(A)SATYAM
A case of day light robbery defying
Ethics and Morality
Introduction
The company was formed in 1987 in
Hyderabad.
By 2003, Satyam’s IT services businesses
included 13,120 technical associates servicing
over 300 customers worldwide.
World IT Market: estimated annual compound
growth rate of 6.4%.
Compete against competitors.
Growth
Satyam generated USD $467 million in total
sales.
By March 2008, grown to USD $2.1 billion, i.e.
35% growth.
Operating profits averaged 21%.
Earnings per share grew, from $0.12 to $0.62.
Share Price: January 2003 Rs 138.08
After 5 years
Rs 526.25 – a 300% improvement
Fall
But, did the numbers represented the full picture.
month of December 2008 announced the acquisition
of two of its promoter group companies
Maytas Properties (unlisted)
Maytas Infrastructure (listed)
On December 16, 2008, the Satyam board Approved
the deal.
Strong apposition from shareholders: Deal called of
within 24 hours
Floor
Four independent directors quit the Satyam
board .
Investment bank DSP Merrill Lynch ultimately
blew the whistle after it found financial
irregularities.
On 7 January 2009, Satyam’s previous
Chairman, Ramalinga Raju, resigned and
comitted the irregularities in the balance sheet.
Facts Reveled
Inflated figures for cash and bank balances of
US$1.04 billion vs. US$1.1 billion reflected in
the Books.
An accrued interest of US$77.46 million which
was non‐existent.
An understated liability of US$253.38 million
on account of funds was arranged by him.
An overstated debtors' position of US$100.94
million vs. US$546.11 million in the books.
Possible Reasons
pressure to perform and satisfy investors’
expectations.
It had incurred a loan of Rs 1230 crore ,so they
were under a pressure to show rosy picture of a
company otherwise creditors would have been
skeptical.
Temptation to be the best and aggressive
growth.
focus on the short term gains
Issues of Corporate Governance
A good corporate governance is one where a
firm commits & adopts ethical practices across
its entire value chain & in all of its dealing with
various parties:
1) Shareholders
2) Employee
3) Management
4) Bankers
5) Government
Shareholder : shareholder has a right to get
information from the organization. In the case
of Satyam, the above obligations were never
fulfilled.
Employees: employees were shown with an
inflated figure. The excess of employees in the
organization were kept under Virtual Pool who
received just 60% of their salaries and several
were removed.
Management: Questions were raised over the
credibility of management.
Government: The company did not pay advance
tax for the financial year 2009. As per the rule,
the advance taxis to be paid 4 times a year; such
was not fulfilled by them.
Banks: SCS was blacklisted by World Bank over
charges of bribery.
These revelation further deepened concerns about
poor corporate governance practices at the company.
Role of auditors
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.
The auditor needs to
examine the company’s internal accounting system
inspect its assets
test-check of accounting transactions.
Their duties
They need to make clear whether the position
depicted in the books and balance sheet is correct,
honest and proper.
In any suspicious circumstances or unusual
transactions like:
unavailability of original documents
sudden increase or decrease in shareholdings or debt
employees given the liberty to access unauthorized
documents.
Its their clear duty to “probe into these
transactions” and ensure that they are proper and
legal.
Possible Actions
the auditor has to report what he has
discovered to the management immediately so
that appropriate action can be taken.
when he suspects that the management may be
involved : the auditor needs to report to a third
party without the consent and knowledge of
the management.
Why they are Questioned
This fraud was not committed overnight; it was
building up continuously from over years.
The role of Satyam’s auditors is under scanner.
They ignored some of the obvious indications
of embezzlement and thus failed to catch on the
massive scam.
Some Indicators:
Decrease in holdings
High amounts of debt despite easy cash positions .
Imaginary fixed deposits
Impact of their behaviour
The shareholders of a company place very high
reliance on the auditor’s report, which apparently
shows the true and fair view of the accounts of a
company. The auditors should perform their
duties with utmost care and vigilance to ensure
that there are no illegal or improper transactions.
But still, Satyam has happened
Ramalinga Raju
In the presence of unethical organizational culture and
structure, even highly moral individuals may become
corrupt.
Mr. Raju, Satyam, as the smallest of the big four players,
was under pressure to show extraordinary results in
order to survive.
There was greed, perhaps reckless greed, causing the
brothers to indulge in illegal and unethical activities.
immense pressure to impress investors made him to
deliver outstanding results.
He had to suppress his own morals and values in favor
of the greater good of the company
In the end
The fraud finally had to end and the
implications were far reaching.
Public confession of fraud by Ramalinga Raju
speaks of integrity still left in the individual.
For the whole world Ramalinga Raju may be a
villain, but for residents of his native village in
West Godavari district, he is still a good
Samaritan.
Utilitarian Theory
The Utilitarian Theory states that “moral actions are
those that produce the greatest net pleasure
compared with net pain.”
One aspect of the Utilitarian Theory is the Cost‐
Benefit Analysis which quantifies the benefits and the
costs of the alternative in a given situation.
The benefit of falsifying Satyam’s accounting was
• increasing Satyam’s stock price
• appearance of continued rapid growth.
The alternative would be to report the company’s
correct finances.
This would lower stock value, reduce profits for
Satyam and its shareholders, and lead to less buy‐ins
from investors.
Ethical Relativism
Ethical Relativism says that “actions must be
judged by what individuals subjectively feel is
right or wrong for themselves.”
Situational Ethics is an aspect of the Ethical
Relativism Theory that says “one must judge a
person's actions by first putting oneself in the
actor's situation.”
Raju chose to act in his best interest. He may
have believed that he was protecting Satyam’s
market shares, but this was short sighted.
Who is to blame
Corporate governance policies
Auditors
Ramalinga Raju
