Aspects of Satyam Accounting Scandal

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Table of Contents

Introduction
Discussion
Conclusion
References

Introduction

The world of accounting, despite relying on strict rules and precise calculations, is not insured against the faults of human nature. Due to various human desires, such as the need to derive enrichment and boost one’s ego, the world of accounting has witnessed a plethora of serious scandals across the years. One example of such a scandal is the Satyam Computer Services scandal that took place in 2009 and shook the realm of Indian IT and accounting infrastructure. The firm in question was brought down by its chairman and founder, Ramalinga Raju, which shows that unsavory practices can take place at the highest levels of the accounting hierarchy.

Discussion

Satyam Computer Services was an Indian firm that specialized in IT services and back-office accounting. Back-office accounting refers to a type of accounting service when the workers do not directly contact or interact with clients. The company was founded by Ramalinga Raju in 1987, and by 2008 it was reported to be earning over two billion dollars in revenue. It was considered to be one of the top five Indian IT enterprises and employed 52,000 professionals inside and outside of India. However, in January 2009, Raju made a decision to confess to falsifying information regarding the company’s assets (Luo, & Zhou, 2020). This decision was not entirely voluntary as the company and his activities as its CEO had been under investigation by the Indian Central Bureau of Investigation at the time.

The result of the investigation revealed various instances of disorderly conduct performed by Raju. The roots of this misconduct had been placed as far as 1999 when he started to exaggerate the quarterly profits. He employed this tactic in order to meet the expectations set by the analyst. Raju was not the only member of the company’s establishing members that took part in the fraud. His brother, B. Rama Raju (who held the position of the firm’s managing director), helped Ramalinga Raju conceal his fraudulent actions (Luo, & Zhou, 2020). Due to their cooperation, they were able to carry out a wide and prolonged deception of auditors, senior managers, and board members.

The process of deception required several machinations to take place. The majority of the well-known accounting scandals are linked with related party transactions (RPT). The Satyam scandal is not an exception to this generalization. Raju performed transactions with RPT, with the firm selling services to a non-existent business entity. The receipts of these operations were recorded as receivables. Further, he took a loan that was not disclosed and, therefore, decreased the firm’s net borrowings. The balance sheet that was provided to the supervisors did not contain accrued interest from the loan, which, in turn, decreased net interest. Having taken these steps, Raju was able to perform various transactions using faux receivables (Beerbaum, 2021). Despite the severity of these actions, the fraudulent activity was not limited to the assets within the company.

In addition to fake receivables and non-disclosure of accounting activities, in 2008, it was established that Raju had serious issues with the World Bank. In December 2008, the representatives of the World Bank announced that they were parting ways with Satyam. In fact, they prohibited the firm from using the bank for the following eight years, stating that it had been infringing upon the bank’s guidelines. These infringements included bribing the bank’s workers and stealing data (Luo, & Zhou, 2020). The World Bank problem was not the only warning sign of the fallout to come.

In December of 2008, Raju attempted to purchase Maytas Properties Ltd and Maytas Infrastructure Ltd. These companies belonged to Raju’s before-mentioned brother, and with his help, Ramalinga Raju was aiming to exploit the liquid resources of Satyam while he still had the chance. The bid was approximately 1.6 billion dollars for both of the companies, and if Raja’s plan had come to fruition, it would leave Satyam in debt by 400 million dollars. The investors did not agree with this decision (although Raju claimed that it was done for their benefit), and the plan failed (Luo, & Zhou, 2020). However, it is necessary to point out that despite the obvious concerns such a decision brings, the board of Satyam initially approved of the deal.

This approval shows how strong the control of the Raju family was on those who were supposed to supervise the legitimacy of the company’s practices. The inner circle actively perpetuated the lack of transparency in regard to their business practices. The company encouraged whistle-blowing, disruption, and postponement of audits. In addition, it cultivated a culture of weak independent directors that did not stand up for the investors’ sake (Luo, & Zhou, 2020). The amalgamation of these measures led to Raju’s control being able to last for as long as he had.

Conclusion

In conclusion, the example of the Satyam accounting scandal shows the detrimental effects that human greed and unhealthy ambition can bring. Due to fraudulent cooperation and professional misconduct with supervisors and bank workers, the CEO of Satyam was able to conduct a scam that lasted for practically a decade. In addition, he used tactics of falsification and concealment, which ultimately led to his and the company’s downfall.

References

Beerbaum, D. O., & Jani, J. (2021). Satyam versus Wirecard – A case study research on two accounting corporate scandals. SSRN Electronic Journal. 8-12

Luo, Y., & Zhou, L. (2020). Satyam Scandal. In H. K. Baker, L. Purda-Heeler, S. Saadi (Eds.,), Corporate Fraud Exposed (pp. 403–419). Emerald Publishing Limited.

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Aspects of Satyam Accounting Scandal

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