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Governance failure at

SATYAM

GROUP MEMBERS

Arun K S

13020841118

Akansha Mohanty

13020841064

Ankit Uttam

13020841066

Nishigandha sorte
Siddiqui Zeeshan
Taranpreet Kaur
Pankaj

13020841090
13020841104
13020841113
13020841119

1. Circumstances for Exposure &


Reasons for fraud

Dec 16th -17th :Maytas acquisition failure: 51% in Maytas infra(listed in


BSE), 100% in Maytas Properties(unlisted) lead to negative investment
failure.

Total value of these two companies $1.6 billion. Justification given was
slow down in IT industry and diversification.

Decline 55% in Satyams ADR, share price by 33%

Dec 23rd :World Bank suspended Satyam for 8 years for bribery
charges, but denied the allegations

Dec

26th

:Mangalam

Srinivasan

independent

director

since

1991,resigned taking responsibility for not voting against acquisition.

Dec 28th :board meeting got postponed, IL&FS Trust sold 4.41 million
shares in open market, family stake dilution from 8.65% to 5.13

Anonymous email to board stating financial


irregularities and lack of liquidity, three more
independent directors resigned.
To keep up the share price, even though
profit is 3%
PwC India had failed to independently
confirm cash balances in bank accounts that
supposedly rose to over $1 billion by the time
the fraud ended
Lack of Transparency: Embezzlement of funds
over

20

crore

from

13000

non-existent

2. Could this fraud have been prevented and by


Whom?
In retrospect this scam could have been prevented,

The buck stops with CEO at any organization, in


Satyams case the scam started with Rajus mishandled
ambitions

Even though CEO acts as a gatekeeper to all the


misappropriations and creative accounting practices. But
in this case the
CFO-Srinivas Vadlamani, COO-themselves collude with
CEO

Even though PwC initially distanced them from the Scam


but, as the primary auditor of the 4th largest company of
India they were lax and on a large extent they were
major partner in the scam as per analysis.

The BOD agreed with the Maytas without consenting with the
share holders and when the scam broke they distanced
themselves from the scam. So we understand that they should
be more aligned to the companies interest more than the CEO

Industry associations like CII-Confederation of Indian Industry,


NASSCOM should have been proactive in implementing
corporate governance across hierarchies in the firm.

3. Corporate Governance at
Satyam

Satyam was one of those few companies in India that


supposedly had been doing things the right way. It allegedly
had all the checks and balances a U.S. company would want in
an overseas business partner. Its financial statements received
repeated clean bills of health from a respected outside auditor,
Price Waterhouse Coopers. And still its corporate governance
rotted away from the inside. So apart from the corporate
governance point of view the important thing is that you have
to trust that your overseas partners are working honestly.
Satyam is an ugly reminder that we should keep that point
very, very small.

SEBI requires Indian publicly held companies to ensure that

The knowledge available to independent directors and


even audit committee members is inherently limited to
prevent wilful withholding of crucial information

The reality is, at the end of the day, even as an audit


committee member or as an independent director, One
would have to rely on what the management was
presenting to him.

Satyam was one of the worlds largest implementers of


SAP systems. In an effort to compete against Satyam,
HCL acquired Axon, an SAP consulting firm, at a cost of
$800 million. 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.

Our Analysis
Independent

directors should also (in addition to the


management) be held accountable for board
decisions and audit-related compliance practices.

The

concept of CEO and Board chair separation is


well accepted in Europe, and American companies
are steadily moving in that direction. This would bring
a better balance in the boardroom.

Accountability

and action against fraud/negligence


are major concerns. Professionals (auditors) should
be
made
accountable
and
consequences
(punishment) should follow if there are any
deficiencies and slip-ups.

4. Responsibility of statutory audit

Internal Audit committee- Headed by the CFO, Srinivas Vadlamani

Statutory Audit committee- PricewaterhouseCoopers(PwC) contracted in


2000

Audit committee of the board- Headed by independent board member.

Under the Companies Act, an auditor is required to express an opinion as


to whether the annual accounts give a true and fair view of the companys
state of affairs and financial position.

PwC was paid INR430 million for auditing which was close to thrice the
fees paid by other IT companies.

PwC should have declined the offer of such huge fees at the very first
place and should have raised a red flag that why Satyam was ready to
pay so much money.

PwC management should have questioned its own employees who were
auditing Satyam.

It should have verified the cash and bank balances properly and fairly.

The auditors have to perform an essential function of fraud prevention


and deterrence.

Auditors should not have neglected the misrepresented amounts, fake


invoices etc.

5. Analysis of Resignation Letter


FINANCIAL ANALYSIS

He inflated the cash and bank balances of Rs 5040 crore.

Interest of 376 crore was not shown in the books.

He understated the liability of RS. 1230 crore

He overstated the debtors position by 490 crore

For the September quarter he showed the revenues as


2700crore and operating margin as 649crore but in reality
these figures were 2112crore and 61 crore

Apart from the Financial Analysis, there were some other


important points in the letter.

The only reason why he confessed his crime was because of his
inablility to fill the marginal gap between the actual operating
profit

and

the

one

reflected

in

books

that

had

attained

unmanageable proportions as the size of the company operations


grew significantly.

In his resignation letter he also stated that the MAYTAS deal was
the last attempt to fill that gap but as this didnt happen hence the
gap could not be filled

In the conclusion he also recommended the board about some


merging opportunities and also requested for the restatement of
the accounts and also apologized to all the stakeholders and
satyamites and requested them to stand by the company in this
hour of crisis

6. ROLE OF BOARD OF
DIRECTORS IN CORPORATE
GOVERNANCE

BOD- ROLES & CG


The principal role of the board of directors is to
oversee the function of the organization and ensure
that it continues to operate in the best interests of all
stakeholders.
Strategic asset for the company
Promoting a transparent culture that promotes
effective dialogues among the directors, senior
management, and various function and risk
managers
Boards of directors in large public companies is that
the board tends to have more de facto power.
Issue of fundamental importance in economics
BOD responsible for the strategic aspect of the
firm.
This implies that the underlying management

SATYAM & BOD

Saytam revealed that it did not have a financial expert on


the board during 2008

Board of Directors lack of independence

The Board first came under fire on December 16, 2008


when it approved the Maytas Deal. The Board rescinded the
approval after shareholders and investors went against it.

Krishna Palepu, Rommohan Rao, and Vinod Dham all


resigned from the Board within two days of the rescission of
the transaction.

The botched transaction provided the investors with the


impression that the Board was not actively monitoring
Satyam. Furthermore, the Board should have caught some
of the same red flags that the auditor, PWC, missed.

Additionally, the Board of Directors should have been


concerned with the knowledge that Mr. Raju decreased his
holdings of Satyam significantly over the three years
leading up the disclosure of the fraud.

Points out to not efficient policy administration , faulty

7. Regulatory Changes is the


Answer?
To

some extent. Yes. Enforcement


regulations definitely plays the key.

of

Absence

of stringent Laws : White-Collar


Crime Penalty Enhancement Act of 2002
provides for the penalty for such crimes. In fact
section 906 of this Act provides for 20 years of
imprisonment
Whereas in India, the Companys Act (1956),
Section 628 provides for 2 years imprisonment
only.

Regulatory Changes after Satyam Scandal

The new companies bill proposes fundamental changes in the


way companies are run in India.

1.In

Company Act 2013, Independent Directors constitute at

least one-third of the BOD in every public limited company.


2.Mandatory
3.Increased
4.Adoption
5.Strict

disclosure of Pledged Securities

Financial Accounting Disclosures

of IFRS (International financial reporting standards)

civil and criminal laws

6.Rotation

of audit partners every five years.

7.Constitution

of Serious Fraud Investigation Office(SFIO).

Negatives of excess regulations


It

is not clear that more paperwork is the


answer, consider Sarbanes-Oxley, which did
nothing to prevent the current scams in the
US.

More

regulation, especially in bureaucratheaven India, will probably just choke


businesses to death, suffocating, License Raj
which, incidentally, did enrich those that
had the right contacts.

8. Lessons Learnt

Improvement required in Law regulatory systems


Rotation of auditing firms
Strengthening of quality review
Criteria for remuneration to key personnel
Education on ethical values
Empowering whistle blowers.
However, One must understand no matter how strong a
regulatory systems is, it cannot always prevent fraud.
There are limits to legislations as a lot depends on the
integrity and ethical values of various corporate players.
The key lies in management decisions and its
commitment to establish and follow rigorous systems.