CORPORATE FRAUD IN INDIA

WITH REFERENCE TO “SATYAM SCAM”

(2009)

MITCHELLE CHEN
MBA IN FINANCIAL MANAGEMENT (2016)
SEMESTER 1
 OBJECTIVES OF THE STUDY

• To Understand Corporate Frauds and analyze its implications for businesses based
on the Satyam scam 2009.
• To debate and suggest on the possible ways and means to arrest corporate fraud
menace in India and to examine the efficacy of the steps already taken
 DATABASE AND METHODOLOGY

• The study is based on secondary data which has been collected from various
newpapers and websites such as http://www.ibscdc.org/, www.cimaglobal.com,
www.investopedia.com, https://en.wikipedia.org, Economic Times, The Hindu, etc.
 INTRODUCTION

WHAT IS CORPORATE FRAUD?

Corporate fraud consists of activities undertaken by an individual or company that

are done in a dishonest or illegal manner, and are designed to give an advantage to
the perpetrating individual or company. Corporate fraud schemes go beyond the
scope of an employee's stated position, and are marked by their complexity and
economic impact on the business, other employees and outside parties.
 CORPORATE FRAUDS MAY INCLUDE:-
• Account takeover
• Application fraud
• Bankruptcy-related fraud
• Betting scams
• Business directory fraud
• Charitable publication scams
• Cheque fraud
• Cheque overpayment fraud
• Domain name scams
• Exploiting assets and information
• Fake invoice scams
• False accounting
• Fixed line fraud
• Government agency scams
• Insurance fraud
• Intellectual property fraud
• Long and short firm fraud
• Mobile phone fraud
• Mortgage fraud
• Office supply scams
• Payment fraud
• Personnel management
• Plastic card fraud
• Ponzi schemes
• Premium rate phone line scams
• Procurement fraud
• Pyramid schemes
• Receipt fraud
•
.

CORPORATE FRAUDS IN INDIA

According to The Global Fraud Survey, 2015-16, conducted by the risk-mitigation consultancy Kroll and the Economist Intelligence Unit:-
 The share of Indian companies that were victims of fraud in 2015-16.
 In 2013-14, only 69% of companies had reported fraud.
 Only Columbia (83%) and sub-Saharan Africa (84%) had more victims of business fraud
 Share of respondents who said their companies had witnessed an rise in fraud in 2015-16.
 Indian companies are "highly or moderately vulnerable" to fraud.
 Share of respondents who said that junior employees of their own company are "leading players" in fraud,
including corruption, compliance breach and procurement irregularities.
 Despite this, only 285 of the companies surveyed invest in background checks of employees.
 Share of companies that reported cases of corruption, making India the nation with the highest incidence of
corruption.
 Although only 8% of Indian companies reported money laundering, it's still more than in any other country.
 20% of Indian companies reported regulatory breach while 15% reported intellectual property theft.
 Amount of private equity investment in India that is entangled in legal disputes.
 "Most disputes are triggered when private equity investors suspect fraud in a portfolio company," says
Reshmi Khurana, Managing Director, Kroll India.
 Share of companies discouraged from operating in Latin America because of the risk of fraud.
 This is followed by Africa, where 22% of the companies are advised not to operate. In Central and Eastern
Europe, 14% companies follow this policy.
 SATYAM SCAM:-
ONE OF INDIA’S BIGGEST CORPORATE FRAUD

The government vowed to strengthen laws to prevent corporate fraud

after Satyam Computer, the country's fourth-largest software
company, shocked investors by revealing profits had been falsely
inflated for years. Chairman Ramalinga Raju resigned on 7th January
2009, after revealing India's biggest corporate scandal in memory,
sending the company's shares plunging nearly 80 per cent. The
following is an overview of how the fraud escaped detection for so long
and what compelled a soft-spoken man born into a family of farmers to
risk all.
 SATYAM-ENRON OF INDIA
 Mahindra Satyam (formerly Satyam Computer Services Limited) was an Indian IT services
company based in Hyderabad, India.
 The company was listed on the Pink Sheets, the New York Stock Exchange (2001), EURONEXT
Amsterdam stock exchange (2008) and Bombay Stock Exchange (1991).
 It offered a range of services, including software development, system maintenance, packaged
software integration and engineering design services.
 In a 2005 SEC filing, Satyam claimed topline growth of 40% to $794 million at 36% gross profit
margin. There were 20,690 technical associates. The five largest customers accounted for 29.5%
of IT services revenues. About 34.2% of its total IT services revenues were generated from fixed-
price contracts
 They together accounted for 42.4% of its IT services revenues. About 26.1% of its total IT
services revenues were generated from fixed-price contracts. Satyam also claimed topline
growth of 68% to $164 million at 45% gross profit margin.
 In addition to other controversies involving Satyam, on 7 January 2009, Chairman Raju resigned
after publicly announcing his involvement in a massive accounting fraud.
 PEOPLE BEHIND THIS SCAM

• RAMALINGA RAJU Former chairman of Satyam.

• B. RAMA RAJU Brother of Ramalinga Raju and former

Managing Director.

• V. SRINIVAS Ex-Chief Financial Officer

• S. GOPALAKRISHNAN Price Waterhouse Auditor

• TALLURI SRINIVAS Price Waterhouse Auditor

 How did Satyam escape
detection?

On the face of it, New York-listed Satyam did everything by the rulebook, with an international firm auditing
its books, declaration of accounts in accordance with Indian and U.S. standards, and the requisite number of
independent directors with excellent credentials, including a Harvard business school professor and a
former federal cabinet secretary. Raju, in his now famous 5-page letter outlining the deception, said no
other board member -- past or present -- was aware of the financial irregularities. Regulators were
blindsided, and analysts and experts say there are "systemic flaws" in accounting and audit practices. About
$1 billion, or 94 percent of the cash, on the company's books was fictitious, Raju said, and manipulation of
the cash flow may be a reason why the fraud was undetected. "Companies have manipulated P&L (profit and
loss) accounts before, but cash flow is the Holy Grail -- you don't tamper with it," said Saurabh Mukherjea,
an analyst at UK-based research firm Noble Group. "Auditors generally assume if there is cash, things are
okay. But there are plenty of accounting and governance loopholes." India also lacks a culture of dissent,
with shareholders and independent directors reluctant to question company founders.
 What was the motive?

India's $50-billion information technology industry -- the poster child for India's
economic liberalisation and rapid growth -- expanded at a scorching pace on
the back of outsourcing demand from Western firms. At the height of the boom,
top software firms Tata Consultancy Services, Infosys Technologies, Wipro and
Satyam consistently reported annual 50-per cent increases in profits every
quarter. Pressure to maintain this pace of growth, please investors and
shareholders and justify inflated P/E multiples during a six-year bull run on the
stock market have all been cited as reasons why Satyam cooked the books.
Some news reports say Raju was an aggressive investor in failed dotcoms, and
the family also put money in real estate. Raju, in his letter, said he had "not
benefited in financial terms" as a result of the inflated accounts.
 How the scam started to unravel?

 Stock markets around the world collapsed during 2008 & the BSE fell from 21,000 to below 8,000.
 The losses caused investors to withdraw funds from the stock market.
 Satyam’s continuance positive results during 2008, even in the economic crisis.
 In October 2008, Satyam reported net income of $132.3 million, an increase of 28 percent from the
same quarter of the previous year.
 Satyam asserted that, despite the challenging environment, continued to find opportunities for growth.
 During October, one stock analyst drew attention to large cash balances in non-interest bearing bank
accounts & expressed concern about the large balances and the accuracy of the numbers.
 Investors ignored the analyst’s and the stock price rose with the reports of positive earnings and
revenue growth.
 In December 2008, Broad of Directors approved the purchase of Maytas Properties and Maytas
Infrastructure, two companies unrelated to the information technology field.
 At the time, Mr.Raju and the Board anticipated that the market would “be delighted” by the transactions as it
would provide Satyam with greater diversification.
 However, investors were outraged over the transactions because Mr. Raju's family held a larger stake in
Maytas Properties and Maytas Infrastructure.
 Shareholders viewed the transactions as an attempt to siphon money out of Satyam into the hands of the
Raju family.
 Satyam quickly aborted the transactions, but the incident still caused significant damage to Satyam’s
reputation as a well-managed company.
 After the incident, Satyam’s shares dropped nearly 10% and four of the five independent directors resigned.
 On December 30, analysts with Forrester research advised clients to stop doing business with Satyam
because of the fear widespread fraud.
 Satyam hired Merrill lynch to advise it on ways to increase shareholder value.
 On January 7, just hours before Mr. Raju disclosed the fraud, Merrill lynch sent a letter to the stock
exchange indicating that it was withdrawing from its engagement with satyam because during the course of
its representation it found accounting irregularities.
 On January 7, 2009, Mr. Raju sent letter to Satyam’s Board of Directors admitting that he manipulated the
company’s accounts for numbers years.
 FAKE ACCOUNTS
 Mr. Raju overstated income in every quarter for years to meet analyst expectations.
 Mr. Raju created fake bank statements to advance the fraud.
 Mr. Raju created 6,000 fake salary accounts and appropriated the money after the company deposited
it.
 The global head of internal audit created fake customer identities and generated fake invoices against
their names to inflate revenue.
 Mr. Raju diverted a large amount of cash to other firms that he owned, since 2004.
SATYAM SHARES
~Biggest single day fall for a stock market
~Rs. 175 (January 6th, 2009)

STOCK MARKET
~BSE Sensex fell by 749.05 i.e., 7.25%.
~NSE fell by 192.40 points, i.e., 6.18%

COMPANY’S WORTH
~Rs. 11464 crore Rs. 1607 crore.

All time low of Rs.11.50 on 9th January 2009 and closed at Rs.23.75.

*Compared to highest of Rs. 524.90 on May 29, 2008.

 IMPACT OF SATYAM SCAM
 Jobs of over 50000 were at risk.
 India’s global image was suffered.
 Indian stock market fell dramatically.
 Biggest single day fall of Rs.175, on 6th January in satyam share.
 SEBI said that, if Satyam found guilty, its license to work in India may be revoked.
 The New York Stock Exchange halted trading in Satyam stock.
 India’s National Stock Exchange announced removal of Satyam from S&P CNX & Nifty 50.
 The GDP fell by 0.4%.
 I.T sector suffered a downturn.
REGULATORY ACTION
New board of directors were appointed.
Disclosure of pledged securities.
Increased financial accounting disclosure.
Adoption of international standards.
Creation of new corporate code of conduct by Ministry of Corporate Affairs.
 HOW THESE SCAMS CAN BE CONTROLLED

 In addition to the present statutory requirement, companies should be required to institute sufficient
internal management controls.
 Management should ensure that the internal audit staffs are able to prevent and detect financial statement
frauds.
 Company whose shares are publicly traded should be required to have audit committees to monitor the
internal control system and provide important links to the internal audit staff.
 Sanctions against preparators of financial statement fraud should be increased by imposing fines and
other deterrent measures like barring from other corporate office.
 There is a need to clarify the duties of external auditors.
 The management should formulate appropriate policies and procedures which would reduce such risks/.
 The audit report should include a letter from the chairman of the audit committee discussing the
committee’s responsibilities and activities during the year.