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Transcript of Satyam Scandal
The Global corporate community was shocked and scandalised when the chairman of Satyam, Ramalinga Raju resigned on 7 January 2009 and confessed that he had manipulated the accounts by US$1.47-Billion.
Satyam was established in 1987
4th fastest growing IT company in India
9% market share
First Indian company to be listed in three International Exchanges:NYSE,DOW and EURONEXT.
PricewaterhouseCoopers was the statutory auditor of Satyam Computer Services when the report of scandal in the account books of Satyam Computer Services broke.
The Indian arm of PwC was fined $6m by the SEC (US Securities and Exchange Commission) for not following the code of conduct and auditing standards.
Role of Auditors:
“ The scam of INR 71.36 billions in the company’s balance sheet was a result of small manipulation of accounts done many years back.”
“Riding a tiger,not knowing how to get off without being eaten.”
What has been done so far:
The government had, till the time of writing,
appointed six directors (including Deepak Parekh,
Kiran Karnik and Tarun Das) to the board of Satyam.
The new board appointed new auditors—Deloitte and KPMG—to look afresh at the numbers and restate the financial position of the company. This will help determine the exact position of Satyam’s liabilities
The board needed to reach out to clients to re-establish the lost confidence and to ensure that clients and employees continue with Satyam and steps to ensure that operations are insulated from liabilities and problems.
Analysts suggested that the company could look at selling operations only (business, customers and employees) and not liabilities to some third party.
CONFESSIONS OF RAJU
Impact on Brand India:
The outrage over Raju's systematic accounting fraud has broadened to wider concern about the potential damage to India's appeal to foreign investors and the IT
industry in particular.
Immediately following Raju's confession, the Co.'s share prices crased 77% to Rs.30. (Rs.544 earlier)
Why does This scam matter?
Satyam Scandal involves an amount close to 10,000 Crores
Satyam is the fourth largest firm in India carrying India's outsourcing image globally.
Impact on Stock Market:
The benchmark sensex slipped over 7% on Jan 9, 2007.
The Company's share price had fallen 21.7% since December 15th, the day before the crisis broke
Fabricated Income Statement
Immediately following the news of the fraud, Merrill Lynch terminated its engagement with Satyam, Credit Suisse suspended its coverage of Satyam, and PricewaterhouseCoopers (PwC) came under intense scrutiny and its license to operate was revoked.
Coveted awards won by Satyam and its executive management were stripped from the company.
Criminal charges were brought against Mr. Raju, including: criminal conspiracy, breach of trust, and forgery.
After the Satyam fiasco and the role played by PwC, investors became wary of those companies who are clients of PwC, which resulted in fall in share prices of around 100 companies varying between 5% - 15%.
Lessons Learned from Satyam Scam:
Investigate All Inaccuracies: The fraud scheme at Satyam started very small, eventually growing into $276 million white-elephant in the room. Indeed, a lot of fraud schemes initially start out small, with the perpetrator thinking that small changes here and there would not make a big difference, and is less likely to be detected.
Ruined Reputations: Fraud does not just look bad on a company; it looks bad on the whole industry and a country. “India’s biggest corporate scandal in memory threatens future foreign investment flows into Asia’s third largest economy and casts a cloud over growth in its once-booming outsourcing sector.
Corporate Governance Needs to Be Stronger: The Satyam case is just another example supporting the need for stronger CG. All public-companies must be careful when selecting executives and top-level managers. These are the people who set the tone for the company
Recent corporate frauds and the outcry for transparency and honesty in reporting have given rise to two outcomes. First, forensic accounting skills have become very crucial in untangling the complicated accounting maneuvers that have obfuscated financial statements. Second, public demand for change and subsequent regulatory action has transformed CG scenario across the globe.
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