Question

You must pick a fraud that occurred in the last 15 years and do the following: 1. Name the Fraud and the companies involved 2. Cite the fraud (article explaining in depth) 3. Explain in layman's terms what happened (detailed) 4. MOST IMPORTANTLY, comment on how the AIS system failed and the auditors failed in detecting the fraud.

Answer 1

1. Financial scandal and failure of corporate governance .comapany name :- Satyam computers service limited
2. .SSCL, India’s fourth largest IT firm with more than 53,000 employees, today plunged into a deep crisis, as B. Ramalinga Raju resigned as its chairman. Raju admitted to major financial wrong­doings and talked about his last minute efforts to fill the “fictitious assets with real ones” through the failed Maytas acquisition.

   Satyam time line was:

   16 Dec 2008:

   Satyam cancels plans to buy two builders for $1.6 billion just 12 hours after announcing the deal due to investor pressure. Analysts question the motives of Satyam’s top executives as they hold stakes in Maytas Infra and in Maytas Properties.

   17 Dec 2008:

   Satyam stocks fall by a third following turn of events as shareholders blamed the company for its total disregard for corporate governance. Chairman Mr. Raju says the deal was called off due to investor reaction.

   18 Dec 2008:

   Satyam says its board will meet on 29 December to consider a proposal for buyback of the company’s shares.

   23 Dec 2008:

   The World Bank bars Satyam from doing business with it for eight years for providing “improper benefits to bank staff” in return for contracts and for lack of documentation on invoices. Satyam shares fell another 14 per cent to their lowest in more than 414 years.

   24 Dec 2008:

   Takeover rumours circulate about Satyam being a takeover target due to fall in share price. Share price improves.

   25 Dec 2008:

   Satyam objects to World Bank’s statement and wants the bank to withdraw its “inappropriate” statements.

   ADVERTISEMENTS:

   26 Dec 2008:

   Satyam receives yet another setback as Mangalam Srinivasan, an independent director resigns.

   28 Dec 2008:

   Satyam postpones its board meeting scheduled for Dec 29 to Jan 10 to discuss a proposal for buy-back of shares by promoters.

   ADVERTISEMENTS:

   29 Dec 2008:

   Three more directors resign from Satyam’s board fuelling rumours that the number may go up. Shares improve on hopes about improvement of shareholder value and corporate governance.

   30 Dec 2008:

   One of two remaining independent directors of Satyam says he would stay on the board. Shares improve.

   02 Jan 2009:

   Satyam says its founder’s stake fell by a third to 5.13 per cent. According to analysts this indicates the company is an attractive takeover target.

   5 Jan 2009:

   Satyam shares fall 9 per cent amid apprehension that corporate governance concerns could affect new business.

   6 Jan 2009:

   Shares improve due to reports that Tech Mahindra approached Satyam for merger.

   7 Jan 2009:

   All hell breaks loose with Satyam chairman Mr. Raju’s resignation and confession of fraud. “It was like riding a tiger, not knowing how to get off without being eaten”, said Raju. Sensex tanks 825 points to 9510.15 as investors spooked by Satyam Computer fraud revelation; Satyam stocks fall to Rs 32 a piece from Rs 178.95

   Financial Irregularities in Satyam:

3. Overview:

   Company’s Balance Sheet as at September 30,2008 carried an inflated cash and bank balances, non-existent accrued interest, an understated liability and an overstated debtors position. As per the letter, the gap in the Company’s Balance Sheet had arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone).

   In the events following the letter of the erstwhile Chairman, the Honourable Company Law Board (‘Honourable CLB’) passed orders to suspend the then existing Board of Directors of the Company with immediate effect and authorised the Central Government to nominate directors on the Company’s Board. Pursuant to the above orders, the Ministry of Corporate Affairs (‘MCA’) – Government of India (‘GOI’), nominated 6 directors on the Board of the Company.

   By a letter dated January 13, 2009, the erstwhile auditors of the Company, M/s Price Waterhouse, Chartered Accountants, communicated to the Board of Directors of the Company, that their audit reports issued on the financial statements of the Company from the quarter ended June 30, 2000 until the quarter ended September 30, 2008 should no longer be relied upon.

   The Government nominated Board of Directors appointed an independent counsel (‘Counsel’) to conduct an investigation of the financial irregularities that would enable preparation of the financial statements of the Company.

   The Counsel appointed forensic accountants to assist in the investigation (referred to as ‘forensic investigation’) and preparation of the financial statements. The sub-paragraphs below detail the findings, effects and other matters relating to the financial irregularities of the earlier management headed by the erstwhile Chairman or the Raju management.

   Limitations:

   The scope of the forensic investigation required investigating the accounting records of the Company to identify the extent of financial irregularities. There could be other instances of possible diversion that remain undetected.

   The following were the significant limitations in the forensic investigation, as stated in the report of the forensic accountants who carried out the forensic investigation, which would impact identifying the full extent of the financial irregularities:

   (i) Certain documents and information were either unavailable or could not be located. There was evidence suggesting that information might have been deleted or destroyed during the period leading to the date of the letter. Further, several documents are in the possession of Government agencies and were not freely accessible for the purpose of the forensic investigation. Limited and controlled access was granted only at a developed stage of the forensic investigation.

   (ii) Lack of access to key former employees and the previous auditors of the Company including those arrested by the law enforcement agencies or the information stored on their computer hard drives / other records found to be in their possession. The computer records of the erstwhile Chairman, the Managing Director and the Chief Financial Officer of the Company were also unavailable.

   (iii) As both the erstwhile Chairman and Managing Director were authorised to open bank accounts and had sole signatory powers on most bank accounts of the Company, it is possible that there are undisclosed bank accounts in which funds could have been diverted. The forensic investigation identified five bank accounts whose existence could not be confirmed by the Management.

   (iv) Company employees could have been deployed on projects that were billed outside the accounting system of the Company. Collections could have been diverted from customers on these projects to bank accounts outside the knowledge of the Company.

   (v) Discharged cheques were not available in all instances and, hence, the forensic investigation was not able to verify that beneficiary information in the Company’s records accorded with that on the cheque instruments.

   Nature of Financial Irregularities:

   The forensic investigation conducted by forensic accountants focused on the period from April 1, 2002 to September 30,2008, being the last date up to which the Company published its financial results. In certain instances, the forensic accountants conducted investigation procedures outside this period.

   The forensic investigation revealed that the Company had a complex accounting and financial reporting framework, which coupled with multiple non-integrated financial systems enabled perpetration of financial irregularities.

   The irregularities were substantial in amount, perpetrated across multiple accounting periods and affecting many areas including inter alia revenue, foreign exchange gains, interest and other expenses with respect to the Profit and Loss account. It also affected debtors, cash and bank, other current assets and reserves and surplus with respect to the Balance Sheet.

   (i) Specific financial irregularities as identified

   The nature of specific financial irregularities can be classified into two categories. These primarily involved recognition of fictitious revenue and interest income, which ultimately resulted in creation of fictitious cash and bank balances and receivables.

   A number of real transactions (movements into and out of the bank accounts) were omitted from the accounting records of the Company.

4. Non-reliance on audit report issued by Price Waterhouse:

   The Company had appointed M/s Price Waterhouse, Chartered Accountants (‘PW’) as the statutory auditors of the Company with effect from May 26, 2000. The previous auditors conducted the audit of the Company from the quarter ended June 30, 2000 to the quarter ended September 30, 2008 (‘audit period’).

   After the letter of the erstwhile Chairman, the previous auditors vide their letter dated January 13, 2009 stated that their audit reports and opinions in relation to the financial statements for the audit period can no longer be relied upon.

   The CBI has filed a charge sheet against Mr. S.Gopala Krishnan and Mr. Talluri Srinivas, partners of PW, for committing offense of cheating, forgery, using forged documents as genuine, criminal conspiracy and falsification of accounts, fabrication of documents, among other offences punishable under law. The trial is ongoing before the ACMM.