GLOBAL SCAMS

PROF. DR. KHAWAJA AMJAD SAEED FCMA;
FCA (kamjadsaeed@yahoo.com)

Aug
 17 - 23, 2009

Significant global notorious list of Companies involved in recent fraudulent activities includes:

1) Enron
2) World Com
3) Societe General
4) Parmalate
5) A Hold
6) Allied Irish
7) Bearings
8) Kidder Peabody

Satyam Computer Services Limited is global IT Company based in Hyderabad, India and is the latest addition to the above list. It employs 53,000 persons and provides BOP services to 62 countries in the World.

THE CONFESSION

An eye opening confession came from Chairman, Satyam Computer Services Limited, Hyderabad, India in a letter consisting of 1080 words addressed to the Board of Directors of the above Company on January 07, 2009. Facts brought to the notice of Board of Directors are reproduced below:

1) The balance sheet carries as of September 30, 2008 the following:

a) Inflated (non-existent) cash and bank balance of Rs. 5,040 crore (as against Rs. 5,361 crore reflected in the books)

b) An accrued interest of Rs. 376 crore which is non-existent.

c) An understated liability of Rs. 1,230 crore on account of funds arranged by me.

d) An overstated debtors position of Rs. 490 crore (as against Rs. 2,651 crore reflected in the books)

2) For the September quarter (Q2) was reported a revenue of Rs. 2,700 crore and as an operating margin of Rs. 649 crore (24% of revenues) as against the actual revenues of Rs. 2,112 crore and an actual margin of Rs. 61 crore (3% of revenue). This has resulted in artificial cash and bank balances going up Rs. 588 crore in Q2 alone".

In the above letter, the Founder of the above Company suggested as under:

"You may have restatement of accounts" prepared by the auditors in the light of the facts that I have placed before you".

Copies of the above letter were marked to Chairman, SEBI* and Stock Exchanges of India.

Unlike several previous global financial frauds, Satyam is a unique and self-confessed financial fraud.

The Founder of Satyam confessed inflating for the past several years with fictitious assets and non-existent cash. He said that about $ 1.04 billion (94% of cash) listed in assets at the end of Company's second quarter in September 2008 was fictitious.

OBJECTIVE OF FINANCIAL SCANDAL

The aim was duping investors through manipulating information. This has tarnished the image of India and has sent shock waves globally regarding conduct of affairs in Corporate Sector in India. This needs to be reversed and true image of excellent conduct of corporate affairs needs to be developed and later capitalized.

This piece focuses its attention primarily on accounting and auditing aspects.

ACCOUNTING FRAUD

The accounting fraud in Satyam Computer Services Limited is generally believed to be much bigger than Rs. 10,000 crore. This figure appears to be is much higher than the one disclosed by the above Company's Founder, Mr. Ramalinga Raju.

The investigating agencies have retrieved over 7,000 fake invoices and forged documents showing fixed deposits and bank balances. Initial investigations have revealed that the scam is over Rs. 9,600 crore. It may be noted that the above Company's Founder, on January 07, 2009, had disclosed the scam to be Rs. 7,800 crore.

Heavy reliance on computer technology helped the Company's Founder to generate nearly 7,000 fake invoices aggregating to a total of Rs. 4,500 crore. This amount was fed through computer in Satyam's book of accounts. Accordingly, the above inflated figures were reflected in the financial statements prepared by management under the supervision of the Founder of the Company.

Moreover, fake fixed deposit receipts for Rs. 3,300 crore were also created by the Founder through forged documents.

CBI is investigating the biggest accounting fraud in the India's Corporate history. They have been joined by 23 Members Team comprising officials drawn from CBI, Income Tax Department, Registrar of Companies, Securities and Exchange Board of India (SEBI), Serious Fraud Investigation Office (SFIO), Institute of Chartered Accountants of India, Institute of Cost and Works Accountants of India and some legal experts are also conducting the investigation.

The biggest misfortune is that the Satyam's scam has dented India's image abroad which was gaining popularity as India Inc.

INDIA'S GOVERNMENT VIEWS

The Government of India stands worried due to financial scam of Satyam. The honourable Prime Minister of India held several meetings with various stakeholders including regulators, prominent industrialists etc.

Mr. Kamal Nath, Minister of Commerce of India, said that:

"The Government should only look at the Regulatory part of it".

CORPORATE GOVERNANCE

Corporate Governance is expected to ensure checks and balances relating to management of a corporate entity. Satyam has been claiming to have implemented Corporate Governance in good spirit. Accordingly, the World Council of Corporate Governance awarded Satyam its "Golden Peacock Award for Corporate Governance" in 2008.

This raises fundamental question of rethinking and redesigning the criteria for the above Award to ensure effective Corporate Governance.

There is a further need to revisit Sarbanes - Oxley legislation to help avoid fraud like the one that took place in Satyam.

AUDIT ASPECTS

The investigating agencies have raised many questions. Some of these questions have been as under:

(a) How come years after years accredited auditors could not smell something fishy?

(b) If indeed they have not been able to do so, how effective have they been in auditing?

(c) What were the Statutory Auditors and the Independent Directors of Satyam Computer Services Limited doing while this massive fraud was taking place?

(d) Strong action must be initiated by the Regulatory Authorities against The Statutory Auditors and Independent Directors.

AUDIT STYLE

It is generally believed that all the Big Four Firms of the World have High Quality Standards for conducting audit. Sample testing procedures are followed. If the same fail to meet the expected results extended checks are performed.

Based on information available, the local unit of PwC said in a statement that Satyam accounts were supported by "Appropriate Audit Evidence".

INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI)

The Institute of Chartered Accountants of India is a well respected six decades old professional accounting institute and is headquartered in New Delhi. It is the second largest Accounting Body in the world with 145,000 members. Being a member of International Federation of Accountants (IFAC), it is in the process of introducing International Financial Reporting Standards (IFRS) systems of accounting in India. PwC uses IFRS and its client (Satyam) is said to be one of the India's first company to keep accounts in this form.

ICAI President, Ved Jain told the media that:

"We are examining it (Satyam's Case) on high priority and strict action will be taken against Auditors, if found guilty".

He further told that: "If found guilty of professional misconduct, the Auditors stand to lose their Practising License".

NEW AUDITORS

The new Board of Directors of Satyam Computer Services Limited has mandated two global auditing firms namely; KPMG and Deloitte to restate accounts of the above Company. It is interesting to note that even the original Company's Auditor namely, Price Waterhouse has stated that its auditing of Satyam's book should not be considered reliable as they were based on statements and information provided by the management. This may be noted that under the Company Law of various countries, including that of India, the prime responsibility for the preparation of accounts and financial statements rests on management. It is expected that the management ought to prepare financial statements to exhibit true and fair view of the state of affairs of the Company on which external auditors will express their opinion. However, investigations are going on and we have to wait for the results.

POLICY RECOMMENDATIONS

Some of the policy recommendations governing accounting, auditing and related aspects are as under:

1) LEGAL AND MORAL ASPECTS

The 19th century English case namely; Kingston Cotton Mills Company Ltd. ( 1896 ), may be revisited.

Lord Justice Lopes stated:

"The Auditor is a watch dog and not a bloodhound".

The responsibility for preparation of financial statements essentially vests upon management. An auditor expresses an opinion about the fairness or otherwise relating to duly certified financial statements. The management needs to be reminded about this times and again. In this respect, sound internationally accredited values system to strengthen moral aspects be popularized, disseminated and operationalized. Divine Value System from Quran is quoted below:

"Allah commands justice, the doing of good, and liberality to kith and kin, and He forbids all shameful deeds, and injustice and rebellion*: He instructs you, that you may receive admonition". ( 16 : 90 )

2) REGULATORS

There is a need to revisit legislative aspects of regulatory agencies and also man them with highly competent and qualified personnel.

The Regulators are suggested to follow both the following two approaches:

(A) PREVENTIVE APPROACH

This may involve the enactment of special legislation which should make accounting misstatement a crime and be given stringent penalty.

(B) PALLIATIVE APPROACH

This would involve measures to take Satyam like case by introducing new process and additional verification methods. This is needed to inspire investors confidence.

3) IFRSS

IFRSs should be strictly implemented. The implementation be made mandatory across the board by the management through strict legislative measures which Governments through guidance of Professional Accounting Bodies ought to take. The role of recently established Oversight Board by IFAC be strengthened and made result oriented.

4) AUDIT EVIDENCE

No cash be allowed to be kept on hand on the closing date of accounts. It should be deposited in bank. Accordingly there will be no need to verify cash on hand by auditors. Difficulty arises when a client has several branches / offices spread over geographical basis. Accordingly, it becomes difficult for an auditor to visit all branches / offices and physically count the cash.

Verification of Bank Balances be made directly from Banks in a strictly Confidential manner, with approval of client. Special efforts be made for double check in case of significantly material amounts to avoid collusion between the client and the bank even in the case of direct receipt of bank certificates.

Significant amounts of debtors be verified through circularization of accounts and their subsequent collection.

In services sector, including BPO, invoices be checked against actual services rendered rather than relying on invoices alone. This can possibly reduce the chances of raising fake invoices. Forensic audit will uncover actual amount of fake invoices raised in Satyam during the current ongoing investigation.

Verification procedure through audit evidence need to be revisited, redefined and strengthened. One may benefit from any weakness or lapse ascertained during investigations of Satyam's accounting records and financial statements.

5) JOINT AUDITORS

- In large clients, the appointment of joint auditors may be considered mandatory for mutual check.

6) MANAGEMENT RESPONSIBILITY

An auditor will examine financial statements prepared by management who ought to take primary responsibility for their preparation and their authenticity. This message needs to be hammered home clearly and loudly.

7) IFAC

IFAC may revisit International Auditing Standards together with Oversight responsibilities and help develop systems of audit to inspire confidence of users of financial statements to improve investment climate and strength capital markets in their positive and productive role. Oversight Board set up by IFAC may take Satyam's case as a test one and initiate steps to uncover the fraud in the above Company.

8) FEEDBACK

As the investigations are continuing in the self-confessed accounting fraud and manipulation in the financial statements, we need to wait for the results. In the light of these results, positive feedback be used to revisit the existing accounting and auditing systems and legislative aspects to introduce reforms to help avoid recurrence of the malpractices and manipulations as practised in Satyam.