1.1 What Is Fraud
to the Association of Certified Fraud Examiners (ACFE), fraud is “a deception
or misrepresentation that an individual or entity makes knowing that
misrepresentation could result in some unauthorized benefit to the individual
or to the entity or some other party” 1. In fraud, groups of unconscionable
individuals manipulate, or affect the activities of a specific business with
the purpose of earning money. Fraud cheats the financial position of the
organization and results in a loss of goods, money, and even 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 belongs to entity’s employees is known as
“fraud by employees’ association”.
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. For example:
The ACFE’s “2010 Report to the
Nations on Occupational Fraud and Abuse” 1 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. Survey
estimated that the typical 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) 5, “The scale of fraud losses
in 2012, against all victims in the UK, is in the region of £73 billion per
Moreover, Fraud was a major contributing factor to the
recent financial crisis and it affected negatively on the efficiency, liquidity
and safety of both debt and capital markets 6, increased uncertainty and
volatility in financial markets. It also decreases the creditability of
financial information that investors use in investment decisions. When taking
into consideration 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 7.
1.3 WHo Commits Fraud
are three groups of people who commit financial statement frauds. They range
from senior management (CEO and CFO); mid- and lower-level management 9. 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 poor performance and/or to earn performance-based bonuses.
Organizational criminals manipulate financial statements to get loans, or to overstate
a stock they plan 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
Fraudulent financial reporting affects
organizations in many areas: financial, operational and psychological 10.
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. Those impacted may range from the “direct”
victims (the company’s stockholders and creditors) to the more “indirect”
(those harmed when investor confidence in the stock market is shaken). Between
these two extremes, many others may be affected: “employees” who may lose jobs
or their diminished pension fund value; “depositors” in financial institutions;
the company’s “underwriters, auditors, attorneys, and insurers”; and even
honest “competitors” whose reputations suffer by association.
As fraud can be committed
by any staff within any company or by those from the outside, therefore, it is
important to have an effective “fraud management” program in place to protect your
organization’s assets and reputation. Thus, earlier detection of fraudulent
financial reporting must start with the entity that prepares financial reports.
Given the current state of the economy, fraud is still a major concern for
corporate executives. In fact, the recent regulations of Sarbanes-Oxley,
designed to help avoid and detect corporate fraud, have exposed fraudulent
practices that previously may have gone undetected.
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.
majority of studies were performed in developed, Western countries. However,
the manager’s behavior in fraud commitment has been relatively unexplored so
far. 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, the present letter seeks to fill this
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 the
evidence 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. This study is primarily
based on “secondary” sources of data (EBSCO host database) collected from the
related journals, newspaper, books, statements, reports. As stated earlier, the
nature of study is “primarily 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 25. 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 understand the riskiness
of Satyam’s fraud, it is important to understand factors that participated to
the “unethical” decisions made by the company’s executives. First, it is important
to understand the rise of Satyam as a competitor within the global IT services
marketplace. Second, it is helpful to assess the driving-forces behind Satyam’s
decisions: The Chairman. Finally, try 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
numerous 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” 26. Unfortunately, less than five months after winning the
Global Peacock Award, Satyam turned into a centre piece of a “massive”
By 2003, Satyam’s IT services
businesses have 13,120 technical associates 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%. “The markets main
drivers were the main importance of IT services to businesses worldwide; the effect
of the Internet on e-Business; the evolution of a high?quality
IT services industry in India and their methodologies; and, the increasing need
of IT services providers who could supply a range of services”. To effectively
compete, both against local and worldwide 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”. 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 company’s growth.