Report on Satyam Scandal

Introduction

The word audit simply defines checking of the work done by someone else in a systematic and independent manner . In our context , briefly, audit can be defined as critical inspection of financial statements of any entity particularly by an independent body. Auditor performs audit on basis of standard on Auditing issued by relevant institute, which defines overall objective of auditor to obtain reasonable assurance that financial statements are not materially misstated and are free from fraud or error and to obtain the audit evidence on the base of which auditor expresses its opinion. Such opinion is expressed in audit report which may be Modified opinion or unmodified opinion depending on the facts of case and circumstances.

This article deals basically on Satyam Accounting scandal, the largest accounting scandal in the history of India. It was a proper play game of Mr R.Raju ,the chairman/founder of Satyam. Briefly , auditor PWC has not performed its duties and responsibilities in proper manner in the case. The amount involved in scandal was about to Rs. 7,000 crores which Raju has fraudulently covered in his part out of the company. PWC as a award of their audit been charged with fine of $6 million by SEC(  (US securities Exchange Commission) for violating the code of conduct in auditing of Satyam Computer services . PWC has also been debar of conducting audit of listed entities for two years in 2018.However appeal has been made by PWC against such ban.

Facts of the case

Audit was being conducted of client Satyam Computer Service ltd, which was one of the company in India that provides services like Consulting and information technology services in multi countries abroad and within India . The company showed huge profit and has lured many of the shareholders for the investment in its share price by manipulation of accounts, falsification of accounts, etc. Such fraud is not under the ambit of small employees or any else other than the top management. So, here in this case also, top of the management, founder of Satyam computer service Pvt ltd himself played against the faith of the company and commit fraud year on year basis. Such fraud is never a one day play, so, here also the case started 5 years back from 2009 from when Raju has started manipulation of accounts. He used to inflate the profits and revenue up higher than actual for which he used to issue fake sale invoices make fake cash receipts and even go on producing fake bank statements to put mud on the grave of his fraud and hence be able to successfully alter the actual profit and loss to unmatched fraudulent value. It was not the case , where the company was not going well or the company has huge losses or any such adverse situation which would cause such activity to lure the shareholders or maintain the brand image of company. The company was going good, but the greed attitude of Raju plunged the company into deepness of fraud by his activity.

From Financials of year ending 31 march 2018, following extracts is made available here:

Particulars Amount(Crores) Remarks

Cash and cash equivalents Rs. 5361 Rs. 5040 crores were fictitious.

Accrued interest Rs. 376 Never Exist in actual

Liability towards promoters Rs.1230 Kept off the books.

Further , the assets of the company was overstated by Rs. 490 crores by overstating accounting receivable. The promoters stake were reduced from 25.6 % in 2001 to 8% in 2008 which Is against the claim of Raju who claimed for no such action by promoters family. Also , the actual number of employees were inflated from 40,000 to 53000 and the salary for the remaining 13000 was withdrawn by Raju which amount to nearly Rs. 200 million.

Culprit of the case

How the case come ahead?

It was all in 7th January 2009 when Raju confessed all in all for his activity in Satyam Computer Service ltd for which he along with board of directors were imprisoned on action of such activity.

When such confession was made and why such confession was made when Raju was able to put sand in the eyes of auditors (for good faith) for years?

• This all happens due to greed nature of Raju as already mentioned. He was keen in real estate business and used to buy plots and sale them and have high income every year. For meeting such need of purchase of real estate, he required more money. One of the reason why he started fraudulent behaviour.
• For need of money, he started falsifying the account, inflating the actual sale not by 2 or times but my many multiple folds as if revenue this year happens to be 5 crore then he used to inflate as 500 crores. What was necessity of such falsification as it created only false money which cannot be used any where. Actually he was making investors doomed by luring them into the company profit and thus the company share goes very high and investor started investing into it . Such investment were withdrawn by Raju and used for real estate business . His approach towards such purchase make him to purchase the land where metro construction would have been made. For this he requires more money and he started lending of shares as loan or in collateral to get the money ,started giving fake sale invoices and reduce the promoters liability from 25% to 8% by selling share at highest price ever.
• His such activity has raised the profit to sky and there was huge difference between actual and fake one. He wanted to fill the gap by selling the purchased properties at highest price but in 2008, due to recession in real estate sector, his dream plunges back to dream once again.
• Then, he thought of another way when he could not succeed in putting money in the company , he thought of taking money out of the company to manage the profits.
• He kept the proposal of acquisition of Maytas properties(100%) and Maytas infra(51%) ,which was approved by the board but the shareholders opposed the same. Seeing such opposition by shareholders many of directors resigned from their post.
• Actually Maytas companies as abovementioned were of Raju family members, and he was planning to show the transaction in books where he requires no any cash dealing.
• But the situation thereafter opposition of shareholders caused him to confess the same to general public.

What about auditors and their culpability?

Auditors culpability has been established as their negligence in their audit process when they were not able to answer the reason behind the scam to ICAI. It has been fined and banned from audit as penalty.

Role of Auditors in the case and their fault

PWC(Big four) Audit firm was the auditor of Satyam Computer Service pvt ltd. Auditor is required at every level to maintain professional scepticism through-out the audit and process every audit evidence as per standards on auditing to express their opinion in the audit. Audit are not bound to express unqualified opinion, they may use modified opinion if the case are not sound and not acceptable. Auditor has not raised any remark in the case and have stated their negligently reliance on document so provided by Client make them issue such audit report which is not reliable.

Fault of PWC in this case was their reliance on document provided to them which was not cross checked or balance confirmation of same was never sought for. They issued report which de embark the shareholders to raise faith on the company and the investment in the company goes on.

Who was held liable and what were they charged for?

After such confession by Raju, Raju along with board of directors were arrested and CID were introduced for the proper investigation of the case. Upon investigation it was quite difficult to prove the culpability of Raju though he confessed the same. However, the judgement was in favour of shareholder that Raju along with board of directors were convicted for the case.

The auditors PWC were issued with show cause notice by ICAI to clarify as to prevent themselves. PWC reply proves them as negligent for having reliance on potential fraudulent document given by client and issued report on same cause report unreliable. PWC has been charges with $6 million as fine by SEC and SEBI bans it to audit for next 2 years for any listed entity.

Relevant issues in Accounting and Auditing field caused by the case

Following issues were possessed on Accounting field and auditing field by the case:

• It has increased the way of making fraud and how they can be mislead from the auditor’s point.
• Another accounting issue is there has been increase in manipulation of account and inflation of profit in many different ways.
• It possess threat to reliance on management by shareholders.
• Auditing issues like reliance from auditors has been fade away by the case. The case has caused client to act masterly in front of auditor or even overpass the auditors thinking it has been quite easy to get things away from such auditors.
• Further, auditors have increased their way of checking, introduced checklist and have increased their demand of papers to client.
• Auditor are having good control over their audit procedure and its seen not accepting the documents which are unsigned, any debar from policies requires approval from company.
• Major issue is seen at client place playing with small numbers to create big multiple at a fold in year end .

In this way we can see both positive and negative impact have been left behind by the case.

ROOT CAUSE OF THE ISSUE

Total non-compliance of law, negligence on part of PWC and not fulfilling the responsibility by board of directors is the main cause to the issue. Had the board of directors acted in good faith and as per law ,the situation might have been revealed many years back. Also every company is required to issue Directors report and the compliance under Companies Act 2013 is to be made. Compliance of such act has not been made at all as seen and not checked by any of the relevant officer for the same.

Next root cause for the issue comes on hand of auditor who has also not acted or audited as per standards on auditing and hinders their responsibility towards audit. They have not used Professional scepticism at all and commonly followed procedures of audit has also not been followed by auditors which causes client to underpass the manipulated statements getting certified by them.

Related to Judgement

PWC has been fined for $ 6 million by SEC and debarred from auditing of listed entities in year 2018 by SEBI. PWC did opposes the banned and plea for extension of banned till march 2020 so threat they can complete their ongoing assignment or contracted one. The plea had been accepted till March 19 but still PWC is in sake to extend the same .The case has been adjourned 13 December 2018 and no bench has confirmed for the extension plea by PWC. PWC is in search of legal action to come out of the matter.

Raju has played for so long and thus he was not still directly take his punishment .Against the judgement made, he plea to supreme court where he contends that over 820 crores has been received by SCSL which has used it as white money in form of salaries and infrastructure investment. SSCL now has been acquired by Tech Mahindra, so Mahindra should be made liable for the case. Acquisition of Satyam by Mahindra has been done to save the company and shareholders interest ,so top court denies to fasten Tech Mahindra in this case.

RECOMMENDATION & IMPROVEMENT

It is strongly recommended to auditors to prevent themselves from such exposures and perform their duty following highly required standards. What auditor and their firms has to follow could be defined from their strategy and audit program.

Audit Strategy & Audit Program

Audit program is the whole summary of the work done by auditor and such program should be specifically prepared before every start of audit . Audit program which contains planning for audit, knowing the client ,its management and internal control in the company, making areas which require participation of top management for discussion, vouching, verification to the deep extent possible. It is recommended for every auditors to have proper planning of audit before commencement of audit , have proper defined Checklist and guidance of top members for the work done, strict compliance of Auditing standards, report to top management for any deviation, checking of every documents for their authenticity and the authorisation done properly or not. Follow up , re follow up for any un resolved queries and having no reliance for whatever be documents issued by client unless same is signed by appropriate personnel and have authorised approval for the same.

It is quite common that auditor is required to obtain reasonable assurance and not absolute assurance as in case of investigation. So, wherever there is involvement of top management in fraud, it is difficult to get them into sight but still auditor has to follow its standards on auditing to deal with the situation and should not take in any way their inherent limitation as their advantage or way to be escaping. However, in case business has proper internal control in place as checked by Auditor, they may have relaxed strategy of checking but still under guidance of Standards on Auditing. Wherever any restriction is imposed to work of auditors, they can ply themselves by reporting disclaimer on the report and also as per Standards on Auditing-580,Written Representation: Written representation to the effect that restriction has been imposed to auditors and document sought were not provided should be obtained to be in safer side on reporting any opinion. It should be kept in mind that such Written representation is not Sufficient and appropriate audit evidence for complete reliance and hence substantive procedures has to be followed by auditors on their end to uncover any fraudulent activity so that they can collect further audit evidence which support their opinion and hence can make their audit report reliable.

CONCLUSION

It might be concluded that transparency in accounting and complete compliance of Standards issued with respect for Accounting and Auditing field is necessary for avoidance of any such scandals in the future. Proper accounting check with segregation of duties, strong internal control in the entity, maker and checker follow up, internal audit of the compliances and accounting by the entity, frequent intervention by top management for appraisal, counter check of the work performed by the employees etc. are some areas where company can work to prevent possibility of fraud in the company. Similarly, proper audit program with proper audit strategy, checklist, trained employees, proper documentation and collection of sufficient and appropriate audit evidence is best practice to be followed by every auditor to prevent such unethical reliance on data produced by client and hence issue proper audit report which could provide correct information to the user of such audit report in decision making for their investment and protect their interest so that no such scandals be witness ever-ever in future.