INDIA’S LARGEST CORPORATE FRAUD: SATYAM SCAM

Satyam fraud "encouraged India's government to tighten the CG requirements to prevent similar frauds from repeating in the future. Thus, for "lessons-learned" and "strategies-to-follow" to minimize the occurrences of such frauds in the future, significant financial reporting frauds need to be studied.
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Introduction

Fraud is a global problem impacting all continents and all economic sectors. A wide variety of fraudulent activities and illegal actions involving deliberate deceit or misrepresentation are covered under fraud. “The Association of Accredited Fraud Examiners (ACFE, 2010) states that fraud is “a deception or misrepresentation committed by a person or organization with the awareness that the deception or misrepresentation may cause damage. The consequence is some unauthorized gain for the individual or the agency or some other group.  In other words, mistakes do not constitute fraud. The Satyam Scam gives an insight into the corporate world fraud.

Indeed, groups of evil people manipulate or influence a target organization’s practices in the form of fraud, intending to make money or acquire goods by unlawful or unfair means. Fraud deprives the target organization of legitimate sales and products, resources, and even goodwill and reputation. Fraud also uses unlawful and unethical means or unfair means.

The “tip of the iceberg” is often the case for scandals. They reflect the catastrophic failures that are ‘visible’. In this essay, an attempt is made to investigate and evaluate India’s Enron, the “creative accounting” scandal of Satyam Machine, in detail. Their scandal/fraud has raised serious questions about India’s entire corporate governance structure. In public companies, this type of ‘creative’ accounting leading to fraud and investigations is launched by the various governmental oversight agencies.

The accounting fraud perpetrated by Satyam’s founders in 2009 demonstrates that “human greed, ambition, and hunger for power, wealth, prestige, and glory sway the science of behaviour in large part.” Scandals have shown that “good conduct based on sound corporate governance, ethics, and accounting and auditing principles is desperately needed.” Unlike Enron, which sank due to the ‘agency’ problem, Satyam was brought to its knee due to the ‘tunnelling’ effect.

In emerging markets, the Satyam controversy highlights the value of securities laws and CG. Indeed, the Satyam fraud “inspired the Indian government to tighten CG norms to avoid similar frauds in the future.” As a result, sizeable financial reporting frauds must be reviewed for “lessons learned” and “strategies to follow” to minimize the risk of potential frauds. The rising rate of white-collar offences requires strict punishments, exemplary penalties, and proactive law enforcement with the right spirit.

Satyam was once regarded as India’s rising star. It was founded in 1987 by Mr. Ramalinga Raju, with only 20 employees. Over the period 2003-2008, the business boomed and grew, and by the end of March 2008, Satyam’s revenues had reached a high of $467 and an annual growth compound rate of 35% and had much more achievements. Six months after the ‘Satyam’ team won the ‘Golden Peacock award’ on 6th January 2009, fraud charges were made, and it was reported that he had manipulated the company’s accounts for years (Rs. 7,316 Crores).

The scandal is a complete show of one’s carelessness with fiduciary duties, a complete breakdown of ethnic values, fierce competition and the need to please stakeholders, especially investors, analysts, shareholders, and the stock market; low ethical and moral standards by top management, and a greater focus on short-term success. Several provisions of the Indian Penal Code – Sections 120 B, 406, 420, 467, 471 and 477 A were charged to the accused by the CBI, Hyderabad, for breaching separate income tax laws. The accused were found guilty of the company’s profits being falsified, the company’s accounts were falsified, the income tax return was falsified, and the transaction invoices were fabricated.

Analysis

The investigation conducted on discovering the fraud resulted in charges against several separate groups of persons involved with Satyam. On criminal charges of fraud, Indian authorities arrested Mr. Raju, Mr. Raju’s brother, B. Ramu Raju, the company’s former managing director, Srinivas Vdlamani, the company’s head of internal audit, and the company’s CFO. Several of the company’s auditors (PwC) were also arrested and charged with fraud by the Indian authorities. “The CFO and the auditor is guilty of professional misconduct,” according to the Institute of Chartered Accountants of India (ICAI).

The holders of Satyam’s ADRs had filed multiple civil charges against the corporation in the United States. Several Indian leaders were also involved in the case. In India, civil and criminal prosecution proceedings continue, and civil litigation in the United States continues. According to Manoharan (2011), some of the major victims included:

  • Satyam’s workers spent stressful moments and sleepless nights facing non-payment of wages, cancellations of programmes, layoffs and similarly poor prospects of outside job opportunities. In several ways, they were stranded: morally, financially, legally, and socially.
  • Satyam’s clients showed a lack of faith and reviewed their contracts, opting to go with other rivals. Several multinational clients, such as Cisco, Telstra and the World Bank, have terminated their Satyam contracts. “Customers were taken aback and anxious about project longevity, confidentiality, and cost overruns.”
  • Shareholders have lost their valuable assets, and there have been questions about India’s rebirth as a favoured destination for investment. In a statement, the VC and MD of Mahindra said that the development had “resulted in incalculable and unjustifiable harm to, in particular, Brand India and Brand – IT.”
  • Bankers were worried and recalled facilities about the recovery of financial and non-financial publicity. · The Indian Government was concerned about its image of the nation and IT sector affecting the confidence of investing or doing business in the county.

The Satyam Scam Taught Us A Lot. The Satyam scandal in India in 2009 exposed the sinister potential of a corporate leader who is not properly governed. The predominant expectation is that some goodwill comes from the scandal in terms of lessons learned, as the fallout persists and the consequences are felt in the global economy.

  • Investigate All Inaccuracies: Satyam’s fraud scheme began small and developed into a $276 million white-elephant in the room. It sends a message to other companies: it is worth checking if the accounts are not balanced or if anything seems inaccurate. It’s easier to spot irregularities or misappropriated funds when tasks are spread through a group of people.
  • Ruined Reputations: Fraud doesn’t just look bad for a business; it looks terrible for the entire industry and a country. The memory of India’s most prominent corporate scandal threatens potential foreign investment flows into Asia’s third-largest economy and casts a shadow over growth in its once-booming outsourcing market. The Satyam case was just one example of why CG needed to improve. In 2009, the Ministry of Corporate Affairs amended a set of voluntary corporate governance guidelines concerning the following issues:
  • The Independence of Directors
  • Audit committees‘ functions and duties
  • The functions and tasks of the Boards of Companies
  • Whistleblower security policies
  • Separation of the chairman’s and CEO’s offices

Conclusion

The Satyam case was a prime example of “abuse” and “misconduct” by SCSL’s accountants, who manipulated them. Systemic insider trading has also been unveiled in the scam, so it has become necessary to deliberate on these issues and devise strict laws. Despite Tech Mahindra’s acquisition of the business, a total loss of Rs. 9,386 crores were reported. This scam raised big questions and debacles regarding accounting and accounting procedure principles in India. In this respect, this scam served as a wake-up call for the ICG and a desperate need to involve more stringent laws in the country.

Corporate organizations of all sizes worldwide are generally accepted to be vulnerable to accounting scandals and fraud.   Various forms of fraud and scams have lowered the integrity of financial data that investors use to make decisions.  It was also a contributing factor in the recent financial crisis, posing a danger to the debt and capital markets performance, liquidity, and protection. The Satyam scam shattered the hopes of various groups of investors, stunned both the government and regulators, and led to India’s statutory auditors’ accounting practices and CG standards being challenged. Satyam’s society, which was governed by the board, represented an immoral culture.

On the one hand, Mr. Raju’s rise to stardom in the corporate world, combined with tremendous pressure to please investors, made him a “mandatory leader to achieve outstanding results.” Mr. Raju, on the other hand, had to put his principles and beliefs aside for the greater good of the business. The board devised with his conduct and stood like a blind spectator; such activity was further promoted by the lure of great reward to members. Yet, in the end, the truth is found, and those who transgress legal, ethical, and social standards are brought to justice through the legal system.

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