Discuss the circumstances under which Satyam's fra
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Discuss the circumstances under which Satyam's fraud was exposed.
1, the failure of the acquisition of Maytas Infra and Maytas Properties which are promoted by two sons of satyam's chairman, Ramalinga Raju.These two companies are considered as business companies where they held more than 35%portion stake (significant realted party transcation involved in the acquisition)
2,the investors strongly against this acquisition , share price fell off by 30%
Media and investors started raising doubts over the corporate governance practices at Satyam ----- considering a share buyback
3,World Bank suspended Satyam for eight years from doing any business with itself
(offering brides to obtain lucrative contracts)
4,an independent director resigned (not opposing to the acquisition)
5, Infrastucture Leasing and Financial Services Trust sold 4.41 million shares which results in the decrease in the raju and his family stake in Satyam
6, market capitalization eroded by 40 %
7,former senior executive in Satyam sent out an anonymous email to board members and then forward ( include details about financial irregularities and fraud at Satyam.
What do you think were the reasons for the fraud? Could this fraud have been prevented?
1, Low profit margin (3%) and increasing competition----overstate profits to maintain the share price level which can make sure Satyam was not subjected to a hostile takeover.
2, raju could first think that a minor adjustment could be in the general interest of everyone concerned (cover up bad performance and become unmanagemeable with company expands)
3, Experts refuse to believe that the operating profit of Satyam could be as low as 3%. This leads to speculation that some of the money could have been siphoned off.
2. Critically evaluate the corporate governance mechanisms adopted at Satyam. Did they help to prevent fraud?
First --- internal audit (team headed by CFO ( financial gap in actual and stated profits was known to senior officials including the chief operating officer and the CFO
Second----- external audit (Pwc) --- higher audit fee twice as peers exists bride---- to hide accounting irregulations( improper verification of cash and bank balances)
Third ---- the board has the audit committee headed by an independent board member
3. What lessons are learned from the Satyam case?
1. Investigate All Inaccuracies
The fraud scheme at Satyam started small. Sound familiar? A lot of fraud schemes start out small, with the perpetrator thinking that small changes here and there won't make a big difference - and are less likely to be detected. This sends a message to a lot of companies: if your accounts aren't balancing or if something seems inaccurate, even just a tiny bit, it's worth investigating. Break down tasks so that there are checks in each area. Dividing responsibilities across a team of people makes it easier to detect irregularities or misappropriated funds.
2. Ruined Reputations
Fraud doesn't just look bad on a company, it looks bad on the whole industry. According to a Reuters article, Accounting Scandal at Satyam Could be India's Enron :
"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 tailspin, with Bombay's main benchmark index tumbling 7.3% and the Indian rupee fell."
The Satyam scandal subjected even the company's Indian rivals to greater scrutiny by regulators, investors and the public.
3. Corporate Governance Needs to be Stronger
The Satyam case is just another example supporting the need for stronger corporate governance. Companies must be careful when selecting executives and top level managers. These are the people who set the tone for the company - if there's corruption at the top, it's bound to trickle down. Separate the role of CEO and Chairman of the Board. When the same person takes on both roles, who's left to check up on the CEO? Splitting up the roles helps avoid situations like the one at Satyam.
Auditing firms, like Pricewaterhouse Coopers also need to be brought under the regulatory umbrella. Without monitoring, it will be difficult to tell if the auditor and the company are working together to tamper with the accounts.
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