Drawbacks in Audit

The primary objective of an audit committee in the firm would be to ensure that all stakeholders know and understand the firm’s actions. But, in the case of Satyam, its audit committee did not carry out its responsibilities. These actions led Satyam’s control system to collapse and did not provide a fair picture of the company’s financial status. The audit committee needed to do its job restricting false information concerning Satyam’s economic problems.

The audit committee’s failure to provide accurate facts to the board had a detrimental influence on the organisation’s performance.

Problems with Disclosure and Transparency

One of the pillars of business success is the transparency disclosure of a company’s materials, which allows the actual state of things to be observed and assessed. The corporation demonstrates its capacity or inability to do business by exhibiting these principles, and stakeholders can determine its prospects. In the case of Satyam, neither openness nor disclosure were offered. The information supplied by Raju needed to adequately reflect the existing situation, resulting in investors losing large sums of money without even realising it. All the information provided to stakeholders was fabricated, and nobody suspected anything was wrong with the company.

Therefore, Satyam’s disclosure and transparency standards limited access to realistic data significantly.”

Failure in the CEO/CFO Role

Satyam eventually became dissatisfied with his duties as CEO and CFO. Corporate governance principles presuppose that the CEO/CFO ensures the organisation’s financial statements are factual and honest. Sadly, Satyam’s CEO Raju CFO Vadlamani both failed to perform satisfactorily. Due to their illegal conduct, which suppressed legitimate financial data, the company’s investors, stakeholders, and clients were unaware of Satyam’s dire predicament. [3]

The misconduct of the organisation’s key personnel harmed the company’s plans and achievements. Since nobody realised the data were inaccurate and couldn’t plan any operations to address the situation; the entire strategy was built wrongly.

Alternative Courses of Action

Failures in Satyam’s operations at all levels necessitate a complete review of the company’s work and the identification of potential solutions. Satyam’s three options appear plausible: separating responsibility, engaging independent supervision, and government intervention. By spreading duties, the corporation would have avoided concentrating power and knowledge availability in the hands of one or a few people.

Engaging impartial supervisors would have reduced the fraud schemes because independent curators focus on uncovering defects in the organisation’s work rather than personal benefit. Government intervention would have shown the firm that it always has more authority than its management. If the government had given attention and control, Raju wouldn’t have felt as strong and might not have been capable of carrying out many illegal actions in Satyam.

Evaluation of Each Course of Action

Dividing the responsibilities.

The first technique advised is to spread duties among business members rather than placing the majority of authority in the hands of only one or few people. Many workers will feel more responsible and devotedto this highly objective evaluation if they know they must collaborate and regularly examine the organisation’s outcomes. Also, when someone planning illegal acts knows their actions would be seen and read by others, their plans to conduct fraudster may be reconsidered.

For instance, if Raju had known that anybody other than himself might detect errors in financial records, he wouldn’t have had the motivation or, if not the least, the chance to bring such disastrous consequences. The costs associated with this action are inexpensive since the participants might be drawn from the management staff or other subordinates. However, the benefits are significant: every member of the organisation would be aware of the absence of a way to participate in illegal actions since many individuals will be held accountable for various phases of the procedure, and they will compare this data regularly. [4]

Inviting Independent Supervisors

This option is a little more time- and money-consuming. Yet, the benefits associated with this strategy would outweigh the costs. The complicated technique of concealing vast amounts of cash would have proven impossible if Satyam had invited independent auditors. Those on the outside would not have any personal preferences; their evaluations would have been far more objective. Additionally, bribing supervisors was only possible because the company’s leader couldn’t predict who would be assigned to review the financial data.

Government Intervention

The third proposed approach, while requiring more significant resources, does have the potential to safeguard the organisation from disaster. As the Satyam case demonstrates, the entire country had become a symbol of such a fraudster, losing the trust and support of several ex-partners worldwide. As a result, maintaining government control over such big enterprises is vital. If the government had interfered sooner, it would have been possible to discover Satyam’s problems and devise solutions to salvage the situation.

The Best Course of Action Recommended: Government Intervention

Although government action is the most cost-consuming of the alternatives, it is the most productive. The other two options have specific merits but convey different amounts of control. Moreover, as the case of Satyam demonstrates, a lack of power was a fundamental contributor to the company’s demise.

The feasibility of government intervention was lower than that of responsibility sharing. Yet, it is well within reach from such a technical and operational sense. Government engagement implies more control and almost exact costs than inviting independent monitors. As a result, considering all risks and rewards, this is the best course of action.

“Satyam’s culture, dominated by the board, represented an immoral culture. Unlike Enron, which collapsed owing to an issue with the agency, Satyam was driven to its knees by the tunnelling effect. All types of scams have demonstrated the importance of excellent behaviour based on strong ethics. Keeping in mind the management’s method of operation in the Satyam fraud, some significant recommendations have been suggested hereunder:

• Corporations must promote their CEOs’ moral, ethical, and social principles.
• Board members must understand the gravity of the trust placed in them and be proactive and vigilant in safeguarding owners’ interests.
• In Satyam’s situation, there was a lack of accurate and timely information.
• Shareholder activism is an effective way to keep a firm and its management in check.
• Block-holders and institutional investors can also help hold the board and management accountable. Finally, the CG framework must be followed to the letter and the spirit.”

Perhaps India’s most successful computer software firms’ sad tragedy provides vital lessons. Due to fundamental deficiencies in Satyam’s corporate governance architecture, the CEO was able to engage in several illegal activities while going unnoticed for several years. Satyam’s audit was flawed, as were concerns with openness and disclosure and failures of independent directors’ CEO/CFO duties.

Given the enormity of the losses generated by such flaws, it is critical to reconsider how large firms build their governance structures. To avoid such disasters in the future, independent supervision shared responsibilities, and government control are essential. While such efforts may need more resources, the result will benefit the company, its employees, and the country whose reputation such enterprises must preserve. [5]

IvyPanda. (2020, November 13).  Satyam Scandal and Corporate Governance Failure.  https://ivypanda.com/essays/satyam-scandal-and-corporate-governance-failure/

[2] https://tradebrains.in/satyam-scam/

[3] https://www.academia.edu/10971389/SATYAM_SCANDAL_A_case_study_

[4] https://www.researchgate.net/publication/304441053_Revisiting_the_Satyam_Accounting_Scam_A_Case_Study

[5] http://nja.gov.in/P-948_Reading_Material/P-948_Audit_of_Fraud_in_economic_crimes/ACCOUNTING%20FRAUD.pdf

• Contemporary Legal Issue

Satyam Scandal: The biggest issue revolving around Corporate Governance

• April 23, 2020
• No Comments

Charu singhal | Bharati Vidyapeeth University | 25th October 2019

Table of Contents

INTRODUCTION :

Till about two decades ago Corporate Governance was relatively an unknown subject. The subject came into prominence in the late 80’s and early 90’s when the corporate sector in many countries was surrounded with problems of questionable corporate policies or unethical practices. Junk Bond fiasco of USA and failure of Maxwell, BCCI and Poly peck in UK resulted in the beginning of codes and standards on corporate governance. The USA, UK and number of other developed countries reacted strongly to the corporate failures therefore codes & standards on corporate governance came to the centre stage. Enron debacle in 2001 and number of other scandals involving large US companies such as the Tyco, Quest, Global Crossings Com and the exposure of auditing lacunae, which led to the collapse of the Andersen, triggered the reform process and resulted in the passing of the  Public Accounting Reform and Investor Protection Act of 2002 known as Sarbanes- Oxley (SOX) Act, 2002 in USA .

Fraudulent financial reporting practices and accounting frauds have occurred in all eras, in all countries, and affected many organizations, regardless of their size, location or industry. It can have significant consequences for organizations and all stakeholders as well as for public confidence in the capital and security markets. In fact comprehensive, accurate and reliable financial reporting is the bedrock upon which our markets are based. It can include the deliberate falsification of underlying accounting records, intentionally breaching an accounting standard, or knowingly omitting transactions or required disclosures in the Financial Statement. Thus, Financial Reporting Fraud- an intentional, material misrepresentation of a company’s financial statements remains a serious concern for investors and other capital market stakeholders.  

CORPORATE GOVERNANCE:

It is typically perceived as dealing with the problems that result from the separation of leadership and control. Corporate Governance may be defined as holding a balance between economic and social goals and between individual and commercial goals. Good corporate governance is one where a firm commits and adopts ethical practices across its entire value chain and in all of its dealings with a wide group of stakeholders encompassing employees, customers, vendors, regulators and shareholders in both good and bad times.

BACKGROUND:

On 24th June 1987, Satyam Computer Services Ltd (Popularly known as Satyam) was incorporated by the two brothers, B Rama Raju and B Ramalinga Raju [1] , as a private limited company with just 20 employees for providing software development and consultancy services to large corporations (the company got converted into public in 1991). It has its headquarters at Hyderabad. During the year 1996, company promoted four subsidiaries including Satyam Renaissance Consulting Ltd, Satyam Enterprise Solutions Pvt. Ltd., and Satyam Infoway Pvt. Ltd. Satyam Computer Services Ltd in 1997 was selected by the Switzerland-based World Economic Forum and World Link Magazine as one of India’s most remarkable and rapidly growing entrepreneurial companies. Satyam Infoway (Sify), a wholly owned subsidiary of Satyam Computer Services Ltd, was the first Indian Internet Company listed on NASDAQ. Mr. B. Ramalinga Raju, Chairman of Satyam, was awarded the IT Man of the Year 2000 Award by Dataquest.

In 2001, Satyam became world’s first ISO Company to be certified by BVQI. In 2003, Satyam started providing IT services to World Bank and signed up a long term contract with it. In 2005, Satyam was ranked 3rd in Corporate Governance Survey by Global Institutional Investors. But all this fame and growth was short lived as the company discovered a major setback.

SATYAM SCAM:

Scandals are often the “tip of the iceberg”. They represent the ‘visible’ catastrophic failures. An attempt is made in this case study to  examine in- depth and analyze India’s Enron, Satyam Computer’s “creative- accounting” scandal . Their scandal/fraud has put a big question mark on the entire corporate governance system in India. In public companies, this type of ‘creative’ accounting leading to fraud and investigations are, therefore, launched by the various governmental oversight agencies. 

The Satyam Scam has never been an easy issue to look upon. It has its own complexities as the very issue involves a scam of around  14000 Crore . The Satyam Scam is still regarded as an example for following poor corporate governance practices. The relationship between the shareholders and employees which is the very crux of every corporate organization has never been satisfactory.  

So, to throw light on the poor governance policies of one of the major IT giants the need to go through this case study is quite vital. The Satyam Scandal basically highlights the importance of Securities Law and Corporate Governance in emerging markets.

Problems in Satyam begin when on December 16’ 2008; its chairman Mr Ramalinga Raju, in a surprise move announced a $1.6 billion bid for two Maytas companies i.e. Maytas Infrastructure Ltd and Maytas Properties Ltd saying he wanted to deploy the cash available for the benefit of investors. It planned to acquire 100% and 50% stakes in Maytas property and infra for $1.6 Billion. The two companies have been promoted and controlled by Raju’s family. The thumbs down given by investors and the market forced him to retreat within 12 hours [2] . Share prices plunges by 55% on concerns about Satyam’s corporate governance [3] . Questions were raised on the corporate governance practices of Satyam with analysts and investors questioning the company’s board on the reasons for giving consent for the acquisition as it was related to party transaction.

In a surprise move, the World Bank announced on December 23, 2008 that Satyam has been barred from business with World Bank [4]   for eight years for providing Bank staff with “improper benefits” and charged with data theft and bribing the staff. [5]  Share prices fell another 14% to the lowest in over 4 years. 

After the deal was aborted, four of the prominent independent directors resigned from the board of the company. The lone independent director since 1991, US academician Mangalam Srinivasan, announced resignation followed by the resignation of three more independent directors on December 28 i.e. Vinod K Dham (famously known as father of the Pentium and an ex Intel employee), M Rammohan Rao (Dean of the renowned Indian School of Business) and Krishna Palepu (professor at Harvard Business School) [6] .

At last, on January 7’ 2009, B. Ramalinga Raju announced confession of over Rs. 7800 crore financial fraud and he resigned as chairman of Satyam. He revealed in his letter that his attempt to buy Maytas companies was his last attempt to “fill fictitious assets with real ones”. He admitted in his letter, “It was like riding a tiger without knowing how to get off without being eaten”. [7]

Satyam’s promoters, two brothers B Ramalinga Raju and B Rama Raju were arrested by the State of Andhra Pradesh police and the Central government took control of the tainted company [8] . The Raju brothers were booked for criminal breach of trust, cheating, criminal conspiracy and forgery under the Indian Penal Code. The Central Government reconstituted Satyam’s board that included three-members, HDFC Chairman Deepak Parekh, Ex Nasscom chairman and IT expert Kiran Karnik and former SEBI member C Achuthan. The Central Government added three more directors to the reconstituted Board i.e., CII chief mentor Tarun Das, former president of the Institute for Chartered Accountants (ICAI) TN Manoharan and LIC’s S Balakrishnan.

A week after Satyam founder B Ramalinga Raju’s scandalous confession, Satyam’s auditors Price Waterhouse finally admitted that its audit report was wrong as it was based on wrong financial statements provided by the Satyam’s management [9] . On January 22, 2009, Satyam’s CFO Srinivas Vadlamani confessed to having inflated the number of employees by 10,000. He told CID officials interrogating him that this helped in drawing around Rs 20 crore per month from the related but 3 fictitious salary accounts. 

Andhra Pradesh State CID raided the house of Suryanarayana Raju, the youngest sibling of Ramalinga Raju who owned 4.3 per cent in Maytas Infra, and recovered 112 sale deeds of different land purchases and development agreements [10] . Senior partners S Gopalakrishnan and Srinivas Talluri of the auditing firm Pricewaterhouse Coopers (PwC) were arrested for their alleged role in the Satyam scandal.  The State’s CID police booked them, on charges of fraud (Section 420 of the IPC) and criminal conspiracy (Section 120B) [11] .

Merely four months after its founder B. Ramalinga Raju admitted to fudging the books, Satyam’s government appointee six-member board managed to salvage the company despite all odds. The board, which kicked off the global competitive bidding process [12]  in March 2009, selected Venturbay Consultants, a subsidiary of Tech Mahindra, as it emerged as the highest bidder [13]  at rupees 58 per share. The deal got the approval of Company Law Board [14] .

Consequently, Tech Mahindra (holding 31% stake in Satyam) bought Satyam renaming it on June 21, 2009, as ‘Mahindra Satyam’ [15]  and replaced its executive Board by appointing its (Tech Mahindra) CEO and MD Vineet Nayyar as ViceChairman (who in December 2009 was promoted as Chairman), its international operations head CP Gurnani as CEO. The executive Board appointed Deloitte Haskins & Sells as the company’s statutory auditors to restate its accounts.

CORPORATE GOVERNANCE ISSUES:

On a quarterly basis, Satyam earnings grew. Mr. Raju admitted that the fraud which he committed amounted to nearly $276 million. In the process, Satyam grossly violated all rules of corporate governance [16] . The Satyam scam had been the example for following “poor” Corporate Governance practices. It had failed to show good relation with the shareholders and employees. Corporate Governance issue at Satyam arose because of non-fulfillment of obligation of the company towards the various stakeholders. If we talk specifically the following interests need to be taken care of: distinguishing the roles of board and management; separation of the roles of the CEO and chairman; appointment to the board; directors and executive compensation; protection of shareholders rights and their executives.

• It is well known that a shareholder has a right to get information from the organization; such information could be with respect to the merger and acquisition. Shareholders expect transparent dealing in an organization. They even have right to get the financial reporting and records.   In the case of satyam, the above obligations were never fulfilled. The acquisition of maytas infrastructure and properties were announced, without the consent of shareholders. They were even provided with false inflated financial reports. The shareholders were cheated.
• The collapse of any organization’s reputation has adverse impact on the employee’s job. As per the instant case, employees were shown with an inflated figure. The excess of employees in the organization were kept under VIRTUAL POOL who received just 60% of their salaries and several were removed.  The entire scam had its impact on management. Questions were raised over the credibility of management.
• Any organization has its obligation towards the Government by means of timely payment of taxes and abiding by the rules and laws framed up by the Government. As per the instant case,  the company did not pay advance tax for the financial year 2009. As per the rule, the advance taxes to be paid were 4 times in a year; such was not fulfilled by them.  
• Despite the shareholders not being taken into confidence, the directors went ahead with the management’s decision.
• 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.
• Simple manipulation of revenues and earnings.
• Operating profits were artificially boosted from the actual Rs. 61crore to Rs. 649crore. Its financial statements for years were totally false and cooked up.
• Satyam Computer Consultancy Ltd. didn’t have good relationship with the bank too . The company as stated in the facts was blacklisted by World Bank over charges of Bribery. It was declared ineligible for contracts for providing:
• improper benefit to bank staff.
• failing to maintain documentation to support fees.

Near about six years after the Rs. 7,123crore Satyam Computer Services financial fraud rocked the nation; founder B Ramalinga Raju and his brother Rama Raju (former Managing Director) have been sentenced to seven years jail and fined Rs. 5 crore each.

The special court trying the case imposed a similar sentence on eight others charged by the Central Bureau of Investigation for a number of criminal offences, including criminal breach of trust, fudging, forgery, cheating, impersonation and destruction of evidence. The eight are Vadlamani Srinivas (former CFO), S Gopalakrishnan (Pricewaterhouse Partner), Talluri Srinivas (Pricewaterhouse Partner), B Suryanarayana Raju, G Ramakrishna, G Venkatapathi Raju, Ch Srisailam and VSP Gupta (all former Satyam staff). Following the judgment, all the 10 convicts were shifted to the high-security prison at Cherlapally, outside Hyderabad. 

In 2014, capital market regulator Securities and Exchange Board of India had imposed a fine of Rs. 1,850 crore on the Raju’s for making unlawful gains and barred them from entering the financial market for 14 years. A local court’s Economic Offences Wing also fined them Rs. 10 lakh and sentenced them to a jail for a term of six months for financial irregularities.

Additional Chief Metropolitan Judge BVLN Chakravarthi  delivered the judgment on  Thursday , completing the five-year trial in the special court. The court was formed by the Andhra Pradesh High Court and entrusted with all the cases related to the scam. The media was not allowed inside the court hall. Eventually, the biggest corporate fraud in recent times forced the government and SEBI to bring in a slew of measures to improve corporate governance.

LESSONS LEARNED FORM THE CASE:

The 2009 Satyam scandal in India highlighted the nefarious potential of an improperly governed corporate leader. As the fallout continues, and the effects were felt throughout the global economy, the prevailing hope is that some good can come from the scandal in terms of lessons learned [17] .Here are some lessons learned from the Satyam Scandal: 

• Investigate all Inaccuracies:  The fraud scheme at Satyam started very small, eventually growing into $276 million. Indeed, a lot of fraud schemes initially start out small, with the perpetrator thinking that small changes here and there would not make a big difference, and is less likely to be detected. This sends a message to a lot of companies: if your accounts are not balancing, or if something seems inaccurate (even just a tiny bit), it is worth investigating. Dividing responsibilities across a team of people makes it easier to detect irregularities or misappropriated funds. 
•   Ruined Reputations:  Fraud does not just look bad on a company; it looks bad on the whole industry as well as the country. “India’s biggest corporate scandal in memory threatens future foreign investment flows into Asia’s third largest economy and casts a cloud over growth in its once-booming outsourcing sector. The news sent Indian equity markets into a tail-spin, with Bombay’s main benchmark index tumbling 7.3% and the Indian rupee fell”. Now, because of the Satyam scandal, Indian rivals will come under greater scrutiny by the regulators, investors and customers. 
•   Corporate Governance Needs to Be Stronger:  The Satyam case is just another example supporting the need for stronger Corporate Governance. All public-companies must be careful when selecting executives and top-level managers. These are the people who set the tone for the company: if there is corruption at the top, it is bound to trickle-down. Also, separate the role of CEO and Chairman of the Board. Splitting up the roles, thus, helps avoid situations like the one at Satyam. The fraud committed by the founders of Satyam is a testament to the fact that “the science of conduct” is swayed in large by human greed, ambition, and hunger for power, money, fame and glory.

CONCLUSION:

Recent corporate frauds and the outcry for transparency and honesty in reporting have given rise to two outcomes. First, forensic accounting skills have become very crucial in untangling the complicated accounting maneuvers that have obfuscated financial statements. Second, public demand for change and subsequent regulatory action has transformed Corporate Governance scenario across the globe.

The Satyam fraud has shattered the dreams of different categories of investors, shocked the government and regulators alike and led to questioning of the accounting practices of statutory auditors and corporate governance norms in India. Severe corporate governance problems emerge out of the above-mentioned corporate wreckage. Many of these governance problems were noticed in several other such corporate failures in USA, UK and Europe. These countries reacted strongly to the corporate failures and codes & standards on corporate governance came to the centre stage.

In addition, the Corporate Governance framework needs to be first of all strengthened and then implemented in “letter as well as in right spirit”. Even though corporate governance mechanisms cannot prevent unethical activity by top management completely, but they can at least act as a means of detecting such activity before it is too late. When an apple is rotten there is no cure, but at least the rotten apple can be removed before the infection spreads and infects the whole basket. [18]  This is really what effective governance is about.

[1]  India Today (New Delhi), January 26’ 2009, p 43

[2]  The Pioneer (New Delhi), January 11’2009, p 1

[3]  India Today (New Delhi), January 26’2009, p 43

[4]  The World Bank is now having a relook at the ban imposed on the Mahindra Satyam when it was under the Raju’s family. Satyam requested for lifting the ban. (Economic Times, New Delhi, May 06’ 2010, P 21)

[5]  Economic Times (New Delhi) , December 24, 2009, p1

[6]  Economic Times (New Delhi), December 30, 2009, p1

[7]  Economic Times (New Delhi), January 8’ 2009, p 1.

[8] http://economictimes.indiatimes.com/Satyams_Raju_brothers_arrested_by_AP_Police/rssarticleshow/3957655.cms

[9]  Times of India (New Delhi), January 25’ 2009, p 1

[10]  http://economictimes.indiatimes.com/articleshow/4084919.cms

[11]  Times Of India (Delhi), January 25’ 2009, p 1

[12]  On February 19’ 2009, the Company Law Board (CLB) had given nod to Satyam board to get a new owner through the process of open auction and authorized it to make a preferential allotment of shares at par or at premium without the need of calling an AGM. (Pioneer, February 20, 2009, p 10)

[13]  The marquee list of bidders included engineering firm L&T, billionaire investor Wilbur Ross, IT services firm Tech Mahindra, B.K. Modi promoted Spice Group and IT services firm Cognizant Technologies. (Economic Times (New Delhi), August 31, 2009, p 6)

[14]  India Today, April 27, 2009, p 46

[15]  Mahindra Satyam is the new name given to Satyam Computer Services Ltd having its registered office at 1st floor Mayfair Centre, S.P. Road, Secunderabad, Hyderabad, India.

[16]  R. Chakrabarti, W. Megginson and P. K. Yadav, “Corporate Governance in India,” Journal of Applied Corporate Finance, Vol. 20, 2008, p 59-78

[17]  B. Behan, “Governance Lessons from India’s Satyam,” Business Week, 16 January 2009.

[18]  Jim Solomon and Aris Solomon (2004), “Corporate Governance and Accountability”, John Wiley & Sons Ltd, England, page 42

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