The Satyam Computer Services Firms Accounting Ethics

Table of Contents

Issue Description
Interested Parties
Causes
Solution
References

Issue Description

As an analyzed case of violation of accounting ethics, the 2009 scandal will be considered in which the Indian outsourcing company Satyam Computer Services became involved. The key problem lies in the significant overestimation of revenue (approximately $1 billion), which corresponds to a legal violation regarding the falsification of income and cash balances. The financial fraud was proven as the founder of the company pleaded guilty. Breach of trust can be seen as one of the ethical issues associated with this case. The scandal was described by Timmons (2009) in The New York Times. The analysis of the Satyam case requires assessing the violations of legal accounting principles to identify prerequisites for fraudulent activities. In addition, the ethical issue of breach of trust deserves attention as a crucial problem in conducting fair financial business.

Interested Parties

Since the Satyam case caused a public outcry and became one of the major accounting scandals of the late 2000s, one can speak of a wide range of parties involved. Since the firm performed outsourcing activities, it was financed by different companies interested in such services. Along with the Indian Ministry of Finance, individual participants became involved in the Satyam scam. Timmons (2009) mentions authoritative global financial market participants such as Merrill Lynch, Cisco, Ford Motor, and many other large corporations. As a result of the fraudulent scheme initiated by Satyams founder, all these businesses suffered losses. Along with financial issues, these brands suffered reputational problems because partnering with an unreliable company was the result of an ineffective market interaction policy. Thus, Satyam initiated a series of checks under which respected companies also fell.

In addition to the company itself, the audit team was a stakeholder in the scandal and was subsequently charged and punished with a substantial fine. According to Timmons (2009), PricewaterhouseCoopers, an audit service that partnered with Satyam, was fined for failing to comply with audit principles, namely overlooking the fraudulent scheme. Its activities were declared illegal because, having the resources and ability to control the financial aspect of Satyams business, PricewaterhouseCoopers did not pay due attention to reporting, which increased the public outcry. Given the transparency of market relationships and the value of partnerships as algorithms for expanding business capabilities, this outcome confirmed the importance of third-party checks. Therefore, PricewaterhouseCoopers was also a vulnerable participant in Satyams fraudulent scheme.

Another interested party was the Indian Central Bureau of Investigation (CSI). Being involved in the work to identify fraudulent transactions, including in the financial sector, the specialists of the Bureau received a signal about violations in Satyam. However, as Timmons (2009) remarks, the CSI was not a board with a direct interest in punishing all those involved, as it did not exercise a judicial function. As a result, Ramalinga Raju, the founder and main fraudster of Satyam, was not taken into custody due to delays in the case, and the fine was the main outcome of the scandal.

The case under consideration concerns all of the listed parties to a greater or lesser extent, but in addition to legislative violations, the ethical factor turned out to be involved. Shattered trust among partners is a negative outcome of Satyams operations, and the financial market has suffered from this. Acting in selfish interests, the founder of the Indian firm did not justify the trust, and for other participants in the target market, this was a signal to control operational activities more carefully. Thus, a wide range of stakeholders proves the objectivity of the hype surrounding the case of the Indian company.

Causes

While analyzing this case of accounting fraud, one can note that the situation with Satyam combines both ethical and legal violations. From a cultural point of view, there were no prerequisites for blaming the firms environment for allowing fraud. The Indian market has always been a promising platform for the development of various financial businesses, and a large number of partners from different countries, including the United States, confirm this. Therefore, the problem was more of a fraudulent initiative by the firms management rather than an environment conducive to doing business under abusive conditions.

When speaking about the specific single factor that caused Satyams fraud, one can emphasize the weak control from the responsible authorities. The absence of strict requirements for financial reporting led to a relaxation of audit activities. Having no barriers and restraints, the founder of Satyam stopped working to ensure comprehensive financial responsibility to partners. As a result, he began to use his business as a platform for generating profits that were not included in the audit documentation and were not noted by the tax authorities. This case is not unique in world practice, but it proves the relevance of attracting responsible and productive financial control algorithms to prevent such critical omissions. Excessive freedom in doing business proved to be unjustified as an idea that led to litigation. For global practice, stories related to accounting fraud are a trigger for optimizing control tools, and much analytical work is usually performed as soon as fraudulent schemes become public. However, these activities are carried out after the fact, and to prevent the repetition of deceptions, a preventive practice is more effective than a punitive one.

While assessing the nature of the accounting failure in question, one can assume that the cause combines legal and ethical backgrounds. On the one hand, Satyam hid real income and used the freedom to maintain financial records as tools for fraud, which was a direct violation of the law. Such behavior is unacceptable, first of all, from a legislative position and is a violation of existing financial reporting principles for market participants, especially at the global level. On the other hand, when counting on partners trust, the company did not confirm its activities with an honest financial policy, which was more likely due to the ethical aspect. Satyams clients, convinced of the firms transparency, did not make the necessary efforts to verify how robust and accurate the Indian companys reporting algorithms were. This, in turn, is evidence of excessive trust, which, although indicative of a positive market environment, can be a prerequisite for fraud, as was the case with Satyam. Therefore, the nature of the fraud in question can be characterized from two perspectives, both of which equally deserve condemnation.

Solution

Despite the fact that Ramalinga Raju was not taken into custody, the optimal resolution of the considered accounting issue would be a criminal punishment. The fraud initiated by him left its mark on all Indian financial companies and set a precedent for revisiting the existing principles of control. At the same time, Satyams case is in many ways reminiscent of the well-known Enron case, where the CEO was also not taken into custody, although his professional reputation was completely destroyed. With regard to the ethical perspective of the scandal, more formal commitments between the partners could make it possible to avoid similar situations in the future. If Satyams clients had documentary evidence of the firms financial activities, such a big scam might have been avoided. Close cooperation is evidence of mutual interest in transparent communication and the absence of pitfalls, and there is nothing offensive in this practice. Conversely, having a full understanding of Satyams business details, the firms partners would be able to perform a function similar to that of auditors, thereby coordinating the financial aspect of joint activities.

As a rational and potentially effective measure to promote at the legislative level, tightening supervision over the activities of audit services can be proposed. This initiative does not address individual ethical issues and aims to create a sustainable reporting framework to oversee those firms designated as oversight bodies. According to Ogoun and Atagboro (2020), the role of official agencies and government departments in this preventive practice is high. Audit firms that are under close state supervision can face less risk of being involved in financial fraud, whether on purpose or by mistake (Ogoun & Atagboro, 2020). The relevant legislative initiative may imply creating a specific oversight program or developing a strong legal framework that clearly defines the firms responsibilities. In this case, the threat of fraud is minimized due to auditors closer attention to their clients activities. As a result, optimizing the existing legislative framework is an adequate solution to prevent accounting issues similar to those of Satyam and avoid financial scandals.