Financial Fraud Involving Satyam Computers-Service Limited

Discussion Questions

What was the assessment of the System Process Audit Team? How was it relevant with respect to

control over financial reporting at Satyam? How should the auditor have responded?

What type of fraud scheme was used by the promoter to propagate financial statement fraud at

Satyam? What were its overall implications for the financial statement of Satyam?

What were the factors that resulted in the material weakness in the internal control over financial

reporting at Satyam, which allowed the promoter to propagate financial statement fraud?

Who should be held responsible for the failure of internal control over financial reporting at Satyam?

If you were the chairman of the audit committee, how would you have assessed whether there was

a material weakness in the internal control over financial reporting at Satyam? What follow-up action

would you have taken?





FINC 495 Contemporary Issues in Finance Practice

Individual Case Study Instructions

Weeks 1-7

INSTRUCTIONS:

For the Weekly Individual Case Study, write a three to four-page (900 to 1,200 word) report and answer the

case study questions as indicated by expressing your position. Keep in mind that for the Weekly Individual

Case Study you will want to

1. Read and examine the case thoroughly, highlight relevant facts, and underline key problems.

2. Focus your analysis. Identify two to five key problems. ...

3. Uncover potential solutions and/or changes needed. Review course readings, discussions, outside

research, and your experience.

4. Select the best solution.

When answering Individual Case Study questions, you can showcase your ability to analyze a situation or

business dilemma, identify the important issues, and develop sound conclusions that flow from your analysis.

For this reason, it's important to use a logical framework for breaking down and analyzing the case. Therefore,

the following template for analyzing a case study is a useful guide.

Preliminary Work

 Critical reading of the case

o Make notes and highlight the numbers and ideas that could be quoted.

o Provide a general description of the situation and its history.

o Name all the problems you are going to discuss in your report.

o Specify the theory used for the analysis.

o Present the assumptions that emerged during the analysis, if any.

Analysis of the Case

 Executive Summary of the Case

o Describe the purpose of the current case study.

o Provide a summary of the company.

o Briefly introduce the problems and issues found in the case study

o Discuss the theory you will be using in the analysis.

o Present the key findings

 Focusing the Analysis

o Single out as many problems as you can, and briefly mark their underlying issues. Then make a

note of those responsible. In the report, you will use two to five of the problems, so you will have a

selection to choose from.

o Describe the detected problems in more detail.

o Indicate their link to, and effect on, the general situation.

o Explain why the problems emerged and persist.

Table 1.0 An overview of a Case Analysis

Identify the main research

problem

For example, the loss of brand identity is a problem faced by

Starbucks

Analyze the main underlying

causes of the existing problem

 When and why did Starbucks lose its brand identity?

 Were there certain changes in the company’s strategy

before the problem occurred?

Establish the cause-and-effect

relations between the various

factors

Starbucks’ brand image – possible sources of influence:

 The inner vision of the company

 Advertising

 The design of the stores

Formulate the best solutions to

address the problem

 Paying more attention to advertising campaigns

 Reconsidering the vision and mission statements

 Improving the design of stores

 Findings. This is where you present in more detail the specific problems you discovered in the case

study. In this section, you will:

o Present each problem you have singled out.

o Justify your inclusion of each problem by providing supporting evidence from the case study and by

discussing relevant theory and what you have learned from your course content.

o Divide the section (and following sections) into subsections, one for each of your selected

problems.

 Proposed Solutions

o List realistic and feasible solutions to the problems you outlined, in the order of importance.

o Specify your predicted results of such changes.

o Support your choice with reliable evidence (i.e., textbook readings, the experience of famous

companies, and other sources of external research).

 Recommendations. This is the section of your analysis where you make your recommendations based

on your research and conclusions. Here you will:

o Decide which solution best fits each of the issues you identified.

o Explain why you chose this solution and how it will effectively solve the problem.

o Be persuasive when you write this section so that you can drive your point home.

o Be sure to bring together theory and what you have learned throughout your course to support your

recommendations.

o Define the strategies required to fulfill your proposed solution.

o Indicate the responsible people and the realistic terms for its implementation.

o Recommend the issues for further analysis and supervision.

 Implementation. In this section, you will provide information on how to implement the solutions you

have recommended. You will:

o Provide an explanation of what must be done, who should take action, and when the solution

should be carried out.

o Where relevant, you should provide an estimate of the cost of implementing the solution, including

both the financial investment and the cost in terms of time.

 Conclusions. This is the section in which you summarize each issue or problem and present your

argument for each chosen solution. Here you will:

o Present a summary of each problem you have identified.

o Present plausible solutions for each of the problems, keeping in mind that each problem will likely

have more than one possible solution.

o Provide the pros and cons of each solution in a way that is practical.





Satyam Financial Statement Fraud (A)

Case

Author: Sanjay Kumar Mishra & Beenish Hussain

Online Pub Date: January 03, 2022 | Original Pub. Date: 2022

Subject: Financial Reporting, Management Control Systems, Corporate Governance

Level: | Type: Direct case | Length: 4734

Copyright: © Sanjay Kumar Mishra and Beenish Hussain 2022

Organization: Satyam Computers Limited | Organization size: Large

Region: Southern Asia | State:

Industry: Information and communication

Originally Published in:

Publisher: SAGE Publications: SAGE Business Cases Originals

DOI: https://dx(dot)doi(dot)org/10.4135/9781529797602 | Online ISBN: 9781529797602

© Sanjay Kumar Mishra and Beenish Hussain 2022

This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion

or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein

shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use

only within your university, and cannot be forwarded outside the university or used for other commercial

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The case studies on SAGE Business Cases are designed and optimized for online learning. Please refer to

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https://dx(dot)doi(dot)org/10.4135/9781529797602

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Page 2 of 11 Satyam Financial Statement Fraud (A)

Abstract

In 2009, the then chairman of Satyam Computer Services Limited, India, confessed to financial

irregularities, which led to a series of grave felonies, including massive financial and securities

fraud. In his statement, he confessed that the irregularities in the company financial statements

had arisen on account of inflated profit over a period of years. Later, the investigation into the

financial reporting process at Satyam and the effectiveness of internal control over financial

reporting highlighted that the weakness of the governance system and ineffective control over

financial reporting allowed promoters of Satyam to propagate the financial statement fraud.

Students will be asked to assess the culpability of the board governing performance and

examine the factors that resulted in financial statement fraud at Satyam.

Case

Learning Outcomes

By the end of the case study, student should be able to:

• Explain the role of an audit committee and an auditor in governing and communicating corporate

performance.

• Discuss the relationship of the effectiveness of internal and external corporate governance to the

quality of financial reporting in a company.

• Assess the impact of the failure of control oversight of financial reporting on company.

Introduction

The System Process Audit Team of Satyam Computer Services Limited (hereafter Satyam), in its assessment

of the company’s IT control system during its system process audit, concluded that the Satyam IT control

system cannot be relied on, the deficiencies identified during the audit process were significant, and that these

deficiencies had the ability to affect the genuineness of the financial reporting and communication, including

the financial statements (Sukumar, 2009). Price Waterhouse, the statutory auditor for the company at the

time of the assessment, which had conducted its own review, termed the assessment of the System Process

Audit Team related to the system control deficiency as ‘insignificant’ and decided not to raise the issue with

the audit committee (Sukumar, 2009). In its audit report for the financial year ending 31 March 2008, Price

Waterhouse expressed unqualified opinion about the effectiveness of internal control over financial reporting

as of 31 March 2008 (Satyam Computer Services Limited, 2008).

Eighteen months later, in September 2008, Ramalingham Raju, erstwhile chairman of Satyam, made the

shocking revelation to the Satyam board of directors that he had perpetrated financial misappropriation at

Satyam. Raju confessed to financial irregularities leading to a series of grave felonies that constituted financial

and securities fraud of massive proportion. In his statement he confessed that the company’s balance

sheet as of 30 September 2008 carried inflated cash and bank balances, non-existent accrued interest,

understated liability, and overstated debtor’s position. The misstatement in the company’s balance sheet was

a consequence of inflated profits during the previous several years. Raju made this confession through a

letter written on 7 December 2009 to the board of directors of the company.

Later, Venturebay Consultants Private Limited, a wholly owned subsidiary of Tech Mahindra Limited,

conducted an assessment of the effectiveness of internal control over financial reporting. Venturebay found

several deficiencies in the internal control over financial reporting, including complex accounting and financial

reporting framework coupled with multiple non-integrated financial systems with no mechanism for

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Page 3 of 11 Satyam Financial Statement Fraud (A)

reconciliation among those systems and an absence of a policy on access to critical IT systems (Satyam

Computer Services Annual Report, 2008–9, 2009–10). These shortcomings made Satyam’s financial

reporting system vulnerable to perpetration of financial irregularities.

Overview of Satyam Computer Services

Satyam was incorporated by two brothers, B. Rama Raju and B. Ramalinga Raju, on 24 June 1987 in

Hyderabad, Andhra Pradesh, India, as a private limited company. The objective of the company was to

provide a comprehensive range of information technology services to its customers. In 1991, the company

became public and made its initial public offering, which was oversubscribed by a factor of approximately 17x

(Shirur, 2011). Satyam was listed in Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) in

India.

Satyam grew rapidly as a global IT firm and was selected as one of the most remarkable and rapidly growing

entrepreneurial companies in India by Switzerland-based World Economic Forum and World Link Magazine.

Satyam benefitted from the growth in global IT spending and the company increased from 20 employees

during its early years to 50,570 employees as of 31 March 2008.

In 2000, B. Ramalinga Raju was awarded the IT Man of the Year by Dataquest. By 2001, the revenue

of the company surpassed USD 1 billion (Shirur, 2011). In the same year, the company began listing its

American Depository Receipts on the New York Stock Exchange under the ticker symbol SAY. In 2005,

Satyam was ranked third in the Corporate Governance Survey by Global Institutional Investors. Satyam

showed impressive financial performance quarter after quarter. Table 1 summarizes the quarterly financial

performance of Satyam Computer Services from March 2005 to September 2008.

Table 1. Excerpts From Consolidated Quarterly Performance Reports of Satyam Computer Services, by Quarter 2005–September 2008 (INR million)

Excerpt from

income statement Sep-08 Jun-08 Mar-08 Dec-07 Sep-07 Jun-07 Mar-07 Dec-06 Sep-06 Jun-06 Mar-06 Dec-05 Sep-05 Jun-Net sales 28,193 26,208 24,160 21,956 20,317 18,302 17,792 16,611 16,019 14,429 13,136 12,653 11,550 10,587

COGS and other

operating

expenses

22,324 20,350 19,082 17,660 16,674 14,583 14,038 10,075 10,206 8,683 7,883 7,746 7,146 6,706

Operating income 5,869 5,858 5,078 4,296 3,643 3,719 3,753 6,537 5,813 5,746 5,254 4,907 4,403 3,881

Non-operating

income/(expenses)

related to

continuing

operation

60.2 381.3 409.8 -40.7 -447.7 -64.7 -182.5 3,164.3 2,615 2,204.7 2,407.2 611.3 2,030.1 1,949.7

Income before

extraordinary item

and discontinued

operation (ordinary

5,809 5,477 4,669 4,336 4,091 3,783 3,936 3,372 3,198 3,541 2,847 4,295 2,373 1,931

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income)

Extraordinary

income/(expenses) 0 0 0 0 0 0 0 0 0 0 0 0 0 -29.1

Net income 5,809 5,477 4,669 4,336 4,091 3,783 3,936 3,372 3,198 3,541 2,847 4,295 2,373 1,960

Source: http://www(dot)moneycontrol(dot)com

In 2007, Ernst & Young presented B. Ramalinga Raju with the Entrepreneur of the Year award. Satyam’s

revenue grew from INR 25,604.9 million in the financial year 2004 to INR 64,850.8 million in the financial year

2007, representing an approximate compound annual growth rate of 36%. During the same period, the net

income of the company grew from INR 5,263 million to INR 14,046.2 million, a compound annual growth rate

of 38.7%. Satyam was twice awarded the Golden Peacock award for corporate governance excellence, the

last being in 2008, by the UK-based World Council for Corporate Governance (Agarwal & Sharma, 2009).

Fuelled by the impressive quarter-by-quarter financial performance of Satyam and its reputation as a wellgoverned

company, the market share price of Satyam continued to appreciate and was trading in the range

of INR 390.65–499.50 per share in April 2008. As of 31 March 2008, Satyam was the fourth-largest Indian

IT service company on the basis of amount of export revenue generated by the company during the financial

year 2007–8.

Satyam offered a range of IT services, including application development and maintenance services,

consulting and enterprise business solutions, and infrastructure management services. Satyam also offered

business process outsourcing (BPO) service through its wholly owned subsidiary Satyam BOP. The

competitors of Satyam included consulting firms, such as Accenture, Bearing Point, Capgemini, and Deloitte

Consulting, and the inhouse division of large multinational technology companies such as Hewett Packard

and IBM. Other competitors included IT outsourcing firms such as Computer Science Corporation, Electronic

Data Systems, IBM Global Services; off-shore IT services firms such as Infosys Technologies Limited, Tata

Consulting Services Limited, and Wipro Limited; and software firms such as Oracle and SAP service group

(Satyam Computer Services Limited, 2008).

In December 2008, Satyam announced it was going to acquire 100% stake in two companies, namely Maytas

Properties and Maytas Infrastructure. The latter was owned by the promoter’s son. The Maytas deal was

criticized on the grounds that there was no due diligence performed before announcing the deal and that

the acquisition of Maytas would only benefit the promoter family, which would result in transfer of wealth

from minority shareholders to majority shareholders. Given the opposition to the deal by selected minority

shareholders, the company had to abort the acquisition within seven hours of its announcement.

During the same month, the World Bank barred Satyam from conducting business with the bank. Satyam

was accused of (a) providing improper benefits to the World Bank staff and (b) its inability to maintain the

necessary documentation related to the fees charged by its subcontractor. The World Bank declared Satyam

to be ‘ineligible to do business’ and barred it for a period of eight years. This penalty was one of the most

severe sanctions against any outsourcing company levied by the World Bank and adversely impacted the

confidence of investors in Satyam. On the same day, the share price of Satyam Computer Services fell by

13.6% in the stock exchange. Satyam opposed the decision of the World Bank and sought an apology, but

the damage was already done.

The World Bank episode adversely impacted investor confidence, which led to the depletion in the wealth

of the Satyam shareholders within a month. That is, the company share price fell from the range of INR

218.60–319 in November 2008 to the range of INR 114.65–251 in December 2008. Table 2 summarizes the

monthly share price of Satyam in Bombay Stock Exchange from April 2008 to May 2009.

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Table 2. Share Price of Satyam Computer Services BSE, April 2008–May 2009 (INR)

Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09

Share price high 499.50 544.00 541.90 493.00 425.95 438.50 325.00 319.00 251.00 188.70 61.00 53.00

Share price low 390.65 464.90 431.25 363.10 371.00 270.10 220.00 218.60 114.65 11.50 39.30 34.00

Source: Satyam Computer Services Annual Report, 2008–9, 2009–10

This series of events led to the resignation from the board of four independent directors. At the end of

December 2008, Satyam Computer Services appointed Merrill Lynch as an advisory firm to explore the

possible strategic options that the company should exercise in order to enhance shareholder value. However,

the market had already lost confidence, which resulted in further deterioration in its share price. Faced with

the inability of the promoters to meet the margin calls on the shares pledged by them with institutional

investors, the investors sold the shares of promoters in the market, which resulted in the decrease of

promoters holding from an already low of 8.64% to 3.6%.

On 7 January 2009, Ramalinga Raju, the chairman of the company, resigned, confessing to the financial

irregularities that led to a series of grave felonies, including massive financial and securities fraud. Through

his letter to the board of directors, the promoter-chairman confessed improprieties and explained that what

started as a marginal discrepancy in the actual and stated operating profit continued to grow over the period

and translated into financial misstatement of massive proportions spread across multiple heads. Furthermore,

the promoter justified his actions on account of low proportion of equity shareholding by the promoter and

the concern that the poor operating performance and adverse movement in the share price might result in

forced takeover of the company. In his confessional statement, Raju also stated that all attempts were made

to eliminate the gap in the books of account and the aborted takeover of the Maytas companies was the

last attempt. Finally, he rationalized his action by claiming that the decisions taken were in the interest of

the company and that he and other members of management had not benefitted from the inflated financial

results.

‘It is like riding a tiger, not knowing how to get off without being eaten’—Ramalinga Raju in his confessional

letter to the Satyam board, 7 January 2009

Corporate Governance System of Satyam Computer Services

In India, the Companies Act 1956, 1 Chapter II and clause 49 of the listing agreement of the Securities and

Exchange Board of India (SEBI) formed the basis of the corporate governance system of Satyam. Satyam,

also being listed on the New York Stock Exchange, was also governed by the listing agreement of the U.S.

Security Exchange Commission (SEC) Sarbanes-Oxley Act 2002.

At Satyam, the board of directors was the highest-level decision-making body. Satyam had a distinguished

board consisting of nine directors, with six of those being independent directors. Among the independent

directors, four were current or former professors, one a former Indian Administrative Service officer, and one

an industry expert from the IT domain. Among the managing directors were the two founding brothers, B.

Ramalinga Raju as chairman and B. Rama Raju as managing director and CEO of the company. The board of

directors was assisted in performing its duties by the board committees, which consisted of audit committee,

compensation committee, and investor grievance committee.

Among the key functions of the board was the governance and communication of the corporate performance

to its stakeholders through its financial reporting system. The audit committee assisted the board in

performing this function. Under Section 292A of Companies Act 1956, India, Satyam was required to

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Page 6 of 11 Satyam Financial Statement Fraud (A)

1.

2.

have an audit committee. The audit committee of the board was directly responsible for the appointment,

compensation, and oversight over the independent auditor; assisting the board by maintaining oversight

on the integrity and quality of the financial reporting system, including financial statements; ensuring

independence in the performance of company internal audit function; describing, reviewing, and ensuring

compliance of the company’s internal quality control procedure through periodic discussion with independent

auditors; and reviewing the half-yearly and annual financial statements before their submission to the board

(as per the Companies Act 1956). The audit committee of Satyam consisted of four independent members

from the board. None of the members of the audit committee had ‘financial expertise’ 2 within the definition of

rule 10A-3 of the U.S. Security Exchange Act (Satyam Computer Services Limited, 2008). The members of

the audit committee also had limited meetings without the presence of directors.

Internal Control Over Financial Reporting

In India, SEBI listing agreement clause 49 V makes company CEOs and CFOs directly responsible for

the establishment and maintenance of internal control over financial reporting. CEOs and CFOs are also

responsible for certifying that the financial statement represents a true and fair view of a company’s affairs

and is in compliance with the accounting standards. As at 31 March 2008, in its report on the effectiveness

of internal control over financial reporting of Satyam, management found the internal control to be effective

(Form 20-F filing, FY ending March 31 2008).

Under Section 292A (6) of the Companies Act 1956 and SEBI listing agreement clause 49, 5D (1), the

Satyam audit committee was responsible for maintaining oversight over the company’s financial reporting

process through periodic assessment of its internal control system. Aside from its independent assessment,

the audit committee also relied on the review of management letter, letter of internal control weakness issued

by statutory auditor, and internal audit report related to internal control weakness (SEBI listing agreement

clause 49, 5E (4)). As well as the above, the audit committee was supposed to periodically discuss the

internal control system with the auditor. Price Waterhouse, a leading auditing firm, was the statutory auditor

of the company until 9 December 2009. In its report on the consolidated financial statement of Satyam

Computer Services for the financial year 2007–8, Price Waterhouse opined that the internal control over

financial reporting at Satyam did not have any material weakness (MW) and that in all material respects the

company maintained effective internal control over financial reporting as at 31 March 2008 (Satyam Computer

Services Limited, 2008).

Later, evidence was found that the auditor ignored the warning of the System Process Audit Team

assessment with respect to IT system control at Satyam Computer Services. The team found that the

company’s IT control system could not be relied upon, since the deficiencies identified during the audit

process were significant in nature and had the ability to affect the genuineness of the financial statements of

the company (Sukumar, 2009). The auditor failed to inform the audit committee of the findings of the System

Process Audit Team and instead termed the above system control deficiency as ‘insignificant’ (Sukumar,

2009).

While conducting an assessment of the prevailing financial reporting system at Satyam Computer Services

by the new acquirer of controlling interest over Satyam, Venturebay Consultants Private Limited, during the

period in which the financial statement fraud was propagated, the following drawbacks were found in the

internal financial control system of Satyam:

The company did not maintain an effective control environment at the entity level.

There was a lack of commitment and effective approach from senior management to perform entitywide

risk assessment. According to the Serious Fraud Investigating Agency report, Satyam founders

B. Ramalinga Raju, B. Rama Raju, ex-CFO Vadlamani Srinivas, and ex-vice president (finance) G.

Ramakrishna conspired collaboratively to use various fraud schemes to perpetrate financial

irregularities. The report also highlighted that these schemes were perpetrated by deliberately

leaving loopholes in the computerized accounting system, which used an enterprise resource

planning (ERP) module. The internal controls over financial reporting were circumvented by

collusion between the key management persons. This also resulted in lack of coordination in the risk

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Page 7 of 11 Satyam Financial Statement Fraud (A)

3.

4.

5.

6.

7.

oversight functions and other deficiencies in the internal control system over financial reporting,

which included (a) deficiencies in internal audit, and (b) ineffective IT general and application

control, allowing unrestricted access to critical IT systems and folders, among others.

Satyam had a complex accounting and financial reporting framework, which, coupled with multiple

non-integrated financial systems, enabled perpetration of financial irregularities (Satyam Computer

Services Annual Report, 2008–9, 2009–10). Furthermore, there was no process of reconciliation

between various systems, including payroll systems.

The company did not maintain an effective, timely, and accurate financial closing and reporting

process.

There was deficiency in the process of revenue recognition and receivables management. Satyam’s

main source of revenue was IT service contracts, which were either time-and-material contracts or

fixed price contracts. Significant accounting policies of Satyam revealed that for time-and-material

contracts, the revenue was recognized when the service was performed. For fixed price contracts,

the revenue was recognized using proportional performance basis, which reflected the pattern in

which the obligations to the customers were fulfilled. Satyam used an input-based approach and

claimed to have established direct relationship between the units of input and productivity. Satyam

revenue recognition principles were consistent with other peer IT companies. However, a forensic

investigation of the books of account for the period 1 April 2002 to 30 September 2008 revealed that

at Satyam, the fictitious revenue was recorded by creation of false invoices by circumventing the

normal revenue recognition cycle. The transactions were recorded using the financial system in a

manner that allowed the irregularity to be camouflaged. After creating the fictitious revenue, fictitious

cash collections were shown as collections from customers. In order to substantiate these fictitious

collections, forged bank statements and fixed deposit receipts were also prepared.

Satyam’s prevailing system lacked an effective mechanism for customer confirmation, bank balance

confirmation, and bank reconciliation procedures by the company. Later evidence was found of the

external auditor’s non-adherence to auditing standards and protocol with respect to the above

(Sukumar, 2009).

Physical verification of assets was not conducted at regular intervals and the fixed assets register

was not updated. Further, the capitalization of fixed assets was done without evidence of approval

by respective departments.

Perpetration of Financial Statement Fraud

In the report published by the Serious Fraud Investigating Agency of India (Satyam Computer Services

Annual Report, 2008–9, 2009–10), based on the agency’s investigation, the report authors concluded that

the confession made by Ramalinga Raju was not out of call of conscience. According to the report, Satyam

founders B. Ramalinga Raju, B. Rama Raju, ex-CFO Vadlamani Srinivas, and ex-vice president (finance) G.

Ramakrishna conspired collaboratively to use various fraud schemes to perpetrate financial irregularities. The

report also highlighted the deficiency in the internal control over financial reporting. The forensic investigation

focused on the period 1 April 2002 to 30 September 2008 revealed that Satyam Computer Services had a

complex accounting and financial reporting framework, which, coupled with multiple non-integrated financial

systems, enabled perpetration of financial irregularities (Satyam Computer Services Annual Report, 2008–9,

2009–10).

Table 3 summarizes the specifics of the financial irregularity, which was substantial in scope and amount,

was perpetrated across multiple financial years, and affected various heads of the balance sheet and

income statement of Satyam Computer Services. The nature of those financial irregularities may be broadly

classified into two categories: (a) fictitious entries recorded in the accounting records through recognition

of fictitious revenue and interest income, which resulted in creation of fictitious cash and bank balance and

accounts receivables (inclusive fraud scheme); and (b) omitting the recording of real transactions (exclusive

fraud scheme) (Satyam Computer Services Annual Report, 2008–9, 2009–10). The overall impact of those

inclusive and exclusive frauds to the extent determined by the forensic investigator was INR 67,631 million,

including cash and bank balance of INR 52,947 million on the balance sheet as of 30 September 2008

(Satyam Computer Services Annual Report, 2008–9, 2009–10).

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Table 3. Summary of the Nature of Financial Irregularities in Satyam Computer Services (based on

the forensic investigation of the books of accounts 1 April 2002–30 September 2008)

Significant

head Nature of financial irregularities

Revenue

Fictitious revenue aggregating INR 53,528 million was recorded over the period from 1 April

2002 to 30 September 2008, of which INR 48,702 million was translated into fictitious cash and

bank balances. The difference amounting to INR 4,826 million comprised of INR 4,828 million

of debtors’ net of other liabilities of INR 2 million. In addition, there was fictitious unrealised

exchange gain of INR 182 million on fictitious debtors which was recognized, resulting in total

fictitious debtors of INR 5,010 million.

Interest

income

Fictitious interest income was recorded in respect of fictitious fixed deposit balances. Total

fictitious interest income aggregating INR 8,998 million was recognized over the period from 1

April 2002 to 30 September 2008. Of the above fictitious interest recognized, INR 3,271 million

was translated into fictitious cash and INR 1,970 million was fictitiously recorded as withholding

tax on such interest income. The difference amounting to INR 3,757 million was reflected as

accrued interest as at 30 September 2008. In addition, an amount of INR 324 million was

accounted as interest accrued for the period from 1 October 2008 to 31 December 2008.

Foreign

exchange

gain (net)

Fictitious exchange gain (net) amounting to INR 2,061 million was recognized over the period

from 1 April 2002 to 30 September 2008 primarily by restatement of fictitious cash and bank

balances, fictitious interbank transfers and collections. The above fictitious exchange gain (net

of exchange losses) resulted in increasing fictitious debtors by INR 182 million, cash and bank

balances by INR 1,885 million, and decrease in advance taxes by INR 6 million.

Salary

cost

Net salary costs aggregating INR 2,933 million were not recorded in the books of account,

resulting in fictitious cash and bank balances of INR 2,933 million.

Others

Others (net expense) aggregating INR 64 million was on account of fictitious interest in relation to

fictitious and unrecorded tax payments/refund identified. The same resulted in understatement of

cash and bank balances by INR 64 million.

Bank

borrowings

(including

interest

thereon)

There were unrecorded bank loans taken during the period from 1 April 2002 to 30 September

2008 aggregating INR 7,201 million. The company had effected unrecorded repayments to the

extent of INR 5,809 million. The outstanding balance of INR 1,392 million as at 30 September

2008 was repaid in December 2008. Unrecorded interest expenses in respect of such loans

amounted to INR 175 million, resulting in fictitious cash and bank balances.

Tax

payments

There were certain fictitious tax payments (advance tax and U.S. federal tax), which were

recorded in the books of account, aggregating INR 3,061 million. Further, there were genuine tax

payments/ refunds (net), unrecorded, to the extent of INR 498 million.

Source: Satyam Computer Services Annual Report, 2008–-09, 2009–-10, Schedule -18, Notes of Accounts

3.3, pp. 227–2-28., Retrieved on February 10, 2014 from http://www(dot)techmahindra(dot)com

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1.

2.

3.

4.

5.

The Satyam episode raised questions on the conventional measures of the effectiveness of corporate

governance and the governance over measuring and communicating corporate performance to the

shareholders of the company, which led to significant loss to the shareholders and loss of trust in the financial

market.

Discussion Questions

What was the assessment of the System Process Audit Team? How was it relevant with respect to

control over financial reporting at Satyam? How should the auditor have responded?

What type of fraud scheme was used by the promoter to propagate financial statement fraud at

Satyam? What were its overall implications for the financial statement of Satyam?

What were the factors that resulted in the material weakness in the internal control over financial

reporting at Satyam, which allowed the promoter to propagate financial statement fraud?

Who should be held responsible for the failure of internal control over financial reporting at Satyam?

If you were the chairman of the audit committee, how would you have assessed whether there was

a material weakness in the internal control over financial reporting at Satyam? What follow-up action

would you have taken?

Notes

1. In India, the Companies Act 2013 has replaced the previous act (i.e. Companies Act 1956).

2. As per the U.S. SEC Sarbanes-Oxley Act Section 407, a company is required to disclose any audit

committee members that the company chooses to designate as ‘financial expert’. According to Section 407,

individuals with (a) accounting experience, (b) supervisory experience of the financial reporting function, such

as CEO and/or CFO, and (c) users of financial reports in a professional capacity, such as financial analyst or

venture capitalist, could fulfil this role of ‘financial expert’ (U.S. SEC Sarbanes-Oxley Act Section 407).

Further Reading

Books

Damodaran, A. (2002). Corporate finance: Theory and practice. Wiley.

Higson, A. (2003). Corporate financial reporting: Theory and practice. Sage.

Skalak, S. L. , Golden, T. , Clayton, M. , & Pill, J. (2011). A guide to forensic accounting investigation, (2nd

ed.). Wiley.

Research Papers

Bhasin, M. (2012). Corporate accounting fraud: A case study of Satyam Computers Limited. International

Journal of Contemporary Business Studies, 3(10), 16–42.

Carpenter, T. D. , & Reimers, J. L. (2005) Unethical and fraudulent financial reporting: Applying the theory of

planned behavior. Journal of Business Ethics, 60(2), 115–129.

Gibbins, M. , Richardson, A. , & Waterhouse, J. (1990). The management of corporate financial disclosure:

Opportunism, ritualism, policies and processes. Journal of Accounting Research, 28(1), 121–143.

Hoitash, U. , Hoitash, R. , & Bedard, J. C. (2009). Corporate governance and internal control over financial

reporting: A comparison of regulatory regimes. The Accounting Review, 84(3), 839–867.

Relevant Websites

• Institute of Chartered Accountants of India. https://www(dot)icai(dot)org

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• Ministry of Corporate Affairs, Government of India. https://www(dot)mca(dot)gov(dot)in

• Public Company Accounting Oversight Board. https://www(dot)pcaobus(dot)org

• Securities and Exchange Board of India. https://www(dot)sebi(dot)gov(dot)in

• U.S. Securities and Exchange Commission. https://www(dot)sec(dot)gov

References

Agarwal, S. , & Sharma, R. (2009). Beat this: Satyam won award for corporate governance, internal audit.

VCCircle. https://vccircle(dot)com/news.

Satyam Computer Services Annual Report. (2008–9, 2009–10). Schedule 18, Notes of accounts 3.3, pp.

227–228. http://www(dot)techmahindra(dot)com

Satyam Computer Services Limited. (2008). Form 20-F Filing. Unites States Security and Exchange

Commission, United States. https://www(dot)sec(dot)gov/Archives/edgar/data/1106056/000114554908001441/

u93288e20vf.htm.

Shirur, S. (2011). Tunneling vs agency effect: A case study of Enron and Satyam. Vikalpa, 36(3), 9–20.

Sukumar, C. (2009, December 7). Auditors in on Satyam fraud: CBI. https://www(dot)livemint(dot)com/Home-Page/

jS33BnPzXSMnwbx9cFtpIN/Auditors-in-on-Satyam-fraud-CBI.html.

https://dx(dot)doi(dot)org/10.4135/9781529797602

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