Governance failure at

SATYAM

GROUP MEMBERS

Arun K S 13020841118

Akansha Mohanty 13020841064

Ankit Uttam 13020841066

Nishigandha sorte 13020841090

Siddiqui Zeeshan 13020841104

Taranpreet Kaur 13020841113

Pankaj 13020841119

1. Circumstances for Exposure & Reasons

for fraud

Dec 16th -17th :Maytas acquisition failure: 51% in Maytas infra(listed in BSE),

100% in Maytas Properties(unlisted) lead to negative investment failure.

Total value of these two companies $1.6 billion. Justification given was slow

down in IT industry and diversification.

Decline 55% in Satyam’s ADR, share price by 33%

Dec 23rd :World Bank suspended Satyam for 8 years for bribery charges, but

denied the allegations

Dec 26th :Mangalam Srinivasan independent director since 1991,resigned

taking responsibility for not voting against acquisition.

Dec 28th :board meeting got postponed, IL&FS Trust sold 4.41 million shares

in open market, family stake dilution from 8.65% to 5.13

• Anonymous email to board stating financial

irregularities and lack of liquidity, three more

independent directors resigned.

• To keep up the share price, even though profit is

3%

• PwC India had failed to independently confirm cash

balances in bank accounts that supposedly rose to

over $1 billion by the time the fraud ended

• Lack of Transparency: Embezzlement of funds over

20 crore from 13000 non-existent employee’s salary

account.

In retrospect this scam could have been prevented,

The buck stops with CEO at any organization, in Satyam’s case

the scam started with Raju’s mishandled ambitions

Even though CEO acts as a gatekeeper to all the

misappropriations and creative accounting practices. But in this

case the

CFO-Srinivas Vadlamani, COO-themselves collude with CEO

Even though PwC initially distanced them from the Scam but, as

the primary auditor of the 4th largest company of India they were

lax and on a large extent they were major partner in the scam as

per analysis.

2. Could this fraud have been prevented and by

Whom?

• The BOD agreed with the Maytas without consenting with the share

holders and when the scam broke they distanced themselves from the

scam. So we understand that they should be more aligned to the

companies interest more than the CEO

• Industry associations like CII-Confederation of Indian Industry,

NASSCOM should have been proactive in implementing corporate

governance across hierarchies in the firm.

3. Corporate Governance at

Satyam Satyam was one of those few companies in India that supposedly had

been doing things the right way. It allegedly had all the checks and

balances a U.S. company would want in an overseas business partner.

Its financial statements received repeated clean bills of health from a

respected outside auditor, Price Waterhouse Coopers. And still its

corporate governance rotted away from the inside. So apart from the

corporate governance point of view the important thing is that you have

to trust that your overseas partners are working honestly. Satyam is an

ugly reminder that we should keep that point very, very small.

SEBI requires Indian publicly held companies to ensure that

independent directors make up at least half their board strength.

The knowledge available to independent directors and even

audit committee members is inherently limited to prevent wilful

withholding of crucial information

The reality is, at the end of the day, even as an audit committee

member or as an independent director, One would have to rely

on what the management was presenting to him.

Satyam was one of the world’s largest implementers of SAP

systems. In an effort to compete against Satyam, HCL acquired

Axon, an SAP consulting firm, at a cost of $800 million. Any

Satyam director should have been puzzled that the company

was proposing to invest $1.6 billion in real estate at a time when

a competitor as formidable as HCL was gunning for one of its

most lucrative markets.

Our Analysis

“Independent directors should also (in addition to themanagement) be held accountable for board decisionsand audit-related compliance practices.”

“The concept of CEO and Board chair separation is wellaccepted in Europe, and American companies aresteadily moving in that direction. This would bring abetter balance in the boardroom.”

“Accountability and action against fraud/negligence aremajor concerns. Professionals (auditors) should bemade accountable and consequences (punishment)should follow if there are any deficiencies and slip-ups.”

4. Responsibility of statutory audit

Internal Audit committee- Headed by the CFO, Srinivas Vadlamani

Statutory Audit committee- PricewaterhouseCoopers(PwC) contracted in 2000

Audit committee of the board- Headed by independent board member.

Under the Companies Act, an auditor is required to express an opinion as to whether

the annual accounts give a true and fair view of the company’s state of affairs and

financial position.

PwC was paid INR430 million for auditing which was close to thrice the fees paid by

other IT companies.

PwC should have declined the offer of such huge fees at the very first place and

should have raised a red flag that why Satyam was ready to pay so much money.

PwC management should have questioned its own employees who were auditing

Satyam.

It should have verified the cash and bank balances properly and fairly.

The auditors have to perform an essential function of fraud prevention and

deterrence.

Auditors should not have neglected the misrepresented amounts, fake invoices etc.

But PwC failed in all the aspects in Satyam case.

5. Analysis of Resignation Letter

FINANCIAL ANALYSIS

He inflated the cash and bank balances of Rs 5040 crore.

Interest of 376 crore was not shown in the books.

He understated the liability of RS. 1230 crore

He overstated the debtors position by 490 crore

For the September quarter he showed the revenues as

2700crore and operating margin as 649crore but in reality

these figures were 2112crore and 61 crore

Apart from the Financial Analysis, there were some other important

points in the letter.

The only reason why he confessed his crime was because of his

inablility to fill the marginal gap between the actual operating profit

and the one reflected in books that had attained unmanageable

proportions as the size of the company operations grew

significantly.

In his resignation letter he also stated that the MAYTAS deal was

the last attempt to fill that gap but as this didn’t happen hence the

gap could not be filled

In the conclusion he also recommended the board about some

merging opportunities and also requested for the restatement of the

accounts and also apologized to all the stakeholders and

satyamites and requested them to stand by the company in this

hour of crisis

6. ROLE OF BOARD OF

DIRECTORS IN CORPORATE

GOVERNANCE

BOD- ROLES & CG

The principal role of the board of directors –is to oversee the

function of the organization and ensure that it continues to

operate in the best interests of all stakeholders.

Strategic asset for the company

Promoting a transparent culture that promotes effective

dialogues among the directors, senior management, and

various function and risk managers

Boards of directors in large public companies is that the board

tends to have more de facto power.

Issue of fundamental importance in economics

BOD responsible for the strategic aspect of the firm.

This implies that the underlying management strategy

comes under the purview of their roles and responsibilities.

Includes the control of the same.

SATYAM & BOD

Saytam revealed that it did not have a financial expert on the board

during 2008

Board of Directors’ lack of independence

The Board first came under fire on December 16, 2008 when it

approved the Maytas Deal. The Board rescinded the approval after

shareholders and investors went against it.

Krishna Palepu, Rommohan Rao, and Vinod Dham all resigned from

the Board within two days of the rescission of the transaction.

The botched transaction provided the investors with the impression

that the Board was not actively monitoring Satyam. Furthermore, the

Board should have caught some of the same red flags that the

auditor, PWC, missed.

Additionally, the Board of Directors should have been concerned

with the knowledge that Mr. Raju decreased his holdings of Satyam

significantly over the three years leading up the disclosure of the

fraud.

Points out to not efficient policy administration , faulty procedures

and systems

7. Regulatory Changes is the

Answer?

To some extent…. Yes. Enforcement of regulations

definitely plays the key.

Absence of stringent Laws : ‘‘White-Collar Crime

Penalty Enhancement Act of 2002’’ provides for the

penalty for such crimes. In fact section 906 of this

Act provides for 20 years of imprisonment

Whereas in India, the Company’s Act (1956),

Section 628 provides for 2 years imprisonment

only.

Regulatory Changes after Satyam Scandal

• The new companies bill proposes fundamental changes in the way companies are run in India.

1. In Company Act 2013, Independent Directors constitute at

least one-third of the BOD in every public limited company.

2. Mandatory disclosure of Pledged Securities

3. Increased Financial Accounting Disclosures

4. Adoption of IFRS (International financial reporting standards)

5. Strict civil and criminal laws

6. Rotation of audit partners every five years.

7. Constitution of Serious Fraud Investigation Office(SFIO).

Negatives of excess regulations

It is not clear that more paperwork is the answer,

consider Sarbanes-Oxley, which did nothing to

prevent the current scams in the US.

More regulation, especially in bureaucrat-heaven

India, will probably just choke businesses to death,

suffocating, License Raj – which, incidentally, did

enrich those that had the right contacts.

8. Lessons Learnt

Improvement required in Law regulatory systems

Rotation of auditing firms

Strengthening of quality review

Criteria for remuneration to key personnel

Education on ethical values

Empowering whistle blowers.

However, One must understand no matter how strong aregulatory systems is, it cannot always prevent fraud.There are limits to legislations as a lot depends on theintegrity and ethical values of various corporate players.

The key lies in management decisions and itscommitment to establish and follow rigorous systems.