Government Failure at Satyam

1. case synopsis

Until the revelations of its runaway fraud, Satyam has through its erroneous financial statements duped the global corporate world to acclaim it as a highly successful IT solutions entity. Satyam is Sanskrit word meaning truthfulness and as such, appealed to numerous stakeholders as it was perceived as the foundation for the company’s governance persona (Gaur & Kohli, 2011). In 2009, it emerged that Satyam had for a long time falsified financial records through a compromised internal and internal audit system. This was after the company sought to acquire the firms, Maytas Infra and Maytas Properties for a sum of 1.6 billion dollars (Gaur & Kohli, 2011). The two real estate sector firms were essentially owned by friends and family of Ramalinga Raju, the Satyam chairperson. Raju justified the move as Satyam’s new diversification agenda resulting from slowed growth in its core IT undertakings in Europe and the US. The result was widespread dissenting among investors leading to a considerable devaluation in the entity’s share price (Bhasin, 2013). Stakeholders voted against the proposed diversification and soon after, the World Bank sanctioned it for bribing its staff (Gaur & Kohli, 2011). One of its longstanding directors Mangalam Srinivasan resigned for allegedly failing to oppose the diversification agenda in writing. The crisis turned into an organizational catastrophe after a whistleblower sent an anonymous email concerning concealed fraud and financial irregularities within Satyam. This resulted in further resignations in the firm’s board and soon after, Raju Ramalinga resigned and the Indian government instituted investigation as well as appointed an interim board in defense of shareholder interests. By 2008, the company’s market capitalization had depreciated by over 78% (Gaur & Kohli, 2011). SEBI approved a 51% stake sale of the company via an international bidding process where Tech Mahindra won a 31% stake in the company.

2. Exposure of Satyam Fraud

Satyam’s fraudulent practices came to light after it tables an acquisition proposal for a listed company and another non listed company operating within India’s real estate as well as the construction industries. More than 31% of shareholding for these two firms was owned by the directors’ family members and close associates (Gaur & Kohli, 2011). The main motivating factor behind the fraud was to continue covering up ever widening gaps in Satyam’s balance sheet due to the highly likelihood of directors siphoning of funds for own purposes. However, the company’s CEO said in a letter to the SEBI that the emerging fraud was aimed at protecting the organization from hostile takeover bids by falsely stabilizing share prices (Bhasin, 2015).

3. Corporate governance mechanisms at Satyam

Satyam is a company that thrived from having large shareholders who were easily distracted through appeasing incentive schemes. The shareholder thus seemed less concerned about the manner of governance in the organization as long there were consistently high returns on investments (Gaur & Kohli, 2011). The firm also projects significant ineffectiveness such that, little regard was accorded to monitoring and control systems to check board actions and decision. Such inadequacies fostered fraud in an unprecedented manner. The board of directors also showed little concern for stakeholder welfare. As such, it is apparent that the board’s composition inadequately addressed diverse stakeholder needs stemming from the fact that the chairman’s value systems allowed for long term fraud (Bhasin, 2015). The governance mechanisms were therefore inherently flawed and to cover this up, it offered long term incentives, bonuses and salaries that hid the truth from managers as well as diverse stakeholders. It not only bribed some employees of its customers to acquire lucrative contracts but also did the same to compromise the three tier audit system. After the fraud was finally uncovered, all board members were replaced further underscoring the glaring incompetence of directors and senior administrators.

4. Role of internal controls in fraud prevention

The role of an effective internal audit committee it to ensure there is a collective responsibility for organizational success by instituting robust monitoring and control protocols. Such control and monitoring frameworks should have the capacity to detect, assess and ultimately manage risks (Gaur & Kohli, 2011). Internal audit ought to assess and appraise human and financial resources to ensure an entity management performance and objectives are consistently reviewed in line with organizational standards and values. Desirable characteristics for a board towards prevent fraud within a company include: transparency, probity, accountability, responsibility, judgment, reputation, and integrity (Bhasin, 2015).

5. The responsibility of audit committees

The internal audit committee under Srinivas Vadlamani’s leadership, the statutory audit committee headed by PWC and the board’s audit committee led by an independent member of the board both failed miserably in carrying out assigned duties (Gaur & Kohli, 2011). However, the buck rests with PWC as statutory auditors to work with integrity to ensure the provision of a true and fair standpoint on Satyam’s financial position and current state of affairs. There were already potent statutory regulation in place and there is the need to transform mechanisms to ensure implementation (Dutta, 2014). However, additional regulations may discourage such fraud. For instance, ensuring rotation of contracted companies heading an entity’s statutory audit committee.

6. Legal and Ethical implications

Ethical Implications: Ethics in any firm is essentially influenced by organizational culture. Satyam failed to adopt a right course for action and as such lost investors, customers, talented employees, goodwill and suffered a reduced turnover rate. Ramalinga Raju exhibit unethical behaviors through bribery, greed, embezzlement and dishonesty translating to a trickledown effect resulting in an essentially unethical organizational system (Dutta, 2014). This is highlighted by the fact that some of the company’s staff attempted to offer bribes to officials within the World Bank in an effort to acquire lucrative contracts. An unethical organizational leader fostered an equally unethical organizational culture.

Legal Implications: From a legal standpoint, ethics as a set of operational and decision making boundaries informs the manner with which an organization ought to operate. This is geared to ensure abstinence from unlawful conduct through placing much focus on rules as well as increased monitoring and penalties (Dutta, 2014). Penalties in the form of penalties ensure rules are adequately enforced. As such, as provided for via the deterrence paradigm, organizational members are prevented from indulging in bad practices by manipulating costs of such misconduct. Satyam had offices in many developed cities and as such, the unraveling of the fraud not only led to closure of operations in host countries but also attracted very heavy financial penalties. More so it suffered heavy losses in terms of lost business opportunities and dented brand image.

7. Critical thinking questions

Why did India’s SEBI fail to proactively detect and manage fraud at Satyam? If SEBI possessed potent regulatory structures, may be Satyam would not have grown into a global phenomenon. The fast rise of Satyam worked quite well for India’s foray into international recognition as an outsourcing hub. The company not only worked to improve IT oriented education institutions within India but also created numerous jobs for the populous nation as well as allowing other related firms to benefit from its growth (Dutta, 2014). Were it not for the whistleblower and credible bribery claims emanating from the World Bank, the fraud could have continued unabated. As such, there was little goodwill not only in Satyam’s corporate governance protocols but in SEBI as well. The fact that PWC could have been so easily coerced into participating in unethical and unlawful practices implies that the country may support corruption to a great extent.

8. Epilogue

Strategic Milestones

The aftermath of this particular crisis led to the company losing nearly 80% of market capitalization requiring that the company sells over 50% stake to a willing investor. Tech Mahinda was able to acquire 31% of the firm and by end of 2013, it amalgamation in Mahindra’s business was completed (Chakma, 2015). As such, the company was rebranded and transformed corporate governance structure considerably to enforce best practices, eliminate overlaps, integrate transparent processes and ensure wealth creation for its vast shareholder base.

Financial Milestones

The new organizational structure was able to remain among the five most outstanding IT services firms within India with operations in about 46 nations and en employee base of nearly 85,000. Tech Mahindra which absorbed Satyam registered 2.7 billion dollars in collected revenues for 2012/2013 and forecasted to achieve about 5 billion in revenues for 2015 (Chakma, 2015). As such, it has been able to realize commendable financial growth despite creditors seeking court action to claim monies borrowed under Ramalinga Raju’s leadership.

Lessons learned from the case: This case aped the Enron saga that actualized in the US and as such offered the Indian regulatory community significant lessons on failure to effectively perform statutory audits. It is unbelievable that a CEO was seeking to cover up a 1.5 billion debt and even devised an elaborate plan that almost came into effect. The greatest winner emanating from the Satyam debacle is it own competitors who under revitalized scrutiny from SEBI are I n a position to ethically and professionally continue international expansion.

References

Bhasin, M. L. (2013). Corporate accounting scandal at Satyam: a case study of India’s Enron. European Journal of Business and Social Sciences, 1(12), 25-47. Retrieved from http://www.ejbss.com/Data/Sites/1/marchissue2013vol12/ejbss-1208-13-corporateaccountingscandalatsatyam.pdf

Bhasin, M. L. (2015). Corporate accounting fraud: A case study of Satyam Computers Limited. Open Journal of Accounting. Retrieved from https://poseidon01.ssrn.com/delivery.php?ID=647007085116109030122071108112092065023042068077035054121102026076068073069083111113021020036120013043047127113118028007083084008086087008079085117096094082006100095052003024124003029009124023113093123004002127084015097084068030004126011031084096113&EXT=pdf

Chakma, J. B. (2015). The Misadventure of Satyam Computers: India: s Biggest Corporate Governance Failure. Asian Journal of Multidisciplinary Studies, 3(12). Retrieved from http://www.ajms.co.in/sites/ajms2015/index.php/ajms/article/view/1508

Dutta, U. K. (2014). Whistle-Blower Mechanism at Corporate Governance: A Study Based on Satyam. In Handbook of Research on Strategic Business Infrastructure Development and Contemporary Issues in Finance (pp. 56-61). Hershey, PA: IGI Global. Retrieved from https://books.google.co.ke/books?hl=en&lr=&id=39xGAwAAQBAJ&oi=fnd&pg=PA56&dq=Failure+of+corporate+governance+Satyam&ots=TBFaPG9zjq&sig=GQo_8-L9MS5e3yX-XMo4ZjmlqN4&redir_esc=y#v=onepage&q=Failure%20of%20corporate%20governance%20Satyam&f=false

Gaur, A. S., & Kohli, N. (2011). Governance failure at Satyam. Ontario, Canada: Richard Ivey School of Business Foundation.