Fraud and abuse have been defined by Wells (2011) as the use of one’s job for the purposes of individual gains through intended misappropriation or misuse of the employer’s resources or assets in reference to ACFE. Further, he observes that fraud involves the use of deception to make what is unreal seem real for the sole intent of gaining advantage over others. It involves the use of clandestine methods that violate duties of employment and leads to loss of assets, revenues, and reserves (Wells, 2011).
There are different types of fraud including customer and vendor miscellaneous frauds among others. This paper will focus on management fraud in which financial fraud, in terms of accounting, forms the most severe financial pressures to a company. In his book, Jones (2011) observes that management fraud is common with directors as well as employees who have been entrusted with the company’s assets or duties. They end up colluding and manipulating financial statements for their own benefits in form kickbacks or offshore deposits.
This work will focus on a serious accounting fraud that happened in Satyam Computer Services Company in the year 2009. This fraud was orchestrated by the most senior persons in the company, the chairman and founder CEO, B. Ramalinga Raju. The fraud involved Rs 78,000 million that the CEO admitted to forging figures in the accounting books in a bid to help the IT giant acquire two Maytas firm. He admitted this in a press conference at Hyderabad after sending a letter to the board detailing his role in the fraud (Jones, 2011).
It was observed that Satyam fraud case led to the loss of about 1.5 million dollars with opinions likening it to Enron fraud case of the US. The CFO of Satyam was also implicated in the deal together with the CEO (Jones, 2011).
Case study: Satyam Computer Services Fraud and the impact to the company
The company was started in 1987 to offer informational technology services under the founder and CEO, Raju, a graduate of Ohio University. In its annual report of 2008, it was reported that it had 51,000 associates in about 60 countries, and has more than 654 customers; a third of them forming Fortune Global companies. The company’s reported statements indicated well performing results in the key operating parameters, a proposition that was not reflected in the share price performance (Riley and Rezae, 2009).
It was a respected company with shares quoted in NYSE, US & Euronext, Amsterdam, Europe, BSE and NSE. The signs started in the year 2008 when one director raised the issue about the share price index and recommending communication strategies to the market to be improved. At the same time, the process of acquiring two Maytas firms, which were owned by Raju’s sons, was cut short. This resulted in the resignation of four non-executive and independent directors. This was a move that shareholder’s resisted without the knowledge probably of what was boiling in the background (Jones, 2011).
In this case, the overall director was involved in the scandal that was part of misreporting fraudulent statements and view. The report involved manipulation of books of accounts to show increased revenues, debtors, and cash balance with doctored reduction of expenses. In effect, this was to illustrate growth and favorable position to the Board and the investors, as well as the world. It is reported that the other problem was insider trading and corporate bad governance as the processes that led to loss of Rs 78, 000 million. The promoter’s holding also went down from 25.6% to 8.79% then to 3.6%. The share price fell 77.6% to close at Rs 39.95 at the Bombay Stock exchange at 0.85 dollars from 90% at NYSE leading to the loss of millions of money for shareholders (Jones, 2011).
Other impacts concern the image of the India Corporate world of which there was a loss to the exchequer and hurting the FD flows into Asia’s largest economy. The fate of the employees stood at risk by then; but later, the company was acquired by the Mahidra group to form the ‘Mahidra Satyam Company’.
The Role of Management and Corporate Culture
In India, the regulatory systems are clear and involve checks and balances against any unauthorized occurrences in organizations. However, as is the case with many corporations, policies and regulations put in place to avert fraud mainly focus on the lower level employees. This is done without giving much attention to high level employees charged with the organization’s daily operations (Jones, 2011). Further, due to the trust endowed to these managers by the Board of Directors, the gap of lack of scrutiny and non-involvement in the operations gives the chance for such fraudulent activities (Wells, 2011).
In the case of Satyam Computer Services Company, the Board of Directors would be said to have lacked lack enough vigilance and resolve to check and investigate the red flags arising in the year 2008. Also, the fact that this fraud involved insider trading, indicates a lack of the Board’s touch with the internal operations of the company to detect the very start of the flaws (Kapil, 2011).
Satyam’s fraud case process was also cited as a case of corporate mismanagement and this can be explained from the top organs position. India as a rising industrial nation has been concerned with policies that target the operations of an organization. The role of internal and external auditors should not be excluded from the main picture since inexcusable mistakes result to fraud and loss of fortunes. In this case, the government of India was spurred to change the authority and jurisdiction of such important figures in any organization (Riley and Rezae, 2009).
The role of any management is to ensure that risks are profiled from the most likely to occur, to the least in the company. This involves every manager identifying the risks using the steps in risk management to reduce the impact or even occurrence of such risks. Secondly, the management should ensure continuation of proactive fraud detection measures that keep checking on the culture and governance of the company.
Thirdly, the management is responsible for detecting red flags that identify an individual or situation in the organization and act as signals to the occurrence of fraud. For this to happen effectively, detection routines should be entrenched in order to enhance fraud risk management strategies (Samociuk, n.d). In this case, the Board of Directors of Satyam Computer Services failed in all of the above practices going to the extent of not following the outlined running of a global company like Satyam.
Measures that could have prevented the Fraud
In accordance to the Disclosure of Accounting Policies and Compliance Act of companies in India, any deviations from the standard accountings should be disclosed with the effect on financial deviation and reasons given duly. In this respect, the management of Satyam may have found to have failed to put the CEO on the stand to explain the inconsistency with the good performance not yet reflected in the stock market price.
The lack of internal auditors ratification that the profit and loss account complied with the standards obvious due to insider trading constitutes and offence as part of the management failure. The observation is that there was extreme failure of measures that led to the failure of the company’s target. The Board should have acted against the management organ wishes in order to keep checks and detect fraud for the purposes of safeguarding shareholder’s interest (Riley and Rezae, 2009).
Since there were no fraud routine check-up measures, this led to lack of detection of red flags; especially when the Satyam reversed the acquisition with the Maytas. Also, during the resignation of the four non-executive directors and the raised concern of lack of effective communication to the market as a noted by a director, the Board should have sat down to search for the actual problem thoroughly which is under the provision of the laws.
Routine fraud check-up should have helped to prevent against this fraud. The fraud had a detrimental impact on the financial and brand reputation of Satyam, as well as India, as the strategic economy in Asia. Lack of serious auditing practices and reports led to this fraud in the company. The employees and auditors of this company swept everything under the carpet despite having full knowledge that the senior authorities were colluding with external auditors to misrepresent the financial position of the company. These measures would have helped guard against the fraud (Kapil, 2011).
Fraud is not a new concept in organizations around the world; however, in India, Satyam set the new statistics. This prompted the government to change many provisions of the law concerning insider trading, disclosure practices, investigation powers, and price manipulation for the sole purpose of abiding to international standards and protecting the benefits of the shareholder. As a result, every organization should develop its own measures to protect and secure the property of the company by making sure that risk reduction measures are implemented. These measures should be in line with the regulated and advocated policies against corporate fraud like the Sarbanes Oxley Act of the US which has been adopted in countries like India.
Jones, M. (2011). Creative Accounting, Fraud and International Accounting Scandals. Hoboken, New Jersey: Wiley and sons.
Kapil, S. (2011). Financial Management. Mumbai, New Delhi: Pearson Education India.
Riley, R. & Rezae, Z. (2009). Financial Statement Fraud: Prevention and Detection. Hoboken, New Jersey: John Wiley and Sons.
Samociuk, M. (n.d). Fraud Risk Management. Retrieved on 8th Feb 2012 from: www.riskmanagementmagazine.com.au.
Wells, J.T. (2011). Corporate Fraud Handbook: Prevention and Detection. Hoboken, New Jersey: John Wiley and Sons.