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1. Corporate Ethics: Satyam Accounting Scandal Raghu Kasturi MBA Stevens Henager College July 1, 2009

2. Overview Introduction Literature Review Research Methodology Findings and Analysis Conclusions and Further Research

3. Introduction Research Statement World is not only just going through economic crisis but also ethical crisis with the Corporate frauds, Accounting scandals, Mismanagement, Ponzi schemes, Bribes and many more. Present Situation Purpose of Research Importance of Ethics

4. Description of terms Code of Conduct GAAP

5. Uses of Financial Statements

6. What is manipulation

7. Terms Used

8. Need for manipulation

9. Types of Manipulation Manipulating timing Early Recognition Postponing Falsifying entries Fictitious revenues Manipulating liabilities and expenses Valuing assets

10. Literature Review Historical Context Why Satyam? What is Satyam ? - Company Background What happened ? - Accounting Scandal How did it happen ? - Scandal Analysis

11. Historical Overview of Ethics Somewhere 470-399B.C. “A set of principles of right conduct” “A system of moral principles applied in the commercial world” also known as morality in business. The term “corporate ethics” was first coined around the 1970’s.

12. Corporate Ethics

13. Enron “As strongly as I believe in a new role for government in the new economy, government action alone cannot provide most of the answer. That’s because what happened at Enron wasn’t just a failure of regulations and law, it was a failure of corporate culture, a failure of values, a failure of heart.” Senator Carl Levin D-Michigan Commenting on his Planned Bill of Rights for Shareholders Ken Lay convicted of 6 counts Faced 165 years in prison – but died of Heart attack before going to jail Source : Hood, 2009

14. Enron "Acts of bad character must have real consequences. And already we're seeing that as financial markets punish companies that have displayed an inability to shoot straight. ... Every CEO in America now must realize that accounting gimmickry is a ticket to destruction.“ - Dave Kansas - WSJ Jeff Skilling convicted of 19 out of 29 counts and received a 24 year sentence Source : Hood, 2009

15. Worldcom "A business run with character and integrity will receive rewards from the market," Kansas writes. "A business run around the edges, whether within the letter of the law or not, will risk joining Adelphia, Global Crossing, Arthur Andersen, Enron and WorldCom on the scrapheap of history.“ - Dave Kansas – WSJ reporter Bernard Ebbers convicted of $11 billion fraud – sentenced to 25 years in prison Scott Sullivan CFO got five years Source : Hood, 2009

16. Tyco Private company owners and public company management often try to run their companies as if there were no one with any outside interests. Any company that has a bank loan, an outside shareholder, or a supplier has people who have a vested interest in the company. Even those companies without any of those listed items have employees whose livelihood may be dependent on the company’s continues existence. Public companies and not-for-profit organizations have a higher degree of responsibility to protect those outside interests. Yet so many treat their organizations as their private fiefdoms. -Art Berkowitz - ENRON Dennis Kozlowski convicted of $400 million fraud – sentenced to eight years in prison Mark Swartz CFO got five years Source : Hood, 2009

17. Other Corporate Scandals & Accounting Frauds Enron – WorldCom Era Adelphia - Cable Rite Aid – Drug stores HealthSouth – Health AOL Time Warner Xerox Bristol-Myers-Squibb Classic Cases Equity Funding – (Insurance & Mutual Funds) 1973 ZZZZ Best – (Carpet Cleaning & Restoration) - Mark Minkow - 1984 ESM Government Securities – 1985 Lincoln Savings & Loan - Charles Keating – CEO - 1989

18. Current Scandals Parmalat – Europe’s Enron (2003) Satyam – India’s Enron (2008) Madoff – World’s largest Ponzi Scheme + 35 other scandals so far totaling $37 Billion

19. Bernard Madoff Law of Intractable Systemic Corruption Any significant breach of a syndrome’s integrity (Government & Commerce) – usually by adopting an inappropriate function – causes some normal virtues to convert automatically to vices, and still others to bend and break for necessary expedience. Over the course of time, corrupted organizations accumulate in society. Without correction, the accompanying rancid cooperation blurs more than the afflicted organizations. -Jane Jacobs – Systems of Survival Ponzi scheme of $ 50 billion Facing 150 years in prison Source : Hood, 2009

21. Accused of issuing audits of Madoff Securities

22. Lied on AICPA membership renewal about peer reviewDavid Friehling, CPA faces 105 years in prison For issuing false audit reports Source : Hood, 2009

23. Satyam + PwC Ramalinga Raju – CEO created INR71.36 billion in fake billing and cash PwC auditors missed cash accounts? Source : Associated Press and Hood, 2009

24. What went wrong in 21st century

25. Satyam was established in 1987. 4th fastest growing IT company in India. 9 % market share 53,000 employees Revenue $2.1 billion First Indian company to be listed in three International Exchanges: NYSE, DOW and EURONEXT Company Background

28. Stance over 55 countries across six continents.

29. Satyam serves Fortune 500 Companies which are 163 in number out of its 558 global companies.

30. Exports account for almost 75.9 per cent of its total sales revenues.

32. Golden Peacock Global Award for Excellence in Corporate Governancefrom World Council for Corporate Governance

33. Best Investors Relations website in Asia pacific and Africa Regionfrom MZ Consult

35. International Financial Reporting Standards (IFRS)

37. Confessions of Raju “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.”

38. Shareholding in the company Source: Jan 14 2009, The Hindu

39. The wealth of Satyam investors has been wiped-out by the scandal. Source: Economic Times, 2009

42. Differences in Account Book Cash and Bank Balance Liability Interest Debtors position 71.36 Billion

43. New Balance Sheet Based on Raju’s confessions, if prepared a new balance sheet, then the statement will show the following effects: Reserve will reduce by INR 71.36 billions Net current asset will reduce by INR 71.36 billions. Then, the book value of Satyam shares will be INR 20.67 but in turn the current market price is hovering around INR 45-50 which clearly shows the range of financial fiasco.

44. Actual Profits Vs Profits in Books

45. Research Methodology Available Research Tools Selecting Research Tool Research Questions Selection of participants Procedure and Technology

46. Categorizing Questions

47. Investors What are the responsibilities of institutional investors? What are the rights of investors? How can investors detect fraud before it occurs? Should investors take more care before investing? If so, what should they do or not do? What are the risks involved when a CEO/Founder has a good percentage of stakes in the company?

48. Board How can boards and board members be made more responsible and accountable? Is there a clear understanding of responsibility which differentiates what the board can do and what manager and employees can do? How does the board ensure that members are suitable and what are the qualifications needed to become a member?

49. Government Regulations, Policies and intervention How can governments and regulators ensure effective corporate governance? In the case of violation of rules and regulations, is the government taking corrective measures? If so, what? If not, what should they be doing? Do you think there is too much government intervention as it relates to policy matters of private sector companies?

50. Ethics of Individuals/Company, Defining and implementing code of conduct Does the organization have a search or nominations committee which is responsible for selecting Board members? Does the organization have rules and guidelines that insure members will contribute to the organization’s objectives? How would you rate your company’s ability to not only detect fraud, but to eliminate it before it occurs? Is there a Code of Conduct and proper implementation at all levels? If there is a resigning of a board of directors in a crisis situation, what kind of signals do you think this sends to corporate India?

51. Selection and Technology Selection Employees and Ex-Employees from Satyam Business Analyst Financial Experts/Analysts Technology Telephonic Interviews Web Video Conference Email Interviews

52. Sample Size, Time and Cost Sample Size 17 interviews Time Average – 30 minutes Minimum – 15 minutes Maximum – 56 minutes Cost ~ USD 75

53. Findings and Analysis Collecting Findings Description of Findings Analysis of Findings

54. Collection and Description Collected seventeen different responses. Recorded most of the findings. Fifteen responses were considered for the analysis. Analysis of findings are discussed

55. Investors Investors play an important role in detecting financial position of a company. Investors must ensure that the share value which is listed is genuine and as per its financial status. Institutional investors should take more responsibility. Information about the company should be latest, from trusted source, easily accessible and correct. New regulation for information Act. Investors should take more care before investing. No risk involved if CEO is the founder of the company.

56. Board Must monitor the ethical policies and the way they are being maintained in the company. Accountable for the financial information being projected. No to inactive board members. Authority to independent board of directors. Clear understanding of responsibility between the board and next level employees. Qualified Board members.

57. Government Regulations, Policies and intervention Government should always plays an active role in the company affairs because the company runs with the public money. The government must frequently check the company’s performance in the market and take necessary steps in curtailing any malpractices or falsification. Government is not taking any corrective measures in case of any violations If the auditor do their work sincerely then any balance sheet and income statements would show the fair value of the company’s financial records. Government intervention must be increased to have a foolproof mechanism in the company policy matters.

58. Accounting Standards Auditors main responsibility is to check fairness and trueness of financial statements. Proper Audit Tools. Freedom for auditors Reputation of auditing firm/individual can’t avoid scandals. Most of the companies involved in mega scandals were audited by reputed auditing firms.

59. Ethics of Individuals/Company, Defining and implementing code of conduct Search or Nominations Committee Proper code of conduct updated on regular basis should be implemented. Every company should have fraud detection mechanism. Good Corporate Governance Good educational background doesn’t always mean individual has good ethics. Whistle blowing policies

60. Conclusions and Further Work Analysis of Scandal Auditors Role and Responsibility Suggestions for fair auditing Failure of Code of Conduct and Ethics Fraud Detection Further Work

61. A Tale of Two Frauds Then : December, 2001 Now : December, 2008

62. Analysis of Scandal Falsification of financial statements The auditor must, however, dig-out such fraud and give the true value of the company The auditor’s main responsibility is to detect fraud which PwC failed to do so. There was no government audit.

63. Failure of Auditors

67. Reforms in Auditing

68. CEO’s must follow simple business rules

69. Business leaders must walk the talk

70. The world should adopt a uniform global accounting standard

71. Bring moderation to CEO’s salaries, bonuses and perksAs USA Replaced SAS 82 with SAS 99

72. Contd… Broader market reforms Ensure ‘responsible governance’ Performance is the best defense against corporate takeovers Create a strong climate of opinion in favor of respectability Institute global awards for good corporate behavior

73. Transparency & Accountability “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.” - Supreme Court Justice Louis Brandeis Source : Hood, 2009 and Wired magazine 17.03 March, 2009

74. The Whistleblowers “All that is necessary for evil to triumph is for good men to do nothing.” – Edmund Burke Harry Markopolis – Madoff Sherron Watkins – Enron Cynthia Cooper – WorldCom Board of Directors - Satyam Source : Hood, 2009

75. Result of scandal

76. 7 Steps to Greater Ethical Behavior Avoid Conflicts of Interest Stand Up for What You Believe is Right Support Others Who Speak Up Disclose, Disclose, Disclose Carry a Big Stick Use Punishment Sparingly Recognize the Difference Between What is Legal & What is Right Source: Enron – A Professional’s Guide to the Events, Ethical Issues and Proposed Reforms by Arthur L. Berkowitz

77. Further Research How to design an effective code of conduct. Regulate policies in implementing code of conduct. Investigation other loopholes which give rise to accounting scandals.

78. Raghu Kasturi E-mail: august.raghu@gmail.com

79. References Images: Retrieved June 18, 2009, from Google Images Web site: http://images.google.com Hood, T (2009). Fraud - Salsibury University Accounting Students. Slide Share, Retrieved June 18, 2009, from http://www.slideshare.net/thoodcpa/fraud-salsibury-university-accounting-students#stats-bottom C.P, Chandrasekhar (2009, Febraury, 13). System failure. The Hindu, 26, Retrieved June 14, 2009, from http://www.hinduonnet.com/thehindu/thscrip/print.pl?file=20090213260300400.htm&date=fl2603/&prd=fline& Worrells, (2008, June 24). Common Financial Statement Frauds. Retrieved April 28, 2009, from Worrells Web site: http://www.worrells.net.au/Fraud%20Awareness/tpf_financial_statement.htm

80. Questions and Discussion