University of Nairobi Satyam Computer Case Study Discussion This is a three pages of case study. I attached the case and the three questions here. Thank yo

University of Nairobi Satyam Computer Case Study Discussion This is a three pages of case study. I attached the case and the three questions here. Thank you for your interesting. Open Journal of Accounting, 2013, 2, 26-38 Published Online April 2013 (
Corporate Accounting Fraud: A Case Study of Satyam
Computers Limited
Madan Lal Bhasin
Bang College of Business, KIMEP University, Almaty, Republic of Kazakhstan
Received January 15, 2013; revised March 12, 2013; accepted March 28, 2013
Copyright © 2013 Madan Lal Bhasin. This is an open access article distributed under the Creative Commons Attribution License,
which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
From Enron, WorldCom and Satyam, it appears that corporate accounting fraud is a major problem that is increasing
both in its frequency and severity. Research evidence has shown that growing number of frauds have undermined the
integrity of financial reports, contributed to substantial economic losses, and eroded investors’ confidence regarding the
usefulness and reliability of financial statements. The increasing rate of white-collar crimes demands stiff penalties,
exemplary punishments, and effective enforcement of law with the right spirit. An attempt is made to examine and analyze in-depth the Satyam Computer’s “creative-accounting” scandal, which brought to limelight the importance of
“ethics and corporate governance” (CG). The fraud committed by the founders of Satyam in 2009, is a testament to the
fact that “the science of conduct is swayed in large by human greed, ambition, and hunger for power, money, fame and
glory”. Unlike Enron, which sank due to “agency” problem, Satyam was brought to its knee due to ‘tunneling’ effect.
The Satyam scandal highlights the importance of securities laws and CG in ‘emerging’ markets. Indeed, Satyam fraud
“spurred the government of India to tighten the CG norms to prevent recurrence of similar frauds in future”. Thus, major financial reporting frauds need to be studied for “lessons-learned” and “strategies-to-follow” to reduce the incidents
of such frauds in the future.
Keywords: Corporate Accounting Frauds; Satyam Computers; Case Study; India; Corporate Governance; Accounting
and Auditing Standards
1. Introduction
1.1. What Is Fraud?
Fraud is a worldwide phenomenon that affects all continents and all sectors of the economy. Fraud encompasses
a wide-range of illicit practices and illegal acts involving
intentional deception, or misrepresentation. According to
the Association of Certified Fraud Examiners (ACFE),
fraud is “a deception or misrepresentation that an individual or entity makes knowing that misrepresentation
could result in some unauthorized benefit to the individual or to the entity or some other party” [1]. In other
words, mistakes are not fraud. Indeed, in fraud, groups of
unscrupulous individuals manipulate, or influence the
activities of a target business with the intention of making money, or obtaining goods through illegal or unfair
means. Fraud cheats the target organization of its legitimate income and results in a loss of goods, money, and
even goodwill and reputation. Fraud often employs illegal and immoral, or unfair means. It is essential that orCopyright © 2013 SciRes.
ganizations build processes, procedures and controls that
do not needlessly put employees in a position to commit
fraud and that effectively detect fraudulent activity if it
occurs. The fraud involving persons from the leadership
level is known under the name “managerial fraud” and
the one involving only entity’s employees is named
“fraud by employees’ association”.
1.2. Magnitude of Fraud Losses: A Glimpse
Organizations of all types and sizes are subject to fraud.
On a number of occasions over the past few decades,
major public companies have experienced financial reporting fraud, resulting in turmoil in the capital markets,
a loss of shareholder value, and, in some cases, the
bankruptcy of the company itself. Although, it is generally accepted that the Sarbanes-Oxley Act has improved
corporate governance and decreased the incidence of
fraud, recent studies and surveys indicate that investors
and management continue to have concerns about financial statement fraud. For example:
? The ACFE’s “2010 Report to the Nations on Occupational Fraud and Abuse” [1] found that financial
statement fraud, while representing less than five
percent of the cases of fraud in its report, was by far
the most costly, with a median loss of $1.7 million
per incident. Survey participants estimated that the
typical organization loses 5% of its revenues to fraud
each year. Applied to the 2011 Gross World Product,
this figure translates to a potential projected annual
fraud loss of more than $3.5 trillion. The median loss
caused by the occupational fraud cases in our study
was $140,000. More than one-fifth of these cases
caused losses of at least $1 million. The frauds reported to us lasted a median of 18 months before being detected.
? “Fraudulent Financial Reporting: 1998-2007”, from
the Committee of Sponsoring Organizations of the
Treadway Commission (the 2010 COSO Fraud Report) [2], analyzed 347 frauds investigated by the US
Securities and Exchange Commission (SEC) from
1998 to 2007 and found that the median dollar
amount of each instance of fraud had increased three
times from the level in a similar 1999 study, from a
median of $4.1 million in the 1999 study to $12 million. In addition, the median size of the company involved in fraudulent financial reporting increased approximately six-fold, from $16 million to $93 million
in total assets and from $13 million to $72 million in
? A “2009 KPMG Survey” [3] of 204 executives of US
companies with annual revenues of $250 million or
more found that 65 percent of the respondents considered fraud to be a significant risk to their organizations in the next year, and more than one-third of
those identified financial reporting fraud as one of the
highest risks.
? Fifty-six percent of the approximately 2100 business
professionals surveyed during a “Deloitte Forensic
Center” [4] webcast about reducing fraud risk predicted that more financial statement fraud would be
uncovered in 2010 and 2011 as compared to the previous three years. Almost half of those surveyed (46
percent) pointed to the recession as the reason for this
? According to “Annual Fraud Indicator 2012” conducted by the National Fraud Authority (UK) [5],
“The scale of fraud losses in 2012, against all victims
in the UK, is in the region of £73 billion per annum. In
2006, 2010 and 2011, it was £13, £30 and £38 billions,
respectively. The 2012 estimate is significantly greater
than the previous figures because it includes new and
improved estimates in a number of areas, in particular
against the private sector. Fraud harms all areas of the
UK economy”.
Copyright © 2013 SciRes.
Moreover, financial statement fraud was a contributing
factor to the recent financial crisis and it threatened the
efficiency, liquidity and safety of both debt and capital
markets [6]. Furthermore, it has significantly increased
uncertainty and volatility in financial markets, shaking
investor confidence worldwide. It also reduces the creditability of financial information that investors use in
investment decisions. When taking into account the loss
of investor confidence, as well as, reputational damage
and potential fines and criminal actions, it is clear why
financial misstatements should be every manager’s worst
fraud-related nightmare [7].
1.3. Who Commits Frauds?
Everyday, there are revelations of organizations behaving
in discreditable ways [8]. Generally, there are three
groups of business people who commit financial statement frauds. They range from senior management (CEO
and CFO); mid- and lower-level management and organizational criminals [9]. CEOs and CFOs commit accounting frauds to conceal true business performance, to
preserve personal status and control and to maintain personal income and wealth. Mid- and lower-level employyees falsify financial statements related to their area of
responsibility (subsidiary, division or other unit) to conceal poor performance and/or to earn performance-based
bonuses. Organizational criminals falsify financial statements to obtain loans, or to inflate a stock they plan to
sell in a “pump-and-dump” scheme. While many changes in financial audit processes have stemmed from financial fraud, or manipulations, history and related research repeatedly demonstrates that a financial audit
simply cannot be relied upon to detect fraud at any significant level.
1.4. Consequences of Fraudulent Reporting
Fraudulent financial reporting can have significant consequences for the organization and its stakeholders, as
well as for public confidence in the capital markets. Periodic high-profile cases of fraudulent financial reporting
also raise concerns about the credibility of the US financial reporting process and call into question the roles
of management, auditors, regulators, and analysts, among
others. Moreover, corporate fraud impacts organizations
in several areas: financial, operational and psychological
[10]. While the monetary loss owing to fraud is significant, the full impact of fraud on an organization can be
staggering. In fact, the losses to reputation, goodwill, and
customer relations can be devastating. When fraudulent
financial reporting occurs, serious consequences ensue.
The damage that result is also widespread, with a sometimes devastating “ripple” effect [6]. Those affected may
range from the “immediate” victims (the company’s
stockholders and creditors) to the more “remote” (those
harmed when investor confidence in the stock market is
shaken). Between these two extremes, many others may
be affected: “employees” who suffer job loss or diminished pension fund value; “depositors” in financial institutions; the company’s “underwriters, auditors, attorneys,
and insurers”; and even honest “competitors” whose
reputations suffer by association.
As fraud can be perpetrated by any employee within
an organization or by those from the outside, therefore, it
is important to have an effective “fraud management”
program in place to safeguard your organization’s assets
and reputation. Thus, prevention and earlier detection of
fraudulent financial reporting must start with the entity
that prepares financial reports. Given the current state of
the economy and recent corporate scandals, fraud is still
a top concern for corporate executives. In fact, the
sweeping regulations of Sarbanes-Oxley, designed to
help prevent and detect corporate fraud, have exposed
fraudulent practices that previously may have gone undetected. Additionally, more corporate executives are
paying fines and serving prison time than ever before. No
industry is immune to fraudulent situations and the negative publicity that swirls around them. The implications
for management are clear: every organization is vulnerable to fraud, and managers must know how to detect it,
or at least, when to suspect it.
2. Review of Literature
Starting in the late 1990s, a wave of corporate frauds in
the United States occurred with Enron’s failure perhaps
being the emblematic example. Jeffords [11] examined
910 cases of frauds submitted to the “Internal Auditor”
during the nine-year period from 1981 to 1989 to assess
the specific risk factors cited in the Treadway Commission Report. He concluded that “approximately 63 percent of the 910 fraud cases are classified under the internal control risks”. In addition, Smith [12] offered a “typology” of individuals who embezzle. He indicated that
embezzlers are “opportunist’s type”, who quickly detects
the lack of weakness in internal control and seizes the
opportunity to use the deficiency to his benefit. Similarly,
Ziegenfuss [13] performed a study to determine the
amount and type of fraud occurring in “state and local”
governments. His study revealed that the most frequently
occurring types of fraud are misappropriation of assets,
theft, false representation; and false invoice.
On the other hand, Haugen and Selin [14] in their
study discussed the value of “internal” controls, which
depends largely on management’s integrity and the ready
availability of computer technology, which assisted in
the commitment of crime. Sharma and Brahma [15] emphasized on “bankers” responsibility on frauds; bank
Copyright © 2013 SciRes.
frauds could crop-up in all spheres of bank’s dealing.
Major cause for perpetration of fraud is laxity in observance in laid-down system and procedures by supervising staff. Harris and William [16], however, examined
the reasons for “loan” frauds in banks and emphasized on
due diligence program. Beirstaker, Brody, Pacini [17] in
their study proposed numerous fraud protection and detection techniques. Moreover, Willison [18] examined
the causes that led to the breakdown of “Barring” Bank.
The collapse resulted due to the failures in management,
financial and operational controls of Baring Banks.
Choo and Tan [19] explained corporate fraud by relating the “fraud-triangle” to the “broken trust theory” and
to an “American Dream” theory, which originates from
the sociological literature, while Schrand and Zechman
[20] relate executive over-confidence to the commitment
of fraud. Moreover, Bhasin [21] examined the reasons
for “check” frauds, the magnitude of frauds in Indian
banks, and the manner, in which the expertise of internal
auditors can be integrated, in order to detect and prevent
frauds in banks by taking “proactive” steps to combat
frauds. Chen [22] in his study examined “unethical” leadership in the companies and compares the role of unethical leaders in a variety of scenarios. Through the use of
computer simulation models, he shows how a combination of CEO’s narcissism, financial incentive, shareholders’ expectations and subordinate silence as well as
CEO’s dishonesty can do much to explain some of the
findings highlighted in recent high-profile financial accounting scandals. According to a research study
performed by Cecchini et al. [23], the authors provided a
methodology for detecting “management” fraud using
basic financial data based on “support vector machines”.
From the above, it is evident that majority of studies
were performed in developed, Western countries. However, the manager’s behavior in fraud commitment has
been relatively unexplored so far. Accordingly, the objective of this paper is to examine managers’ unethical
behaviors in Satyam Computer Limited, which constitute
an ex-post evaluation of alleged or acknowledged fraud
case. Unfortunately, no study has been conducted to examine behavioral aspects of manager’s in the perpetuation of corporate frauds in the context of a developing
economy, like India. Hence, the present study seeks to
fill this gap and contributes to the literature.
3. Research Methodology, Objectives and
Sources of Information
Financial reporting practice can be developed by reference to a particular setting in which it is embedded.
Therefore, “qualitative” research could be seen useful to
explore and describe fraudulent financial reporting practice. Here, two issues are crucial. First, to understand why
and how a “specific” company is committed to fraudulent
financial reporting practice an appropriate “interpretive”
research approach is needed. Second, case study conducted as part of this study, looked specifically at the
largest fraud case in India, involving Satyam Computer
Services (Satyam). Labelled as “India’s Enron” by the
Indian media, the Satyam accounting fraud has comprehensively exposed the failure of the regulatory oversight
mechanism in India. No doubt, to design better accounting
systems, we need to understand how accounting systems
operate in their social, political and economic contexts.
The main objectives of this study are to: 1) highlight the
Satyam Computers Limited’s accounting scandal by portraying the sequence of events, the aftermath of events, the
key parties involved, and major follow-up actions undertaken in India; and 2) what lesions can be learned from
Satyam scam?
To complement prior literature, we examined documented behaviors in cases of Satyam corporate scandal,
using the evidence taken from press articles, and also
applied a “content” analysis to them. In terms of information collection “methodology”, we searched for evidence from the press coverage contained in the “Factiva”
database. Thus, present study is primarily based on “secondary” sources of data (EBSCO host database) gathered
from the related literature published in the journals,
newspaper, books, statements, reports. However, as
stated earlier, the nature of study is “primarily qualitative, descriptive and analytical”.
4. Corporate Accounting Scandal at Satyam
Computer Services Limited: A Case
Study of India’s Enron
Ironically, Satyam means “truth” in the ancient Indian
language “Sanskrit” [24]. Satyam won the “Golden Peacock Award” for the best governed company in 2007 and
in 2009. From being India’s IT “crown jewel” and the
country’s “fourth largest” company with high-profile
customers, the outsourcing firm Satyam Computers has
become embroiled in the nation’s biggest corporate scam
in living memory [25]. Mr. Ramalinga Raju (Chairman
and Founder of Satyam; henceforth called “Raju”), who
has been arrested and has confessed to a $1.47 billion (or
Rs. 7800 crore) fraud, admitted that he had made up
profits for years. According to reports, Raju and his
brother, B. Rama Raju, who was the Managing Director,
“hid the deception from the company’s board, senior
managers, and auditors”. The case of Satyam’s accounting fraud has been dubbed as “India’s Enron”. In order to
evaluate and understand the severity of Satyam’s fraud, it
is important to understand factors that contributed to the
“unethical” decisions made by the company’s executives.
First, it is necessary to detail the rise of Satyam as a
Copyright © 2013 SciRes.
competitor within the global IT services market-place.
Second, it is helpful to evaluate the driving-forces behind
Satyam’s decisions: Ramalinga Raju. Finally, attempt to
learn some “lessons” from Satyam fraud for the future.
4.1. Emergence of Satyam Computer Services
Satyam Computer Services Limited was a “rising-star” in
the Indian “outsourced” IT-services industry. The company was formed in 1987 in Hyderabad (India) by Mr.
Ramalinga Raju. The firm began with 20 employees and
grew rapidly as a “global” business. It offered IT and
business process outsourcing services spanning various
sectors. Satyam was as an example of “India’s growing
success”. Satyam won numerous awards for innovation,
governance, and corporate accountability. “In 2007, Ernst
& Young awarded Mr. Raju with the ‘Entrepreneur of the
Year’ award. On April 14, 2008, Satyam won awards
from MZ Consult’s for being a ‘leader in India in CG and
accountability’. In September 2008, the World Council
for Corporate Governance awarded Satyam with the
‘Global Peacock Award’ for global excellence in corporate accountability” [26]. Unfortunately, less than five
months after winning the Global Peacock Award, Satyam
became the centerpiece of a “massive” accounting fraud.
By 2003, Satyam’s IT services businesses included
13,120 technical associates servicing over 300 customers
worldwide. At that time, the world-wide IT services
market was estimated at nearly $400 billion, with an estimated annual compound growth rate of 6.4%. “The
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