Table of Contents
SATYAM CASE STUDY.. 3
The problem.. 4
Problem analysis. 5
Chairman authority. 5
Reliance on a single auditor 6
Poor board management 7
Possible solutions. 7
Recommended course of action. 9
SATYAM CASE STUDY Introduction
Satyam limited was a company owned by two brothers, Rama Raju and Ramalinga Raju as a private enterprise. For a long time, the company had enjoyed high ranking in the corporate world. So high was the ranking that it attracted foreign investors. As of 2009, the company was largely owned by foreign investors who operated more than 48% interest in the company. Satyam was the first Indian country to be listed in the NYSE, EURONEXT and DOW. In General The Company Seemed To Be In Good Health Financially And In Terms Of Governance. One of the brothers, Ramalinga Raju sat on the board of directors as the chairman, representing the family interests, which though had lowered in the recent past, still allowed the family operational authority. As the fastest growing IT solutions company in India, Satyam was touted as the benchmark for all other companies in the country.
Satyam faced the biggest scandal to date in the Indian corporate world. Despite its high record and advanced governance techniques, the company fell short of controlling the massive fraud that took place within its structures. Having served large fortune 500 companies and achieved what many Indian companies have not only been unable to achieve but have also failed in their attempts, it is sad to recall that Satyam is better known for the fraud and failure at governance. Satyam’s fraud is one which took advantage of weak accounting systems and financial reporting. In fact, there are many researchers including Bhasin (2013) who simply state that the fraud was purely an accounting fraud. Using many diverse methods, the company property rights representatives took advantage and manipulated the accounting to their own benefit for a long time. The problem
For many spectators, the problems at Satyam began and exploded within a matter of months. However, further investigation showed that the problems experienced in the company had been festering for many years. In December 2008, Satyam announced its decision to purchase the company known as Maytas incorporated. This posed two major questions; first the company was owned by the sons of the Satyam Chairman which in itself raised a lot of concerns among the investors. Secondly, Maytas was purely a real estate company which should not have held any interest to saytam. It can be assumed the main interest of Saytam was to rescue and increase cash flow to the Maytas. Further, maytas provided a platform from which to generate an even larger asset portfolio. Following investor uproar, the sale was cleared off however; it provided a loophole from which the scandal and filth within the company escaped.
On December 19th 2008, Unpaid went to court suing Saytam for more than 55 billion rupees and sighting fraud in the company payment system. At this time, the World Bank had been conducting an independent investigation into the dealings of Satyam. A few days after being sued, Satyam was suspended for eight years by the World Bank citing incidences of fraud and bribery for high paying contracts. Immediately after this, majority of the board members (four in number) resigned stating that they had not carried their moral obligation in investigating and supporting dealings at the company. The final blow to the coffin came with the confession of the chairman, Ramalinga Raju f defrauding investors to a tune of more than 50 billion.
Continued reliance poor board
Massive fraud of more than 71.87 rupees
Independent on a singular auditor
Decisions by chair
Control of finances and revamped balance purchase of Maytas
Sheet, exaggerated bribery for contacts
Chairman authority: although the company was publicly owned and included investors from all over the world, the family still retained the position of chairman in addition to being represented by at least three other members. While at the time this seemed to be a move geared at keeping the company locally owned, it emerged that the chairman often used his authority to usurp decisions made by other board members. In reality, it seems that the company was still under the control of the family. Mr. Raju had control of majority of the finances and assets, a fact that he took advantage of. Without such authority, it would have been difficult for him to exaggerate the assets owned in order to put the company at a better position as well as to refocus the profits so that they seem much larger than the liabilities. As the board members began to resign, they indicated that they did not exercise due diligence especially in the decision to purchase Maytas among other decisions. As a result, the chairman was able to pass many decisions without scrutiny from the board.
Reliance on a single auditor: after the scandal erupted, the one concern was that many of the problems and fraudulent activities could have been avoided through a simple audit. Surprisingly, the company had employed a single independent auditor; price warehouse coopers. The company is renowned for its exemplary practices and high quality services. How then, could the experts have failed to catch the fraud at an early stage? It is alleged that the company was taking heavy bribes and ignoring relevant procedures that could have exposed the fraud. PWC visited the company more than 8 times, and in those times, Satyam spent more than double what other large companies in India were paying PWC for audits. One of the concerns was the continued exaggerated cash available in the bank and as liquid assets of the company. This would only have required a simple follow up with the bank for confirmation of the same. However, upon scrutiny such confirmation was missing from the documents filed by the auditors. Abott *et al* (2010) states that continued reliance on a singular independent auditor though favorable in terms of creating rapport and mastering systems which then makes auditing not only easier but in fact it takes a much shorter time, also creates much bigger challenge. With understanding auditors and management can collude to take advantage of the system and defraud investors as was the case in Satyam. Whereas the board may not have the expertise to understand the balance sheets and profit margins, they often rely on reports by auditors to support the claims of management. Auditor reports are considered by both the board and the investment community as evidence of what has transpired within the company. While satyam recorded more than 24% profit margin from over 5200 core sales, in reality the company was making a 3% profit margin with at least 4000 sales. The more hand 7000 fake invoices were not only ignored they were never highlighted in the auditor reports.
Poor board management: any large company with as many investors as were found in Satyam heavily relies on its board of management to not only authenticate decisions but also to protect stakeholders and investors. The mandate of the board of management is to entirely focus on protecting the investment of the shareholders. However, in the case of satyam it seems the mandate changed from protection of shareholders to simply increasing profits. Investors remain happy when assets are much higher than the liabilities of the company. As long as profits continue to increase, investors feel that the company is healthy. The board on the other hand is privy to details from which they can make decisions that allow the company to grow healthier. In the case of Satyam, it is clear that the board failed in carrying out its role. This is especially seen in the decision to purchase a real estate company owned by a family member. In this issue, there were many red flags that should have caused the board to question the decision of the chairman. Yet, the purchase would have gone through had it not been for the uproar raised by the private investors which then forced the board to recall its decision. On December 28th 2008 as the four board members resigned, they stated that they had failed the investors by not exercising due diligence in questioning majority of the decisions made by management. The completely relied on the information presented to them, without ding independent research and often made decisions not with particular regard to the needs of the company but with more focus on the desire of the management. Possible solutions
*Appoint new board members *
*New independent auditors *
*Sale of family shares *
They will provide renewed confidence in the decision making.
They will allow the company to continue operating as other aspects of business are corrected
Auditors will play a crucial role determining the strength of the company.
Set up new standards and structures which cannot be easily manipulated
Production of more reliable accounting reports for investors
This disengages the company from the Raju scandal and allows for renewal and rebirth
Money recovered can be used to repay the investment made by shareholders and cushion against immediate loss
Despite a new board, the mess of the fraud will take time to sort through
Following the failure of the previous board, the new board maybe reluctant to make any decisions, thus increasing the time for recovery
Cost of finding a new auditor and payment for the services may be much higher thus increasing costs to the company.
PWC is a renowned company and it will be difficult to find a replacement
There are few investors who are willing to purchase the shares of the company; therefore such sale is likely to be at the lowest price reducing the expected income.
This may also increase the foreign investment capital in the company forcing out local investors who cannot compete…
Recommended course of action
Ribstein (2002) in his study found that in times when a company faces extreme detrimental actions, immediate action is not only recommended but he also suggests that the most extreme form of action will bear the best fruits. In this case, this would be the buyout of the family coupled with introduction of the new board. Satyam is still recognized as a family owned investment despite having majority shares from foreign investors. This has decreased not just its net worth but also the trustworthiness of the company. Uzun *et al. *(2004) indicate that family owned entrepreneurships often suffer from poor governance especially where family members enjoy some sort of authority. The resignation of the chairman though efficient, in itself has to deal with the core of the problem. The company needs to immediately disengage from the family that first started it. His will allow the company to be reborn. Replacement of the board though a wise decision may not be enough to regain the trust of investors as well as service seekers. It is important to note that whereas the focus is on returning the trust of investors, there is also need to refocus attention away from the scandal. Currently there are several law suits against the company and criminal charges against the former chairman and his management. With this in mind therefore, it is important to completely disengage with the family and seek out a more public ownership so that the profits and accounting of the company are no longer the responsibility of an individual answering to family members. Although the sale of such shares may not bring in much profit in the short term, in fact the shares are likely to be sold at a massive loss however this action is likely to stop massive exit of investors as they look to see what will happen. This step can be touted as a new company even though the name may remain the same. Conclusion
There is much to be leant from the Satyam scandal. One the face, it seems like it was a simple case of greed; however the complex nature of the scandal has made it difficult for investors to recover their earnings from the company. With even more class suits expected against the company, it seems like there will be no hope. The only hope for the company lies in a complete takeover by another investor. Buying off the property shares and therefore forcing a restructuring of the company. It is time to inject new blood into the company. While the former chairman claimed that the manipulated accounts in order to keep away hostile takeovers, it is ironic that this seems to be the only and the best solution for the company. A takeover will give two distinct advantages. First, it will allow investors to regain their confidence in the company and therefore wait off to see if their investment will pay off. This means that the company will have a grace period, much longer than would be the case to impress investors and regain their confidence. The second advantage is in regard to the individuals who seek out the company services; this change will allow customers an opportunity to develop new relationships with the company. This will allow continued flow of income as the company seeks to return to its previous envied position. However, due to the many claims against the company and especially expected criminal charges such take over maybe made difficult by government procedures and bureaucracy. If the company is to survive and wither this storm successfully, this may be the only solution available.
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