3 Lessons From Satyam’s Accounting Fraud Fiasco

Satyam Fraud

The Satyam accounting scandal that rocked the outsourcing company- and the country of India, has proven (once again) that companies still have a lot to learn.

The Satyam accounting scandal that rocked the outsourcing company- and the country of India, has proven (once again) that companies still have a lot to learn. News of the inflated profits broke in early 2009, not long after Madoff’s arrest. The timing of these events added more fuel to the fire behind the public’s demand for greater corporate responsibility. Here’s a brief overview of the Satyam scandal and three major lessons learned from it:

Crooked Books

In January 2009, Satyam’s Chairman, Ramalinga Raju, resigned after breaking the news to the company’s board that the company accounts had been anything but accurate. In the Forbes article “The Satyam Scandal,” the author writes:

“Raju took responsibility for broad accounting improprieties that overstated the company’s revenues and profits and reported a cash holding of approximately $1.04 billion that simply did not exist.”

The false $1.04 billion in cash equated to 94% of the cash listed on the company’s books. Raju stated that no one else on the board was aware of his actions. I find it disturbing that no one else in the company was on to him, as $1.04 billion is a lot of money, even when it’s made up. The Forbes article (mentioned above) discusses that these actions are commonly brought about by pressure to meet targets and post good numbers to make shareholders happy. In the case of Satyam, it spun terribly out of control.

Lessons Learned

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1. Investigate All Inaccuracies

The fraud scheme at Satyam started small, eventually growing into a 1.04 billion pound elephant in the room. Sound familiar? A lot of fraud schemes start out small, with the perpetrator thinking that small changes here and there won’t make a big difference- and is less likely to be detected. This sends a message to a lot of companies: if your accounts aren’t balancing or if something seems inaccurate, even just a tiny bit, it’s worth investigating. Break down tasks so that there are checks in each area. Dividing responsibilities across a team of people makes it easier to detect irregularities or misappropriated funds.

2. Ruined Reputations

Fraud doesn’t just look bad on a company, it looks bad on the whole industry. The Reuters article, “Accounting Scandal at Satyam Could be India’s Enron,” states:

“India’s biggest corporate scandal in memory threatens future foreign investment flows into Asia’s third-largest economy and casts a cloud over growth in its once-booming outsourcing sector. The news sent Indian equity markets into a tailspin, with Bombay’s main benchmark index tumbling 7.3% and the Indian rupee fell.”

I don’t think companies realize the impact of their actions on the industry they operate in. The BusinessWeek article, ”India’s Madoff? Satyam Scandal Rocks Outsourcing Industry,” states that, “because of the Satyam scandal, they say, Indian rivals will come under greater scrutiny by regulators, investors, and customers.”

3. Corporate Governance Needs to be Stronger

The Satyam case is just another example supporting the need for stronger corporate governance. Companies must be careful when selecting executives and top level managers. These are the people who set the tone for the company- if there’s corruption at the top, it’s bound to trickle down. Each employee must be accountable for their actions, regardless of the role they play in the company. Separate the role of CEO and Chairman of the Board. When the same person takes on both roles, who’s left to check up on the CEO? Splitting up the roles helps avoid situations like the one at Satyam.

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Article Published November 8, 2010

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