Satyam: India’s Enron

Corporate governance failures marked the business and accounting frauds of the early 2000s. The
United States was not alone. Enron and WorldCom had their counterparts in the global arena. Italy had a
massive fraud at Parmalat, and Satyam, sometimes referred to India’s Enron, was a $1.4 billion fraud
that triggered a reduction in share price of almost 99 percent.

Satyam Computer Services was the fourth-largest software exporter in India until January 2009, when
the CEO and cofounder, Ramalinga Raju, confessed to inflating the company’s profits and cash reserves
over an eight-year period. The accounting fraud at Satyam involved dual accounting books, more than
7,000 forged invoices, and dozens of fake bank statements. The total amount of losses was 50 billion Rs
(rupees) (equal to about $1.40 billion). This represented about 94 percent of the company’s cash and
cash equivalents. Raju stepped down in early January 2009. In April 2015, he was convicted of forging
documents and falsifying accounts. He is currently serving a seven-year prison term.

The Satyam incident was investigated by India’s “Serious Frauds” (seems a redundancy) Once that
coordinated the investigations and the diversion of funds by promoters within and outside India and
corporate governance failings.

Corporate Governance Failings

The legal complaints alleged that members of the audit committee of the Satyam board of directors—
who were responsible for overseeing the integrity of the company’s financial statements, the
performance and compensation of the outside auditors from PricewaterhouseCoopers (PwC) India firms,
and the adequacy and effectiveness of internal accounting and financial controls—were responsible for
the publication of false and misleading public statements due to their extreme recklessness in
discharging their duties and their resulting failure to discover and prevent the massive accounting fraud.

Effective corporate governance was missing at Satyam at all levels including:

 Lack of independent members of the board of directors; those not beholden to management
 Audit committee failings to properly oversee financial reporting and internal controls.
 Questionable “ethical” tone at the top that worked against promoting ethical and competent
behavior throughout the organization
 External audits that were heavily influenced by conflicts of interest between PwC and
management.

A unique aspect of the corporate governance system in India is the ownership of shares by outside
promoters, multinational blockholder companies, and the state. Unlike in the United States where public
ownership is high and transparency is key, the more closed system in India leads to a relative lack of full
and fair disclosure.

Audit Failures by PwC and Resulting Legal Actions

The complaint asserted claims against PwC and its Indian partners and affiliates. Satyam’s outside
auditors from the PwC India firms allegedly were aware of the fraud but still certified the company’s
financial statements as accurate. The company’s financial statements were signed off on by PwC on
March 31, 2008.
PwC and its Indian affiliates initially hid behind “client confidentiality” and stated that it was “examining
the contents of the statement.” Realizing that this was not enough, PwC came up with a second
statement claiming that “the audits were conducted in accordance with applicable auditing standards
and were supported by appropriate audit evidence.” This is somewhat troublesome because an audit in
accordance with generally accepted auditing standards (GAAS) calls for examining the contents of the
financial statements. Given that the firm did not identify the financial wrongdoing at Satyam, it would
appear that the firm, at the very least, was guilty of professional negligence. At a minimum, the firm
missed or failed to do the following:

 Fictitious invoices with customers were recorded as genuine.

One ironic note about the Satyam fraud is in September 2008 the World Council for Corporate
Governance honored the company with a “Golden Peacock Award” for global excellence in corporate
governance. Once news of the fraud broke, the council rescinded the award, stating that the company
failed to disclose material information.

As you read this chapter, reflect on the following questions:

(1) What systems are necessary to ensure that a company runs efficiently and ethically?

(2) What role does corporate culture and ethical leadership play in creating an ethical organization?

(3) What are the components of an ethical control environment from an accounting and auditing
perspective?

(4) How do whistleblowing obligations of accounting professionals influence ethical behavior?