Essay on Satyam Case

The circumstances under which Satyam’s fraud was exposed is interesting in the fact that the exposure was not immediately caused by any type of regulatory or auditors finding nor was the fraud presented through specific shareholder complaints. Instead, exposure was a result of Ramalinga Raju’s actions to perpetuate his fraud through the proposed acquisition of a firm that investors rejected. The domino effect started as many investors and the media took an interest in corporate governance practices - Satyam’s were being called into question. In addition, more details and concerns were presented surrounding the fraud when a letter a former senior executive emailed the board of directors, confirming details about financial irregularities and questioned the level of liquid assets Satyam really had. The wake of destruction left in this CEO’s path can be attributed to several factors. Overshadowing all of the individual factors is the need for increased governmental regulation and revised laws, specifically for companies not registered in the stock market. First factor to mention is the governance mechanism Satyam used can certainly be called into question. With Raju and his family members often in a director role and serving on the board of the many of his non-public 327 companies, it can be much easier to facilitate this activity absent standard governance practices that a public company would be required to follow. Another factor to discuss is the competency of the board members which could lead to failures at Satyam. The structure of the board left the impression that leveraging internal members to be part of the board was not likened as it was only the two founding brothers and 2 other internals with limited knowledge of the business sitting on the board. The qualifications and occupational background of the independent board members may also play a factor – a board composition with strong ethical and educational backgrounds as well as a better understanding of the actual business may have been able to uncover any types of fradulant activity much earlier on. Third, the auditing function failed on all three levels at Satyam. Both internal and external auditiors ignored financial irregularities that should have easily been questioned and reviewed my early on. Regularly examining policies and procedures and having auditors with required experience and competence would have decreased the chances of this fraud from occurring. The absence of an effective governanve enabled much of the activity to occur. The constant cover up and reports of profits and were inflated made it harder and harder for Satyam to continue. Internal Controls are designed to promote efficiency and effectiveness of operations, compliance with policies and procedures, and reliability of financial reporting. Because controls are inherent in the everyday operations of the business, they are critical for a company to prevent or at least reduce the exposure to fraud risk. There are several different types of controls that are necessary to help companies gain some level of comfort that fraud can be prevented or detected. In the case of Satyam, one of the primary controls is the Board of Directors. The board provides monitoring and oversight related to strategic and financial decisions. Also, an Accounting Committee was established to oversee and work with the auditors. Further, internal and external auditors have the responsibility to monitor internal controls and evaluate the reliability of the financial statements. Note that government regulations, such as the accounting standards of India and IFRS, help facilitate financial reporting by auditors and firms. Finally, corporate governance and company policies on ethics are important internal controls to help in the prevention of fraud. Corporate Governance is extremely important in order to ensure that strategic decisions are made effectively and in the interest of stakeholders. The

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