The primary instigator of the Satyam fraud case was the top management of Satyam, including its Chairman, Ramalinga Raju, and his brother Rama Raju. The auditors for Satyam were PricewaterhouseCoopers (PwC), although it was found that they outsourced the auditing process to a local auditing company (Bhasin, 2016). PwC was being paid significantly more for its auditing services by Satyam when compared to its income from similar companies in the region. This indicates Satyam was creating an incentive not to look too closely at their account (Bhasin, 2016). Senior executives at PwC had shown knowledge of some discrepancies in Satyam’s statements; however, no actions were taken by the auditing company (Gupta, 2018). Board members of Satyam were also partially responsible, as they did not thoroughly assess and investigate the actions of Chairman Ramalinga Raju, allowing the fraud to persist. Overall, the financial deceit’s leading players were the Raju brothers and the complicit management at PwC.
Fear of not meeting market analysts’ predictions can be one of the main motivations to create fraudulent reports. In the case of Satyam, not achieving the revenues predicted by analysts could potentially see stock prices fall and access to debt markets limited (Duncan, 2001). The company’s culture could also be partially to blame, as senior executives at both Satyam and PwC would be interested in achieving the end-of-year bonuses and positive performance reviews. This might result in fraud, as these executives falsify the company’s condition in order to obtain specific rewards (Duncan, 2001). While this may have influenced PwC, Ramalinga Raju was the Chairman and founder of Satyam and was already well-liked by the board of directors (Bhasin, 2016). Personal factors, such as a desire to appear more successful than he was, could have directed Mr. Raju’s decision to go through with fraud (Duncan, 2001). However, it is more likely that a combination of factors between Satyam and PwC was to blame for the financial deception.
Corporation earnings are not often representative of the ongoing financial growth of an individual company. Therefore, a careful examination needs to be conducted to discover whether the quantity reported is substantive. Hence, quality of earnings analysis is utilized to determine specific problematic characteristics, overall issues and to uncover red flags (Hawkins, 1993). In Satyam’s case, the company have never fired their auditors; in fact, the organization had a Big 4 affiliate as an auditor (Narayanaswamy et al., 2015). Therefore, they specifically used a well-known auditing company to appear particularly legitimate.
One of the central red flags listed in the quality of earnings analysis is an indicator that a company is doing too well, which seems to be Satyam’s case. The company was repeatedly placed on the New York Stock Exchange (NYSE), had approximately five hundred businesses as clients, and obtained corporate governance honors (Narayanaswamy et al., 2015). An additional way of understanding whether a company has been doing too well is that the fraud disclosure was perceived with absolute shock by the general public worldwide. Overall, the earnings analysis showed that the characteristics of Satyam were incredibly positive, to the point where it was hard to believe in their success. Therefore, Satyam’s fraud case represents financial deception’s effectiveness at masking a company’s actual performance. It also reveals that in companies where chief executives collaborate with leading auditors, fraud becomes highly possible.
References
Bhasin, M. (2016). Fraudulent financial reporting practices: Case study of Satyam Computer Limited. Journal of Economics, Marketing, and Management, 4(3), 12–24. Web.
Duncan, J. R. (2001). Twenty pressures to manage earnings. The CPA Journal, 71(7), 32-37. Web.
Gupta, R. (2018). Creative accounting practices: A case study of Enron and Satyam scandals. International Journal of Research and Analytical Reviews, 5(4), 238–242. Web.
Hawkins, D. (1993). Quality of earnings analysis [Harvard Business School Background Note]. Web.
Narayanaswamy, R., Raghunandan, K., & Rama, D. V. (2015). Satyam failure and changes in Indian audit committees. Journal of Accounting, Auditing & Finance, 30(4), 529–540. Web.