SATYAM SCAM

Introduction

The Satyam scam is one of the biggest accounting scams in India. The
scam was done by the company Satyam Computers. Satyam Computers
was formerly the crown jewel of the Indian Information Technology (IT)
industry, but its founders brought it to its knees in 2009 owing to financial
misconduct. Satyam's abrupt demise spurred a discussion over the CEO's
role in driving a company to new peaks of success, as well as the CEO's
interaction with the Board of Directors and the establishment of crucial
committees. The controversy highlighted the significance of corporate
governance (CG) in the development of auditing committee standards and
member of the board duties. The Satyam scam case shocked the market,
especially Satyam investors, and it also harmed India's image in the
worldwide market. So, let's delve into the topic by understanding what is
Satyam scam.

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What is Satyam Scam?

Satyam scam means a huge corporate fraud committed in 2009 by

Ramalinga Raju, the founder and chairman of Satyam Computer Services.
He admitted to exaggerating sales, earnings, cash balances, and
personnel numbers in the company's books. He also acknowledged
siphoning off money from the firm for his personal use. The Satyam fraud
was considered worth Rs. 7800 crores and was formerly regarded as
India's largest business scandal.

The Satyam scam highlighted a lack of corporate governance, auditing

standards, regulatory monitoring, and ethical behavior at one of India's
largest IT firms. It also damaged the faith and confidence of Indian IT
sector investors, consumers, workers, and stakeholders. The Satyam
Computers scam had serious consequences for the corporation, its
auditors, its board of directors, and its stockholders.

Understanding Satyam Scandal - India's Biggest Accounting Fraud

The Satyam Computers scam exemplifies one of India's most catastrophic

scams, sending shockwaves across the business world. Ramalinga Raju,
the founder and chairman of Satyam Computer Services, admitted to
falsifying the company's accounting for many years in 2009. This
disclosure surprised investors, workers, and regulators, ruining Satyam's
and the Indian business community's image.

The Satyam scam was a methodically planned effort to defraud

stakeholders. Raju and a small group of accomplices increased sales,
earnings, and cash levels, providing a false sense of financial
accomplishment. Forging bank statements, faking invoices, and inflating
customer numbers were all part of the fraudulent operations. Auditors
tasked with protecting shareholders' interests failed to discover the
anomalies, showing the failure of corporate governance processes.

The results were devastating. Share prices fell precipitously, causing

substantial capital destruction for investors. As the corporation fought to
survive, thousands of workers faced uncertainty. The Satyam scandal
damaged local and foreign investors' faith in India's business sector,
generating concerns about transparency, accountability, and ethical
standards. Following the incident, the Indian government intervened to
avert Satyam's collapse and preserve stakeholders' interests. Tech
Mahindra finally purchased the firm, kicking off a lengthy path to recovery.
The episode was a wake-up call for Indian regulators, prompting
substantial changes in corporate governance, accounting methods, and
audit rules.

The Satyam controversy is a sharp reminder of the significance of strong

regulatory supervision, ethical behavior, and good corporate governance
in sustaining company confidence and integrity.

Satyam Scam Case Study: How Did the Raju Brothers Do Satyam Scam?

In 2003, Raju started falsifying Satyam's financial records to depict a more

rosy image of growth and profitability than the firm has actually
accomplished. Raju participated in a web of deception with his brother
Rama Raju, Satyam's managing director, and a group of top executives,
faking audit reports and generating bogus invoices, clients, bank
accounts, and even employees. To make things worse, Raju used Satyam's
finances to invest in his family's enterprises, such as Maytas, for personal
benefit in real estate and other projects.
Raju deceived authorities, auditors, investors, and analysts for six years,
who were caught off guard by his faked data and bogus awards. In 2008,
Satyam's stock price jumped from Rs. 10 to Rs. 544, making it one of
India's most valuable IT firms. The firm has also received social
responsibility and corporate governance awards, including the Golden
Peacock Award in 2008.

However, the facade started to disintegrate towards the end of 2008,

coinciding with the global financial crisis, which ravaged the IT sector. Raju
faced increased pressure from lenders and creditors to settle his
obligations as Satyam's sales and profitability decreased. Furthermore, the
World Bank examined his behavior and barred Satyam from participating
in its projects for eight years owing to Raju's illicit employee benefits.

In a desperate effort to save his disintegrating enterprise, Raju used

Satyam's financial reserves in December 2008 to launch an ill-fated $1.6
billion offer for Maytas. This strategy, however, backfired catastrophically,
sparking a furious uproar from Satyam shareholders and board members
who saw the transaction as a diversion of cash and a blatant conflict of
interest. Raju had just 12 hours to cancel the deal, but Satyam's stock
price had dropped by 55% by then.

Raju ultimately admitted to his deceptions after being cornered and given
no other choice. On January 7, 2009, he acknowledged inflating Satyam's
assets by a stunning Rs. 7,800 crores, accounting for approximately 94%
of the company's assets, in a letter to Satyam's Board of Directors and
authorities. Furthermore, he admitted to overstating Satyam's revenues
by Rs. 5,040 crores, accounting for nearly 75% of the company's revenue.
Raju said he worked independently and that neither his auditors nor board
members knew of his illegal operations.

The Serious Fraud Inquiry Office (SFIO), the Securities and Exchange Board
of India (SEBI), and the Central Bureau of Investigation (CBI) launched a
thorough inquiry in response to Raju's admission. Raju and his associates
were caught and charged with various offences, including money
laundering, insider trading, forgery, criminal conspiracy, breach of trust,
account falsification, and forgery.
The aftermath of the Satyam Computers scam left Satyam's workers,
customers, investors, and suppliers fearful and apprehensive. Layoffs,
project cancellations, and unpaid dues beset the firm, leaving a
destructive path in their wake.

Government’s Reaction to Satyam Scam

The Satyam fraud case taught India a lot. Indian law is continually
evolving. However, this is how the government responded to the Satyam
Scam:

Steps

Description

Companies Act

The Companies Act of 1956 was abolished, and the Companies Act of
2013 took effect. Corporate fraud is a criminal offence under the new act's
terms. The statute explicitly defines and identifies cost accountants,
auditors, and corporate secretaries as obligated to disclose Satyam fraud.

A new provision for auditor rotation was also implemented, requiring

auditors to be replaced after five years and audit firms to be changed
after ten years. It also states that the Director's Responsibility Statement
should be included in the Board of Directors' Report.

ICAI- The Institute of Chartered Accountants of India

The accounting organization underlined the auditors' comprehensive

reporting of fictional assets & contingent liabilities in its audit report.

SEBI
The SEBI Regulations 2015 (Listing Obligations and Disclosure
Requirements) were enacted, and they established criteria for reporting
actual and suspected frauds and disclosing important events that
influence the decision-making ability of investors.

Serious Fraud Investigation Office (SFIO)

This regulatory authority, constituted under the administration of the

Ministry of Corporate Affairs, was given the status of a statutory
organization under the Companies Act of 2013. In India, it looks into
business and accounting fraud.

Corporate governance best practices have become an urgent need.

Who Exposed the Satyam Scam?

The Satyam scam was exposed by an anonymous whistleblower who sent

emails to one of the company’s directors, Krishna Palepu, revealing the
fraud. Palepu forwarded the emails to another director and S.
Gopalakrishnan, a partner at PwC, the auditor of Satyam. The emails were
sent from the alias Joseph Abraham. The whistleblower also alerted the
SEBI and the media about the scam. The emails prompted an
investigation by the regulators and the auditors, eventually leading to
Raju’s confession and arrest.

Satyam Scam Case Study: How Raju was Able to Get Away with the
Scandal?

Raju got away with the Satyam scam for six years by exploiting flaws in
the accounting and auditing procedures and deceiving stakeholders with
his power and charm. He had a network of accomplices with his brother
Rama Raju, Satyam's managing director, and several senior executives.
He also paid World Bank officials and other clients to get contracts and
evade inspection.

PricewaterhouseCoopers (PwC), Satyam's auditor, was Raju's key ally in

the scheme. PwC failed to undertake its obligation of evaluating Satyam's
financial statements and discovering fraud. PwC violated auditing
standards and the code of conduct and was involved in falsifying the
accounts with Raju. PwC also overlooked red signals from whistleblowers
who revealed the theft in anonymous emails to one of Satyam's directors,
Krishna Palepu.

Raju also utilized his influence and reputation to gain the confidence and
admiration of regulators, investors, analysts, and the media. He depicted
Satyam as a successful and ethical firm, collecting multiple corporate
governance and social responsibility awards. He was also recognized for
his commercial skills and entrepreneurship. He kept a low profile and a
modest manner to avoid suspicion or criticism.

Raju's scheme was discovered in 2009 when he attempted to purchase

Maytas, a family-owned real estate firm, using Satyam's financial
reserves. This decision backfired, resulting in a major outcry from
Satyam's shareholders and board members.

Raju decided to come clean and admit his deception with no other option.
On January 7, 2009, he admitted in a letter to Satyam's board and
regulators that he had overstated Satyam's assets by Rs. 7,800 crores, or
almost 94% of its total assets. He said he operated alone and that none of
his board members or auditors knew of his deception.

Highlights of the Satyam Scandal

● Satyam had won the Golden Peacock Award for Corporate

Accountability in 2008, around five months before the Satyam scam was
revealed.

● The same year, Mr Ramlinga Raju received the Ernst and Young Young
Entrepreneur Award.

● When read backwards, SATYAM is MAYTAS, the real estate business Mr

Raju sought to buy.

● Satyam was barred from conducting business with its connections for
an eight-year term by the World Bank.

● PwC, the external audit company, has been barred from providing
assurance and auditing services to publicly traded firms for over two
years.
● Satyam is known as the "Enron Scandal of Indian History." Enron was
the largest accounting and business fraud in the United States,
contributing to Wall Street's demise.

Conclusion

The Satyam scam case demonstrates how human avarice and ambition
influence behavior. The Satyam scandal emphasizes the need for ethics,
solid governance, and accounting standards. Securities legislation and
corporate governance are required in emerging markets such as India.
Satyam Computers scam sparked more strict regulations. Investigating big
financial crimes aids in the prevention of future incidents and encourages
best practices.

FAQs

● Who is to blame for the Satyam scam?

B. Ramalinga Raju, his brother and Satyam's former managing director;

former PwC auditors Subramani Gopalakrishnan and T Srinivas; former
chief financial officer Vadlamani Srinivas and Raju's other brother are
mostly to blame for the Satyam fraud case.

● How were Satyam books cooked?

Satyam's accounts were manipulated by overstating its sales, profit

margins, and earnings from 2003 to 2008. Off-balance-sheet transactions
were engaged.

● What happened to PwC after the Satyam scandal?

Following the Satyam scam, PwC faced criticism and legal actions. The
Indian government barred PwC from auditing companies for five years.
PwC implemented measures to strengthen audit procedures and rebuild
trust. Over time, it recovered, emphasizing transparency, accountability,
and high-quality services to regain client confidence.

● Who acquired Satyam?

Tech Mahindra, an Indian multinational technology company, acquired

Satyam Computer after the Satyam scam in 2012.
● Why did Mahindra acquire Satyam?

Tech Mahindra, which had previously concentrated on telecom, saw the

Satyam purchase as an opportunity for diversification and development.
Satyam's scale, worldwide reach, and renowned customers created a
strategic opportunity for Tech Mahindra and the Mahindra Group to
accelerate their expansion.