CORPORATE GOVERNANCE

FAILURE AT
SATYAM
Team - Aziz Premji

Case Distinctive
Had its own complexities as it involved 14000crorescam.
Satyamscamhadbeentheexampleforfollowingpoorgovernance
Practices.
It had failed to show good relation with the shareholders and employees.
So as to throw a light onthe poor governance practice at one of the major IT
giants, the need to study such case is made important.
Taking this scam as a role model, it could be suggested that there is a need
to frame up good governance rules and seeto the proper implementation of
it.

How SCAM got exposed?

16 December 2008: The board approved a 51% stake acquisition of MAYTAS

INFRA and 100% stake in MAYTAS PROPERTIES. Both firms were in construction
& real estate business.

The deal required borrowing of US$300 million in addition to US$ 1.2 billion of
cash that Satyam claimed to possess.

There was stiff resistance from the Investors.

Even though Satyam called off this deal, it raised questions about its corporate
governance practices.

23 December 2008: World Bank suspended Satyam for 8 years from doing any
business with itself.

 On December 26- Mangalam Srinivasan, an independent director resigned.

IL&FS sold 4.41 million shares of Satyam in open market and hence Rajus and his
familys stake diluted to 5.13%.
According to Investors Protection and Redressal Forum, Investment bank DSP
Merrill Lynch, which was appointed by Satyam to look for a partner or buyer for
the company, ultimately blew the whistle and terminated its engagement with the
company soon after it found financial irregularities
A former senior executive in Satyam wrote an anonymous email about
the financial irregularities & fraud to one of the board members.
On January 7,2009 B. Ramalinga Raju wrote a resignation letter to the SEBI where
he admitted that he falsified the financial statements.

Reasons:
1. Weak corporate governance:
The mechanism for monitoring the actions, policies and decisions made in
Satyam was proved to be weak.
2. Dubious role of independent directors:
It is hard to believe the independent directors could not discover the wellplanned massive fraud and manipulations.
They should have questioned how and why the company was sitting on
such a huge pile of cash.
3. Failure at all 3 levels of auditing:
Financial irregularities were ignored by the internal & external auditors.
Internal audit headed by the CFO
External audit by PwC
Boards audit committee headed by independent directors

What can be don to prevent this?

Board
1. Must monitor the
ethical practices and the
way they are
implemented in the
company
2. Accountable for the
financial information
being projected
3. No to inactive board
members
4. Authority to
independent board of
directors
5. Clear understanding
of responsibility
between the board and

Government Regulation,
Policies and Intervention
1. Play an active role in
company affairs because
company runs with public
money
2. Frequently check the
companys performance in
the market and take
necessary steps in
curtailing any malpractices
or falsifications
3. Government intervention
must be increased in the
auditors work to have a
foolproof mechanism in the

Accounting Standards
1. To check the fairness and trueness
of the financial statements by
involving proper audit tools
2. Freedom for auditors
3. Reputation of auditing
firm/individual cant avoid scandals
4. Most of the companies involved in
mega scandals were audited by
reputed auditing firms

Ethics of individual/company, defining and

implementing code of conduct
1. Search or Nominations Committee
2. Proper code of conduct updated on a regular
basis should be implemented
3. Every company should have fraud detection
mechanism
4. Good corporate governance
5. Good educational practices doesnt always
mean individual has good ethics

Could this scam have been predicted?

In our analysis, 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

About Sathyams Board of Directors

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.

Roles and responsibilities of Auditors:

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.
Auditors brought in by the top management develop a cozy relationship which has
led them to get comfortable with even fraudulent accounting practices found time
and again in a company
Good auditing practice requires the auditor to confirm the balances directly with
the bank or by confirming with the banks the statements provided by the
management.

Auditors:.
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.
But PwC failed in all the aspects in Satyam case.

Learnings:
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.

Suggestions:
An institution of mechanism for whistle blowers with an effective whistle blower
policy in place.
Central Governments power to direct special audit in certain cases
To re-appoint independent directors after expiry of a term of five consecutive years
Blacklisting of Chartered Accountants by ICAI for indulging in fraudulent accounting
practices
Use of investigative audit techniques & Forensic auditors
New Auditing regulations must be cost effective for the companies
Promotion of shareholders democracy with protection of rights of minority
shareholders