FRAUDS IN AUDIT

PRATIK GUPTA: 12

ABHISHEK KANKAVLIKAR:

YADU NAIR: 36

NIKHIL NANDAGIRI: 37

VIKRAM SAINI:

NITHIN VARGHESE: 50

CLASS: T.Y.BBI

COLLEGE: VARTAK VIDYALAYA

SUBMITTED TO: BHAVANA CHAVAN

DATE: 8/20/2010

AUDITING

An examination and verification of company's financial and accounting records and supporting documents by a professional, such as a Certified Public Accountant.

An audit is an IRS examination of an individual or corporation’s tax return, to verify its accuracy. There are three types of audits: correspondence audits (the IRS mails a request for additional information), office audits (an interview is conducted at a local IRS office), and field audits (an interview is conducted at a taxpayer's place of business, for a corporate tax return). Since there is always the chance of an audit, experts recommend keeping good records to support all the information in a return. The reason detailed and accurate bookkeeping is so important is that the burden of proof is on the filer, not the IRS.

WHAT IS FRAUD AUDIT?

A fraud audit is a meticulous review of financial documents, while one searches for the point where the numbers and/or financial statements do not mesh. Fraud audits are done when fraud is suspected. Some companies do them as a precaution to prevent fraud from happening and to catch it before the offender takes too much money. There is more to a fraud audit.

Not an Investigation

Fraud auditing is used to identify fraudulent transactions, not to figure out how they were created. It is a common mistake that many people make---believing that audit and investigation are the same process. The auditor simply traces every transaction performed by the company, looking for the one that is fraudulent, if any. A regular auditor simply checks the numbers for accuracy.

Looking at All of the Records

Fraud auditors often go outside the ledger of accounts to find fraudulent transactions. This may include reviewing receipts, not only from the company, but from customers as well. Any inconsistencies in these numbers could help uncover an act of fraud. These auditors also interview employees, customers and sometimes clients to find out if a fraud has taken place.

Patterns

There are patterns to every fraud case--these help fraud auditors uncover illegal activity. Many criminals perpetrating a fraud will believe that he is too good to be caught or that the scheme is original. In fact, all fraud has the same indicators that aid the criminal in his crime and the auditor in his search for the same. These include lax management, history of unethical behavior, document tampering and disregard of procedure. These patterns are found wherever there is a fraud crime in progress. Some patterns are less obvious than others, but they are still present.

Types of Fraud

Fraud auditing is designed to look for six types of fraud, according to Business Network's "Recognizing Fraud Indicators." These are embezzling, bribes, stealing, extortion, "fictitious transactions," kickbacks and conflict of interest. Although not all fraud cases can be easily classified, they will always---at the very least---involve one of these categories. Fraud auditors are trained to look specifically for indicators to any of these fraud types.

Become a Fraud Auditor

To become a fraud auditor, you must obtain a bachelor's degree in accounting. Take some forensic accounting classes if available. Next, the accountant goes for a certified public accountant's license or to a special program designed to make him a certified forensic examiner. Depending on the state in which you live, there are specific work-hour and testing requirements to follow. See the resources section for more information.

Auditing Fraud – A SAI Indian Experience

In recent times the Comptroller and Auditor General of India audited a series of fraudulent drawls of public funds in a provincial government. These drawls amounting to Rs. 6500 million occurred during 1990-96 and related to the Animal Husbandry department of that government.

Audit investigations were prompted by the following:

Annual financial statements and appropriation accounts of several years showed that the Animal Husbandry department had made large scale excess drawls over and above their authorized budgets.

Unexplained and unjustified increase in purchases of cattle feed, fodder, medicines and veterinary equipment were noticed.

Preliminary examination of records provided evidence of subversion of internal control mechanisms.

Media reports.

Public interest litigations had been filed before the High Court of the province.

Police action had been initiated in some cases in early 1996.

The provincial government had shown vulnerability to fraud as it had been reluctant to ensure timely submission of initial accounts and had been lukewarm in its response to earlier reports of the CAG of India.

Though the fraud essentially involved drawl of money against bills based on fake invoices by officials of the Animal Husbandry Department connivance of officials of the Treasury and Finance departments were probable.

Audit Strategy

In view of the strong evidence of extensive subversion of internal controls and established procedures, reliance was placed on direct substantive testing. Nearly 9000 vouchers and 0.35 million sub-vouchers were compiled into a database. It was also decided to extensively document and report on the breakdown of internal controls and subversion of procedures relating to purchases, budgetary and expenditure control, and the drawl and disbursement of funds. The role of officials in departments, such as Finance, District Administration, Treasury, Vigilance and Sales Tax, who could have connived in the systematic fraudulent drawl of funds, was also to be examined.

Constraints

Large non- computerized volumes of data were to be audited.

Audit staff had limited previous experience of investigating fraudulent transactions

Audited offices were dispersed and located at considerable distances away from the audit office.

Since the fraud was also being investigated by a Federal Investigating agency key officials were not easily available for discussion as many were in custody. Further, a number of vital records had also been seized by the investigating agency and were therefore not easily available for audit examination.

A large number of audit teams were deployed and this raised coordination issues.

The possible connivance of the top political leadership in the fraud led to reluctance on the part of key officials in coming forward with information.

Threats existed to the personal safety of audit officials.

The ongoing criminal investigations placed a heavy demand on senior audit officials for information thereby affecting the pace of audit work.

There was pressure from the media to provide information on audit findings.

Audit Approach

The more significant of these are:

A database was created of purchase and payroll vouchers and sub- vouchers. This facilitated analysis and review of the fraudulent payments and provided insights into new aspects of the fraud.

The skills of the auditors were supplemented through close supervision and monitoring to cover the lack of adequate guidelines for auditing fraud.

To keep audit findings confidential the standard practice of issuing preliminary observations was dispensed with. The findings were ultimately issued to the highest ranking civil servants of the provincial government.

Audit teams were given limited assignments and their findings were collated by senior officers so as to maintain confidentiality of final audit conclusions.

Records were largely examined at the audit offices and the offices of the investigating agencies.

Audit Findings

Rupees 6,500 million were drawn over budget authorization in 6 years by the Animal Husbandry Department.

During 1993-96, Rupees 4,730 million was drawn by Animal Husbandry Department towards purchase of feed and fodder while approximately only Rupees 100 million was required as per approved scale.

Just 7 Drawing officers of this department, drew approximately Rupees 4,350 million in 3 years even though the total budget provision for the entire department was approximately Rupees 2,300 million .The bulk of the fraudulent payments , amounting to Rupees 4,010 million were made to only 36 suppliers in 6 districts.

System of centralized selection of vendors for purchase of feed and fodder was made non-functional. This facilitated issue of purchase orders on little known farms for supply of enormous amounts of feed/fodder, medicines etc.

Reputed manufacturers and suppliers of medicines were bypassed and established procedures for vendor selection were ignored. Hence medicines were ordered on little known local dealers.

While Rupees 1,510 million was paid for supply of medicines, hospitals and dispensaries reported receipt of negligible quantities of medicines. They also confirmed that no indents for medicines had been placed by them. The purchases were therefore fictitious. Numerous discrepancies were noticed in the supplier’s invoices and they appeared to be fake.

Payment authorization process by the departmental officers and the treasuries violated all prescribed checks and controls. Funds allotment figures, quoted in the bills, were unrealistically high. The treasury officers overlooked this and did not check whether allotments shown actually existed before admitting claims for payments. Several other violations in procedures pointed to the direct complicity of treasury officers in this fraud.

Finance Department failed to investigate continued excess of expenditures over budget allotments thereby eroding completely the expenditure control

mechanisms. This significantly contributed to the unfettered drawl of funds by the Animal Husbandry Department.

Finance Department overlooked exchequer problems caused due to heavy drawl of funds from the some of the treasuries. They did not question or investigate the reasonableness of such cash outgo, even though the Reserve Bank of India periodically kept the department posted regarding cash disbursement from treasuries.

The Budget Controlling Officer (Director) of the concerned department subverted crucial budgetary and expenditure controls. Instead he provided misleading budgetary forecasts. These were not critically examined in the Finance Department while framing budget estimates of the government.

Internal checks over payments were completely subverted within the Animal Husbandry Department. The bill drawing officers , entrusted with the task of exercising checks , were directly involved in presenting false claims on the basis of fake documents.

Several officials subsequently found to be involved in the fraud were continued in the same positions in violation of laid down policy regarding transfer of officials. Some of these officers were also retained in service beyond their dates of superannuation without following laid down procedures for vigilance clearance etc. and in one case despite court orders to the contrary.

The complicity of top political executives in blocking detailed investigation into the fraudulent drawls and in providing patronage to tainted officials was pointed out in audit and documented.

Cases of irregular and unauthorized appointment of large number of junior officials were also detected in course of audit examinations.

An examination of sales tax cases and income tax cases relating to the suppliers who had received fraudulent payments showed that action taken on

these by the concerned departments were inadequate and had allowed suppression of taxable sales turnover as well as taxable incomes.

Impact of the Audit

SAI demonstrated its capability to investigate and report on cases of corruption and fraud even if these involved high level political functionaries.

Speedy finalization of audit facilitated the ongoing investigation by the Investigating agencies and commencement of prosecutions against the key officials who were mentioned in the audit report.

Media coverage of the audit findings created public awareness about the need of improved accountability through the CAG's audit.

In the light of the audit findings the concerned department and the government could take corrective action for improving financial control.

Fraud awareness and methodology of audit of fraud related matters in the SAI was developed. This helped in audit of several other cases of fraud in other provincial governments.

Timely completion of this audit highlighted the importance and usefulness of application of information technology in investigative audit. In the countries where auditee records are not computerized, application of sophisticated analytical tools could be possible by creating computerized databases in the audit office, as was demonstrated in this case.

4 Steps To A Successful Fraud Risk Assessment:

STEP 1: EVALUATE THE ORGANIZATION'S FRAUD RISK FACTORS

Internal auditing should consider a variety of factors during this step. To identify which factors increase the risk for fraud within an organization, auditors should analyze industry and business operations, hold discussions with management, review previous frauds committed against or on behalf of the company, review company performance, and evaluate similar frauds that occurred at competitors' organizations. Internal auditing has the best opportunity to conduct this evaluation as its work involves analyses of many areas of the business operations, review of the internal controls structure, insight into company performance, and identification of pressures on performance. Its work should be without scope restrictions and include complete access to all records, personnel, and company locations. Internal auditing's ability to take maximum advantage of this knowledge will ensure the compilation of a thorough and complete list of risk factors impacting the organization.

STEP 2: IDENTIFY POSSIBLE FRAUD SCHEMES

The ability to identify specific schemes resulting from fraud risk factors depends on the auditor's knowledge of this area. Fraud specialists, including individuals with certified fraud examiner (CFE) and certified fraud deterrence (CFD) designations are ideal for this step of the process, as they possess specialized knowledge of fraud detection and investigation.

It is important to identify as many fraud schemes and scenarios as possible during step two. For example, auditors must understand that business operations conducted in countries known for corruption (fraud risk factor) will undoubtedly increase the risk for certain types of frauds such as bribery, kickbacks, and violations of the U.S. Foreign Corrupt Practices Act. Additionally, auditors should recognize that a decentralized procurement function increases the risk for a variety of procurement frauds, including fictitious vendors, overbilling schemes, and product substitution frauds. The auditor's evaluation should include a segregation of duties review with an emphasis on the potential for fraud and the evaluation of large human resources functions where the risk of "ghost" employees within the payroll system is prevalent.

STEP 3: PRIORITIZE IDENTIFIED FRAUD RISKS

Fraud is not just an ordinary risk, but also an inherent and significant one. Once the fraud schemes database is populated, management and internal auditing should identify the frauds that pose the greatest risk for the organization. The risk of a financial statement fraud associated with decentralized accounting processes, abnormal pressure to meet earnings expectations, and mediocre tone at the top is a higher priority than expense reporting fraud. The ability to prioritize these risks allows for better concentration of efforts to assess if the necessary controls are in place to reduce the highest risks. Auditors should consider the following factors when prioritizing fraud risks:

* Financial impact to the organization.

* Reputation risk of negative publicity associated with fraud.

* Loss of productivity.

* Potential criminal/civil actions taken against the organization.

* Loss of company assets.

STEP 4: EVALUATE MITIGATING CONTROLS

Internal auditing is well-positioned to review and counsel on the existence and operational effectiveness of internal controls. In step four, the auditor should evaluate the high-priority frauds and determine if the necessary controls are in place to reduce the risk of occurrence. This step takes time, as the auditor should attempt to identify more than one control for each fraud scheme. This step of the process normally begins with the determination of which controls serve to reduce the risk of the identified fraud scheme. Take for example the risk of bid rigging, which is reduced though segregation of duties in the bidding process, vendor reviews, and other pertinent controls. An analysis of the organization's controls database is a logical starting point in this instance.

The auditor must consider not only the existence of the control, but also the operational effectiveness of each control. For example, a company with a high risk of bribery and corruption may develop anti-corruption training for employees and review all expense reports looking for suspicious payments and fees. The auditor should review the training course contents and identify the methodology for delivering the course. He or she also determines if guidance for gifts and entertainment is present within the organization and has been communicated to company employees.

Fraud Prevention and Detection Audit Work Program

INTRODUCTION

This program can be used by internal auditors as an evaluation tool or converted into a questionnaire for use with management to better understand current prevention and detection program activities. This template can be customized into self-assessment style questionnaires as well. 

• To what extend has the entity implemented measures at the process level designed to prevent, deter and detect significant fraud risks?

Senior members of management who are able to override process-level controls based on authority levels are often involved in the largest frauds. These anti-fraud environments encourage all employees to report possible issues through a culture of “doing the right thing.”

Developments of a proactive process to detect, investigate, and resolve possible fraud schemes. These activities can be stimulated through fraud risk analysis and other indicators through the normal course of transaction processing.

OBJECTIVES

Evaluate the overall process for management’s fraud prevention and detection compliance program for Entity Level or Tone at the Top.

To determine effectiveness of compliance with corporate business conduct policies and ensure Sarbanes-Oxley Act compliance through detailed testing of Ethical Business Conduct forms.

Evaluate the Ethical Business Conduct forms at the Executive/Director level and for all other employees.

Evaluate management’s understanding of the existence of specific process/account controls, assessment of control effectiveness, and related supporting evidence.

ENRON AUDIT SCANDAL

The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron undoubtedly is the biggest audit failure.

Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that, through the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives were able to mislead Enron's board of directors and audit committee of high-risk accounting issues as well as pressure Andersen to ignore the issues.

Enron's stock price, which hit a high of US$90 per share in mid-2000, caused shareholders to lose nearly $11 billion when it plummeted to less than $1 by the end of November 2001. The U.S. Securities and Exchange Commission (SEC) began an investigation, and Dynegy offered to purchase the company at a fire sale price. When the deal fell through, Enron filed for bankruptcy on December 2, 2001 under of the United States Bankruptcy Code, and with assets of $63.4 billion, it was the largest corporate bankruptcy in U.S. history until WorldCom's 2002 bankruptcy.

Financial audit

Enron's auditor firm, Arthur Andersen, was accused of applying reckless standards in their audits because of a conflict of interest over the significant consulting fees generated by Enron. In 2000, Arthur Andersen earned $25 million in audit fees and $27 million in consulting fees (this amount accounted for roughly 27% of the audit fees of public clients for Arthur Andersen's Houston office). The auditors' methods were questioned as either being completed for conflicted incentives or a lack of expertise to adequately evaluate the financial complexities Enron employed.

Enron hired numerous Certified Public Accountants (CPA) as well as accountants who had worked on developing accounting rules with the Financial Accounting Standards Board (FASB). The accountants looked for new ways to save the company money, including capitalizing on loopholes found in the accounting industry's standards, Generally Accepted Accounting Principles (GAAP). One Enron accountant revealed "We tried to aggressively use the literature [GAAP] to our advantage. All the rules create all these opportunities. We got to where we did because we exploited that weakness."

Andersen's auditors were pressured by Enron's management to defer recognizing the charges from the special purpose entities as their credit risks became clear. Since the entities would never return a profit, accounting guidelines required that Enron should take a write-off, where the value of the entity was removed from the balance sheet at a loss. To pressure Andersen into meeting Enron's earnings expectations, Enron would occasionally allow accounting firms Ernst & Young or PricewaterhouseCoopers to complete accounting tasks to create the illusion of hiring a new firm to replace Andersen. Although Andersen was equipped with internal controls to protect against conflicted incentives of local partners, they failed to prevent conflict of interest. In one case, Andersen's Houston office, which performed the Enron audit, was able to overrule any critical reviews of Enron's accounting decisions by Andersen's Chicago partner. In addition, when news of SEC investigations of Enron were made public, Andersen attempted to cover up any negligence in its audit by shredding several tons of supporting documents and deleting nearly 30,000 e-mails and computer files.

Revelations concerning Andersen's overall performance led to the break-up of the firm, and to the following assessment by the Powers Committee (appointed by Enron's board to look into the firm's accounting in October 2001): "The evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enron's financial statements, or its obligation to bring to the attention of Enron's Board (or the Audit and Compliance Committee) concerns about Enron’s internal contracts over the related-party transactions".

Who were the culprits?

Arthur Andersen was charged with and found guilty of obstruction of justice for shredding the thousands of documents and deleting e-mails and company files that tied the firm to its audit of Enron. The conviction was later overturned by the U.S. Supreme Court due to the jury not being properly instructed on the charge against Andersen. Despite the reversal, Andersen had already lost the majority of its clients and had been barred from auditing public companies. Although only a small number of Arthur Andersen's employees were involved with the scandal, the firm was closed and resulted in the loss of 85,000 jobs.

Between December 2001 and April 2002, the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services held numerous hearings about the collapse of Enron and related accounting and investor protection issues. These hearings and the corporate scandals that followed Enron led to the passage of the Sarbanes-Oxley Act on July 30, 2002. The Act is nearly "a mirror image of Enron: the company's perceived corporate governance failings are matched virtually point for point in the principal provisions of the Act."

The main provisions of the Sarbanes-Oxley Act included the establishment of the Public Company Accounting Oversight Board to develop standards for the preparation of audit reports; the restriction of public accounting firms from providing any non-auditing services when auditing; provisions for the independence of audit committee members, executives being required to sign off on financial reports, and relinquishment of certain executives' bonuses in case of financial restatements; and expanded financial disclosure of firms' relationships with unconsolidated entities.

On February 13, 2002, due to the instances of corporate malfeasances and accounting violations, the SEC called for changes to the stock exchanges' regulations. In June 2002, the New York Stock Exchange announced a new governance proposal, which was approved by the SEC in November 2003. The main provisions of the final NYSE proposal are:

All firms must have a majority of independent directors. Independent directors must comply with an elaborate definition of

independent directors. The compensation committee, nominating committee, and audit

committee shall consist of independent directors.

All audit committee members should be financially literate. In addition, at least one member of the audit committee is required to have accounting or related financial management expertise.

In addition to its regular sessions, the board should hold additional sessions without management.

Causes of downfall

Enron's nontransparent financial statements did not clearly detail its operations and finances with shareholders and analysts. In addition, its complex business model stretched the limits of accounting, requiring that the company use accounting limitations to manage earnings and modify the balance sheet to portray a favorable depiction of its performance. According to McLean and Elkid in their book The Smartest Guys in the Room, "The Enron scandal grew out of a steady accumulation of habits and values and actions that began years before and finally spiraled out of control." From late 1997 until its collapse, the primary motivations for Enron’s accounting and financial transactions seem to have been to keep reported income and reported cash flow up, asset values inflated, and liabilities off the books.

The combination of these issues later led to the bankruptcy of the company, and the majority of them were perpetuated by the indirect knowledge or direct actions of Lay, Jeffrey Skilling, Andrew Fastow, and other executives. Lay served as the chairman of the company in its last few years, and approved of the actions of Skilling and Fastow although he did not always inquire about the details. Skilling, constantly focused on meeting Wall Street expectations, pushed for the use of mark-to-market accounting and pressured Enron executives to find new ways to hide its debt. Fastow and other executives, "...created off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people can understand them even now."

Scam at Satyam Computer Services

The scam at Satyam Computer Services, the fourth largest company in India’s much showcased and fiscally pampered information technology (IT) industry, has had an unusual trajectory. It began with a successful effort on the part of investors to thwart an attempt by the minority-shareholding promoters to use the firm’s cash reserves to buy out two companies owned by them — Maytas Properties and Maytas Infra.

That aborted attempt at expansion precipitated a collapse in the price of the company’s stock and a shocking confession of financial manipulation and fraud from its chairman, B. Ramalinga Raju.

What is ‘known’ as of now is that over an extended period of time, the promoters decided to inflate the revenue and profit figures of Satyam. In the event, the company has a huge hole in its balance sheet, consisting of non-existent assets and cash reserves that have been recorded and liabilities that are unrecorded. According to the ‘confessional’ statement of Mr. Raju, the balance sheet shortfall is more than Rs.7000 crore.

Why did a leading company in one of India’s most successful industries of recent years need to inflate profits? After all, the revenues of India’s IT industry have grown at a scorching compound annual rate of almost 30 per cent in the past eight years, driven by exports. This is remarkable, assuming that revenue and profit inflation have not excessively overstated performance. With cheap skilled labour having shored up profits that were lightly taxed when compared with the norm, net profits must have been substantial and rising too. Why then did the fourth largest IT Company choose to take the criminal route of falsifying accounts and indulging in fraud?

One possible cause could be the desire to drive up stock values. The benefits derived by promoters from high stock values are obvious, allowing them to buy into real wealth outside the company and giving them the ‘invasion money’ to acquire large stakes in other firms. This tendency was epitomized by the benefits derived by America Online when it merged with Time Warner. Although the latter had more assets, revenues, and customers, AOL’s higher market capitalization led

to that company and its chairman, Steve Case, getting more out of the deal than did long-time giant Time Warner.

There is some suspicion that Mr. Raju and his family may have sought similar benefits. The family chose to build its shareholding in Satyam Computer Services and shed it when required. For example, in year 2000 Satyam Computer merged with a related company, Satyam Enterprises. Raju’s cousin, C. Srinivasa Raju, who held 800,000shares, or 19 per cent, in Satyam Enterprises, was reportedly allotted an equivalent number in Satyam Computer, leading to criticism that relative prices did not justify the 1:1 swap.

But the original promoter’s share held by the Raju family and their subsequent acquisitions were not for keeping. Though the precise numbers quoted vary, according to observers the stake of the promoters fell sharply after 2001 when they held 25.60 per cent of equity in the company. This fell to 22.26 per cent by the end of March, 2002, 20.74 per cent in 2003, 17.35 per cent in 2004, 15.67 per cent in 2005, 14.02 per cent in 2006, 8.79 in 2007, 8.65 at the end of September 2008, and 5.13 per cent in January 2009 (Business Line, January 3, 2009). The most recent decline is attributed to the decision of lenders from whom the family had borrowed to sell the shares that were pledged with them. But the earlier declines must have been the result either of sale of shares by promoters or of sale of new shares to investors.

According to audited balance sheet figures (if they are to be trusted) available from the CMIE’s database, the paid-up equity in Satyam Computer Services rose from Rs. 56.24 crore in March 2000 to just Rs. 64.89 crore by March 2006 and further to Rs. 133.44 crore in March 2007. Overall, the number of shares held by the promoter group fell from 7.16 crore (22.8 per cent) to 5.8 crore (8.6 per cent) between September 2001 and September 2008.

This point to a conscious decision by the promoters to sell shares, which may have been used to acquire assets elsewhere. The more inflated the share values, the more of such assets could be acquired. It is quite possible that the assets built up by the eight other Raju family companies under scrutiny, including Maytas Properties and Maytas Infra, partly came from the resources generated through these sales. If true, this makes Raju’s confession suspect, since he stated that “neither myself, nor the Managing Director (including our spouses) sold any shares

in the last eight years — excepting for a small proportion declared and sold for philanthropic purposes.”

This may not have been the only way in which resources were transferred out of Satyam Computer Services into other arms of the expanding Raju family empire. Money could have been siphoned out through opaque transactions with beneficiaries who were paid sums not warranted by their business profile. Satyam’s business strategy did involve unusual transactions. One example was the acquisition in 1999 by group company Satyam Infoway, which was the largest private Internet Services Provider in the country at that time, of India World Communications, for a sum of $115 million. The acquired company operated popular portals such as samachar.com and khel.com that had no clear revenue model, and was the principal beneficiary just as in the AOL deal.

According to reports, the owner of India World was himself charged with intellectual property violations by his erstwhile employer IndiaWorld.com, an Internet services company managed by U.S.-based ASAP Solutions Inc. Satyam Infoway’s position was that it was aware of the claim being made by ASAP Solutions, but that its interest was not in IndiaWorld.com but was “limited to the URL indiaworld.co.in and the other portals under its banner,” for which it had of course paid a huge sum. There is reason to suspect that this acquisition delivered little to the company, rising questions about the motivation.

Mr. Raju’s confession is also suspect for another reason, which has been widely discussed in the media. Even if he and his colleagues were inflating revenues and profits, the actual revenue earning capacity of the company, as confessed by him, seems to be extremely low. He claims that the huge difference between actual and reported profits in the second quarter of 2008-09 was because the ratio of operating margins to revenues was just 3 per cent rather than the reported 24 per cent. But even if Satyam Computer Services was cooking its books, it was engaged in activities similar to that undertaken by other similarly placed IT or ITeS companies and it too had a fair share of Fortune 500 companies on its client list. It is known that many of these companies have been showing operating margins that are closer to the 24 per cent reported by Satyam than the 3 per cent revealed in Mr. Raju’s confession. Thus in financial year ending March 2008, the ratio of profits before tax of Infosys was 32.3 per cent of its total income, that of TCS 23.1 per cent, of Satyam 27.8 per cent, and that of Wipro 19.2 per cent.

This suggests that either Mr. Raju is exaggerating the hole in his balance sheet or there is some other, more complex, and more disturbing explanation. But whatever it is, the difference between 24 per cent and 3 per cent seems too large to be the industry standard.

Despite indicators of these kinds, which could raise suspicion, Satyam Computer Services remained a leading player with substantial investor support for many years. The promoters continued to hold control over the company despite the small share in equity they held and built an empire with land assets and contracts for executing prestigious infrastructural projects. And despite its award-winning reputation for corporate governance, its impeccable board with high-profile independent directors, and its appointment of big-four member PwC as its auditor, this still mysterious accounting fraud occurred. The full truth, it appears, is not yet out.

FAILED

• The promoters decided to inflate

• Revenue and profit figures of Satyam.

• In the event, the company had a huge hole in its balance sheet, consisting of non-existent assets and cash reserves that have been recorded and liabilities that are unrecorded

• Company announced Acquisition of 51% stake in Maytas Infra and 100% stake in Maytas Properties on 16th Dec 2008 but were unsuccessful.

• The deal was not profitable for investors

• Investors dumped Satyam’s stock and threatened action against the management.

• Satyam Computer ADRs took a huge beating.

• This was mainly done to hide the irregularities in the accounts of Satyam

• It is also said the close association with the political leaders is one of the reasons.

What went wrong?

Simple manipulation of revenues and earnings to show superior performance. Raising fictitious bills for services that were never rendered. To increase the Cash & bank balance correspondingly. Operating profits were artificially boosted from the actual Rs 61 crore to Rs 649 crore. Its financial statements for years were totally false, cooked up and... Never had Rs 5064 crores (US$ 1.05 Billion) shown as cash for several years. Its liability was understated by $ 1.23 Billions. The Debtors were overstated by 400 millions plus. The interest accrued and receivable by 376 Millions never existed.

5312.62

ACTUAL CASH IN

BANK WAS

321INFLATED

5040cr

2651.6

ACTUAL DEBT WAS 2161OVERSTATED 490 Cr

CURRENT ASSESTS

376

NO ACCRUE

D INTERES

T 376 Cr

UNDERSTATED

LIABILITY 1230 Cr

which was arranged by

Mr.Raju5040+376+1230+

490= 7136

LIABILITIES

ARTIFICIALLY ADDED 588OPERATING

PROFIT ADDED 588

INCREASING THE CASH

RESERVE ONLY FOR Q2 ALONE

TO 588

Government to Provide Help to CBI in Satyam Scam Case

The Andhra Pradesh government on Wednesday promised to render all possible assistance to the Central Bureau of Investigation (CBI) in probing the massive fraud in Satyam Computer Services after the High Court expressed its displeasure over the lack of cooperation with the investigating team.

On a direction from the court, the government filed a report within two and half hours, detailing the steps it would take to extend cooperation with the multi-disciplinary team of the CBI.

After being rapped by the judge for not cooperating with the CBI team, the government informed the court that it would provide the state-owned Dilkusha Guest House on Raj Bhavan road to the investigating officials.

It also promised to provide all necessary cooperation to the agency to complete the probe.

Earlier, in an extraordinary move the CBI approached the High Court, complaining that the government was not extending cooperation in the investigations.

Taking a serious note of the government’s attitude, Justice N.V. Ramana directed the state government to file its reply within two and half hours.

The CBI plea and the court’s displeasure have come as major embarrassment to the Congress government, which was already under fire from the opposition for being soft towards the disgraced founder and former chairman of Satyam B. Ramalinga Raju and other accused.

The government came under criticism for the delay in recommending to the central government to order a CBI probe. Opposition parties alleged that the probe by the Crime Investigation Department (CID) of the state police was aimed at shielding the accused.

The CBI last week took over the investigations into the Rs.70 billion accounting fraud, the biggest in India’s corporate history.

The premier investigating agency formed a multi-disciplinary team to probe the fraud, which Ramalinga Raju admitted to Jan 7.

The 23-member team comprising officials from CBI, Income-Tax Department, Registrar of Companies, Securities and Exchange Board of India (SEBI), Serious Fraud Investigation Office (SFIO), representatives of Institute of Chartered Accountants of India and Institute of Cost and Works Accountants of India and legal experts landed here Friday.

Though CID handed over all the evidence and material gathered so far to the CBI team, the latter felt the state authorities were not providing necessary facilities.

Since CBI has only a small office here, the team was facing an accommodation problem and also had trouble storing and protecting 200 trunk loads of documents handed over by the CID. These documents were seized from the offices of Satyam and the residence of Ramalinga Raju and other accused.

Ramalinga Raju, his brother and former managing director B. Rama Raju, former chief financial officer Vadlamani Srinivas and two former auditors from Price Waterhouse have been arrested and are lodged in Chanchalguda central jail here.

Satyam’s Market Price Can Not Be Used For Valuation Of SATYAM AUDIT

Industrialist B K Modi, whose Modi group is interested in acquiring Satyam Computer, said on Saturday that the stock market valuation could not be the basis for putting a reserve price for the sale of troubled IT firm.

Asserting that only action could determine the sale price for Satyam, Modi said that stock market price could not be considered a benchmark in this case, as the market was not fully aware about the firm’s actual assets and liabilities.

“The auction will determine the price… Why you require a reserve price … reserve price will only create controversy,” Modi told a news channel.

Besides Modi group, domestic engineering major L&T and Hinduja group are also interested in acquiring Satyam. A board member of L&T, which has already purchased about 12 per cent stake in Satyam from open market, yesterday said that the company was waiting for Satyam board’s decision on pricing mechanism to consider its next step.

Earlier this month, the Company Law Board allowed Satyam’s government-appointed board to go-ahead with a public auction plan to bring in new owners for the company. “What is the indicative figure…books are not there. It cannot be the market, because market is not even aware what are the assets and liabilities of the company,” Modi said.

“Even the board is not aware (about the assets and liabilities), so the market is working on the available information. So, I don’t think there could be any basis of reserve price,” Modi added.

“You can’t take market price for reserve price because market is not self aware of all these liabilities,” he asserted.

The government had superseded Satyam’s board last month after its founder and former Chairman B Ramalinga Raju admitted financial wrongdoings at the company for several past years, which entailed overstatement of cash position and profits and under-statement of liabilities.

Investigations are currently on in the Rs 7,800-crore fraud at Satyam and the new board has mandated global auditing majors KPMG and Deloitte to restate its accounts.

The company’s auditors Price Waterhouse had said that its auditing of the Satyam books should not be considered reliable as they were based on statements provided by the management.

'Impact of Satyam Scam on Indian Economy'

Satyam Likely To Exist Post Scam : Gartner Study

Although several companies are trying to have a bite into Satyam Computers, according to Gartner study, the company is likely to exist in its current form.

It is expected to discontinue some of its businesses, service lines or cease to exist in certain geographies by 2010. The study indicated that even the name

Satyam may not be around by that time, as the company is expected to undergo a complete change, in ownership and organizationally.

Satyam’s ability to sign on new clients during 2009 has significantly diminished, says the study. ‘‘In addition, it will be challenged to invest in client engagements, staff developments or R&D, all critical elements for IT services,’’ said Gartner’s V-P for research, Frances Karamouzis.

Post Satyam Scam, Indian Students Shun IT Companies

The Satyam effect has starting spreading its tentacles, and has proved to have a negative impact on the Engineering students. IT (Information Technology) which used to be the Mecca of all jobs is now the outcaste. Students are preferring to take jobs in their core branches rather than move to the dwindling IT sector.

“I was offered a job as trainee employee at Satyam last year. But after the fiasco has happened at Satyam, I have changed my mind to get suitable job in other firm,” said Divyadeep Goyal, a student Mechanical Engineering student of University Institute of Engineering and Technology (UEIT), who was offered an annual package of Rs 3.25 lakh in Satyam.

Echoing similar views, Sumant, another final-year student of the same college, said, “The impact of Satyam fraud has been so damaging that we now do not have any intention to join the IT company. Rather we will look for job in other sectors.”

The total number of engineering students placed by Satyam from this region was not available but some colleges have shared their placement figures.

Almost 80 students from the Institute of Engineering and Technology were selected by Satyam last year, while 13 students were placed from Punjab Engineering College (PEC) and seven were from UIET.

Students were offered an annual package between Rs 3 lakh and 3.5 lakh.

According to placement officers of various colleges, engineering students are now looking at the core sector, comprising manufacturing and telecom sectors.

The Satyam Scam Has Dented India Inc.’s Image Abroad : Govt

Huge losses to investors aside, the Satyam scandal has caused “serious damage” to India Inc’s reputation as well as the country’s regulatory authorities outside, the government has said.

Seeking to dismantle the existing board and to nominate ten new directors at the beleaguered IT firm, the Centre has said in its petition before the Company Law Board that the “interests of the company will not be safe in the hands of the present board of directors.”

“The admission of fraudulent manipulation of the financial affairs has created an adverse impression in the minds of the trade, business and industry across the world.”

“This has also resulted in serious damage to the reputation of Indian Corporate sector and the regulatory mechanism in the eyes of the world,” the government said.

It also asked the new board to submit periodical reports to the Centre and the CLB on the company’s state of affairs.

Indian Firms Reviewing Fraud Control Mechanism

In the face of the Satyam scam and its deadly repercussions, Indian firms are looking into methods to avoid scenarios of such scams within their companies.

Indian companies have started to review and document their risk management policies and practices to check corporate fraud in the wake of the Rs.70 bn Satyam Computer Services scam, a survey by an industry lobby says.

A quick analysis by the Associated Chambers of Commerce and Industry of India (Assocham) with feedback of over 400 leading corporate, said that to deter possible corporate frauds, companies have commenced re-codifying their risk management policies.

However, about 85 percent of the respondents said although Clause 49 of the market regulator’s Listing Agreement clearly states that the management and the board of directors must accept responsibility for not issuing accurate financial statements, most officials at this level managed to get off the hook even if found guilty.

On the other hand, about 80 percent of respondents argued that putting these programmes and controls in place will help organizations to set the tone of zero-tolerance to fraud and create a mechanism for employees to report wrongdoing to the appropriate authorities.

'Satyam Auditing Firms Lapses'

KPMG, Deloitte Statutory Auditors For Satyam

Post the goof up by PwC in failing to identify the cooking up of Satyam’s books, during their audits, new audit firms have been assigned for carrying out the audit of Satyam Computer Services.

Deloitte Haskins & Sells and KPMG, both part of the Big Four accounting firms, have been appointed as joint statutory auditors for Satyam Computer Services.

The newly-constituted three member board of Satyam had earlier said that it would appoint new joint auditors to audit the accounts of Satyam, following the software company’s former chairman B Ramalinga Raju’s admission of having forged the books over the past seven years.

When contacted, both Deloitte and KPMG declined to comment on the issue. Sources in the Institute of Chartered Accountants of India, the apex body for accountants in the country, had earlier said that the new board had wanted to appoint firms from the Big Four - Price Waterhouse; the earlier auditor of Satyam is also part of the Big Four - as the new auditor. Ernst & Young is the other firm in the four member premier league of global accounting firms.

PwC Did Not Find Any Fraud In Satyam’s Account

Though  it is very clear that Ramalinga Raju had managed to cook the books of Satyam to a figure of Rs. 7,800 crores, the fact remains that the top auditing firm PriceWaterhouse saw no fraud in the IT company’s accounts during 2007-08. The Chartered accountants body, ICAI on Saturday issued showcause notice to auditor Price Waterhouse on its role in vetting Satyam’s accounts.

The ICAI President, Mr. Ved Jain on Saturday said the showcause notice has been issued and Price Waterhouse has been asked to reply within 21 days. Price Waterhouse has maintained that it followed applicable audit standards and went audit evidence provide d by the company.

Ernst And Young Valued Maytas, PwC Approved Accounts

Ernst and Young (E&Y) did the valuation of Maytas Properties and a Delhi law firm Luthra and Luthra the title diligence of the real estate company’s assets, records of the controversial Board meeting at which Satyam Computer Services was allowed to buy two firms linked to its disgraced promoter B Ramalinga Raju show.

E&Y, which is also the internal auditor for Satyam, has all along denied doing any work for Satyam related to the failed acquisitions and its representative has said it had “no connection of any kind with the transaction”.

The Satyam board, at its meeting on December 16, approved buying 100% of privately-held Maytas Properties for up to Rs 6,410 crore and Maytas Infra, a listed infrastructure company, for about Rs 1,500 crore.

The minutes of the meeting show that V Srinivas, the CFO of Satyam, informed the board that E&Y valued Maytas Properties at Rs 6,523 crore.

Satyam’s statutory auditor PricewaterhouseCoopers is already under pressure to explain its role after Mr. Raju confessed on Wednesday to falsifying accounts to the tune of Rs 7,000 crore. The key members of PwC’s audit team with Satyam included S Gopalakrishnan, Srinivas Talluri, Ravindranath and R Srinivasa Sankar.

'Satyam Scam Legal Actions'

Serious Fraud Team to Probe Into Satyam Scam

Ramalinga Raju’s Satyam scam has had many business analysts and experts stunned as it involved hiding of funds in excess of Rs. 7000 crores from the entire Board and also from the auditing bodies. The Serious Fraud Investigating Team will now join CID to help unravel the Satyam Fraud.

The Serious Fraud Investigating Office (SFIO) has also started probing into the role of independent directors, managers and officers of the company in the Satyam scam.

The Ministry of Corporate Affairs has given instructions to the SFIO to probe the involvement and role of the independent directors, managers and officers of the company in the alleged misrepresentation, falsification and manipulation of information in the financial statements.

“The order said it is has be probed whether the conduct of the affairs of the company by such directors and officers of the company was in an improper or fraudulent manner,” an official said.

The ministry of corporate affairs ordered the probe by Serious Fraud Investigating Office on January 13 into the scam.

The six-member team headed by K V S Singh, additional director of SFIO and five assistant directors has already begun their probe.

Raju Avoiding SEBI Probe Over Satyam Scam

Ramalinga Raju the main accused over the multi crore Satyam scam is trying to avoid SEBI’s probe in the case. “We issued an order at 8.30 pm and he surrendered at 9 pm. So obviously he knew it would be difficult if he came in front of us and if he was questioned by SEBI,” said Pradyumna K Reddy, advocate for SEBI.

So if SEBI lawyers are to be believed, was there a planned strategy to escape interrogation? Sources say that Raju used his political connections to ensure that he

is arrested before SEBI could interrogate him. And then despite having a provision of seeking bail once in judicial custody, his lawyers did not apply for bail.

Satyam’s Raju Ramalinga Life In Jail

Life for the founder of Satyam Computer Services has taken a huge turnabout. From a business tycoon used to sleeping in luxurious beds and driving around in a Mercedes, B Ramalinga Raju, the disgraced chief of Satyam Computer Services, has now turned into someone who will sleep on a coarse thick mattress and share a cell that includes a common Indian toilet-with about 40 under trials wanted for murder, rape, chain snatching, pocket picking and selling illicit liquor.

According to Chanchalguda jail officials, B Ramalinga Raju and his brother Rama Raju were brought to the prison at 8 pm and, after finishing the formalities, were ushered into the admission barrack, with 40 other days under trials. The brothers were frisked at the reception and a metal detector was also run on them.

As part of the jail procedures, all valuables like jewellery, cash and prohibitive items like cell phone and knives belonging to the under trials were taken away from them and kept in a locker. Ramalinga Raju and his brother have also deposited Rs 5,000 cash, which they had on them, with the jail officials. After that, the duo was led to the jail enclosure and put in the admission barrack, where all the days under trials were kept.

On Sunday morning, a duty doctor will examine all new under trials and give a health status report. Based on the medical report, the jail officials will segregate the prisoners and assign them to individual barracks or cells.

CFO Of Satyam Customers Arrested

Close on the heels of CEO and founder of Satyam Computer Services, Ramalinga Raju in regards with the Satyam scam came out followed by his arrest yesterday. News has come out that the Satyam CFO, Vadlamani too has been arrested.

The CFO of the tainted company Satyam Computers was facing severe criticism for him being caught unawares regarding the accounting fraud in Satyam. How could a CFO of a company be unaware of a fraud of such magnitude was the pertinent question.

The Chief Financial Officer of India’s Satyam Computer Services was arrested, Hyderabad police said on Saturday, as authorities seek to unravel India’s biggest corporate scandal

CEO OF SATYAM ARRESTED

'Latest News on Ramalinga Raju'

Raju Made Rs. 1230 cr By Pledging Satyam Shares

While Ramalinga Raju maintains that he did not have any ulterior motive in inflating the profits of Satyam, reliable sources reveal that Ramalinga Raju infact did pocket up money upto Rs. 1230 crores by selling Satyam shares which are now worth Rs. 66 crores only.

As the enormity of the fraud is surfacing, with the government, regulators and state authorities tightening their noose on Raju and the firm, information available with stock authorities reveal that all the promoter shares held through SRSR Holding were pledged for Rs 1,230 crore.

As per the statutory regulatory filings, the process of pledging started way back in September 2006, when promoter entity SRSR Holding held over 2.78 crore shares, comprising a 8.51 per cent of total equity.

As on September-end, 2006, these shares were worth Rs 2,275 crore at a price of Rs 818 a share. However, at the current price of Rs 23.85, the equity pledged with institutions is worth just about Rs 66 crore.

These shares were worth about Rs 500 crore a day before Raju made the disclosure about cooking of accounts and financial fraud, with scrip ruling low at Rs 179 a share on January 6. From the very next day, stock started plunging and touched an intra-day low of Rs 6.30 a share on Friday.

In his disclosure, Raju had said that “in the last two years, a net amount of Rs 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoters shares…”