Ethical Obligations and Decision Making in Accounting, 4/e 1
Case 6-9 Satyam: India’s Enron
Satyam Computer Services, now Mahindra Satyam, is an India–based global business and
information technology services company that specializes in consulting, systems integration, and
outsourcing solutions. The company was the fourth-largest software exporter in India until
January 2009, when the CEO and cofounder, Ramalinga Raju, confessed to inflating the
company’s profits and cash reserves over an eight-year period. The accounting fraud at Satyam
involved dual accounting books, more than 7,000 forged invoices, and dozens of fake bank
Fraudulent Actions by Raju
Raju stepped down in early January 2009, admitting to falsifying financial figures of the
company with respect to nonexistent cash and bank balances. Stunning his well-wishers and
investors, Raju revealed the real motive behind the December 16 bid to acquire Maytas
companies for $1.6 billion: to swap the fictitious cash reserves of Satyam built over years with
the Maytas assets. Raju thought that the payments to Maytas could be delayed once Satyam’s
problem was solved. What had started as a marginal gap between actual operating profit and the
one reflected in the books continued to grow over the years. It had attained unmanageable
proportions as the size of the company’s operations grew over the years. One lie led to another.
The problem further worsened as the company had to carry additional resources and assets to
justify a higher level of operations, leading to increased costs.
Ethical Obligations and Decision Making in Accounting, 4/e 2
an inflation of receivables or the cash in bank balance. The following is a summary of the way
financial statement amounts were manipulated:
• 94 percent (Rs 5.04 billion/approximately $10.5 million) of the cash in bank account
balance in the September 30, 2008, balance sheet was inflated, due largely to exaggerated
profits and fictitious assets.
Acquisition of Maytas Properties and Maytas Infrastructure
In December 2008, Raju tried to buy two firms owned by his sons, Maytas Properties and
Maytas Infrastructure (Satyam spelled backward is Maytas) for $1.6 billion. Raju tried to justify
the purchase by stating that the company needed to diversify by incorporating the infrastructure
market to augment its software market. However, many investors thought that the purchases of
two firms were intended to line the pockets of the Raju family. Raju owned less than 10 percent
of Satyam, whereas Raju’s family owned 100 percent of the equity in Maytas Properties and
about 40 percent of Maytas Infrastructure. Stock prices plunged dramatically after the
announcement, so Raju rescinded his offer to buy the two companies.
When asked if the board had taken into consideration the possible impact of the purchase of the
two companies on shareholders’ interests and the market reaction, the ISB dean responded,
“There were concerns on these grounds as well, especially the market reaction for such an
unrelated diversification.” However, according to Rao, there was no way that they could gauge
Ethical Obligations and Decision Making in Accounting, 4/e 3
the market reaction at first, so they decided to take a risk. But the way the market reacted was a
bit unanticipated, he added.
Litigation in the United States
Securities fraud class action lawsuits were filed on behalf of a class of persons and entities who
purchased or acquired the American Depositary Shares (ADSs)1 of Satyam on the NYSE and/or
were investors residing in the United States who purchased or acquired Satyam common stock
traded on Indian exchanges between January 6, 2004, and January 6, 2009 (the class period).
The complaint alleged that Satyam, certain of its directors and officers, and the company’s
outside auditors (PwC) made false and misleading public statements regarding Satyam’s
financial condition and performance, which artificially inflated the stock price. On January 7,
2009, Satyam’s chair, Ramalinga Raju, sent a letter to the company’s board confessing to a
massive accounting fraud. Raju admitted that the company’s balance sheet and other public
disclosures contained numerous false statements. For example, Raju wrote that, as of September
30, 2008, the company overstated revenue by approximately 22 percent and reported cash and
bank balances of Rs 53.61 billion (approximately $1.1 billion), of which Rs 50.4 billion (over $1
billion) did not exist.2
The complaint asserted claims against other defendants as well. In particular, the complaint
alleged that members of the audit committee of the Satyam board of directors—who were
responsible for overseeing the integrity of the company’s financial statements, the performance
and compensation of the outside auditors from PW India firms, and the adequacy and
Actions Against PwC
PwC and its Indian affiliates initially hid behind “client confidentiality” and stated that it was
“examining the contents of the statement.” Realizing that this was not enough, PwC came up
with a second statement claiming that “the audits were conducted in accordance with applicable
auditing standards and were supported by appropriate audit evidence.” This is somewhat
troublesome because an audit in accordance with generally accepted auditing standards (GAAS)
calls for examining the contents of the financial statements. Given that the firm did not identify
the financial wrongdoing at Satyam, it would appear that the firm, at the very least, was guilty of
professional negligence as follows.
• Fictitious invoices with customers were recorded as genuine.
• Raju recorded a fictional interest credit as income.
• The auditors didn’t ask for a statement of confirmation of balance from banks (for cash
balances) and debtors (for receivables), a basic procedure in an audit.
Questions
Overview
Are Big-Four U.S. Accounting Firms One Global Firm or Independent Entities?
Ethical Obligations and Decision Making in Accounting, 4/e 5
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.
Ethical Issues
It appears that Satyam engaged in reporting misleading financial information that constituted
fraud since top managers knew 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
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,
Ethical Obligations and Decision Making in Accounting, 4/e 6
money, fame and glory.” All kinds 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 conduct and moral values, will strengthen sustainable roots of
the company. Transparency, effective auditing and regulatory checks, through internal
and external auditors and monitoring agencies, will also help to establish long-lasting
2. Hofstede’s cultural values that were discussed in Chapter 1 reflect the following
scores with respect to India and the United States.
Cultural Dimension
India
U.S.
Individualism (IDV)
48
91
Power Distance (PDI)
77
40
Uncertainty Avoidance (UAI)
40
46
Masculinity (MAS)
56
62
Long-term Orientation (LTO)
61
29
Do you believe these differences in cultural values and the discussion in this 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? What checks and balances might have existed in the
United States to deal with the fraud in a more effective manner?
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 high power distance with lower individualism)
than the U.S. From the masculine score, India is thus considered a masculine society and is
Ethical Obligations and Decision Making in Accounting, 4/e 7
There are many similarities between corporate governance systems in the U.S. and India
Differences include in India there exists a separate corporate governance section in the
annual report providing useful information highlighting any noncompliance (similar to
comply or explain provision in codes of German companies) and lack of independent
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 the U.S. and India and the frauds at Enron and Satyam. The paper can
be found at: http://ecedweb.unomaha.edu/EBJIP2010Khedekar.pdf]
The checks and balances that exist in the U.S. that might have helped to deal with the fraud
on a timely basis and more effectively relate to internal controls and the requirements for
management to report on its controls and auditors to assess that report and draw their own
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
Ethical Obligations and Decision Making in Accounting, 4/e 8
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 for a nonexistent note, recording a fictional interest credit as income,
and infusion of personal funds recorded as revenue.
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