Question 17.1: Fictitious Reports Satyam Computer Services Limited Satyam C......
Fictitious Reports
Satyam Computer Services Limited
Satyam Computer Services Limited, an Indian information technology company, was founded in 1987 and grew rapidly by providing business process outsourcing (BPO) on a global basis. In 2007, its CEO, Ramalinga Raju, was named “Entrepreneur of the Year” by Ernst & Young, and in 2008, the World Council for Corporate Governance recognized the company for “global excellence in corporate accountability.” In 2009, the CEO submitted a letter of resignation that outlined a massive financial fraud at the company. The company’s decline was so rapid and significant that it came to be referred to as “India’s Enron.”
In late 2008, the World Bank terminated its relationship with the company after finding that Satyam gave kickbacks to bank staff and billed for services that were not provided. These initial revelations of wrongdoing had the effect of putting the company under increased scrutiny. Among other misconduct, the CEO eventually admitted that he created fictitious bank statements to inflate cash and to show interest income. The CEO also created fake salary accounts and took the money paid to those “employees.” The company’s head of internal auditing created fictitious customer accounts and invoices to inflate revenues.^5
The external auditors did not independently verify much of the information provided by the company. Even when bank confirmations, which were sent to them directly as opposed to indirectly through Satyam, contained significantly different balances than those reported by Satyam, they did not follow up.
1 . Based on the information provided, characterize Satyam’s financial reports, with reference to the quality spectrum of financial reports.
2 . Explain each of the following misconducts with reference to the basic accounting equation:
A . Transactions with World Bank
B . Fictitious interest income
C . CEO’s embezzlement
D . Fictitious revenue
3 . Based on the information provided, what documents were falsified to support the misconducts listed in Question 2?
^5See Bhasin (2012) for more information.
to 1: Based on the information provided, Satyam’s financial reports were of the lowest quality. They clearly are at the bottom of the quality spectrum of financial reports: reports based on fictitious information.
to 2: The effects on the basic accounting equation of the different acts of misconduct are as follows:
A . Upon billing for fictitious services, the company would increase an asset, such as accounts receivable, and a revenue account, such as service revenues. The kickbacks to the customer’s staff, if recorded, would increase an expense account, such as commissions paid, and increase a liability, such as commissions payable, or decrease an asset, such as cash. The net effect of this misconduct is the overstatement of income, net assets, and equity.
B . Fictitious interest income would result in overstated income; overstated assets, such as cash and interest receivable; and overstated equity. These overstatements were hidden by falsifying revenue and cash balances.
C . The embezzlement by creating fictitious employees would increase an expense account, such as wages and salaries, and decrease the asset, cash. The resulting understatement of income and equity was offset by a real but fraudulent decrease in cash, which was hidden by falsifying revenue and cash balances.
D . Fictitious revenues would result in overstated revenues and income; overstated assets, such as cash and accounts receivable; and overstated equity.
to 3: Based on the information provided, the documents that were falsified include
• invoices to the World Bank for services that were not provided,
• bank statements,
• employee records, and
• customer accounts and invoices.
The falsified documents were intended to mislead the external auditors.