(A) Satyam: A Case of Day Light Robbery Defying Ethics and Morality

(A)SATYAM
A case of day light robbery defying

Ethics and Morality
Introduction
 The company was formed in 1987 in
Hyderabad.
 By 2003, Satyam’s IT services businesses
included 13,120 technical associates servicing
over 300 customers worldwide.
 World IT Market: estimated annual compound
growth rate of 6.4%.
 Compete against competitors.
Growth
 Satyam generated USD $467 million in total
sales.
 By March 2008, grown to USD $2.1 billion, i.e.
35% growth.
 Operating profits averaged 21%.
 Earnings per share grew, from $0.12 to $0.62.
 Share Price: January 2003 Rs 138.08
After 5 years
 Rs 526.25 – a 300% improvement
Fall
 But, did the numbers represented the full picture.
 month of December 2008 announced the acquisition
of two of its promoter group companies

Maytas Properties (unlisted)
Maytas Infrastructure (listed)
 On December 16, 2008, the Satyam board Approved
the deal.
 Strong apposition from shareholders: Deal called of
within 24 hours
Floor
 Four independent directors quit the Satyam
board .
 Investment bank DSP Merrill Lynch ultimately
blew the whistle after it found financial
irregularities.
 On 7 January 2009, Satyam’s previous
Chairman, Ramalinga Raju, resigned and
comitted the irregularities in the balance sheet.
Facts Reveled
 Inflated figures for cash and bank balances of
US$1.04 billion vs. US$1.1 billion reflected in
the Books.
 An accrued interest of US$77.46 million which
was non‐existent.
 An understated liability of US$253.38 million
on account of funds was arranged by him.
 An overstated debtors' position of US$100.94
million vs. US$546.11 million in the books.
Possible Reasons
 pressure to perform and satisfy investors’
expectations.
 It had incurred a loan of Rs 1230 crore ,so they
were under a pressure to show rosy picture of a
company otherwise creditors would have been
skeptical.
 Temptation to be the best and aggressive
growth.
 focus on the short term gains
Issues of Corporate Governance
 A good corporate governance is one where a
firm commits & adopts ethical practices across
its entire value chain & in all of its dealing with
various parties:
1) Shareholders
2) Employee
3) Management
4) Bankers
5) Government
 Shareholder : shareholder has a right to get
information from the organization. In the case
of Satyam, the above obligations were never
fulfilled.
 Employees: employees were shown with an
inflated figure. The excess of employees in the
organization were kept under Virtual Pool who
received just 60% of their salaries and several
were removed.
 Management: Questions were raised over the
credibility of management.
 Government: The company did not pay advance
tax for the financial year 2009. As per the rule,

the advance taxis to be paid 4 times a year; such
was not fulfilled by them.
 Banks: SCS was blacklisted by World Bank over
charges of bribery.
These revelation further deepened concerns about
poor corporate governance practices at the company.
Role of auditors
 Under the Companies Act, an auditor is
required to express an opinion as to whether
the annual accounts give a true and fair view of
the company’s state of affairs and financial
position.
 The auditor needs to
 examine the company’s internal accounting system
 inspect its assets
 test-check of accounting transactions.
Their duties
 They need to make clear whether the position

depicted in the books and balance sheet is correct,
honest and proper.
 In any suspicious circumstances or unusual
transactions like:
 unavailability of original documents
 sudden increase or decrease in shareholdings or debt
 employees given the liberty to access unauthorized
documents.
 Its their clear duty to “probe into these
transactions” and ensure that they are proper and
legal.
Possible Actions
 the auditor has to report what he has
discovered to the management immediately so
that appropriate action can be taken.
 when he suspects that the management may be
involved : the auditor needs to report to a third
party without the consent and knowledge of
the management.
Why they are Questioned
 This fraud was not committed overnight; it was
building up continuously from over years.
 The role of Satyam’s auditors is under scanner.
They ignored some of the obvious indications
of embezzlement and thus failed to catch on the
massive scam.
 Some Indicators:
 Decrease in holdings
 High amounts of debt despite easy cash positions .
 Imaginary fixed deposits
Impact of their behaviour
The shareholders of a company place very high
reliance on the auditor’s report, which apparently
shows the true and fair view of the accounts of a
company. The auditors should perform their
duties with utmost care and vigilance to ensure
that there are no illegal or improper transactions.
But still, Satyam has happened
Ramalinga Raju
 In the presence of unethical organizational culture and
structure, even highly moral individuals may become
corrupt.
 Mr. Raju, Satyam, as the smallest of the big four players,
was under pressure to show extraordinary results in
order to survive.
 There was greed, perhaps reckless greed, causing the
brothers to indulge in illegal and unethical activities.
 immense pressure to impress investors made him to
deliver outstanding results.
 He had to suppress his own morals and values in favor
of the greater good of the company
In the end
 The fraud finally had to end and the
implications were far reaching.
 Public confession of fraud by Ramalinga Raju
speaks of integrity still left in the individual.
 For the whole world Ramalinga Raju may be a
villain, but for residents of his native village in
West Godavari district, he is still a good
Samaritan.
Utilitarian Theory
 The Utilitarian Theory states that “moral actions are
those that produce the greatest net pleasure
compared with net pain.”
 One aspect of the Utilitarian Theory is the Cost‐
Benefit Analysis which quantifies the benefits and the
costs of the alternative in a given situation.
 The benefit of falsifying Satyam’s accounting was
• increasing Satyam’s stock price
• appearance of continued rapid growth.
 The alternative would be to report the company’s
correct finances.
 This would lower stock value, reduce profits for
Satyam and its shareholders, and lead to less buy‐ins
from investors.
Ethical Relativism
 Ethical Relativism says that “actions must be
judged by what individuals subjectively feel is
right or wrong for themselves.”
 Situational Ethics is an aspect of the Ethical
Relativism Theory that says “one must judge a
person's actions by first putting oneself in the
actor's situation.”
 Raju chose to act in his best interest. He may
have believed that he was protecting Satyam’s
market shares, but this was short sighted.
Who is to blame
 Corporate governance policies
 Auditors
 Ramalinga Raju

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(A)SATYAM

A case of day light robbery defying

of two of its promoter group companies

tax for the financial year 2009. As per the rule,

 They need to make clear whether the position

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