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Class Action Lawsuits in the U.S.
On January 11, 2010, India asked the authorities in the U.S. to not take any action against
Satyam, as it would amount to punishing shareholders twice. Satyam can face punitive action in
the U.S. because the company’s shares are listed and traded on U.S. exchanges. Satyam also is
contending about a dozen class action lawsuits in U.S. courts. It is also possible that the company
will face charges from the SEC.
As many as 12 class action lawsuits were filed against the company by January,
2009, and more are expected to be filed. The lawsuits were filed by investors in the ADS ever
since Raju confessed to having fudged the accounts of the company for at least seven years.
The charges alleged against the defendants in the lawsuits filed to date are:
1. The defendants issued misleading financial information about the Company
including information contained in its annual reports, which were signed by the
defendants and contained fairness opinions issued by Satyam’s auditor, PwC.
2. A letter was sent by Ramalinga Raju to the board of directors of Satyam and SEBI
admitting to falsification of accounts, overstatement of profits and debt owed to
the company, and understatement of liabilities. The purchasers of Satyam’s ADS
were injured through their purchase of stock at inflated prices because they relied
on the false and misleading information provided by the defendants.
3. None of the statements made by the defendants that have been alleged to be false
in the lawsuit had any qualifying cautionary statements identifying factors that
could cause results to differ materially from that stated.
Are Big-Four U.S. Accounting Firms One Global Firm or Independent Entities?
An interesting aspect of the Satyam case is whether Big-Four international CPA firms truly
operate as one firm across the globe, or whether each PwC affiliated-entity is separate and apart
from the U.S. firm. The issue is important because PwC in the U.S. initially claimed it should not
be held legally liable for the actions of its affiliates. Although audit firms around the world use
similar names and are part of global networks, the firms say they are legally independent. The
international networks say they have procedures to assure that their affiliates perform high-
quality audits, but those procedures appear to broken down in this case.
Those procedures include having partner from different firms in the network review
audits. While the 2008 audit was being conducted, the U.S. S.E.C. said, a partner from a different
PwC firm “alerted members of the Satyam engagement team that its cash confirmation
procedures appeared substantially deficient,” but the Indian firm did nothing to correct the
procedures.
Had the firm done as the foreign partner advised and was proper, the commission said,
“Satyam’s fraud could have been uncovered in the summer of 2008.”
Ethical Issues
It appears that Satyam engaged in reporting misleading financial information that constituted
fraud since top managers know very well about what was going on in the company. Investors
(U.S. and global) rely on the accuracy of the financial statement information. In Satyam, the
broad international scope of the company and unethical actions negatively affected the interests
of many stakeholders in many countries.
Using a rights perspective, it is not right to mislead the investors by making it look as though
the company is doing better than it really is. Any attempt to intentionally misstate the financial
statements violates the categorical imperative. Using a justice perspective, stakeholder interests
are not represented because Raju’s and his family were given priority over the interests of all the
other stakeholders. Act-utilitarianism requires that the act that creates the greatest good for the
greatest number of stakeholders should be selected. The only stakeholders to benefit from fraud
was Raju and his family (temporarily). All other stakeholders are harmed by this action,
including the entity, because the SEC imposed sanctions on the company due to the fraudulent
financial statements. From a virtue perspective, honesty requires that the statements should be
truthful and top management responsible in carrying out their fiduciary obligations. Objectivity
requires that the company should approach its decision about the proper revenue recognition
procedure with fair-mindedness and without partially to one set of stakeholders. Trustworthiness
means that the accountants should not violate the investors’ faith that the statements are accurate
and reliable.
Questions
1. Madan Bahsin concludes in her research paper that examined the fraud at Satyam
that “the scandal brought to light the importance of ethics and its relevance to
corporate culture.” Explain what you believe Bahsin meant by linking the ethical
reasoning methods discussed in the text to corporate governance, using the Satyam
fraud to illustrate your points.
The fraud committed by the founders of Satyam is a testament to the fact that “the science of
conduct is swayed in large by human greed, ambition, and hunger for power, money, fame and
glory.” All kind of scandals/frauds have proven that there is a need for good conduct based on
strong ethics. A transformed organizational culture, which pays highest attention to ethical
Ethical reasoning is the foundation of a strong corporate governance system. Managers
(agents) have to act in the best interests of the shareholders (principals). This requires an
enlightened egoistic approach to decision making. When conflicts exist between the company
(and management) and stakeholder interests, the rights of the stakeholders must be uppermost.
2. Hofstede’s cultural values that were discussed in Chapter 1 reflect the following
scores with respect to India and the U.S.
Cultural Dimension India U.S.
Individualism (IDV) 48 91
Do you believe these differences in cultural values and the discussion in the chapter
about corporate governance in India can be used to explain the nature and scope of
the fraud at Satyam including the involvement of Raju in the acquisition of two
companies owned by his sons?
India is very similar to China using Gray’s accounting values of higher level of conservatism
(medium uncertainty avoidance and lower individualism) and higher levels of secrecy (medium
uncertainty avoidance and poser distance with lower individualism) than the U.S. From the
masculine score, India is thus considered a masculine society and is actually very masculine in
An important question in the attempt to acquire the Mayta’s companies is how independent were
the independent directors of Satyam. Professor M. R. Rao, a board member and dean of the
Indian School of Business, claimed the board had taken an independent view and raised concerns
about valuation, unrelated diversification, market reaction and other issues. A conflict of interest
arose when Satyam’s Board of Directors agreed to invest $1.6 billion to acquire a 100 percent
An Indian lawsuit alleged that Satyam’s board of directors are guilty of negligence, breach of
duty, trust and fraud.
[To extend the discussion of culture, you may want to ask students to read the paper, Corporate
Crime: A Comparison of Culture at Enron and Satyam that looks at different aspects of culture in
3. Briefly discuss the audit failures of PwC and its affiliates with respect to the
accounting issues raised in the case including fraud risk assessment. What rules of
professional conduct in the AICPA Code that was discussed in Chapter 4 were
violated?
The improper accounting included dual accounting books, more than 7,000 forged invoices,
dozens of fake bank statements, fictitious billings for services never rendered, an accrued interest
Satyam’s outside auditors from the Indian affiliate of PricewaterhouseCoopers are alleged to
have been aware of the fraud, but still certified the company’s financial statements as accurate. In
an Indian lawsuit, it is alleged that the auditors received documentation from Satyam’s banks that
showed that the amounts were overstated. The auditors did not ask for bank or receivables
confirmations. It is further alleged that the auditors received fees from Satyam that were
PwC initially hid behind “client confidentiality” and stated that it was examining the contents of
the statement. Then they quickly issued a second statement claiming that the “audits were
Optional Questions
4. Research the current status of all legal action against Satyam, its officers, and the
PwC auditors. What changes have occurred in the facts of the case since June 2013?
Some the events of Satyam’s scandal since June 2013 include:
August 15, 2013 Tech Mahindra announced July 25, 2013, that the “formal amalgamation”
