3 Lessons From Satyam's Accounting Fraud Fiasco

The Satyam accounting scandal that rocked the outsourcing company – and India – proved that companies still have a lot to learn.

Posted by Joe Gerard in Corruption, Ethics & Compliance, Fraud on November 8th, 2010
Fraud doesn't just look bad on a company, it looks bad on the whole industry.
News of the inflated profits at Satyam 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.

Read about many more companies caught in ethical lapses. Download the free eBook The Unlucky 13: Lessons Learned from Companies Caught in the Act.

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 per cent of the cash listed on the company’s books. Raju said that no one else on the board was aware of his actions. The Forbes article suggests 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

1. Investigate All Inaccuracies

The fraud scheme at Satyam started small. 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 are 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. According to a Reuters article, Accounting Scandal at Satyam Could be India’s Enron:

“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.”

The Satyam scandal subjected even the company’s Indian rivals to greater scrutiny by regulators, investors and the public.

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. 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.

Joe Gerard
Joe Gerard

CEO, i-Sight

Spend my days showing off the i-Sight investigative case management software and finding ways to help clients improve their investigations. Usually working with corporate security, HR & employee relations, compliance and legal teams.

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