Enron+ Satyam case

1. A Project On
Write a Case Study on CORPORATE Fraud that led to Effective
Investigation by Law Enforcement Agency, and Conviction by
Judicial Authority with reference to ENRON
Submitted by
Ankit Srivastava
BBA.LLB (Sem X) Div-A
Roll No-27
Under the guidance of
Prof. Arjun Chaudhuri
SYSTEMIC AND FINANCIAL FRAUD
Symbiosis Law School, NOIDA
Symbiosis International University,Pune

2. C E R T I F I C A T E
The project entitled “Case Study on corporate Fraud that led to Effective Investigation by
Law Enforcement Agency, and Conviction by Judicial Authority with reference to ENRON”
submitted to the Symbiosis Law School, NOIDA for Financial and Systematic Fraud as part
of internal assessment is my original work carried out under the guidance of Prof. Arjun
Chaudhuri from February, 2015 to March, 2015. The research work has not been submitted
elsewhere for award of any publication or degree.
The material borrowed from other sources and incorporated in the work has been duly
acknowledged. I understand that I myself could be held responsible and accountable for
plagiarism, if any, detected later on.
Signature of the candidate
Name: Ankit Srivastava

3. ACKNOWLEDGMENT
It is a great pleasure for me to put on records my appreciation and gratitude towards Dr. C.J.
Rawandale, Director, for his immense support and encouragement all through the preparation
of this report. I would like to thank my faculty Prof. Arjun Chaudhuri (Project Guide) for
their valuable support and suggestions for the improvement and editing of this project report.
Last but not the least, I would like to thank all the friends and others who directly or
indirectly helped me in completing my project report.

4. INTRODUCTION
“Enron/Satyam is a company that reached dramatic heights, only to face a dizzying
collapse.”
When terrorists attacked Mumbai last November, the media called it “India’s 9/11.” That
tragedy has been succeeded by another that has been dubbed “India’s Enron.” In one of the
the biggest frauds in India’s corporate history, B. Ramalinga Raju, founder and CEO of
Satyam Computers, India’s fourth-largest IT services firm, announced on January 7 that his
company had been falsifying its accounts for years, overstating revenues and inflating profits
by $1 billion. Ironically, Satyam means “truth” in Sanskrit, but Raju’s admission —
accompanied by his resignation — shows the company had been feeding investors,
shareholders, clients and employees a steady diet of asatyam (or untruth), at least regarding
its financial performance.
What is Fraud?
Fraud is a worldwide phenomenon that affects all continents and all sectors of the economy.
Fraud encompasses a wide-range of illicit practices and illegal acts involving intentional
deception, or misrepresentation. According to the Association of Certified Fraud Examiners
(ACFE), fraud is “a deception or misrepresentation that an individual or entity makes
knowing that misrepresentation could result in some unauthorized benefit to the individual or
to the entity or some other party” [1]. In other words, mistakes are not fraud. Indeed, in fraud,
groups of unscrupulous individuals manipulate, or influence the activities of a target business
with the intention of making money, or obtaining goods through illegal or unfair means.
Fraud cheats the target organization of its legitimate income and results in a loss of goods,
money, and even goodwill and reputation. Fraud often employs illegal and immoral, or unfair
means. It is essential that organizations build processes, procedures and controls that do not
needlessly put employees in a position to commit fraud and that effectively detect fraudulent
activity if it occurs. The fraud involving persons from the leadership level is known under the
name “managerial fraud” and the one involving only entity’s employees is named “fraud by
employees’ association”.
Ironically, Satyam means “truth” in the ancient Indian language “Sanskrit” . Satyam won the
“Golden Peacock Award” for the best governed company in 2007 and in 2009. From being
India’s IT “crown jewel” and the country’s “fourth largest” company with high-profile

5. customers, the outsourcing firm Satyam Computers has become embroiled in the nation’s
biggest corporate scam in living memory. Mr. Ramalinga Raju (Chairman and Founder of
Satyam; henceforth called “Raju”), who has been arrested and has confessed to a $1.47
billion (or Rs. 7800 crore) fraud, admitted that he had made up profits for years. According to
reports, Raju and his brother, B. Rama Raju, who was the Managing Director, “hid the
deception from the company’s board, senior managers, and auditors”. The case of Satyam’s
accounting fraud has been dubbed as “India’s Enron”. In order to evaluate and understand the
severity of Satyam’s fraud, it is important to understand factors that contributed to the
“unethical” decisions made by the company’s executives. First, it is necessary to detail the
rise of Satyam as a competitor within the global IT services market-place. Second, it is
helpful to evaluate the driving-forces behind Satyam’s decisions: Ramalinga Raju. Finally,
attempt to learn some “lessons” from Satyam fraud for the future.
KNOWING THE ENRON CASE
Enron was formed in 1985 following a merger between Houston Natural Gas and Omaha-
based Inter North. Kenneth Lay, who had been the chief executive officer (CEO) of Houston
Natural Gas, became Enron's CEO and chairman, and quickly rebranded Enron into an
energy trader and supplier. Deregulation of the energy markets allowed companies to place
bets on future prices, and Enron was poised to take advantage. The story ends with
the bankruptcy of one of America's largest corporations. Enron's collapse affected the lives of
thousands of employees, many pension funds and shook Wall Street to its very core. To this
day, many wonder how a company so big and so powerful disappeared almost overnight.
How did it manage to fool the regulators and the Wall Street community for so long, with
fake off-the-books corporations? What is the overall lasting impact that Enron has had on the
investment community and the country in general? It was a collapse of a Wall Street Darling
by the fall of 2000. Enron was starting to crumble under its own weight. CEO Jeffrey Skilling
had a way of hiding the financial losses of the trading business and other operations of the
company; it was called mark-to-market accounting. This is used in the trading of securities,
when you determine what the actual value of the security is at the moment. This can work
well for securities, but it can be disastrous for other businesses.
In Enron's case, the company would build an asset, such as a power plant, and immediately
claim the projected profit on its books, even though it hadn't made one dime from it. If
the revenue from the power plant was less than the projected amount, instead of taking the

6. loss, the company would then transfer these assets to an off-the-books corporation, where the
loss would go unreported. This type of accounting created the attitude that the company did
not need profits, and that, by using the mark-to-market method, Enron could basically write
off any loss without hurting the company's bottom line. Part of the reason the company was
able to pull off its shady business for so long, is that Skilling also competed with the top Wall
Street firms for the best business school graduates, and would shower them with luxuries and
corporate benefits. One of Skilling's top recruits was Andrew Fastow, who joined the
company in 1990. Fastow was the CFO of Enron until the SEC started investigating his role
in the scandal.
KNOWING THE SATYAM CASE
It was audacious, preposterous, outrageous and shocking event – the Satyam Computer-
Maytas deal. That a promoter, with less than 9 per cent stake in his company, would have the
nerve to try and transfer $1.6 billion of cash to two completely unrelated businesses owned
by his sons is unthinkable. And to pass that off as a 'wonderful' opportunity! Satyam.
Chairman Ramalinga Raju says he didn't anticipate investors' reactions and was surprised. It
is not a mere coincidence that Maytas is Satyam spelt in reverse way (Satyam - Maytas). As it
became evident from Raju’s letter it was basically an effort to cover-up Satyam fiasco. The
figures stated in the resignation letter of Raju relating to Satyam: Inflated ( non-existent)
Cash and Bank balance of Rs. 5,040 crores An accrued interest of Rs. 376 Crores which is
non-existent An understated liability of Rs. 1,230 Crores An over stated debtors position of
Rs. 490 crores Total Rs. 7136 crores! It all started on 16.12.2008, when Ramalinga Raju felt
that the only way to cover up the scale of fraud perpetrated was through buying the
infrastructure companies owned by his sons and family members. It is a common affair in
Indian Inc to make such pointless investments to divide the dividends by manipulating profit
margins. But the scale of this scam needs to take a deeper look in the fiasco Satyam created.
Satyam’s Maytas bid dragged media in to it. Satyam intended to buy entire stakes in Maytas
Properties for $1.3 Billion and 51% stakes in Maytas Infra for another $300 Million. Raju
and his immediate family members own up to 35% stakes in Maytas. The deal was to be
financed from “surplus” cash. Investors and the Fund managers were shocked that the
bidding process was carried without informing them. Raju said that the deal was in complete
interest of the investors and informing them was “unnecessary”. On following days, Satyam’s
share prices started falling reflecting share holders disbelief. Satyam’s share prices nosedived

7. in U.S.A. after the bid was announced. The interrogation by investors forced Raju to
reconsider his decision, which he had to reverse within hours. World Bank, one of Satyam’s
esteemed customers banned it from providing service for next 8 years. Satyam’s image in
front of its customers, investors, and more importantly, the entire nation got dented. Share
prices tumbled even further. The aborted buy-out deal and the ban indicated that something
seriously went wrong at the board level. Valuation of Maytas turned out to be fraudulent. All
of the four Firms, including Merrill Lynch and JP Morgan denied having done any Valuation.
The move sparked row between the institutional investors from across the world and
Sataym’s board members. Ultimately lawsuits followed valuation and now judicial custody of
Ramalinga Raju and his brother. One of company’s two independent directors T.R. Prasad
defended the decision of buy-out believing it to be increasing share value. Another director
M. Shrinivasan quit before it was too late. Vinod Dham (fouder of Pentium) was also one of
the non-executive directors of Satyam who later resigned in the wake of controversy. Two
days after the controversial deal, Indian government ordered separate probe in to the matter
On 7th January, Ramalinga Raju wrote a letter to all the board members and SEBI, informing
them about inflated cash, faked profit margins and accounting malpractices
DISCUSSION
While both Enron and Satyam were involved in corporate crimes where the senior
management of the companies inflated assets, they used very unique means to accomplish the
ends. The first clear difference is the transfer of funds to other entities in order to separate
those transactions from the parent company. In the case of Enron, mark to market accounting
and reliance on SPEs enabled the company to achieve the purpose. Also, Enron was unique in
the sense that the company had placed enormous powers in the hands of its CFO to carry out
transactions which were not scrutinized by the board (Coffee, 2002). Andrew Fastow and his
management team skillfully created hundreds of special purpose entities before their
declaration of bankruptcy in 2001. While the management at Satyam tried to accomplish
something of the same kind through the Maytas deal, the differentiating angle here is the fact
that Maytas was a family holding. Enron found loopholes in the legal system and was
eventually successful in maintaining the pretense of the fake off-shore entities and duping the
public, but it had to find those loopholes. The scene in India seems to be a little different.
Even though regulations in both the countries are almost the same on paper, Indian
companies in general seem to find bending the law, openly and quite directly, easier than
U.S. firms. Although the Maytas deal was not allowed to go through due to investor

8. resistance, there is plenty of evidence to show the ease with which companies in India
disregard regulation and how openly this is done. In a country where giving and taking bribes
is commonplace, legislators will have to pay more emphasis on drawing future regulations
that help avoid such a situation to spread to the corporate sector of the country. The U.S.
attempted to achieve a goal of stricter regulation by passing the SarbanesOxley; India is in
the process of strengthening accountability in higher management and auditors by making
amendments to Clause 49 of the Listings Agreement. There’s also something to be said about
corruption and familial connections within a company. It is common knowledge that lack of
evidence regarding the involvement of board of directors in a fraud, both in the U.S. and in
India, is frustrating for investors. Most people feel certain that crimes of such high magnitude
cannot be conducted without the knowledge of those people who are closely related to the
functioning of the company. This line of thought takes on more meaning when we consider
the degree of nepotism in the Indian corporate sector. As mentioned previously, in many
companies where the majority shareholder is a family, relatives are directly allotted positions
of power. This has been an unquestioned practice for several years. Family members expect
to be given senior positions and not doing so can sometimes be construed as being a traitor to
the community. The practice is so widely accepted that not much is done in the form of
following anti-discrimination policies. However, while this practice is discriminatory and
against the principles of employment law, it bears even greater consequences when corporate
crimes of this kind become easier. With the whole family involved in the company there’s
often the attitude of wanting the company to earn profits for the family as opposed to
benefiting all the stakeholders. There’s high probability of the family being in cahoots while
conducting bogus transactions and this risk can be eliminated by a stricter adherence to anti-
nepotism policies. While recruiting family is not always a bad thing, especially when worthy
heirs are tested for their merit before being allowed to hold a position (Brendan, 2004), the
trade-offs of this policy have to be kept in mind and emphasis should be placed on
developing a system of checks to avoid any concentration of power once the company starts
trading in public securities. In Enron, crime was possible as a result of cooperation among
senior management and an unhealthy emphasis on aggressive competition. Western culture,
and especially the U.S., is celebrated for its focus on individualism and goal- directed
behavior. The ability to work hard, be competitive and reach the pinnacle of success is
admired. This has been true to such an extent that people from eastern countries come to the
U.S. to try to achieve the ‘American Dream’. A clarification that needs to be made here is
that Asian cultures also have a competitive culture. However, in these countries the kind of

9. competition that is encouraged differs. In Asian countries competition does not take the
aggressive form of driving out competition but focuses more on improving oneself. It is a
more inclusive culture which respects community norms. Studies have shown that while
Americans tend to use words like ‘best’, ‘achievement’ and ‘success’, Asians tend to use
words like ‘growth’, ‘endure’ and ‘advancement’ (Baillie, Dunn & Zheng, 2004). One might
assume that America has reached a stage where the culture expects people to achieve even
when it might be injurious to them and people around them in the long run. A lot can be said
about the harmful effects of cultural expectation; in the case of the U.S., the very culture of
competition seems to have lead to the downfall of Enron.
INVESTIGATION
The investigation that followed the revelation of the fraud has led to charges against several
different groups of people involved with Satyam. Indian authorities arrested Mr. Raju, Mr.
Raju’s brother, B. Ramu Raju, its former managing director, Srinivas Vdlamani, the
company’s head of internal audit, and its CFO on criminal charges of fraud. Indian authorities
also arrested and charged several of the company’s auditors (PwC) with fraud. The Institute
of Chartered Accountants of India [33] ruled that “the CFO and the auditor were guilty of
professional misconduct”. The CBI is also in the course of investigating the CEO’s overseas
assets. There were also several civil charges filed in the US against Satyam by the holders of
its ADRs. The investigation also implicated several Indian politicians. Both civil and criminal
litigation cases continue in India and civil litigation continues in the United States. Some of
the main victims were: employees, clients, shareholders, bankers and Indian government. In
the aftermath of Satyam, India’s markets recovered and Satyam now lives on. India’s stock
market is currently trading near record highs, as it appears that a global economic recovery is
taking place. Civil litigation and criminal charges continue against Satyam. Tech Mahindra
purchased 51% of Satyam on April 16, 2009, successfully saving the firm from a complete
collapse. With the right changes, India can minimize the rate and size of accounting fraud in
the Indian capital markets. 4.6. Corporate Governance Issues at Satyam On a quarterly basis,
Satyam earnings grew. Mr. Raju admitted that the fraud which he committed amounted to
nearly $276 million. In the process, Satyam grossly violated all rules of corporate governance
[34]. The Satyam scam had been the example for following “poor” CG practices. It had failed
to show good relation with the shareholders and employees. CG issue at Satyam arose
because of non-fulfillment of obligation of the company towards the various stakeholders. Of
specific interest are the following: distinguishing the roles of board and management;

10. separation of the roles of the CEO and chairman; appointment to the board; directors and
executive compensation; protection of shareholders rights and their executives.
The 2009 Satyam scandal in India highlighted the nefarious potential of an improperly
governed corporate leader. As the fallout continues, and the effects were felt throughout the
global economy, the prevailing hope is that some good can come from the scandal in terms of
lessons learned [35]. Here are some lessons learned from the Satyam Scandal:
 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. This sends a message to a lot of
companies: if your accounts are not balancing, or if something seems inaccurate (even just a
tiny bit), it is worth investigating. Dividing responsibilities across a team of people makes it
easier to detect irregularities or misappropriated funds.
 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. The news sent Indian equity markets into a tail-spin, with
Bombay’s main benchmark index tumbling 7.3% and the Indian rupee fell”. Now, because of
the Satyam scandal, Indian rivals will come under greater scrutiny by the regulators, investors
and customers.
 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: if
there is corruption at the top, it is bound to trickle-down. Also, separate the role of CEO and
Chairman of the Board. Splitting up the roles, thus, helps avoid situations like the one at
Satyam. The Satyam Computer Services’ scandal brought to light the importance of ethics
and its relevance to corporate culture. The fraud committed by the founders of Satyam is a
testament to the fact that “the science of conduct” is swayed in large by human greed,
ambition, and hunger for power, money, fame and glory.

11. CONCLUSION
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. In fact, both these trends have the common goal of addressing the investors’
concerns about the transparent financial reporting system. The failure of the corporate
communication structure, therefore, has made the financial community realize that “there is a
great need for skilled professionals that can identify, expose, and prevent structural
weaknesses in three key areas: poor corporate governance, flawed internal controls, and
fraudulent financial statements [36]. In addition, the CG framework needs to be first of all
strengthened and then implemented in “letter as well as in right spirit”. The increasing rate of
white-collar crimes, without doubt, demands stiff penalties and punishments. Perhaps, no
financial fraud had a greater impact on accounting and auditing profession than Enron,
WorldCom, and recently, India’s Enron: “Satyam”. All these frauds have led to the passage
of the Sarbanes-Oxley Act in July 2002, and a new federal agency and financial standard-
setting body, the Public Companies Accounting Oversight Board (PCAOB). It also was the
impetus for the American Institute of Certified Public Accountants’ (AICPA) adoption of
SAS No. 99, “Consideration of Fraud in a Financial Statement Audit” [37]. But it may be that
the greatest impact of Enron and WorldCom was in the significant increased focus and
awareness related to fraud. It establishes external auditors’ responsibility to plan and perform
audits to provide a reasonable assurance that the audited financial statements are free of
material frauds. As part of this research study, one of the key objectives was “to examine and
analyze in-depth the Satyam Computers Limited’s accounting scandal by portraying the
sequence of events, the aftermath of events, the key parties involved, major reforms
undertaken in India, and learn some lessons from it”. Unlike Enron, which sank due to
“agency” problem, Satyam was brought to its knee due to “tunneling”. The Satyam scandal
highlights the importance of securities laws and CG in emerging markets. There is a broad
consensus that emerging market countries must strive to create a regulatory environment in
their securities markets that fosters effective CG. India has managed its transition into a
global economy well, and although it suffers from CG issues, it is not alone as both
developed countries and emerging countries experience accounting and CG scandals. The
Satyam scandal brought to light, once again, the importance of ethics and its relevance to

12. corporate culture. The fraud committed by the founders of Satyam is a testament to the fact
that “the science of conduct is swayed in large by human greed, ambition, and hunger for
power, money, fame and glory”. All kind of scandals/frauds have proven that there is a need
for good conduct based on strong ethics. The Indian government, in Satyam case, took very
quick actions to protect the interest of the investors, safeguard the credibility of India, and the
nation’s image across the world. Moreover, Satyam fraud has forced the government to re-
write CG rules and tightened the norms for auditors and accountants. The Indian affiliate of
PwC “routinely failed to follow the most basic audit procedures. The SEC and the PCAOB
fined the affiliate, PwC India, $7.5 million which was described as the largest American
penalty ever against a foreign accounting firm” [38]. According to President, ICAI (January
25, 2011), “The Satyam scam was not an accounting or auditing failure, but one of CG. This
apex body had found the two PWC auditors prima-facie guilty of professional misconduct”.
The CBI, which investigated the Satyam fraud case, also charged the two auditors with
“complicity in the commission of the fraud by consciously overlooking the accounting
irregularities”. The culture at Satyam, especially dominated by the board, symbolized an
unethical culture. On one hand, his rise to stardom in the corporate world, coupled with
immense pressure to impress investors, made Mr. Raju 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 board connived with his actions and stood as a
blind spectator; the lure of big compensation to members further encouraged such behavior.
But, in the end, truth is sought and those violating the legal, ethical, and societal norms are
taken to task as per process of law. The public confession of fraud by Mr. Ramalinga Raju
speaks of integrity still left in him as an individual. His acceptance of guilt and blame for the
whole fiasco shows a bright Copyright © 2013 SciRes. OJAcct M. L. BHASIN 35 spot of an
otherwise “tampered” character. After quitting as Satyam’s Chairman, Raju said, “I am now
prepared to subject myself to the laws of land and face consequences thereof”. Mr. Raju had
many ethical dilemmas to face, but his persistent immoral reasoning brought his own demise.
The fraud finally had to end and the implications were having far reaching consequences.
Thus, Satyam scam was not an accounting or auditing failure, but one of CG. Undoubtedly,
the government of India took prompt actions to protect the interest of the investors and
safeguard the credibility of India and the nation’s image across the world. In addition, the CG
framework needs to be strengthened, implemented both in “letter as well as in right spirit”,
and enforced vigorously to curb white-collar crimes.