Case Analysis on Satyam Essay Example for Free

Case Analysis on Satyam EssayThis case illustrates the d bearfall of Satyam, whizz of the biggest IT giants in India, because of the burlesqueulent activities carried out by its flop Mr. Ramalinga Raju and his associates. moving in world at that point had garnered immense respect for Satyam in terms of risk management and embodied governance practices and Satyam was ranked as the tail largest IT Company in India. This was the case before December 16, 2008, when Satyam promoter Mr. Ramalinga Raju proposed his intent to acquire Matyas down the stairs and Matyas Properties. When this announcement of acquisition reached to the public, investors had a tremendously negative reception towards Satyams decision. Satyam founder eventually admitted fraud in a financial description revealing that he had been cooking the books of Satyam for quite some time. Raju and his team manipulated immediate payment balance, bank balance, accrued interest figures, overstated debtors and understa ted liability in order to manipulate the share prices of the confederacy in the market by lead astray its investors and the public.After admission of fraud, share prices of Satyam sharply fell down and Satyam was eventually removed from the New York stock exchange and the Bombay stock exchange. The US investors initiated several mark action suits against Satyam for its fraudulent activities and top executives of Satyam were charged with violation of federal securities laws by issuing false and misleading financial statements. The Satyam scandal has shaken the roots of the Indian financial market and has put a big question mark on corporeal governance and how far corporations (people) can go to enhance their own personal benefits.Major Issues in the Case Corporate governance Satyam failed to follow the corporate governance practices that every firm was meant to follow, it looked for loop hopes that could be tweaked to enhance the companys profit and hide liabilities from the inv estors as well as the general public. The Satyam Board was composed of chairman-friendly directors who failed to question managements strategy. They were in any case extremely slow to act when it was cognise that the company was in financial distress. The Board ignored critical information related to financial wrongdoings before the company ultimately collapsed.Agency problems The Chairman (Ramalinga Raju) and the chief financial officer (Srinivas Vadlamani) worked together to defraud the stakeholders for their personal gain, while the investors thought that the company was generating revenues, and investing in different areas. Clearly, the Chairman and CFO had personal gain in spirit rather than company benefit. There also seems to be conflicting interest of the management and the shareholders i. e. the management wanted to take over two building companies Maytas properties and Maytas Infra which was against the interest of the shareholders. ArgumentsIts hard to imagine a leadi ng company like Satyam manipulating its financial statements but in this highly competitive industry it is essential to remain profitable in order to survive in the long-run. This is perhaps the reason why Satyam resorted to manipulating its financial statement. We can see that there were large list of manipulation in the income statement as well as in the balance sheet of Satyams financial statements. Manipulation in the Income Statement The income statement consisted of some inconsistencies that were made intentionally to maintain the train of profitability of the company.The amount of sales revenue has been overstated by Rs. 588 crore i. e. was recorded as Rs. 2700 crore instead of Rs. 2112 crore. The in operation(p) profit margin was recorded as Rs. 649 crore (i. e. 24 % of the sale revenue) when the effective operating profit margin was Rs. 61 crore (i. e. 3 % of the sales revenue). The number of employee was also manipulated i. e. it was recorded as 52000 employees when th e actual number of employees was only 43622 employees.Manipulation in the Balance SheetThe balance sheet also seemed to have some level of inconsistencies from the actual value that were done intentionally to show a strong liquidity position of the company. The cash balance that was recorded as Rs. 5361 crore consisted of non-existence amount of Rs. 5040 crore i. e. the actual cash balance was Rs. 321 crore. The assets side also consisted of accrued interest of Rs. 376 crore which was non-existent and the debtors amount was overstated by Rs. 490 crore i. e. the actual value of debtor was Rs. 2161 crore whereas the recorded value was Rs. 2651 crore. The liability side of he balance sheet was understated by Rs. 1230 crore which was the amount borrowed from the known sources by Mr. Raju to ensure the operations are running.Even after such manipulations the regulatory authorities, the independent executive and the external auditors were not able to raise the red flag which shows that t here is a huge hole in the corporate governance. The company also seems to be having conflicting interest amongst the management and the shareholders. The company was looking to diversify its business by taking over the construction companies Maytas Properties and Maytas Infra at a cost of 1. billion dollars. Satyam was looking to enter the real-estate business but this was a surprising strategic decision for the shareholders. The shareholders wanted Satyam to scatter in related businesses.The negative reaction of the shareholders toward the decision caused the share prices to fall by 70% in a just a few geezerhood of the decision. Managerial Implication Agency problem The problem of motivating one party to act on behalf of another can be called the principal-agent problem or agency problem for short. (Wikipedia, 2013) Agency problems arise in a variety of different contexts.The agency problem usually refers to a conflict of interest between a companys management and the companys stockholders. The manager, acting as the agent for the shareholders, or principals, is supposed to make decisions that will maximize shareholder wealth. However, the decision must be in the favor of all parties but it was not the case with Satyam. Satyam decided to acquire Maytas Properties and Maytas Infra. The shareholders resisted the decision claiming it to be unrelated business and acquisition should not take billet with Maytas which became a finishing blow to the company.Corporate governance and business ethics Corporate governance refers to the system by which corporations are directed and controlled. The governance organise specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs. (Wikipedia, 2013) Governance is a mechanism for moni toring the actions, policies and decisions of corporations.On a quarterly basis, Satyams earnings grew. Mr. Raju admitted that the fraud which he committed amounted to nearly $276 million. In the process, Satyam violated all the rules of corporate governance. The Satyam scam has been an example for followers poor governance practices. The issue of governance rose at Satyam because of non fulfillment of the obligation of the company towards its stakeholders like separating fibres of board and management, and also the role of CEO and chairman.Business ethics reflects the philosophy of business, one of whose aims is to determine the fundamental purposes of a company. Business ethics are implemented in order to ensure that a authoritative required level of trust exists between consumers and various forms of market participants with businesses (Investopedia, 2013). The culture in Satyam, especially dominated by the board, symbolized such an unethical culture. Satyam as the smallest of the quartet players was under pressure to show good results in order to survive.Apart from this there was greed causing them to indulge in unethical behavior. On the one hand, Rajus rise to stardom in the corporate world joined with immense pressure to impress investors made him a compelled leader to deliver outstanding results. On the contrary, Mr. Raju had to suppress his own morals and values in favor of the greater good of the company. The lure of big compensation to members further encouraged such behavior. In the end the fraud came to an end and the implications were great. AlternativesThe failure of company like Satyam which had been awarded for its corporate governance and risk management creates a dilemma for the investors as to which company to mean and invest. Hence, investors, board, government intervention, accounting standards and ethics and Code of conduct must all work hand in hand to resolve the issue. Investors play an important role in detecting fraudulent acti vities of a company. They must ensure that information about the company is latest and from trustable source. Hence, they should take more care and compare the reduce of the company with the industry before investing.Board must monitor the ethical policies and the way they are being maintained in the company. Transparency and effectiveness in auditing and regulatory checks through internal and external auditors and monitoring agencies should be maintained as it helps to build and maintain trust and loyalty from stakeholders, increase goodwill and investors confidence and establish long lasting credibility for the company. Government should play an active role in companys affair, frequently checks of the companys performance and take necessary steps to discourage malpractice and falsification.There is a need to create strong measures to prevent fraudulent activities from happening in emerging and the auditing firms also need to be brought under the regulatory umbrella. Moreover, al l companies need to practice ethical behavior. Every company should also have its own fraud detection mechanism. It is also important for companies to establish an organizational culture, which supports ethical conduct through a code of conduct and properly laid out corporate governance policies and procedures.