Satyam Scandal- Ethical Model Analysis
1. Introduction and Background
In
the year 2009, when the world was already reeling under the impacts of major
financial recession, Indian Technology sector was hit by what is termed as the
most colossal fraud in corporate history of India, The Satyam Scandal. The
fraud often dubbed as the ‘India’s Enron’1 took everyone
by surprise as at the time scam was exposed, Satyam was a renowned Indian IT
company. However, things turned ugly when on January 07, 2009, the chairman of
Satyam Computer Services Ramalinga Raju wrote a letter to Securities and
Exchange Board of India admitting to the fraudulent activities and financial
irregularities in his company2.Ramalinga acknowledged in his letter
that he had been forging company’s accounts by overstating its revenues and
inflating its profits for years and that Satyam Balance sheet showed nearly
$1.5 billion in non-existent cash and bank balances, accrued interest, and
misstatements3.
Before
we analyze the factors led to the debacle of Satyam, we briefly discuss the
background of the company which was doing well in business before the scam came
to light. Satyam, the name which ironically means ‘Truth’, was established in
1987.It was a major IT player which provided services across the globe in
fields of healthcare, Bio -Tech, Telecommunication, Banking and Finance4 etc.
Prior to 2009, Satyam Computer Services was fourth largest Indian IT Service
Provider5 which was generating USD 2.1 billion revenue5.
It had 9% of the market share6. There were 530007 employees
working in different IT Projects on different IT projects in Satyam’s
Development Center across the world. Its clients included 163 Fortune 5008 Companies.
The exports of Satyam accounted for almost 75.9 %9of its
total sales revenue with North America being the largest contributor (65%)10. Everything was going
well with Satyam until the sequence of events unfolded which ultimately led to
the disclosure of not only the biggest financial but also the major ethical
scam of corporate India
2. Ethical
Framework
Satyam
was evidently the case of ethical malpractices of Ramalinga Raju, chairman of
the company who admitted his own misconducts. The Serious Fraud Investigation
Office (SFIO), investigating arm of Ministry of Corporate Affairs in India
investigated the case and submitted its preliminary report on April 13, 200912.
Per the report, Satyam founders, ex-CFO Vadlamani Srinivas, and
ex-vice-president (finance) G Ramakrishna, conspired to artificially increase
the revenues and profits in the books. The report highlights that the
falsification was done by deliberately leaving loopholes in the Computerized
Accounting System which uses ERP modules. The high-level application landscape
of Satyam internal applications has many links between various systems where either
there was no integration or there was weak integration. These loopholes were
intentionally left to insert fictitious invoices and bank statements to balance
them without being detected13.
2.1 Unethical Conduct –
Ramalinga Raju
Satyam’s chairman Ramalinga Raju’s way of conducting
the business is the classical example of unethical practices in the industry.
He was solely driven by the greed of money and acquiring lands. He wanted to
compete with the top three IT companies of India (Infosys, TCS and WIPRO). Raju
chose the easiest yet the most immoral ways to achieve his goals. He forged the
accounting books for nine years, avoided taxes, and diverted the money received
from shareholders, created fake clients, account salaries and invoices. Ramalinga
Raju showed his company in very good financial health and attracted money from
shareholders to buy lands. Ironically, he had bagged golden peacock global
award in 200814 for good corporate governance. Also,+ world Bank in December,
2008 barred Satyam from business for eight years for providing Bank staff with
“improper benefits”. Ethical standards thus in the company were poor15.
2.2 Insider Trading
The
promoters indulged in insider trading of the company’s shares to raise money.
The funds collected by the former chairman B. Ramalinga Raju, his brother
Rama Raju and their relatives were used to purchase lands in the names of 330
companies Promoters of Satyam and their family members during April 2000 to
January 7, 2009 sold almost 3.9 crore shares collecting in Rs 3029.67 crore16.
The promoters based on the inflated books thus projected a very good financial
position of the company and used the shareholders’ money deceitfully for their
personal gains.
2.3 False Books &
Accounting
According
to the findings of SFIO, Satyam’s balance sheet as on September 7, 2008 carried
an accrued interest of Rs. 376 crore, which was non-existent. The company had
created a false impression about its fixed deposits summing to be about Rs
3318.37 crore while they held FDRs of just about Rs 9.96 crores17.
One
of the biggest sources of forgery at Satyam was the inflation of the number of
employees. While founder chairman Raju claimed that the company had 53,000
employees on its payroll but in real number was just over 40,000.
The fictitious number could be fabricated 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 employees18.
2.4 Negligent Board of
Directors
The
directors at the Satyam Board never questioned the actions of their Chairman.
They did not raise objections when the management decided to invest 1.6 billion
dollars to acquire a 100 percent stake in the two real estate firms promoted by
Raju's sons19 which was in gross violation of the Companies Act
1956, under which no company is allowed without shareholder’s approval to
acquire directly or indirectly any other corporate entity that is valued at over
60 percent of its paid-up capital.
2.5 Dubious role of
Independent directors
Six of the nine directors on Satyam’s Board were independent directors including US academician Mangalam Srinivasan (the independent director since 1991), Vinod K. Dham (famously known as father of the Pentium and an ex Intel employee), M Ram Mohan Rao (Dean of Indian School of Business), US Raju (former director of IIT Delhi), T.R. Prasad (former Cabinet Secretary) and Krishna Palepu (professor at Harvard Business School)20.
They all were men of good reputation. But the fact that seven out of nine of
these directors were present when Maytas deals were unanimously finalized,
raises questions about their integrity. It indicated
that they were aware of the malpractices and kept silent about them.
2.6 Dubious role of rating
agencies
Credit
rating agencies based their ratings of Satyam based on the falsified documents
and never did any due diligence in their coverage and assessment21.
They seemed conveniently unaware of the deteriorating financial condition of
Satyam and therefore could not warn investors in advance.
2.7 Questionable role of
Banks
Banks did not raise any doubt while
sanctioning the short-term loans to Satyam which was supposedly a cash rich
company. The behavior of banks is unscrupulous in this regard22.
2.8 Unscrupulous role of
Auditors
Price
Waterhouse, was the auditor for Satyam and have been auditing their accounts
since 2000-0123. The auditors compromised on standards by not using
the PwC standard testing tools rather they relied on Satyam for that. Auditors,
in connivance with perpetrators, did not report the possibility of fraud and
control deficiencies in Information Systems to shareholders. The Statutory
auditors also failed in discharging their duty when it came to independently
verifying cash and bank balances, both current account and fixed deposits.
There needs to be a physical verification of assets owned by the company rather
than simply relying on the books prepared by the company.
Satyam
ownership model was flawed from the perspective of good corporate governance24.
1.
As a publicly owned company, it was under pressure to overstate profits to keep
the company’s bonds and equities in high esteem.
2.
Mr. B. Ramalinga Raju, diluted his holding from 25.6 % in 2001 to 3.6 % in
2009. He could overstate profits with the objective of influencing other
shareholders. The overstatement never hurt him as his own share was small.
3.
Satyam would not have overstated its revenues and profits if it had to back
both with real cash. A big part of the blame for the colossal fraud thus
belongs to India’s trade and fiscal policy makers.
· Deontology: is the study of that
which an “obligation of duty”25 and consequent action based on
moral judgment determine whether the person, business or any actor has complied
to.
Ramalinga
Raju actions were ethically in contrast with what is expected from the leader
of any organization. He put his greed and ambitions before his duties towards
his company, employers and stakeholders and did not hesitate from falsifying
the accounting books for years ignoring all moral obligations towards them.
· Consequentialism26: is the judgment on
right or wrong based on the consequences of action taken or conduct of
individual, company et al.
It
is quite evident from Ramalinga Raju’s letter that when he started to show
inflated numbers in his Account books, he miscalculated the consequences of his
unlawful actions in long term. Since company was doing well in terms of
business (on papers) stakeholders were happy, Raju chose to conveniently overlook
the approaching disaster. In his own words “It was like riding a tiger without
knowing how to get off without being eaten” (source 7: Economic Times (New
Delhi), January 8, 2009, p1.). After his last attempt to fill the fictitious
asset with real ones failed, he had to come face to face with the disastrous
consequences of his unethical actions.
· Graham Tucker’s 5
Questions27: The actions of Ramalinga Raju’s can be analyzed
based on following questions:
o Is decision
profitable? - In short term, Yes. In long term, No. Due to
manipulation in accounts, Satyam established its good reputation in the global
IT market that helped it attract many investors and gain confidence of clients.
The share prices rose due to fictitiously inflated numbers in accounting books
but as soon as the truth came out the Satyam shares crashed 77% directly
hitting the shareholders28 So in long run Ramalinga Raju’s
unethical actions did not yield any profit to anyone.
(source:
http://www.marketwatch.com/story/satyam-shares-crash-mumbai-after)
o Is decision legal? – No.
Raju flouted all the corporate governance rules. He projected the bank balance
which did not exist and created fake salary accounts, invoices and illegally
diverted money to purchase lands.
o Is decision fair?
- No, the decision was not taken based on fairness and accountability.
The balance sheet and other financial statement should reflect the correct
picture of the organization however, in Satyam’s case all the financial
statements were unfair and manipulated.
o Is the decision,
right? - No, the decision made by Raju reflects his greed and
hunger for power and money. As a decision maker, Raju should have considered
the negative impacts of his decision on the Indian IT industry. He was rather
focused on improving his company’s profits by manipulating the accounts and
statements bringing the trust factor on Indian IT companies.
o Is the decision going to
further sustainable development? - No, the decision in fact had
negatively impacted the company’s sustainable development. The decision’s scope
was not limited only to Satyam but led to the crash of entire Indian stock market.
· Virtue Ethics29: Satyam prescribed
itself to some great virtues and principles, though their conduct is completely
opposite of what they claim to be. Ramalinga Raju flouted every rule in the
book of corporate governance to fulfill his hunger and greed for power and
money. If the conduct was ethical it would act parallel to the virtues expected
by stakeholders. Out here virtues like Sustainability, Honesty and Integrity
were only preached but not practiced. The act is based more on greed of making
profits at the cost of shareholder’s money.
As
soon as the news of Ramalinga Raju’s letter to SEBI (Securities and Exchange
Board of India) broke out, the Satyam shares plunged 77%, the future of 40000
employees became uncertain, and the trust on Indian IT sector was shattered.
Government of India promptly intervened to save interests of shareholders and,
employees as well reinstate the faith in India Inc at global level. Legal cases
were filed as per law of land of India against all accused including Ramalinga
Raju, his brothers and PWC auditors. Government
appointed six-member board to contain the damages in the aftermath. The
board selected Tech Mahindra through the global competitive bidding
process. Consequently, Tech Mahindra (holding 31% stake in Satyam) bought Satyam renaming it on June 21, 2009, as ‘Mahindra Satyam’ and replaced its executive Board and Auditors30. Though the steps
taken by Government ensured that Satyam did not collapse, however there were
multiple financial, legal and customer challenges for new “Mahindra Satyam”. In the first few months after the takeover, the
new management in Mahindra Satyam spent its energy on traveling, meeting key
customers, and reassuring them that it was business as usual.
A few customers like State Farm Insurance had moved to rivals even before the
new owner and management came on board. Others, shaken by the scam, decided to
de-risk and move. One of the most high-profile losses was that of British
Petroleum’s $1-billion contract31. A few big names such as GE, a top
customer, and GSK stayed on but extracted their pound of flesh. They asked for
15-20% rate cuts across the vendor base, and Mahindra Satyam was no exception32.
The
Satyam fiasco led government of India to introduce the new measures in
corporate governance to prevent reoccurrence of such frauds in future33.
These are:
Ø The voluntary adoption
of international financial reporting standards;
Ø The appointment of chief
financial officers by audit committees based on qualifications, experience, and
background.
Ø The rotation of auditors
every five years so that familiarity does not lead to corporate malpractice and
mismanagement34.
Ø Independent Directors
are not entitled to receive remuneration for their services, except for
reimbursement. At least one-third of the Board of a company should consist of
independent Directors35.
Ø Audit committee has to
accommodate a majority of independent Directors.
Ø Additional disclosure
norms are – providing for the formal evaluation of the performance of the Board
of Directors, filing returns with the Registrar of Companies with respect to
any change in the shareholding positions36.
1. http://www.economist.com/node/12898777
2. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1405419346107.pdf
3. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1405419346107.pdf
4. http://www.slideshare.net/shinewithrohit/satyam-scandal-a-full-analysis
5. http://www.slideshare.net/shinewithrohit/satyam-scandal-a-full-analysis
6. http://www.slideshare.net/shinewithrohit/satyam-scandal-a-full-analysis
7. http://www.slideshare.net/shinewithrohit/satyam-scandal-a-full-analysis
8. http://www.slideshare.net/shinewithrohit/satyam-scandal-a-full-analysis
9. http://www.slideshare.net/shinewithrohit/satyam-scandal-a-full-analysis
10. http://www.slideshare.net/shinewithrohit/satyam-scandal-a-full-analysis
11. https://www.researchgate.net/publication/271134027_India’s_Satyam_Accounting_Scandal_How_the_Story_Unfolded
12. http://www.iodonline.com/Articles/Inst%20of%20Directors-WCFCG%20Global%20Covention-Paper%20Prof%20J%20P%20Sharma-What%20Went%20Wrong%20With%20Satyam.pdf
13. http://www.businesstoday.in/magazine/issue/feb82009
14. http://www.financialexpress.com/archive/satyam-receives-golden-peacock-global-award-for-excellence-in-corporate-governance/364843/
15. The World Bank is now having a relook at the ban imposed on the Mahindra Satyam when it was under the Rajus family. Mahindra Satyam requested for lifting the ban. (Economic Times, New Delhi, May 06, 2010, Page 21).
16. http://www.iodonline.com/Articles/Inst%20of%20Directors-WCFCG%20Global%20Covention-Paper%20Prof%20J%20P%20Sharma-What%20Went%20Wrong%20With%20Satyam.pdf
17. http://www.iodonline.com/Articles/Inst%20of%20Directors-WCFCG%20Global%20Covention-Paper%20Prof%20J%20P%20Sharma-What%20Went%20Wrong%20With%20Satyam.pdf
18. http://timesofindia.indiatimes.com/business/india-business/Satyam-fudged-FDs-has-40000-employees-Public-prosecutor/articleshow/4015830.cms
19. http://www.ipsnews.net/2009/01/india-satyam-scam-tip-of-corporate-fraud-iceberg/
20. http://www.business-standard.com/article/economy-policy/satyam-how-guilty-are-the-independent-directors-109011201009_1.html
21. http://www.hindustantimes.com/business/credit-rating-agencies-didn-t-confer-rating-on-satyam-govt/story-eUKPIZ8cDmhA2AFD7myNQP.html
22. http://indianexpress.com/article/news-archive/web/satyam-probe-turns-to-role-of-banks-in-fraud/
23. http://www.business-standard.com/article/companies/pwc-india-finally-brings-the-curtain-down-on-satyam-115090101331_1.html
24. http://www.thehindubusinessline.com/todays-paper/tp-opinion/satyams-flawed-ownership-model/article1039290.ece
25. https://en.wikipedia.org/wiki/Deontological_ethics
26. https://en.wikipedia.org/wiki/Consequentialism
27. http://documentslide.com/documents/5-question.html
28. http://www.marketwatch.com/story/satyam-shares-crash-mumbai-after
29. https://www.scribd.com/doc/73590653/Satyam-Fraud-Ethical-Corporate-Governance
30. http://www.iosrjournals.org/iosr-jbm/papers/ies-mcrc-volume-2/14.pdf
31. http://economictimes.indiatimes.com/tech/software/its-baby-steps-still-but-in-right-direction/articleshow/5334722.cms?intenttarget=no
32. http://economictimes.indiatimes.com/tech/software/its-baby-steps-still-but-in-right-direction/articleshow/5334722.cms?intenttarget=no
33. http://economictimes.indiatimes.com/news/company/corporate-trends/lesson-from-satyam-corporate-governance-evolves-not-execution/articleshow/50476372.cms
34. http://www.academia.edu/21517350/SATYAM_SCAM_INDIAS_BIGGEST_CORPORATE_GOVERNANCE_FAILURE
35. http://blog.mylaw.net/after-satyam-how-a-scandal-changed-corporate-governance-law-in-india/
36. http://blog.mylaw.net/after-satyam-how-a-scandal-changed-corporate-governance-law-in-india/
2. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1405419346107.pdf
3. http://www.sebi.gov.in/cms/sebi_data/attachdocs/1405419346107.pdf
4. http://www.slideshare.net/shinewithrohit/satyam-scandal-a-full-analysis
5. http://www.slideshare.net/shinewithrohit/satyam-scandal-a-full-analysis
6. http://www.slideshare.net/shinewithrohit/satyam-scandal-a-full-analysis
7. http://www.slideshare.net/shinewithrohit/satyam-scandal-a-full-analysis
8. http://www.slideshare.net/shinewithrohit/satyam-scandal-a-full-analysis
9. http://www.slideshare.net/shinewithrohit/satyam-scandal-a-full-analysis
10. http://www.slideshare.net/shinewithrohit/satyam-scandal-a-full-analysis
11. https://www.researchgate.net/publication/271134027_India’s_Satyam_Accounting_Scandal_How_the_Story_Unfolded
12. http://www.iodonline.com/Articles/Inst%20of%20Directors-WCFCG%20Global%20Covention-Paper%20Prof%20J%20P%20Sharma-What%20Went%20Wrong%20With%20Satyam.pdf
13. http://www.businesstoday.in/magazine/issue/feb82009
14. http://www.financialexpress.com/archive/satyam-receives-golden-peacock-global-award-for-excellence-in-corporate-governance/364843/
15. The World Bank is now having a relook at the ban imposed on the Mahindra Satyam when it was under the Rajus family. Mahindra Satyam requested for lifting the ban. (Economic Times, New Delhi, May 06, 2010, Page 21).
16. http://www.iodonline.com/Articles/Inst%20of%20Directors-WCFCG%20Global%20Covention-Paper%20Prof%20J%20P%20Sharma-What%20Went%20Wrong%20With%20Satyam.pdf
17. http://www.iodonline.com/Articles/Inst%20of%20Directors-WCFCG%20Global%20Covention-Paper%20Prof%20J%20P%20Sharma-What%20Went%20Wrong%20With%20Satyam.pdf
18. http://timesofindia.indiatimes.com/business/india-business/Satyam-fudged-FDs-has-40000-employees-Public-prosecutor/articleshow/4015830.cms
19. http://www.ipsnews.net/2009/01/india-satyam-scam-tip-of-corporate-fraud-iceberg/
20. http://www.business-standard.com/article/economy-policy/satyam-how-guilty-are-the-independent-directors-109011201009_1.html
21. http://www.hindustantimes.com/business/credit-rating-agencies-didn-t-confer-rating-on-satyam-govt/story-eUKPIZ8cDmhA2AFD7myNQP.html
22. http://indianexpress.com/article/news-archive/web/satyam-probe-turns-to-role-of-banks-in-fraud/
23. http://www.business-standard.com/article/companies/pwc-india-finally-brings-the-curtain-down-on-satyam-115090101331_1.html
24. http://www.thehindubusinessline.com/todays-paper/tp-opinion/satyams-flawed-ownership-model/article1039290.ece
25. https://en.wikipedia.org/wiki/Deontological_ethics
26. https://en.wikipedia.org/wiki/Consequentialism
27. http://documentslide.com/documents/5-question.html
28. http://www.marketwatch.com/story/satyam-shares-crash-mumbai-after
29. https://www.scribd.com/doc/73590653/Satyam-Fraud-Ethical-Corporate-Governance
30. http://www.iosrjournals.org/iosr-jbm/papers/ies-mcrc-volume-2/14.pdf
31. http://economictimes.indiatimes.com/tech/software/its-baby-steps-still-but-in-right-direction/articleshow/5334722.cms?intenttarget=no
32. http://economictimes.indiatimes.com/tech/software/its-baby-steps-still-but-in-right-direction/articleshow/5334722.cms?intenttarget=no
33. http://economictimes.indiatimes.com/news/company/corporate-trends/lesson-from-satyam-corporate-governance-evolves-not-execution/articleshow/50476372.cms
34. http://www.academia.edu/21517350/SATYAM_SCAM_INDIAS_BIGGEST_CORPORATE_GOVERNANCE_FAILURE
35. http://blog.mylaw.net/after-satyam-how-a-scandal-changed-corporate-governance-law-in-india/
36. http://blog.mylaw.net/after-satyam-how-a-scandal-changed-corporate-governance-law-in-india/
