41741272 project-ii-failure-of-satyam3

Organizational Behaviour

Project II

Organizational Failure: The Satyam Saga

Group Members (D/3):

Daisy Basumatary 197

Dass Banty Ashok 198

Devashish Agarwal 200

Prateek Vijaivargia 225

Ravi Rambhatla 231

Satheesh Gowtham 233

Sathyamoorthy M 234

Shivakumar R 237

Organizational Behavior

Table of Contents

1.0 EXECUTIVE SUMMARY....................................................................................4

2.0 COMPANY PROFILE.........................................................................................5

2.1 Achievements....................................................................................................................6

2.2 Industry Presence..............................................................................................................6

2.3 Competencies....................................................................................................................7

2.4 Controversies....................................................................................................................7

2.4.1 Maytas acquisition.........................................................................................................7

2.4.2 World Bank...................................................................................................................8

2.4.3 Upaid lawsuit.................................................................................................................8

2.4.4 Accounting scandal of 2009..........................................................................................8

3.0 THE CHRONOLOGY OF SATYAM FAILURE:....................................................9

3.1 Details...............................................................................................................................9

3.2 The Aftermath:................................................................................................................10

4.0 THE ANALYSIS: SOURCES/CAUSES.............................................................12

4.1 Corporate Governance:...................................................................................................13

4.2 Failure of Supervisory and Regulatory Agencies:..........................................................14

4.3 The Auditor:....................................................................................................................14

4.4 Number of Employees:...................................................................................................16

4.5 The Maytas chapter:........................................................................................................17

4.6 The role of SEBI:............................................................................................................19

4.7 Ministry of Corporate Affairs:........................................................................................20

4.8 The Income Tax Department:.........................................................................................20

4.9 Institute of Chartered Accounts of India (ICAI):............................................................20

5.0 MORAL AND ETHICAL FAILURE:..................................................................20

6.0 MEASURES TO AVOID SUCH RECURRENCES:...............................................23

6.1 The Laxity of Indian laws:..............................................................................................23

PGP13/Group 3/Section D


6.2 Conclusions and Recommendations:..............................................................................24

6.3 Five Core Issues of governance......................................................................................26

6.4 A problem of ethical deficit............................................................................................27

7.0 CONCLUSION:................................................................................................28

8.0 SOURCES OF INFORMATION.........................................................................29



1.0 Executive Summary

On January 7th, 2009, Satyam Systems, a global IT company based in India was added to a

notorious list of companies involved in fraudulent financial activities, one that includes such

names as Enron, WorldCom, Societe General, Parmalat, Ahold, Allied Irish, Bearings and

Kidder Peabody. Satyam's CEO, Ramalingam Raju, took responsibility for broad accounting

improprieties that overstated the company's revenues and profits and reported a cash holding of

approximately $1.04 billion that simply did not exist.

Satyam Computers, the fourth largest IT industry of India, The member of Nifty 50, BSE

Sensex, and winner of golden peacock award for best corporate governance, and many more

laurels that it has in its kitty did not stop it from drowning like a rock in its dirty waters.

Satyam, which means “truth” in Sanskrit, plunged in New York trading, after earlier dragging

down India’s benchmark index, in a scandal described as “horrifying” by markets regulators.

Raju’s reign unraveled as a shareholder revolt blocked the asset purchases, a World Bank ban

kept Satyam from bidding for orders and four directors quit.

The disclosure of fraud of such magnitude caught everyone by surprise. Questions arise over

why this episode actually took place. What was the reason behind it.

Was it the result of individual greed?

Was it celebration of profit-making?

Was it belief in markets or regulatory failure?

Through this report we analyze the event and the happenings that covered the failure of satyam

in the organization theory perspective.



2.0 Company Profile

Satyam Computer Services Ltd was founded in 1987 by B Ramalinga Raju. The company offers

consulting and information technology (IT) services spanning various sectors, and is listed on

the New York Stock Exchange, the National Stock Exchange (India) and Bombay Stock

Exchange (India). Satyam's network spans 55 countries, across six continents. The company

employs 45,000 IT professionals across development centers in India, the United States,

the United Kingdom, the United Arab Emirates, Canada, Hungary, Singapore, Malaysia, China,

Japan and Australia. It serves over 489 global companies, 156 of which are Fortune

500 corporations. Satyam has strategic technology and marketing alliances with over 50

companies.



2.1 Achievements

#1 in ASTD(American Society for Training and Development) BEST award, 2007

#2 BPO Global Rankings- BrownWilson Group’s 2008 Black Book of Outsourcing

UK Trade and investment India (UKTI) Business award for Corporate Social

Responsibility

Golden Peacock award for Excellence in Corporate Governance

2.2 Industry Presence


Aerospace and Defense

Banking, Financial Services &Insurance Energy and Utilities Life Sciences &

Healthcare

Manufacturing, Chemicals & Automotive

Public Services & Education

Retail and Consumer Packaged

Telecom, Infrastructure, Media and Entertainment &

Semiconductor

Travel and Logistics & Industrial Equipment


2.3 Competencies

Mahindra Satyam offers the following ‘horizontal’ services.

2.4 Company Composition


Extended Enterprise Solutions

Web Commerce Solutions

Business Intelligence

Services

Engineering Service

Quality Consulting

Strategic Outsourcing

Services

Industry Native

SolutionsBPO

Business

process consulti

ng

IT strategy consulti

ng

Quality consulti

ngERP

Supply Chain

CRM

PLM

e-businessEngineering &

Embedded solutions

BI

EAI

Application Mgmt

Infrastructure

services

Business

Process Outsour

cing

Custom

built

Packaged

CONSULTING

OUTSOURCING

SYSTEM INTEGRATION


2.5 Pioneereed

2.6 Trusted By


Pioneered delivery of offshore service (John Deere & Co.)

First Indian Co. to set-up dedicated satellite link

First IT company to get ITAA certification

Set-up India’s first private ISP – SIFY

Among world’s first 10 companies to get SEI-CMM Level 5 assessment

Forming Alliances with best of breed technology vendors very early on

Adoption of Verticalization and a customer-centric organizational Structure

Pioneered ITES quality framework – eSCM

Among the first to be certified under BS 7799 for ISMS

First & only Lead Auditor for eSCM

8 of the top 10 Auto majors

7 of the top 10 Electronics and Electrical Equipment Manufacturers

6 of the top 10 Pharmaceutical companies4 of the top 5 Networking and Other Communication Equipment Manufacturers

3 of the top 5 Healthcare companies

2 of the top 5 Securities companies


2.7 Company Structure


Satyam Board Structure

Other Independent

Directors

Dr/ M. Srinivasan

Prof. Krishna G Palepu

Mr. Vinod K Dham

Prof. M Rammohan

Rao

Mr. T R Prasad

Prof. V S Raju

ISB Dean/Bharat electronics

Sasken Communication/Hellsoft /Montalvo Systems and Newpath

Former CabinetSecretary /GMR Infra/ GVK Taj

GTB/Dr. Reddy’s

Laboratories

B.Ramalinga Raju

Promoter &

Chairman

B.Rama Raju

Promoter & CEO

Ram Mynampat

iWhole time

Executive Director

Srinivas Vadlamani

Chief Financial Officer

8.74%61.22%

10.58%

19.46%

Shareholding Pattern as on 31st March 2008

Promoters Institutional Shareholders

Non-Institu-tional Sharehold-ers

Custodians


2.7 Controversies 2.7.1 Maytas acquisition

In 2008, Satyam attempted to acquire (Maytas Infrastructure and Maytas Properties) founded by

family relations of company founder Ramalinga Raju for $1.6 billion, despite concerns raised by

independent board directors. Both companies are owned by Raju's sons. This eventually led to a

review of the deal by the government, a veiled criticism by the vice president of India and

Satyam's clients re-evaluating their relationship with the company. Satyam's investors lost

about INR 3,400 crore in the related panic selling. The USD $1.6 billion (INR 8,000 crore)

acquisition was met with skepticism as Satyam's shares fell 55% on the New York Stock

Exchange. Three members of the board of directors resigned on 29 December 2008.

2.7.2 World Bank

The World Bank had banned Satyam from doing business with it for 8 years due to inappropriate

payments to the World Bank's staff. The World Bank accused Satyam of giving improper

benefits to its (the Bank's) staff and of failing to maintain documentation to support fees charged

for its subcontractors. However, it clarified that Satyam was not involved in incidences of data

theft or malicious attacks that had been made on the Bank's information systems.

2.7.3 Upaid lawsuit

UK mobile payments company Upaid Systems sued Satyam for over 1 billion US dollars on

complaints of fraud, forgery and breach of contract. On 9-December-2009 Satyam settled the

lawsuit with UPAID for $70MM, of which $45MM was payable upon regulatory approval, and

the remaining $25MM was payable a year after the initial payment. The settlement requires

Upaid to give Mahindra Satyam a worldwide royalty-free license on its patents, and provides for

the dismissal of all pending actions including the litigation between the companies pending in the

U.S. court.

2.7.4 Accounting scandal of 2009

The Satyam Computer Services scandal was publicly announced on 7 January 2009, when

Chairman Ramalinga Raju confessed that Satyam's accounts had been falsified.


http://en.wikipedia.org/wiki/Breach_of_contract

http://en.wikipedia.org/wiki/Forgery

http://en.wikipedia.org/wiki/Fraud

http://en.wikipedia.org/wiki/Mobile_payment

http://en.wikipedia.org/wiki/New_York_Stock_Exchange

http://en.wikipedia.org/wiki/New_York_Stock_Exchange

http://en.wikipedia.org/wiki/Crore

http://en.wikipedia.org/wiki/Indian_rupee

http://en.wikipedia.org/wiki/Ramalinga_Raju

http://en.wikipedia.org/wiki/Maytas_Properties

http://en.wikipedia.org/wiki/Maytas_Infrastructure


3.0 The chronology of satyam failure:

Satyam means "truth" in Sanskrit. But the name was proved wrong by the founder himself when he himself busted one of the biggest frauds in the world of India Inc.

3.1 Details

On 7 January 2009, company Chairman Ramalinga Raju resigned after notifying board members

and the Securities and Exchange Board of India (SEBI) that Satyam's accounts had been

falsified.

Raju confessed that Satyam's balance sheet of 30 September 2008 contained:

Inflated figures for cash and bank balances of Rs 5,040 crore (US$ 1.04 billion) (as

against Rs 5,361 crore (US$ 1.1 billion) crore reflected in the books).

an accrued interest of Rs. 376 crore (US$ 77.46 million) which was non-existent.

an understated liability of Rs. 1,230 crore (US$ 253.38 million) on account of funds was

arranged by himself.



an overstated debtors' position of Rs. 490 crore (US$ 100.94 million) (as against Rs. 2,651

crore (US$ 546.11 million) in the books).

Raju claimed in the same letter that neither he nor the managing director had benefited

financially from the inflated revenues. He claimed that none of the board members had any

knowledge of the situation in which the company was placed.

Satyam, the 2008 winner of the coveted Golden Peacock Award for Corporate Governance have

faced government and stakeholder’s pressure ever since its plan to acquire two infrastructure

companies owned by Mr. Ramalinga Raju’s sons – Maytas infrastructure and Maytas properties

for $1.6 billion was rejected by investors last December. The failed acquisition plan resulted in

panic selling by investors causing loss worth millions to investors in India. In the New York

Stock Exchange, Satyam’s share price plunged by 55%. Mr. Raju in his resignation statement

confessed that the acquisition plan was “the last attempt to fill fictitious assets with the real ones.

When it failed Mr. Raju had no other option but to resign taking entire responsibility for the

accounting fraud but hoping that the company would bounce back. Analysts however have

expressed skepticism at Satyam’s ability to bounce back.

3.2 The Aftermath:

As Mr. B. Ramalinga Raju, Chairman and founder of Satyam Computer Services resigned after

confessing to falsifying accounting records and inflating accounting profits, Satyam shares

plummeted 77.69% on the Mumbai Stock Exchange. Analysts and journalists were quick to draw

similarities between Enron and Satyam - India’s 4th largest software consultancy, system

integration and outsourcing firm, listed on the New York Stock Exchange, with network

operations in 66 countries across six continents, employing over 50,000 IT professionals and

serving over 654 global companies including a large number of Fortune 500 companies.



4.0 The Analysis: Sources/Causes

“It is only when the tide goes out that you realize who has been swimming naked.”

Satyam was always seen as one of the top Indian IT companies and often represented as shining

example of Indian liberalization and entrepreneurship. This fraud that will impact the investors

and employees of the company shows a systemic breakdown in audit and board oversight of the

company. How this happened and who caused it to happen. As the scandal unfolded, Merrill

Lynch (Now with the Bank of America) terminated its engagement with the company. The New

York Stock Exchange immediately suspended trading in Satyam shares. Consequently analysts

speculated about the possible negative impact of this scandal on foreign investors’ willingness to

invest in emerging markets like India.

Many analysts while attributing Satyam’s downfall to failure of corporate governance have

emphasized on making family owned businesses founders aware of the risks inherent in non

adoption of corporate governance frameworks in their true spirit emanating from the reluctance

of the owners to introduce transparency and professionalism in their businesses. Even though

Satyam Computers had independent directors on their board of directors, their inability

apparently due to lack of expertise or knowledge of accounting frauds raises the question of the



role and responsibilities as well as qualifications, skills and expertise of independent

nonexecutive directors.

4.1 Corporate Governance:

ACCA research indicates that failure in corporate governance is a major contributor to the credit

crunch and consequently the current financial turmoil. Corporate governance is the set of

processes, customs, policies, laws, and institutions affecting the way a corporation is directed,

administered or controlled. Corporate governance also includes the relationships among the

many stakeholders involved and the goals for which the corporation is governed.

The principal stakeholders are the shareholders, management, and the board of directors. Other

stakeholders include labor (employees), customers, creditors (e.g., banks, bond holders),

suppliers, regulators, and the community at large. Corporate governance is a multi-faceted

subject. An important theme of corporate governance is to ensure the accountability of certain

individuals in an organization through mechanisms that try to reduce or eliminate the principal-

agent problem.

A related but separate thread of discussions focuses on the impact of a corporate governance

system in economic efficiency, with a strong emphasis shareholders' welfare. There are yet other

aspects to the corporate governance subject, such as the stakeholder view and the corporate

governance models around the world. Collapses like Satyam demonstrate that regulatory boxes

may have been ticked but fundamental principles of corporate governance have been breached.

The charitable explanation for corporate collapses like Satyam is that those responsible did not

understand the risks that were being taken thus suggesting a failure of diligence and

professionalism. A less charitable explanation is that those responsible knew about the risks but

chose to turn a blind eye.


http://en.wikipedia.org/wiki/Stakeholder_view

http://en.wikipedia.org/wiki/Economic_efficiency

http://en.wikipedia.org/wiki/Principal-agent_problem

http://en.wikipedia.org/wiki/Principal-agent_problem

http://en.wikipedia.org/wiki/Accountability


4.2 Failure of Supervisory and Regulatory Agencies:

Satyam may be an exception because of the sheer magnitude of the amount of defalcation, which

is two-and-a-half times the sum involved in the Enron scandal. But the fact remains that all the

supervisory and regulatory agencies failed to detect and prevent the Satyam scam, and that this

failure is structural and pervasive.

These agencies include:

The statutory auditor (Price Waterhouse, the Indian subsidiary of

PriceWaterhouseCoopers)

Satyam's independent directors

The Ministry of Corporate Affairs

The Registrar of Companies

The Company Law Board

The Institute of Chartered Accountants of India

The Securities and Exchange Board of India (SEBI)

The Quality Review Board (QRB), a high-powered 11-member committee appointed by

the Indian government for chartered accountants.

Many of the agencies did not perform their assigned oversight functions, ignored complaints and

warnings, or actively covered up the fraud.

4.3 The Auditor:

Price Waterhouse, which has been Satyam's auditor since 1991, blindly certified its account-

books to be correct and accurate without verifying their authenticity. It failed to detect huge

transfers of funds, of the order of over one billion dollars, according to Raju's own confession.



Before one gets into the endoskeleton of what exactly caused the audit failure in the Satyam

case, it would be prudent to examine what exactly is the role of the Auditor.

The Role of Auditor:

The complete scope of who an auditor is and what he does is laid down by many sections of the

Companies Act. Sec 209 of the Act lays down that not should a company maintain “proper”

books of accounts; such books should also give a true and fair view of the state of affairs of the

company. Sec 211 of the Act, inter alia, requires that every balance sheet of the company should

give a true and fair view of the state of affairs of the company at the end of the financial year and

that every profit and loss account should give a true and fair view of the of the profit and loss of

the company and they should comply with accounting standards.

An audit, as defined in the landmark case of Frankston and Hastings Corpn. v. Cohen, (1960)102

CLR 607, comprises of three main objects –

1. To certify to the correctness of the financial position as shown in the balance sheet, and

the accompanying financial statements.

2. The detection of errors.

3. The detection of fraud. The detection of fraud is of primary importance.

Having said, it is also paramount to state that the auditor is a watch-dog, not a bloodhound.

This means that his job is verification and not detection. When suspicion is aroused, it is his duty

to probe the issue to the bottom but in case there is no material to arouse suspicion, he is not

bound to go sniffing around with the intention of uncovering financial anomalies.

In the case of the Satyam audit failure, it shows that though there is evidence of negligence at

many levels, there is none with respect to collusion or criminal conspiracy on part of the

auditors. PWC relied on the documents provided by the company to do the audit. The charges of

negligence have been heaped on them because they did not go to every bank to independently

verify that the cash deposits as shown in the books really existed. Though ideally, an auditor is



supposed to do this, it is a fact that very few actually do. In fact when a firm like PWC is dealing

with a company like Satyam (which won the prestigious Golden Peacock Award for Corporate

Governance in 2008) it generally takes the company at its word that the statements provided are

true and represent the true state of affairs.

Two of accounting company's directors has since been arrested. They failed to verify the

authenticity of the bank documents pertaining to cash reserves and balances presented to them by

Satyam's management.

It is likely that there was collusion between Satyam and its auditor. According to Deepak Parekh,

the chairman of a reputed private bank who was appointed to the Satyam board after the scandal

broke out; these documents were 'obvious forgeries' and would have been visible as such to

anyone.

4.4 Number of Employees:

One of the biggest sources of defalcation at Satyam was the inflation of the number of

employees. Raju claimed that the company has 53,000 people on its payroll. But according to the

Criminal Investigation Department of the Andhra Pradesh police, the real number was just over

40,000. This closely matches the number of Satyam employees registered for provident fund

payments, a little over 43,000.



The fictitious number could be conjured up

only because payment to the remaining 10,000 employees was faked year after year - an

operation that evidently involved the creation of bogus companies with a large number of

employees. Yet, no one detected this massive fraud.

Similarly, going by Raju's account, Satyam's operating margin was as low as three percent. But

India's top-ranking IT companies have margins of 20 to 30 percent. If Satyam's margin was

indeed higher, then hundreds of millions of dollars were spirited out of the company, without

detection.

4.5 The Maytas chapter:

WHEN the disgraced founder of Satyam, B. Ramalinga Raju, named his two other pet projects as

Maytas Infra and Maytas Properties, the parent company spelt in reverse, little would he have

imagined that their fortunes too would go topsy-turvy.



Another source of fraud was the Satyam board's decision last December to invest 1.6 billion

dollars to acquire a 100 percent stake in Maytas Properties and in 51 percent stake in Maytas

Infrastructure. Both of these real estate firms were promoted by Raju's sons. They also floated 21

other companies under the Maytas brand.

This investment decision was in gross violation of the Companies Act 1956, under which no

company is allowed without shareholders' approval to acquire directly or indirectly any other

corporate entity that is valued at over 60 percent of its paid-up capital.

Yet, Satyam's independent directors went along with the decision, raising only technical and

procedural questions about SEBI's guidelines and the valuation of the Maytas companies.

They did not even refer to the conflict of interest in buying companies in a completely unrelated

business, floated by the chairman's relatives. Indeed, one of the independent directors, Krishna

Palepu, a professor at Harvard Business School, praised the merits of real estate investment on

Satyam's part.

Palepu was earlier an independent director on the Global Trust Bank, which collapsed in 2003,'

recalls former union revenue secretary E.A.S. Sarma, a public-spirited civil servant of high

integrity.



4.6 The role of SEBI:

C.B. Bhave, Chairman of SEBI, at a press conference in Mumbai on January 21

Sarma recently warned SEBI and the Prime Minister's office about malfeasance in Satyam, but

was ignored.

SEBI's failure was even starker. Irregularities were repeatedly reported to it in Price

Waterhouse's handling of Satyam accounts in 2001 and 2002. But mysteriously, it failed to

conduct an investigation. Similarly, a complaint was filed with SEBI by a Member of Parliament

in 2003. But under political pressure, this was not pursued.

Last December, SEBI also approved the Maytas investments. The investment decision were

eventually reversed because of shareholder protests, not because of the regulatory authorities'

actions



.

After Ramalinga Raju made his 'voluntary confession' on Jan. 7, SEBI wasted precious time and

did not move to interrogate him or to seize Satyam's papers until after he had surrendered to the

state police. The police have still not allowed SEBI to question him.

4.7 Ministry of Corporate Affairs:

Similarly, other official agencies, including those under the Ministry of Corporate Affairs, did

not discharge their obligations or were prevented from doing so.

4.8 The Income Tax Department:

The Income Tax Department unearthed several cases of illegal transfers by Satyam as early as

2002. But the concerned official was transferred and the investigation suppressed.

4.9 Institute of Chartered Accounts of India (ICAI):

Equally striking is the failure of the Institute of Chartered Accounts of India (ICAI) to take

punitive action against Price Waterhouse, which it is empowered to do. Ironically, Price

Waterhouse has two members in the ICAI disciplinary council! The council met earlier this

month, but failed to take action against PwC. ICAI is a closed professional guild. Like the Bar

Council or Medical Association of India, it shields even the most errant of its members. To the

best of knowledge, not a single auditor in India has ever faced punitive action by ICAI or been

convicted and sentenced under the Companies Act and other laws.

5.0 Moral and Ethical failure:

Satyam downfall once again brings into focus the issue of moral and ethical failure. How could

the owner and chairman of the company inflate accounting profits without the knowledge of the



entire board or anyone else in the company? Why did board of directors not question the

financial statements? Greater emphasis on professionalism and ethics in business is the need of

the hour. That is why ethics and professionalism figure so prominently in ACCA professional

accountancy qualification, alongside the need for strong technical financial and accounting skills,

and why the demand for people with ACCA international qualification is growing across the

world.

What put Ramalinga Raju’s fraud in a different league is the numerous awards and accolades he

won for his business skills.

Chief Minister Y.S. Rajasekhara Reddy presenting the IT

Award to B. Ramalinga Raju at GITEX India 2006, at Cyberabad, in Hyderabad, on January 11, 2006. P. Sabita Reddy, Minister for

Information Technology, Mines and Geology, is at right.

A young man hailing from Bhimavaram town in West Godavari district of Andhra Pradesh

promoted a start-up, when information technology in India was just a nascent industry, to

provide software development and consultancy services to large corporations. All he had was an

MBA degree from Ohio University in the United States and just enough money to hire 20

employees. Twenty-one years later, this man, Byrraju Ramalinga Raju, now 54, stands at the

centre of Brand India’s biggest corporate fraud.

The tremors have shaken not merely bourses in India and abroad but also, more importantly, the

confidence of overseas and Indian investors about ethics and corporate governance practices in

India’s IT industry. Worse may be in store for the country’s reputation as a global outsourcing



hub once hearings begin on a clutch of class action lawsuits filed in the U.S. by purchasers of

Satyam’s American Depository Receipts. British mobile solutions firm Upaid, which is already

fighting a forgery case against Satyam in the U.S., questioned how $1.6 billion was siphoned out

of the company to acquire Maytas in advance of a judgment on its lawsuit.

Gilded image: What put Ramalinga Raju in a different league is the numerous awards and

accolades he won for his entrepreneurial skills, his ability to compete with the biggest in Silicon

Valley, and his becoming the IT service provider for the 2010 and 2014 Federation

Internationale Football Association (FIFA) World Cups in South Africa and Brazil. This gilded

image as a global player and Satyam’s operating profits of up to 50 per cent were apparently a

cover-up for the false inflation of profits that Raju had been indulging in “over a period of last

several years”

Charade of integrity: That these claims of integrity were a charade became evident after he wrote

a five-page confessional letter to his Board of Directors making five shocking admissions. All

this was done to fill “a marginal gap” between actual operating profit and the one reflected in the

account books. This gap attained unmanageable proportions as the size of the company’s

operations grew significantly.

IT poster boy: In 2000, Raju was showcased by the then Chief Minister, N. Chandrababu Naidu,

to the then U.S. President, Bill Clinton, as a first-generation entrepreneur and the face of India’s

IT prowess when the dignitary visited Hyderabad. Andhra Pradesh was desperately in need of

poster boys, big-ticket entrepreneurs either in the manufacturing sector or in the digital sphere.

The Institute of Chartered Accountants of India (ICAI) gave him the Golden Peacock award for

corporate governance. All this now appears as cruel irony. Ramalinga Raju has fallen from his

iconic status after committing a Rs.7,100-crore fraud in a company that he himself built from

scratch.



6.0 Measures to avoid such recurrences:

6.1 The Laxity of Indian laws:

If an auditor fails in his duty in India, he faces a ridiculous penalty of Rs 10,000 (under 200

dollars) and maximum imprisonment of two years. In contrast the U.S. Sarbanes-Oxley Act

passed after the Enron and WorldCom scandals, awards imprisonment for 20 years.

The U.S. and many other countries have greatly improved fraud detection by reforming audit

methods and offering incentives to whistle-blowers. India is yet to do any of this.

India lacks adequate corporate regulation. And its enforcement is appalling. For instance, as

many as 1,228 of the Bombay Stock Exchange's 4,995 listed companies have failed to submit

reports required by the Listing Agreement, including information on their boards' composition,

audit committees, CEO certification of accounts, and related-party transactions and subsidiary

companies.

Unless we urgently take corrective measures, corporate fraud will continue, cheating

shareholders and milking the public exchequer. Statutory auditors aren't enough. We need a

Board of Audit, which is authorized to conduct surprise audit on its own or on whistle-blower

complaints. Only then will the conviction rate in corporate frauds, which is currently under five

percent in India, improve.

The Satyam episode has forced a rethink of the accounting and audit policies that Indian

companies now follow. Many solutions have come up to plug the loopholes which were exposed

by the Satyam scandal and if implemented, some of the solutions could be highly effective. With

respect to accounting and audit, knee-jerk reactions like taking confirmations from banks with

respect to amount of funds have already begun. Most of the big auditors have started to

implement the aforesaid. However, these are procedural changes and not policy ones. It’s the

latter which can hope to accomplish anything. One very viable solution put forward by the IASC



Foundation is a call for all major Indian companies to move towards full convergence with the

International Financial Reporting Standards (IFRS).

The evidence base for firm recommendations on corporate governance in financial institutions is

thinner than one would like, and certainly not robust enough to offer a standardized set of

recommendations valid at all times and in all places.

6.2 Conclusions and Recommendations:

First , that people are more important than processes. Many of the failed firms, or near

failed firms which we have encountered, had Boards with the prescribed mix of

executives and non-executives, with socially acceptable levels of diversity, with directors

appointed through impeccably independent processes, yet where the individuals

concerned were either not skilled enough for, or not temperamentally suited to, the

challenge role that came to be required when the business ran into difficulty.

Secondly , and in spite of first conclusion, there are some good practice processes worth

having. Properly constituted audit committees, and Board risk committees can play an

important role, as long as they are prepared to listen carefully to sources of advice from

outside the firm.

Third , and this is a foundation stone of the FSA's approach, a regulatory regime built on

senior management responsibilities is absolutely essential. In some of the cases we have

wrestled with, senior management did not consider themselves to be responsible for the

control environment and indeed, in the old pre FSA regime, were able successfully to

claim that they were not responsible even if the business failed. So our regulation is built

on a carefully articulated set of responsibilities up and down the business. It is important

that they are not unrealistic. We do not expect the CEO to check in the bottom drawers of

each of his traders for un-booked deal tickets. But we do expect the CEO to ensure that

there is a risk management structure and a control framework throughout the business

which ought to identify aberrant behaviour, or at least prevent it going on unchecked for

any length of time.



One consequence of this senior management regime, fourth point, is that regulators must

focus attention on the top level of management in the firm. For the major firms we

regulate we insist that our supervisors have direct access to the Board, and that they

present to the Board their own unvarnished view of the risks the firm is running, and of

how good the control systems are by comparison with the best of breed in their sector.

Unfortunately, we find some resistance to this approach. The management of some of our

firms want to negotiate the regulators assessment, so that when it reaches the Board it is

an agreed paper and sufficiently bland to cause no debate. Well-structured Board, and a

confident management, should welcome an independent view, even expressed at the

Board level, which they may challenge and contest if they wish. And non-executive

directors should find it helpful to see a knowledgeable view of the institution which does

not come from or through its own senior management.

Fifth and penultimate point may not be a popular one. Boards should take more interest in

the nature of the incentive structure within the organisation. I am not talking solely about

the pay of the CEO, important though that is to get right - as some firms in Britain have

recently discovered. Talking about ensuring that the incentives within the firm, and pay is

a very powerful one, are aligned with its risk appetite. A number of our most problematic

cases have their roots in a misalignment of incentives.

Lastly , no corporate governance system will work well unless there is some engagement

on the part of shareholders. Boards are responsible to shareholders. That is the received

wisdom in Anglo-American capitalism, at least. But if those shareholders are not

prepared to vote their shares, and show little interest in business strategy, then that

accountability is somewhat notional, and unlikely to be effective. Certainly regulators

cannot hope to substitute for concerned and challenging shareholders, though in some

senses they may complement them.



Among other measures being suggested are compulsory rotation of auditors every three years,

the creation by the government of a pool of independent directors from amongst citizens of high

integrity, and their appointment by impartial authorities, as well as tighter enforcement and

stiffer penalties.

With respect to independence of directors, there have been many ‘suggestion’ and a few steps

taken by the government which should help in ensuring good Corporate Governance. The

Companies Bill of 2008 sought to increase the levels of transparency and corporate governance

to ensure greater accountability to stakeholders. To this end, the Bill brings in a more stringent

definition of an independent director. The new Bill introduces the requirement that independent

directors must not receive any remuneration, other than a sitting fee or reimbursement of

expenses. However, they may receive profit-related commission or stock options if approved by

the members.

In addition, an independent director must, in the opinion of the board, be a person of integrity

and possess relevant expertise and experience.

6.3 Five Core Issues of governance

Chairman and CEO: It is considered good practice to separate the roles of the Chairman of the

Board and that of the CEO. The Chairman is head of the Board and the CEO heads the

management. If the same individual occupies both the positions, there is too much concentration

of power, and the possibility of the board supervising the management gets diluted.

Audit Committee: Boards work through sub-committees and the audit committee is one of the

most important. It not only oversees the work of the auditors but is also expected to

independently inquire into the workings of the organisation and bring lapse to the attention of the

full board.

Independence and conflicts of interest: Good governance requires that outside directors

maintain their independence and do not benefit from their board membership other than



remuneration. Otherwise, it can create conflicts of interest. By having a majority of outside

directors on its Board.

Flow of information: A board needs to be provided with important information in a timely

manner to enable it to perform its roles. A governance guideline of General Motors, for instance,

specifically allows directors to contact individuals in the management if they feel the need to

know more about operations than what they are being told.

Too many directorships: Being a director of a company takes time and effort. Although a board

might meet only four or five times a year, the director needs to have the time to read and reflect

over all the material provided and make informed decisions. Good governance, therefore,

suggests that an individual sitting on too many boards looks upon it only as a sinecure for he or

she will not have the time to do a good job.

6.4 A problem of ethical deficit

The Satyam scam is a one-off episode. But it highlights the need to create value systems in

firms

Satyam seems very much like India’s Enron. The strong brand that had been created, with a

name that meant truth, was respected by its customers and was attractive to very high quality

talent. The independent directors on the board were people with top credentials and the auditors

were one of the top four names in the business. Yet, both the size of the deceit and the length of

time it went on were remarkable, leading to a justifiably strong and loud outcry.

It is time business schools had a code of ethics for their own governance. IIMs can jointly draft

the ethics code for all the processes and practices in an institute and for the conduct of the

governing board, director, faculty and students. There should be clear guidelines of conduct for

directors or faculty members who join boards of companies. If any faculty member lends his

name to a board, he is also lending the name of the institute he represents, and should be made

more accountable. Similarly, ethical ways of internal processes—including admissions, faculty



selection and evaluation, the selection of the director, student evaluation, interaction with

industry, placements, etc.— should be clearly defined. Such a document can be a guide for all

business schools. Maybe this could be the agenda of the next quarterly meeting of all IIM

directors.

7.0 Conclusion:

The Satyam incident, though unfortunate, exposed some big loopholes in the system. Just as the

United States needed the Enron Scandal to clean up its act, perhaps India needed the Satyam

fiasco to introduce sweeping changes in its own financial reporting system. It cannot be denied

that the Satyam episode was a stark failure of the code of Corporate Governance in

India. Corporate Governance is not something which can be enforced by mere legislation; it is a

way of life and has to imbibe itself into the very business culture the company operates in.

Ultimately, following practices of good governance leads to all round benefits for all the parties

concerned. The company’s reputation is boosted, the shareholders and creditors are empowered

due to the transparency Corporate Governance brings in, the employees enjoy the improved

systems of management and the community at large enjoys the fruits of better economic growth

in a responsible way.



8.0 Sources of Information

http://en.wikipedia.org/wiki/Satyam_scandal

http://en.wikipedia.org/wiki/Satyam_Computer_Services

http://www.frontlineonnet.com/fl2603/stories

http://suchetadalal.com/?id=c38e8fff-6b1a-eb9b-495b1c23ddaa&base=sections&f&t=The+Truth+about+Satyam

http://www.radianceweekly.com/142/3193/CORPORATE-INDIA-OR-CORRUPT-INDIA-The-Satyam-of-the-Loot-March/2009-01-18/Cover-Story/Story-Detail/Corporate-India-or-Corrupt-IndiaThe-Satyam-of-the-Loot-March.html

http://businessmagazines.wordpress.com/2009/02/03/february-issue-of-outlook-business-magazine-brings-to-you-the-dismal-condition-of-the-software-sector-post-satyam/

http://www.financialexpress.com/news/satyams-true-lies/409266/

http://www.forbes.com/2009/01/07/satyam-raju-governance-oped-cx_sb_0107balachandran.html

http://businesstoday.intoday.in/index.php?option=com_content&task=view&id=9744&sectionid=22&issueid=48&Itemid=1

http://simulating.blogspot.com/2009/01/what-happened-to-satyam.html

http://www.slideshare.net/aseemsidhu/satyam-fiasco

http://www.livemint.com/2009/01/11223309/Satyam-shows-Bschools-too-nee.html

http://www.ethicalcorp.com/content.asp?ContentID=6281


http://www.karmayog.org/newspaperarticles/newspaperarticles_22038.htm

http://www.outlookindia.com/gsearch.aspx?cx=partner-pub-8484176841147392:mw5jlf-i5af&cof=FORID:9&ie=ISO-8859-1&q=satyam&sa=Search&siteurl=www.outlookindia.com/search.htm

http://www.nwlink.com/~donclark/leader/leadob.html

http://www.livemint.com/2008/09/12000541/The-great-accounting-scam.html


http://www.livemint.com/2008/09/12000541/The-great-accounting-scam.html

http://www.nwlink.com/~donclark/leader/leadob.html



http://www.karmayog.org/newspaperarticles/newspaperarticles_22038.htm



http://www.livemint.com/2009/01/11223309/Satyam-shows-Bschools-too-nee.html

http://www.slideshare.net/aseemsidhu/satyam-fiasco

http://simulating.blogspot.com/2009/01/what-happened-to-satyam.html



http://www.forbes.com/2009/01/07/satyam-raju-governance-oped-cx_sb_0107balachandran.html

http://www.financialexpress.com/news/satyams-true-lies/409266/








http://www.frontlineonnet.com/fl2603/stories

http://en.wikipedia.org/wiki/Satyam_Computer_Services

http://en.wikipedia.org/wiki/Satyam_scandal


http://www.corporatenarc.com/accountingscandals.php


http://www.corporatenarc.com/accountingscandals.php