Satyam’s Manipulative Accounting Methodology Unveiled: An Experience of an Asian Economy

Madan Lal Bhasin

doi:10.18533/ijbsr.v6i12.1010

Madan Lal Bhasin

Open Access

https://doi.org/10.18533/ijbsr.v6i12.1010

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Abstract

<p>Manipulative accounting practices are perennial and such practices have occurred in all eras, in all countries and affected millions of corporations. Unfortunately, there are few loopholes in accounting and auditing standards, which provide leeway and thus motivate accounting professionals to use aggressively manipulation practices. In fact, manipulative accounting (MA) involves the intentional cooking-up of financial records towards a pre-determined target. Every company indeed maneuvers the numbers, to a certain extent, as formally reported in its financial statements (FS) to achieve budgetary targets and generously reward senior managers. From Enron, WorldCom to Satyam, it appeared that window-dressing leading to MA is a serious problem that is increasing both in its frequency and severity, which undermines the integrity of financial reports and eroded investors’ confidence. The responsibility of preventing, detecting and investigating financial frauds rests squarely on Board of Directors and they should adopt preventive steps. Despite the raft of CG, and financial disclosure reforms, corporate accounting still remains murky and companies continue to find ways to play ‘hide-and-seek’ game with the system. Satyam computers were once the crown jewel of Indian IT-industry but were brought to the ground by its founders in 2009 as a result of financial manipulations in FS. The present study provides a snapshot of how Mr. Raju (CEO and Chairman) mastermind this maze of AM practices? Undoubtedly, Satyam scam is illegal and unethical in which computers were cleverly used to manipulate account books by creating fake invoices, inflating revenues, falsifying the cash and bank balances, showing non-existent interest on fixed deposits, showing ghost employees, and so on. Satyam fraud has shattered the dreams of investors, shocked the government and regulators and led to questioning of the accounting practices of auditors and CG norms in India. Finally, we recommend that “All types of MA practices should be legally recognized as a serious crime, and accounting bodies, law courts and regulatory authorities must adopt exemplary punitive measures to prevent such unethical practices.”</p>

Highlights

Corporate financial reporting (FR) is intended to serve a number of user groups, with diverse and sometimes conflicting interests, such as, shareholders, creditors, lenders, labor leaders, and governments
Investors, board members, and executives would have full-confidence in companies’ financial statements (FS). They could rely on the numbers to make intelligent estimates of the magnitude, timing, and uncertainty of future cash flows, and to judge whether the resulting estimate of value was fairly represented in the current stock price
In another research study performed by Bhasin (2013), “the main objectives of this study were to: (a) identify the prominent companies involved in fraudulent financial reporting practices, and the nature of accounting irregularities they committed; (b) highlighted the Satyam Computer Limited’s accounting scandal by portraying the sequence of events, the aftermath of events, the key parties involved, and major follow-up actions undertaken in India; and (c) what lesions can be learned from Satyam scam?” To attain the above stated research objectives we applied a “content” analysis to the “press” articles

Summary

Introduction

Corporate financial reporting (FR) is intended to serve a number of user groups, with diverse and sometimes conflicting interests, such as, shareholders, creditors, lenders, labor leaders, and governments. Investors, board members, and executives would have full-confidence in companies’ FS. They could rely on the numbers to make intelligent estimates of the magnitude, timing, and uncertainty of future cash flows, and to judge whether the resulting estimate of value was fairly represented in the current stock price. They could make ‘wise’ decisions about whether to invest in or acquire a company, promoting the efficient allocation of capital. Managers and executives routinely encounter strong incentives to deliberately inject error into FS.”

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