Activists Say That Shareholders Should Club Together Accounting Essay

Category: Accounting

Satyam in one of the household names in IT companies that exists in India. It was started in 1987 by Ramalinga Raju. It provides IT solutions as well as consultancy services in various sectors. It is listed on the New York Stock Exchange and the Bombay Stock Exchange.

However in one single day the company made a loss of 3400 cr due to a drop of 30% share prices of the company as it attempted to aquire 2 companies owned by Ramalinga Raju's sons. The review by the government of India led to panic selling of the shares which created a havoc in the sharemarket and led to the steep fall in prices. The major losses were brunt by the shareholders that include government corporations like LIC (Life Insurance Corporation), banks and foriegn investors like JP Morgan Chase apart from the individual share holders in the country.

The world bank has banned Satyam from it's operations after discovering that it had bribed it's employees to keep the fraud and misappropriated balance sheets behind closed doors and continue giving the company loans. On 7 January 2009 Ramalinga Raju was arrested when he declared that the accounts were manipulated in the tune of 5000 cr rupees.

On the day Ramalina Raju admitted his mistakes, there was a huge fall in Indian stock exchange and the stock price was down by 77%. There was 7% fall in BSE Sensex itself at the end of that day. Due to this problem, corporate governance is getting doubted as there may be undisclosed problems of the other companies. The corporate world was at shock when the Satyam chairman tried to attain two companies Maytas Properties and Maytas Infra for 1.6 billion dollars which was managed by his sons under the Maytas deal to cover up the gap in the accounts. The investors completely disapproved this and declared that the funds were misused and claimed that this was an act of partiality. After much investigation it was proved that there was an increase in the company's profit by 1.6 billion dollars in cash and assets by this scam. Price Waterhouse had audited the accounts of Satyam since the financial year 2000-2001.(Source-http://m.news.com.au/AustralianIT/fi452362.htm).

Data Analysis

As the fraudulent activity of Satyam came into focus the share price of the company took the way of volatility with a sharp fall. The Founder and chairman of Satyam Ramalinga Raju admitted on the 7Th of January 2009. The share price fall took place by 62% in a day. The company was charged with various bribery cases, inflated profit account, misappropriation in the balance sheet created by accounting division with fictitious acquisition of account. All these revealed shook the Corporate Governance pillar of the company. The inflated revenue of the company was Rs.2700crore (Rs.27bn) in the financial year of 2007-08 as opposed to the actual Figure of Rs.2112 crore, the profit was heightened as Rs.649 crore where as the true profit figure was Rs.61 Crore. The company was actually struggling to perform and except two people in the company even none of the board members were aware of the fact that was going on inside the company.(Source-http://www.indianexpress.com/fullcoverage/satyam-scam/187/).

THE ANALYSIS OF FORGED BALANCE SHEET OF SATYAM:

The balance sheet as on September 30, 2008

Inflated (non -existent) cash and bank balance was Rs 5361 Crore as against the real one which was Rs.5040 Crore.

Accrued interest of Rs .376 Crore (which is nonexistent).

A fictious liability of Rs.1230 crore.

Debtor position was over stated in books with Rs.2651 (where actual was Rs.490).

To maintain the operations, a net amount of Rs.1230 Crore was arranged to Satyam for two years before they decided to pledge all the promoter shares by raising funds from unknown sources by providing assurances of significant dividend payments, acquisitions, and capital expenditure to provide growth which did not work.

Satyams share price movement on fortnight basis

Graph- 1 Satyams share price movement in BSE on fortnight basis

Source- (self-made)

Satyams share price in BSE (Bombay Stock Exchange)

Date

Closing price of Satyam's share

Volume

03/11/2008

300.19

645790

18/11/2008

242.10

598041

03/12/2008

230.10

931543

18/12/2008

169.35

13522354

03/01/2009

177.55

15103899

18/01/2009

24.45

61545193

03/02/2009

53.75

36563817

18/02/2009

48.55

8950532

Table 01 (self- made)

Source-www.moneycontrol.com

Satyam's ADR movement in NYSE (New York Stock Exchange)

http://2.bp.blogspot.com/_74PuLZ2gzEU/SUqtSVngngI/AAAAAAAAAHI/HEH0azlwcQQ/s320/Satyam+share+chart.gif

http://money.blogdig.net/archives/articles/December2008/18/Satyam_Computers_and_Corporate_Governance_N_ere_The_Twain_Shall_Meet.html

The share price movement of Satyam in BSE can be viewed on the basis of the closing price of the share price on fortnight basis starting from 3/11/2008. Whereas the share price on 3/11/2008 was Rs.300.19 with a trading volume of 645790 and the trader in the market wanted to take the benefit by buying the falling share price in every 15 days with closing price at Rs.242.10, Rs. 230.10, Rs.169.35, and Rs.177.55 with the sharp slide to Rs.24.45 on 18/01/2009. As the scam came into light, the share trading volume came down abruptly with a continuous fall up to 18/02/2009.(Source-www.satyam.co.in).

Satyam 's ADR was also listed on the NYSE ,with the announcement of MAYTAS acquisition , Satyam faced the wrath and disbelief of the shareholders and the share price fluctuated in 5 days and on 18/12/2008 it had a sharp fall to with a sharp fall to $5 levels.(Source- http://www.ft.com/cms/s/0/d7f958b0-cb06-11de-97e0-00144feabdc0,dwp_uuid=c18d0adc-bf1b-11de-a696-00144feab49a.html).

Reasons for Satyam's failure

Satyam is well known for its creativity and innovation in corporate governance as it has received many honors and rewards. As discussed already the irregularities happened in Satyam shows that there is a mess in India's corporate system which needs to be reformed as soon as possible. In this situation it would be very difficult for the company like Satyam to survive if at all it needs to exist it should face strange and new challenges. There are chances like in this case that Satyam may be acquired by any other company and the problems may be solved by them which exists in the company. Due to this disaster the competitors of Satyam foresee the opportunity to grow more. Now we should see whether Satyam will stay as one of the top IT companies as it used to be before. The top IT companies were called SWITCH (Satyam, Wipro, Infosys, TCS, Cognizant, and HCL)

Corporate governance

Corporate governance deals with the responsibility and task of an organization's board of directors in controlling the company and the association with the stakeholders of the company and the shareholders groups (Pass 2004). The research on corporate governance have stressed on the role of executive versus the non executive members of the board (Pass 2004) and the role and revelation of the audit committee, the enforcement of observance and the role of auditors(Vinten 2002). Together with the accountability, integrity and efficiency forms good corporate governance. Excellent corporate governance studies have showed that practice traits plays an important part in upholding organizations by promoting transparency and integrity (Parker 2000). The research on corporate governance has revealed that major organizations failed due to the inefficient ways of carrying out the governance principles (Doost and Fishman 2004). The current studies on corporate governance shows that audit committee plays an important role and the disclosure level of the committee together with the audit committee are important entities for good corporate governance practices (Rezaee 2003).

Failure of corporate governance in Satyam

Satyam was awarded Golden Peacock award for best governance by world Council for Corporate governance in 2008. This scam has led to the questioning of the hard raised doubts about the class of corporate governance in India. The stake holders of India Inc have failed themselves. All the Directors of Satyam are responsible for ignoring the most commonly used and accepted foundation of good governance like Accountability, integrity and transparency; this has led to the Directors destroying the hard earned reputation of the company, their image in the corporate world and has bungled India's reputation in the world market. It mostly has ruined the life of thousands of shareholders who were the biggest losers as the shares of the company in the market dropped by 80%.

(Source:http://indiacorplaw.blogspot.com/2009/02/beyond-satyam-analyzing-corporate html)

In a $2 billion company like Satyam there cannot be accountability without transparency and transparency without integrity (in terms of decision making and decision making process, quality of information and principles).

The disaster of corporate governance has erupted in family held business in the recent past. About 1/3rd of the companies in India are run by members of the family. Forbes Global 2000 financial performance studies shows that 19 out of the 45 top companies in India are family run businesses. The studies also showed that the family run businesses had very high revenue and generated more profits compared to non family run businesses but there was a significant fall in the market value of securities in the financial year 2007. The research showed that family owned businesses faced more corporate governance problems. The present scenario shows that in spite of strong legislation and corporate governance the higher management breaches the set norms for the advantage of family members and also because of rivalry among the siblings. There is no efficiency in prosecuting the people who have violated the set norms.(Source- http://m.news.com.au/AustralianIT/fi452362.htm).

The case of Satyam shows that the minority stakeholders don't have an idea about the chairman's remark that the company had only 3 % margin in its profit and if this is right. Also the share holders don't have a clue about the size of the company regards to its revenues and assets. (Source:http://indiacorplaw.blogspot.com/2009/02/beyond-satyam-analyzing-corporate html)

Satyam should have revealed the information well in advance and not have waited for the full summary of the accounts. The minor stakeholders also don't have any power to express themselves in the stimulation of a strategic investor. In general the minor stake holders should also be given with all the information that is available to the bidders.

There are a few important elements of corporate governance like Auditing, Independent Directors, Regulators and Board of Directors. All these elements either did not function as they had to or have failed completely.

Satyam failure is not about bribery or total corruption which affects institutional investors planning but it is a more contained crisis a major failure of corporate governance within the company. Performance of a company stresses the Directors are to be held responsible to the Shareholders, equity investors, debt providers, customers and society.

Conflicts between the majority and the minority share holders that exist in a company

A report by CNN-IBN says that the minority shareholders of satyam were the ones who took the ultimate burn of the loss in the share prices. Not even one single independent director supported the requirement for appointing a new CEO. The independent directors are selected by the major shareholders to protect their own interests. This creates a conflict with the shareholders as the minor share holders will be reduced to mere spectators and they will not have any say in the proceedings of the company. The resignation of 2 directors of Satyam has further reduced the confidence of the shareholders in the company.

Requirements from the shareholders to resolve such situations

The duties of the shareholders of Satyam

Attend the meetings of the company regularly.

Monitor the value of the assets as well as the share price in the market.

Stand firm with the their decisions on the company's mergers and aquisition policy.

Keenly follow and analyse the diversification strategy of the company and make sure if it is justified and profitable to the company in the long run.

Requirement of the shareholders to be more active

It increases the transperancy in the company operations and the functions.

It helps in avoiding the short term approach of the shareholders which may hamper the progress of the company.

It ensures that the management is not acting to protect their own interests rather than that of the share holders.

Makes the management more responsible towards making the right decisions in the interest of everone involved.

Requirement of effective corporate governance policy

Corporate governance should have proper alignment with company's accountability of financial functions and proper directions of regulations to ensure principal agent relationship. The main theme of a company should be to enrich economic efficiency with maximization of shareholders wealth. Due to the lack of transparency in the company's structure, there are various scandals in the global system leading to the fiasco of the company and in the recent case Satyam has been the major one. It costs billion dollars with a heavy enforcement on millions of people or shareholders who added to company's wealth. At that point of time everybody favored an early warning system.

Being the fourth largest technological giant, Satyam has been once regarded as the forerunner in the innovative corporate governance. A fraud of $1.6 billion dollars on the part of the company led to a great resentment and skeptic to its auditor Price waterhouse coopers. This debacle has led to the question of existence of the company and a tainted company of such stature will not have a chance of acquisition by some other companies.

(Source-http://www.emeraldinsight.com/Insight/ViewContentServlet?contentType=Article&Filename=/published/emeraldfulltextarticle/pdf/4130010106.pdf).

The Satyam fiasco shows and proves that family run business are not in the grasp of corporate governance as the share holders and the senior management were unaware until a week before the take over of Maytas, an infrastructure development company owned by Raju's son. The Companies Act makes it manadatory for the shareholders to be made aware of all the functions in the company. It is the responsibility of SEBI ( Stock Exchange Board Of India) to make sure that the shareholders interests are protected in the future. The govt of india has appointed 4 directors for satyam to take charge of the company and to induce a system where there is more transperancy involved.

With this kind of scam looming the board of directors, managers and stake holders advocated an early warning system to gauge overall health and effectiveness of the management functions.

High earning expectation-This is the most dreadful parameter in the part of recent corporate houses which marked with massive irregularities and a mismatch between revenue earning in terms of what has been forecasted by analysts in prior. The stakeholder and auditor should be alert with the hyperbolic growth in the revenue.

Fraudulent accounting- Non synchronized cash flow account in terms of revenue and receivables with a balance sheet that is unscrupulous is a doubtful sign in the company's part. Strict vigilance in this area is required.

To consider reforms arising out of the Satyam governance failure and to protect the overall interest of the Shareholders the following can be recommended:-

There should be proper and well defined authority provided so that quick and effective actions can be taken.

Proper and effective training should be given to vigilance officers to detect frauds in the early stages itself.

The legal system should empower clause 49 with more powers in audit system concerning family run business and authority to punish fraudulent companies

Audit Process

The Appointment of auditors has to be shifted to independent audit committee and has to be free from controlling shareholders, so that the auditors do not owe any kind of loyalty to the controlling shareholders.

Auditors have to be changed or rotated as it does not give a chance for bonding between the controlling share holders and the auditors and it also prevents insiders from getting audit information.

Audit partners rotation for every 5 years should be done compulsory.

The audit firm should submit annual report to the auditing committee and also board of directors

Independent Directors

In a crisis situation where the company's operations has been affected it is difficult to blame the board for the failure specially in situations where the share holders receive false information, so in order to control the share holders situation, the appointment of independent Directors is necessary as they would have a sense of responsibility to the shareholders.

Investor activism

Investors need to actively participate in the decision making process involving the company ,most often this is not possible due to lack of coordination between various investors. Information with in the company has to be communicated specially to the shareholders. This would help in enhancing the corporate governance practices of the company.

(Source: http://www.blonnet.com/2008/12/29/stories/2008122950200800.htm).

Conclusion

The main objectives of the shareholders of Satyam are to maximize their returns for investing in the company. There has to be emphasis in increasing the level of existing transparency that exists in the organization, so that along with the shareholders everyone who is involved with the company have a clear picture of the existing scenario in Satyam. The failure in the corporate governance is solved by the government of India along with SEBI (Stock Exchange Board of India) by introducing new policies like appointing separate Board of Directors for the company and changing the audit policy of family run businesses. With the perspective of the shareholders, it is imperative that they come together and be more pro-active with their involvement in the functioning of the company and its policy on mergers, acquisitions and taking up new ventures. By doing this the shareholders make sure that their interests are upheld by the management. The shareholders should be more involved in the activities of the organizations, along with effective corporate governance strategies so that in the future such frauds are avoided.