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Fraud is an act which takes place in almost every sector. Corporate frauds are illegal and are generally the ones which are tainted by the breach of trust of persons holding fiduciary relationship with the company. Fraud is also defined as those acts which ascertain to create such misrepresentations in the eyes of the third party that can be lethal for the company in the long run and it further creates unlawful benefits for the person committing it. The organization shall make endeavors to deal with frauds and to prevent all such circumstances which can lead to fraudulent activities in a company. It shall also develop procedures and systems which can monitor the functions and identify any kind of illegal or illicit activity in the system. Fraud can take place either at managerial level and is known as “managerial fraud” or the ones that takes place at employees’ level and is coined as “fraud by employee’s association.”This article majorly focuses on the Satyam Scam that took place in India in the year 2002. The article further discusses about nuances, reasons for commission of such crimes, order by different authorities in the case and changes in corporate governance aftermath.
The Satyam Computer Service scam is a corporate fraud of Rs. 7,000 crores committed by the promoters of Satyam Computer Services in the year 2009. The Satyam Computers was at its peak and kept flourishing with years. It was also known as “IT Crown Jewel of India.” The Satyam Company Services Limited (hereinafter referred as SCSL) was incorporated as a private company on 24th June 1987 in Hyderabad with a strength of 20 employees. It originally had two shareholders viz.B.Ramalinga Raju and D.V. Satyanarayana Raju. These two were also the promoters of the company. The company became public in the year 1992 by getting itself listed on the Bombay Stock Exchange (hereinafter referred as BSE). The SCSL was a company that majorly dealt in full range of IT services. It also served business process outsourcing services. The company operated on a global level and it was incorporated in more than 55 countries withmore than 30,000 employees who served more than 500 companies of the corporation. Out of 500 companies, 150 companies constituted a part Fortune 500 companies. In 1999, it was declared to be the fastest growing IT company in India.Mr. Ramalinga Raju was also awarded “Entrepreneur of the Year” by Ernest & Young in 2007. It was also awarded “Global Peacock Award”by World Council for corporate governance in September 2008. Just after 5 months of being awarded Global Peacock award, the satyam scam was unfolded, and it was also termed as “India’s Enron” and “debacle of Indian Financial System.”
Mr. Ramalinga Raju’s Confession
Mr. Ramalinga Raju on 9th January 2009 resigned from his post and informed the board of directors through a letter confessing to the manipulation of accounting numbers for years. Through this confession it came into light that nearly $ 1.04 billion amount in bank loans and cash owed to be claimed by the company was non-existent. The liabilities were also rated lower than the actual amount. SCSL overstated its income in order to meet the analyst’s expectation every quarterresulting in piling up of fraud in such a huge amount. Mr. Raju created several bank accounts and used these bank accounts to escalate the balance sheets with fake balances. He also admitted to create nearly 6,000 salary accounts with the intent to appropriate themoney deposited by the company. It is also believed that the cash raised from the americandepository receipts never made it to the company’s accounts. Mr. Raju breached the fiduciary relationship he had with the company as a promoter, at various levels and also affected the employment of various persons serving the company at different positions.
Manipulation of books of Accounts
During the period of 2001 when company went public, there was a huge growth in the real estatein Hyderabad. Estimating the profits and the trending boom in purchase of property in the city, Mr. Raju also got attracted to the industry. At that time, Raju bought properties in Hyderabad aggressively which resulted in shortage of funds hence to obtain more funds and profits, he went on to manipulate the books of accounts of the company. Mr. Raju kept practising this system and he opined that he will obtain profits once the prices of the properties start to increase. Further, he planned to balance the amount when he incurs profits from the properties purchased. Meanwhile, the manipulations in the books of accounts made sure that the condition of company seemed growing and incurring profits. He also kept increasing the prices of shares so as to gain profits and with those profits he would again buy more properties. With time, the gap in the actual profits and the profits shown in books of accounts kept growing.
The scenario changed when the economy witnessed recession in the year 2008 and due to this, the prices of properties also decreased. Mr. Raju found himself surrounded in a quagmire and therefore, this gave birth to his last opportunity to save SCSL and fill the gap between the actual profits and manipulated profits in books of accounts of the company. He decided to buy MaytasProperties and Maytas Infra which could possibly be the only solution to get away with the situation and ameliorate the fraud initiated by him. The transaction was planned in such a manner that the companies will be purchased only on papers but there will be no actual cash transaction and hence, this will balance the amounts already mentioned in the books of accounts. The board of directors of SCSL agreed and sanctioned the purchase of companies without prior approval of the shareholders. The problem occurred again when the purchase made investors unhappy which resulted into a sudden decrease in the shares of the company. A law suit was also filed against SCSL which led to a decrease in the shares by 55% on the NYSE. The increasing pressure served as the final nail in the coffin for Mr. Raju and hence he confessed of manipulation of books of accounts and committing of fraud before Securities Exchange Board of India (hereinafter referred as SEBI).
This confession came as a shock to investors, shareholders and to everyone else. The Government immediately appointed new board of directors for the company and ultimately 51% of SCSL shares were bought by Mahindra and it was then known as “Mahindra Satyam”. Consequently, it merged with Mahindra group and now it is famously known as ‘Tech Mahindra.’
Role of Accountants in Satyam Scam
It is believed by a lot of people that the chartered accountants are involved in the Satyam Scam i.e. Price Waterhouse (hereinafter referred as PWC) India because of the fact that fraud went undiscovered for such a long time. A similarity between the role of PWC in the aforesaid case is drawn to the conduct of accountants in Enron case. The SFIO report also opined that the accountants instead of using independent testing mechanism used the tools of Satyam and hence were negligent in performing their statutory duties and reporting standards.The accountants in the instant case, not only failed in bringing the clear picture in the eyes of the public but also perpetrated the fraud by givinga clean chit to the company and by depicting the correctness of books of accounts. Satyam’s case highlights the loopholes in controlling and determining the actions of the auditors.Lamentably, PWC was managing the accounts of the company from the past 9 years and still it failed to unveil such a huge scam.
SEBI in 2014 ordered that Mr. Ramalinga Raju and 4 others should be barred to deal in the markets for 14 years and also asked for an amount of Rs. 1,849 crores worth of unlawful gains with interest.The interest was charged at the rate of 12% per annum with effect from the date on which Mr. Raju made such confession about the fraud and manipulation of the books of accounts. The amount was supposed to be deposited within 45 days from the date of order along with interest. The 4 others culprits who are facing prohibitory orders were B Rama Raju (Managing Director of Satyam), Vadlami Srinivas (Ex-Chief Financial Officer), G Ramakrishna (Ex-Vice President) and VS Prabhakara Gupta (Head of Internal Audit). SEBI in its 65-pages long judgment acknowledged the fact that a sophisticated whitecollar crime has been committed by the promoters and accountants of the company and this deliberate action of the persons involved was a well-designed plan to incur personal gains and was detrimental to the company and the investors involved.
The Securities Appellate Tribunal (hereinafter referred as SAT) also identified the actions as fraudulent under the Prohibition of Fraudulent and Unfair Trade Practices (hereinafter referred as PFUTP) and also held the erstwhile promoters and SRSRliable for conductinginsider trading which is prohibited under the Prohibition of Insider Trading (hereinafter referred as PIT). However, through a fresh order dated 2nd November 2018, SEBI decreased the amount of penalty to Rs. 813 crores.
The case was handed over to the CBI as soon as the matter came to light and people got wind of it. A team was constituted viz.Multi-Disciplinary Investigation Team (also referred as MDIT) to investigate the case. After 45 days the team came up with the findings that the accused shall be put on trial for charges of criminal conspiracy, cheating, forgery and falsification of accounts.It also reiterated that the bank accounts were forged with the assistance and connivance of internal auditors and officials.The auditors have also wrongfully presented to the audit committee that the deficiencies therein where insignificant.The Special Bench constituted, sentenced the Mr. Raju and all the other accused of a jail term of seven years and also imposed a penalty of Rs. 5 crores. Considering their roles in the satyam scam, the CBI has also found two of the auditors’ prima facie guilty of professional misconduct.
Consequences faced by India’s Corporate Governance
The revelation of such huge accounting scam has created several problems in India. The primary and the most lethal repercussion of the scam which was foreseeable was reluctance and decrease in India’s appeal for foreign investment inthe IT services sector.. Further the shares of Satyam hit the lowest at 30 and saw a decline of 77% in its value. Such scams and experiences serve as warnings for the investors and people to be vigilant before investing their money in any company.Though necessary steps were undertaken by the Indian corporate governance (hereinafter refereed as ICG), the Federation of Indian Chambers of Commerce and Industry (hereinafter refereed as FICCI) also issued a statement addressing the issue and stating that the scam was an exceptional situation and the investors need not worry about accounting standards and corporate governance in India.
The scam also opened India’s eyes on several loopholes persisting in the ICG rules like non-disclosure of material facts to the stakeholders, insider trading, unethical conduct, fraudulent accounting etc. To curb these problems in the ICG a task force was set up by Confederation of Indian Industries and based on recommendation of this task force the Ministry of Corporate Affairs (hereinafter referred as MCA) issued voluntary guidelines for Corporate Governance in 2009. The National Association of Software and Services Companies also established a Corporate Governance and Ethics Committee which suggested reforms concerning audit committees, rights of shareholders and policies relating to whistle blower.
SEBI also amended the existing guidelines relating to corporate governance. Amendments in the Listing Agreement were also made to ensure prevention of such fraudulent activities. SEBI also introduced SEBI (Listing Obligation and Disclosure Regulation) (hereinafter referred as LODR), 2015 which is applicable on all public companies, thereby making stringent rules and guidelines in regards to disclosure of material events and accounts of the companies.
The government also took necessary measures by introducing Companies Act, 2013 (hereinafter referred as Act) which vehemently focussed on interest of stakeholders. The Act also declared corporate fraud as a criminal offence. It created clear guidelines for disclosure of fraud by cost accountants, company secretaries and auditors. It also created a rule of checks and balances in the Act thereby ensuring proper governance and management of companies in the country. It also embodied a clause making it mandatory to rotate individual auditors of the company in every five years and in auditing firms every 10 years. Further the accountants are obligated to disclose if they find any kind of fraud being practised by the company or persons related to it, while performing their duties.
Satyam case was a perfect example of “abuse” and “misconduct” bythe accountants of SCSL where the company cooked up the books of accounts. The fraud has also unveiled systemic insider trading, so it has become quintessential to deliberate these issues and formulate stringent laws for the same. Though the firm was saved by purchase of it by Tech Mahindra but there was still a total recorded loss of Rs. 9,386 crores. This scam raised huge questions and debacles for accounting and norms relating to accounting practices in India. This scam served as a wakeup call for the ICG and a dire need of implication of more stringent laws in the country, in this regard.
Read about Enron Scam
Satyam Computer Services Ltd. (Merged), Economic times, https://economictimes.indiatimes.com/satyam-computer-services-ltd(merged)/infocompanyhistory/companyid-11407.cms.
 Satyam case: SEBI bans Raju and others for 14 years, https://www.thehindu.com/business/Industry/satyam-case-sebi-bans-raju-others-for-14-years/article6213750.ece
 Satyam Scam: Sebi Passes Fresh Order; Directs Raju, 3 Others To Disgorge Over Rs 813 Cr, http://www.businessworld.in/article/Satyam-scam-Sebi-passes-fresh-order-directs-Raju-3-others-to-disgorge-over-Rs-813-cr/02-11-2018-163617/
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Satyam case: Ramalinga Raju, nine others get seven years jail, https://www.moneylife.in/article/satyam-case-ramalinga-raju-nine-others-get-seven-years-jail/41195.html.
 Scandal at Satyam: Truth, Lies and Corporate Governance,Wharton University of Pennsylvania, https://knowledge.wharton.upenn.edu/article/scandal-at-satyam-truth-lies-and-corporate-governance/
Susmit Pushkar and Susanah Naushad,What changed in the legal landscape post-Satyam scam, https://www.moneycontrol.com/news/business/companies/what-changed-in-the-legal-landscape-post-satyam-scam-2480623.html.