1.1 What Is Fraud
to the Association of Certified Fraud Examiners (ACFE), fraud is “a misrepresentation
of financial information made by company staff or managers that result in some
unauthorized benefit to the individual or to the entity or some other party”. Staff
or managers may manipulate, or affect the activities of a specific business
with the objective of earning money. Fraud manipulates the financial position
of the organization and results in a loss of goods, money, goodwill and reputation.
It is essential that organizations establish procedures and controls that prohibit
employees from committing fraud and detect fraudulent acts whenever it occurs.
The fraudulent activities on the leadership level is known as “managerial
fraud” and the one related to company’s employees is known as “fraud by
1.2 Magnitute of Fraud Losses
Over the past years, major companies have
encountered financial reporting fraud, resulting in trouble in the capital
markets, a loss of shareholder value, and, the bankruptcy of the company
itself. Although, the Sarbanes-Oxley Act has enhanced corporate governance and lowered
the incidence of fraud, recent studies reference that investors and management still
have concerns about financial statement fraud. Example of some studies:
The ACFE’s “2010 Report to the
Nations on Occupational Fraud and Abuse” found that financial statement fraud, which
represent less than five percent of the cases of fraud in its report, was by
the most costly, with a median loss of $1.7 million per incident. Some Surveys
estimated that the standard organization loses 5% of its revenues by fraud each
year. Gross World Product, estimated potential projected annual fraud loss of
more than $3.5 trillion per year.
According to “Annual Fraud Indicator
2012” made by the National Fraud Authority (UK), “The scale of fraud losses in
2012, against all affected negatively in the UK, is in the region of £73
Moreover, Fraud was a major contributing factor to the
recent financial crisis and it affected negatively on the efficiency, liquidity
and safety of debt and capital markets, increased uncertainty and volatility in
financial markets. It also decreases the creditability of financial information
that investors use in investment decisions. When taking into account the loss
of investor confidence, as well as, potential fines and criminal actions, it is
obvious why financial misstatements should be every manager’s worst fraud nightmare.
1.3 WHo Commits Fraud
are three groups of people who commit financial statement frauds which are
senior management (CEO and CFO); middle level management and lower level
management. CEOs and CFOs commit accounting frauds to hide true business
performance, to maintain personal status and personal income and wealth. Mid-
and lower-level employees manipulate financial statements under their responsibility
(subsidiary, division or other unit) to hide weak performance and/or to earn
performance-based bonuses. The purpose of manipulating financial statements is to
get loans, or to overstate a stock to sell in a “pump-and-dump” scheme. While
many changes in financial audit procedures have emerged from financial fraud,
or manipulations, and related research repeatedly proved that a financial audit
cannot be relied upon to detect fraud at any significant level.
of Fraudulent Reporting
financial reporting affects organizations in many areas: financial, operational
and psychological. While the financial loss is important, the full effect of
fraud on an organization can be stunning. The losses to reputation, goodwill,
and customer relations can be destructive. The entities maybe directly affected
by fraud activities like (the company’s stockholders and creditors) or
indirectly (those harmed when investor confidence in the stock market is
shaken). Between these two edges, many others may be affected: “employees” who may
lose jobs or their diminished pension fund value; “depositors” in financial
institutions; the entity’s “underwriters, auditors, attorneys, and insurers”.
As fraud can be committed
by any staff within any company or by those from the outside, so, to protect an
entity’s assets and reputation, it should develop effective fraud management
program. As a result, early detection of fraudulent activities must start with
the preparation of financial reports. Fraud recently is still a major concern
for corporate executives. In fact, Sarbanes-Oxley, has designed recently more
regulations to help avoid and detect corporate undetected fraud, based on
2. Review of
Starting in the late 1990s, a
wave of corporate frauds in the United States existed with Enron’s failure
perhaps being the nominal example.
manager’s attitude in fraud commitment has been relatively undetected.
Accordingly, the objective of this study is to inspect managers’ unethical
behaviors in Satyam Computer Limited. Unfortunately, no study has been done to inspect
behavioral aspects of manager’s in the perpetuation of corporate frauds in the
developing economy, like India. Hence, this letter tries to highlight on the
gap and contributes to the literature.
3. research focus
reporting procedure can be developed by reference to a particular setting in
which it is embedded. Therefore, “qualitative” research is useful to describe
fraudulent financial reporting act. Here, two issues are critical. First, the
need for an “interpretive” research approach on fraudulent financial reporting.
Second, case study developed as part of this study, looked specifically at the
largest “India’s Enron” by inspecting the accounting system applied at Satyam
Company, and how the Indian regularities failed to avoid and prevent fraud.
H1: How can we
avoid corporate fraud through Satyam case study?
objectives of this study are to:
Highlight the Satyam Computers Limited’s accounting outrage by describing
the sequence of events, the aftermath of events, the key parties involved, and
major follow-up actions undertaken in India.
Lesions can be learned from Satyam scandal?
4. research methodology
inspected documented behaviours in cases of Satyam corporate, using information
published on press articles, and also do a “content” analysis to them.
Regarding information collection “methodology”, we obtained evidence from the
press coverage contained in the “Factiva” database. So this study is based on
“secondary” sources of data (EBSCO host database) collected from the related
journals, newspaper, books, statements, reports. The nature of study is qualitative,
descriptive and analytical.
Accounting Scandal at Satyam Computer services Limited: A Case study of india’s
From being India’s IT “crown
jewel” and the country’s “fourth largest” company the company has become involved
in the nation’s biggest corporate fraud in living memory. The company’s Chairman
and founder has been arrested and has admitted to a $1.47 billion fraud for
several years from company profits. According to reports, The Chairman and his
brother, who was the General Manager, “conceal the deception from the company’s
board, senior managers, and auditors”. In order to comprehend the risk factors
of Satyam’s fraud, we should understand factors that participate to the
“unethical” decisions made by the company’s executives. First, by understanding
the growth of Satyam as a competitor within the global IT services marketplace.
Second, assessing the driving-forces behind Satyam’s decisions: The Chairman.
Finally, trying to learn some “lessons” from Satyam fraud for the future.
5.2 The Emergence of the Company.
The company was established in
1987 in Hyderabad (India) by Mr. Raju. The firm started with 20 staff and expanded
rapidly as a “global” business. It sold IT and business software for various sectors.
Satyam was as an example of “India’s growing success”. Satyam earned many
awards for innovation, governance, and corporate accountability. “In 2007,
Ernst & Young awarded the Chairman with the ‘Entrepreneur of the Year’
award. In September 2008, the World Council for Corporate Governance awarded
Satyam with the ‘Global Peacock Award’ for global excellence in corporate
accountability”. Unfortunately, less than five months after winning the Global
Peacock Award, Satyam turned into a centre piece of a “massive” accounting
By 2003, Satyam’s IT services
businesses included 13,120 technical IT servicing over 300 customers worldwide.
At that time, the world-wide IT services market was assessed at nearly $400
billion, with an assessed annual growth rate of 6.4%. “. To compete effectively
against local and foreign competitors, the company started to develop multi
business growth strategies.
2003-2008, Satyam earned USD $467 million in total sales. By March 2008, the
company value grew to USD $2.1 billion. The company proved “an annual growth
rate of 35% over that period”. With an Average Operating profits by 21%,
Earnings per share similarly increased, from $0.12 to $0.62, with an annual
growth rate of 40%. Over the same period (2003?2009), the
average EBITDA multiple was 15.36. Satyam clearly earned significant corporate growth
and shareholder value. The company became a leading star and a recognizable
name in a global IT marketplace. The external environment was beneficial to the