Weak corporate governance, creative accounting and compromised independence of statutory auditors are the three most unholy trinity for dilution of ethical practice and public trust of the corporate world.
The corporate scandal of Satyam Computer Services Limited is a classic business case where confluence all three phenomenon, weak corporate governance, creative accounting, and compromised independence of statutory auditors, can be found.
In 1992 Satyam Computer Services Limited was listed on the Bombay and Hyderabad stock exchange and in 2001, the company was listed on the New York Stock Exchange. Over the years the company projected a phenomenal growth and operated in 66 countries. Its high-profile clients include General Electric, Qantas, Nestle´ and British Petroleum. Satyam and its chairman Ramalinga Raju received awards for excellence in corporate governance, professional conduct and for the company’s corporate social responsibility.
As the business grew, the company also claimed the growth of its employees upto 53,000 and out of this inflated figure 13000 were ghost employee. These ghost employees’ salaries were used as legal deductable expenses to siphon out company’s profit. This deception was maintained more than a period of 10 years because of weak corporate governance, compromised professional conduct of auditors, and due to creative accounting.
Read the follow suggested articles to understand the ethical issue relating to weak corporate governance, creating accounting and compromised independence of statutory auditors.
Abed, Ibtihal A., Nazimah Hussin, Mostafa A. Ali, Hossam Haddad, Maha Shehadeh, and Elina F. Hasan. 2022. Creative Accounting Determinants and Financial Reporting
Literature Review. Risks 10: 76. https://doi.org/10.3390/ risks10040076
Ardelean, Alexandra 2013, Auditors’ Ethics and their Impact on Public Trust,Procedia – Social and Behavioral Sciences, Volume 92, pp. 55-60,
https://doi.org/10.1016/j.sbspro.2013.08.637.
Rishi, M., & Singh, A. (2011). CORPORATE GOVERNANCE AND INTERNATIONAL BEST PRACTICES: THE CASE OF SATYAM. Journal of Services Research, 11(1), 121-142. Retrieved from https://ezproxy.cqu.edu.au/login?url=https://www.proquest.com/scholarly-journals/corporate-governance-international-best-practices/docview/878630152/se-2
Bhasin, M.L. (2016) Creative Accounting Scam at Satyam Computer Limited: How the Fraud Story Unfolded? Open Journal of Accounting, 5, 57- 81.
http://dx.doi.org/10.4236/ojacct.2016.54007
Saha, S. S., & Roy, M. N. (2015). Statutory Auditors’ Independence in the Backdrop of Corporate Corruption: Select Case Studies. Indian Journal of Corporate Governance, 8(1),84–102. https://doi.org/10.1177/0974686215574433
You must submit an individually written report about ethical behaviour and ethical decision- making in the following format:
1. Title Page
2. Executive Summary (indicative only- 10% of the word limit)
3. Introduction (indicative only - 5% of the words limit)
4. Report of a maximum of 2,000 words, consisting of Parts A, B , C , D and E (as shown above). Use headings to clearly indicate which part is being answered. Provide in text reference.
5. Recommendation & Conclusion (indicative only 500 words)
6. References
The accounting statements serve as the foundation for determining the financial health of the Organizations. The reliability, transparency, and authenticity of the financial statements positively reflect the ethical integrity of the company which helps in attracting various investors to the Company. On the contrary, poor quality of the financial statements harms the brand image of the Organizations and causes hindrances in the flourishment and prosperity of the Organizations. Corporate Governance strategies are pivotal to the success of Organizations and help in averting future risks that would otherwise harm the reputation and progress of the Organizations adversely which is evident from the Satyam scandal case. Adherence to the code of ethics in accounting helps in maintaining reliability, transparency, and fairness in the financial statements which would preserve the trust of the investors. The study has revealed the different ways in which the ethical integrity of the financial statements was harmed had triggered one of the biggest financial scandals in India. Furthermore, the study has highlighted the role of creative accounting that was adopted by the Organizations to maneuver the financial statement to acquire the trust and faith of the investors.
The case of Satyam Services revealed that the financial statements were manipulated and the acquisition of Maytas Infrastructure was initiated by the higher executives of the Company to bridge the existing gaps in the financial statements and cover the manipulation. The study has also emphasized the impact of compromising the independence of the statutory auditors that negatively influence the authenticity and reliability of the audit reports to justify the monetary health of the Organizations which triggers future risks. Furthermore, different recommendations have been provided to enhance the overall quality of corporate governance, detect creative accounting, and preserve the trust of the public in the statutory auditors.
The study aims to highlight the concept of corporate governance, creative accounting, and the role of the independence of statutory auditors. The study has revealed the different ethical issues budding due to weak corporate governance strategies in the Organizations, the prevalence of creative accounting, and the independence of the statutory auditors in the Organizations. Satyam Computer Services Limited was one of the most renowned Companies in India and had also received numerous awards for performing exceptionally well also the Company was the first to implement International reporting Standards into the accounting system. The study has focused on the role of weak corporate governance, the devastating impact of creative accounting, and the independence of the statutory auditors that had led to the corporate scandal of Satyam Computer Services Limited. Furthermore, the study has also emphasized how the different ethical principles were violated by the Organization. Moreover, different recommendations have been provided in the study to probe creative accounting and improve the functioning and conduct of the statutory auditors which would help in restoring the trust and faith of the public
a. The Concept of Corporate Governance
The case study of the scam of Satyam Computers serves as an eye-opener for all the Organizations of the present era to adopt suitable corporate governance initiatives to prevent the possibility of risks and frauds in the future. Satyam Computers was one the leading Organizations in India and had also won several awards but due to the misrepresentation in the financial statements, the reputation of the Company was damaged adversely. According to Rishi & Singh (2011), Organizations in the present era must prioritize the different interests and the needs of the investors by implementing suitable corporate governance strategies. Furthermore, the corporate governance strategies adopted by the Organizations would help in monitoring and modifying the different Organizational processes and strategies that would help in mitigating the possibility of future risks that are harmful to progress and growth.
Corporate Governance encompasses different rules, regulations, and principles to align the functioning of the Organizations with the various needs and requirements of the stakeholders (both internal and external stakeholders). The Corporate Governance policies and regulations are effectuated by the higher management team of the Organizations. Furthermore, good Corporate Governance strategies implemented by the Organizations help in positively reflecting the responsibility of the Organizations toward the stakeholders (Naciti, Cesaroni & Pulejo, 2022). The Corporate Governance policies are also aimed at preserving transparency and fairness in the different operations and initiatives that are undertaken by the Organization. Moreover, Organizations that are committed to Corporate Governance are also able to reduce the susceptibility to future risks that harm the brand image and reputation adversely.
b. Creative Accounting
Creative accounting is the strategy of deriving benefits from the existing gaps in the accounting laws, regulations, and standards to maneuver the financial record of an Organization. The application of creative accounting makes the financial records of an Organization appear fair, transparent, and compliant with the different legal regulations and policies. Furthermore, creative accounting makes the financial statements of an Organization appear as steady through maneuvering, but in reality, the monetary health of the Organization is poor (Bhasin, 2016).
c. Independence of Statutory Auditors
Saha & Roy (2015) have highlighted the role of the independence of the statutory auditors which play an active role in triggering huge monetary scandals in Organizations. The study has emphasized the role of the statutory auditors in the monetary scandals that occurred in India, the U.S.A, and the U.K.
Considering the case of the monetary scandal in Satyam Computer Services, no safeguards were present, and the external evaluation of the auditing operations performed by the statutory auditors was not done properly. Furthermore, no standard framework was available to the statutory auditors who had done the auditing operations in Satyam Computer Services which had raised the independence of the auditors. Henceforth, the existing loopholes in the auditing process played an active role in the occurrence of the monetary scandal in Satyam Computer Services in India (Roy & Saha, 2016).
a. Ethical issues arising from poor Corporate Governance
According to the research study of Benson & Ganda, 2022,), a poor corporate governance system harms the overall Organizational performance which worsens the sustainability of the Organizations in the long run and worsens the relationship with the stakeholders. Furthermore, the Organizations have to disclose the reports of corporate governance and business sustainability annually, weak corporate governance policies cause a decline in the Company's performance which reflects in the financial records and sustainability reports. Henceforth, the decline in Organizational performance negatively influences the relationship with the investors and the stakeholders due to the lack of accountability and commitment of the Organizations. The Organizations also adopt various corruptive practices to maneuver the performance of the Organization which triggers corruption, and fraud, and also negatively reflects fairness and transparency in the overall Organizational functioning.
b. Ethical Issues Arising from Creative Accounting
Creative accounting makes the financial statements of an Organization appear transparent and fair despite the poor financial condition of a given Organization in reality through maneuvering. Creative accounting makes the financial statements of an Organization appear in compliance with the different legal regulations and policies but the financial statements in reality are in contravention of the different ethical standards and laws of accounting. Furthermore, creative accounting violates different accounting ethics and also increases the susceptibility of the Organizations to fraud which destroys the reputation and credibility of the Organizations adversely.
Creative accounting also violates the different ethical principles in the field of accounting which results in the misrepresentation of the financial statements of an Organization. Firstly, when the accounting statements are maneuvered, the integrity of the financial statements is harmed which negatively impacts the relationship with the stakeholders. Secondly, creative accounting causes bias in the financial statements which harms the overall objectivity of the financial statements. Thirdly, creative accounting derives the benefits from the loopholes in the accounting laws and standards to manipulate the financial statements which are in contravention to the professionalism in the field of accounting.
c. Ethical Issues Due To The Compromising of The Independence of Statutory Auditors
The auditors must perform the different auditing operations independently without getting influenced which could otherwise lead to the misrepresentation of information and harm the reputation of the Organization (Threats to auditor independence, 2022).
When the auditors get influenced and are biased by the superiors of the Organization, the reliability and the fairness of the financial statements get negatively impacted which would ultimately cause a decline in the overall financial stability of the Organization. Furthermore, the superiors of the Organizations often bribe the auditors to maneuver the financial statements, and sometimes the auditor might be an employee of a given Organization due to which the flaws committed get covered due to which the ethical integrity is harmed. The good relationship of the higher executives with the auditors triggers bias due to which the auditors get coerced to apply creative accounting to falsely represent the financial statements of the Organization which is in contravention the accounting ethics.
The role of weak corporate governance, creative accounting, and compromised independence of the statutory auditors in the corporate scandal of Satyam Computer Services Limited have been discussed below-
a. Weak corporate governance
The analysis of the case of the corporate scandal of Satyam Computer Services Limited had given an idea of the role played by a lack of a positive purpose and poor evaluation strategies of the different Organizational processes and operations in the downfall of the company. Furthermore, the different observations that were made from the financial statements of Satyam Computer Services Limited included misrepresentation of the revenue generation and misrepresentation of the liabilities and the assets of the Organization. Furthermore, manipulation was also observed in the salary accounts of the Organization and the fundraising strategies adopted by the Organization. The irregularities in the financial statements of the Organization had got revealed during the acquisition of Maytas Infrastructure Limited. Poor leadership strategies, lack of authenticity and transparency of the financial statements, and poor documentation methodologies worsened the effectiveness of Corporate Governance in the given Organization (Bhasin, 2013).
Moreover, the Company lacked a suitable code of conduct and did not implement suitable policies and regulations to monitor the various processes and operations which were in contravention of the interest of the Organizational shareholders.
b. Creative Accounting
The concept of creative accounting was prevalent in the case of the corporate scandal of Satyam Computer Services Limited. The financial statements were actually in contravention of the different regulations and policies of the Indian regulatory authorities. The financial statements of the Organization were manipulated using creative accounting. Furthermore, the strategy of the acquisition of Maytas Infrastructure was initiated to mitigate the existing gaps and loopholes in the financial statements of the Company (Bhasin, 2013).
c. Compromised Independence of The Statutory Auditors
The ethics of auditing was violated adversely by the auditors while auditing Satyam Computer Services Limited. The threats on the grounds of self-interest, familiarity, and intimidation were observed in the corporate scandal case of Satyam Computer Services Limited (Bhasin, 2013).
PricewaterhouseCoopers had conducted the auditing operations in the Organization but no irregularities in the financial statements were detected by the auditors which indicate the compromised independence of the statutory auditors. Henceforth, further investigation into the case revealed that the auditors did not verify the different suspicious financial transactions properly which had negatively reflected the code of conduct in the Company MBA assignment experts.
The violation of the various fundamental accounting principles in the Satyam scandal has been discussed briefly below-
a. Violation of Integrity
The financial statements were found to be manipulated by Satyam Computer Services Ltd. which was a violation of the ethical code of integrity (Duska, Duska & Kury, 2018). Furthermore, the auditors of Satyam Computer Services Ltd. had carried out the auditing operations for nearly ten years and were unable to identify the manipulation in the financial statements.
The conduct of the organization with the investors was also deceptive due to the manipulation of financial statements that were done to make the company's financial statements appear stable which was in contravention of the ethical code of integrity in accounting.
b. Violation of Objectivity
The fraud that PricewaterhouseCoopers was unable to detect (audited Satyam Computer Services for nearly 10 years) was detected by Merrill Lynch in nearly 10 days which indicates the lack of objectivity in the auditing operations (Duska, Duska & Kury, 2018).
Furthermore, the auditors might have colluded with the higher officials of Satyam Computer Services Limited due to which the financial misrepresentation was overlooked which is a violation of the ethical code of objectivity.
c. Violation of Professional Competence
Satyam Computer Services Ltd. was the first Indian Organization to implement International Financial Reporting standards but the monetary scandal negatively reflected the commitment to the professional competence of the Organization.
The manipulation of the financial statements and lack of detection of the creative accounting signifies the gross violation of the ethical code of professional competence by the given Organization (Duska, Duska & Kury, 2018).
d. Violation of Confidentiality
The financial misrepresentation in Satyam Services indicates that the manipulation of the financial statements was done for personal advantage by the higher authorities which violated the ethical code of confidentiality (Duska, Duska & Kury, 2018).
e. Violation of the ethical code of professional behavior
The violation of the different regulatory compliances and standards (like the regulations of SEBI) of accounting was observed in the case of manipulation of the financial statements in the Satyam scandal which was in contravention of the ethical code of professional behavior.
a. Recommendations for Strengthening The Corporate Governance
According to Veselovsky et al. (2018), one of the major ways in which corporate governance could be strengthened in Organizations is through the evaluation of the quality of corporate governance after regular intervals based on different parameters. Firstly, the activities and the priorities of the shareholders must be determined and checked with the existing corporate governance strategies in the Organizations and necessary modifications must be made. Secondly, the dividend and the compensation policies in the Organizations have to be evaluated and modified periodically when irregularities would be identified. The functioning of the auditors and the audit reports must be evaluated by the Organizations to make the necessary improvements in the Organization and ensure adherence to the different regulatory compliances and policies. The brand image of the Organizations in the mind of the shareholders has to be identified and the gaps and deficiencies have to be bridged adequately.
b. Recommendations for Effective Detection of Creative Accounting
As per Al-Olimat et al. (2020), creative accounting practices could be detected through the application of the cognitive capabilities of the auditors. Firstly, the recruitment board in the Organizations must evaluate the academic performance and the skillset of the auditors. Secondly, the awareness and knowledge base of the auditors on the different auditing laws and participation in various training and development programs have to be evaluated to determine the competency of the auditors in detecting creative accounting. Furthermore, the proficiency of the auditors in using the different tools and technologies used in the auditing processes must also be determined.
c. Recommendations To Strengthen The Public Trust of Statutory Auditors
According to Ottaway (2013), the audit reports must be scrutinized properly by the Organizations which would help in determining the existing gaps and deficiencies in the accounting statements. The MAFR strategy that has been recommended in the given study would help in enhancing the independence of the statutory auditors in the Organizations that would help in improving the effectiveness of auditing. Furthermore, the U.K. re-tendering regime that has been highlighted in the study would also help in improving the reliability and the monitoring of the accounting statements which would help to preserve the public trust.
4. Conclusion and Recommendations
Corporate Governance serves as the foundation for reinforcing the brand image of the Organizations and ensures that the Organizations adhere to the different regulatory compliances and policies. The study helped in understanding the importance of the different educational credentials and skill sets that are needed to be evaluated for hiring auditors for Organizations. The recruitment of qualified and proficient auditors helps in identifying the various deficiencies and gaps in the accounting system of the Companies which degrades the reliability, transparency, and authenticity of the financial statements. Furthermore, the financial scandal of Satyam Computer Services Ltd. served as an eye-opener and a guiding force to the different regulatory authorities and the auditors to improve corporate governance strategies and detect creative accounting. The independence of statutory auditors plays a major role in improving the overall effectiveness of auditing operations and preserving public trust. PricewaterhouseCoopers (PwC) was the auditor for Satyam Computer Services for nearly 10 years which had lowered the independence of the statutory auditors and harmed the quality of the financial statements due to the presence of bias and involvement of higher management. Henceforth, the irregularities in the financial statements of the Organization were undetected by the auditors of PwC but Merrill Lynch was able to detect the irregularities within a tenure of 10 days. A gross violation of the various ethical codes of accounting was observed in the given corporate financial scandal of Satyam Computer Services Ltd. Moreover, the authenticity of the audit reports and compliance with the different regulatory standards forms the base of the Organizations to brighten the brand image that facilitates growth and flourishment.
The different recommendations based on the financial scandal of Satyam Computer Services Ltd. have been discussed below-
Firstly, the corporate governance strategies in the Organizations are needed to be evaluated periodically and the necessary improvements have to be made which would help in averting the possibility of future risks by resolving any kind of irregularities that have been identified. Furthermore, Organizations should prioritize the different needs and requirements of the stakeholders before formulating different Corporate Governance strategies.
Secondly, the Organizations must modify the recruitment strategies and criteria for hiring the auditors after regular intervals which would help in hiring the relevant candidates. Furthermore, recruiters must not only evaluate the academic credentials of the auditors but the skill sets, training, and awareness programs attended must also be evaluated which would facilitate better detection of irregularities and improve the quality standards of auditing.
Thirdly, the Organizations must ensure that the performance of the auditors is not biased by any kind of external influences and is aligned with the different fundamental accounting principles. The audit reports must be evaluated and verified by the Organizations to detect the presence of any kind of irregularities.
Bhasin, M. L. (2013). Corporate accounting fraud: A case study of Satyam Computers Limited. Open Journal of Accounting, 2, 26-38. https://www.scirp.org/html/2-2670015_30220.htm?pagespeed=noscript
Naciti, V., Cesaroni, F., & Pulejo, L. (2022). Corporate governance and sustainability: A review of the existing literature. Journal of Management and Governance, 26(1), 55-74. https://e-tarjome.com/storage/panel/fileuploads/2022-07-07/1657177265_e16864.pdf
Ottaway, J. (2013). Improving auditor independence in Australia: Is ‘mandatory audit firm rotation’the best option?. https://law.unimelb.edu.au/__data/assets/pdf_file/0004/1709509/27-OTTAWAYJoanne-MandatoryAuditFirmRotationPaper2.pdf
Saha, S. S., & Roy, M. N. (2015). Statutory auditors' independence in the backdrop of corporate corruption: Select case studies. Indian Journal of Corporate Governance, 8(1), 84-102. https://journals.sagepub.com/doi/abs/10.1177/0974686215574433
Threats to auditor independence. (2022, November 28). Retrieved December 11, 2022, from https://corporatefinanceinstitute.com/resources/accounting/threats-to-auditor-independence/
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