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International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comISSN 2156-7506International Journal ofContemporary Business StudiesVOLUME 3NUMBER 10OCTOBER, 2012In this Issue:Evaluating the Impact of Social Influence on User Intention:A study on Online CommunitiesKausar Fiaz Khawaja,Mohammad Bashir Khan,Saima NaseerCorporate Accounting Frauds: A Case Study of SatyamComputers LimitedMadan BhasinImpact of Human Resource Management Practices onOrganizational Performance in Nigeria: An Empirical Studyof Ecobank Nigeria Plc in the Last Five YearsFadiora Richard GbolahanMicrocredit and Job Creation: Evidence from TunisianContextAbir Mrabet , Sonia Ghorbel ZouariHandling Technological Innovations: China OverviewBekmurodov Adham Sharipovich,Ahunjonov Umidjon MaxamadumarovichAn International Journal Published byAcademy of Knowledge Processwww.akpinsight.webs.com1Copyright © 2012. Academy of Knowledge Copyright Process © 2012 IJCBS

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comwww.akpinsight.webs.comInternational journal of Contemporary Business StudiesA journal of Academy of Knowledge ProcessSaddal H.AEditor-in-ChiefEditorial Board3Copyright Enrich © 2012. Knowledge Academy through of Knowledge Quality Process Research

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comwww.akpinsight.webs.com4Copyright Enrich © 2012. Knowledge Academy of through Knowledge Quality Process Research

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comwww.akpinsight.webs.comContents:VOLUME 3, NUMBER 10October, 2012Evaluating the Impact of Social Influence on User Intention: A study on OnlineCommunitiesKausar Fiaz Khawaja,Mohammad Bashir Khan,Saima Naseer………………………………………06Corporate Accounting Frauds: A Case Study of Satyam Computers LimitedMadan Bhasin………………………………………………………………………………………………………………16Impact of Human Resource Management Practices on Organizational Performance in Nigeria:An Empirical Study of Ecobank Nigeria Plc in the Last Five YearsFadiora Richard Gbolahan……………………………………………………………………………………………..43Microcredit and Job Creation:Evidence from Tunisian ContextAbir Mrabet , Sonia Ghorbel Zouari……………………………………………………………………………………64Handling Technological Innovations:China OverviewBekmurodov Adham Sharipovich,Ahunjonov Umidjon Maxamadumarovich………………………………..815Enrich Knowledge through Quality ResearchCopyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comInternational Journal ofContemporary Business StudiesVol: 3, No: 10. October, 2012Pp.06-15©Academy of Knowledge ProcessEvaluating the Impact of Social Influence onUser Intention: A study on OnlineCommunitiesKausar Fiaz KhawajaCorresponding AuthorLecturer/PhD ScholarFaculty of Management Sciences,International Islamic University,Islamabad, PakistanMohammad Bashir KhanDean/ProfessorFaculty of Management Sciences,International Islamic University,Islamabad, PakistanSaima NaseerLecturer/PhD ScholarFaculty of Management Sciences,International Islamic University,Islamabad, PakistanABSTRACTThe purpose of conducting this study is to evaluate the factors responsible fordetermining user intention towards the usage of online communities. For this aresearch model is proposed consist of three major determinants includingsubjective norm, social factor and image, derived from theories of NetworkExternalities effect and Unified theory of acceptance and use of technology. Datawas collected from 220 respondents (Teachers and Student), and the statisticalanalysis was conducted to test the model. The results depict that out of three, twohypotheses were significant i.e. subjective norm and social factor positivelyinfluence user intention for using Online Communities. The study has certainlimitation on which future research is needed to be conducted. Future researchersneed to explore the role of dispositional factors as an important individualdifference variable influencing the users technology acceptance. This study hasutilized the Network externality theory which is a theoretical framework broadlyemployed and adopted from the field of economics to explain the impact ofsocial influence dimensions on the users’ technology acceptance.Keywords: Social Influence, Subject Norm, Social Factor, User Intention, OnlineCommunities, UTAUT.Article Classification: Research paper6Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comINTRODUCTIONSince 1980’s (Lau and Woods 2009) 50% of investments in organizations are made on adoptionof Information technology inorder to achieve competitive edge. But with the rapid advancementin technology, its lifecycle has been reduced, and inorder to sustain in this competitive globalenvironment, business has to adopt new technology which is more complex and difficult to use.With the increase in the importance and adoption of technology, several theoretical modelsrelated to acceptance of information technology has been proposed and empirically tested, wherefactors responsible for determining user technology acceptance was investigated Like (1) push-Pull model; (2) Micro-Macro relationship; (3) Organization Memory Model; (4) Theory ofReasoned Action (5) Theory of Planned Behavior; (6)Unified Model for Technology Adoption(7) Technology Acceptance Model; (8) Unified Theory of Acceptance and Use of Technology.But Beside from all the research conducted in Past, where researchers determined a list of factorsresponsible for technology acceptance in organization , still mixed results are reported related toimplementation and acceptance of Information system (Legris et al., 2003).In UTAUT (Unified theory of Acceptance and use of technology) social Influence has been usedas a broader construct ignoring its various dimensions. The present study is unique in the sensethat it has proposed to conduct research examining the impact of various dimension of socialinfluence in creating user intention towards technology usage. This study is also the first of itskind which has based its research on the Network externalities effect, which has its roots ineconomics. So this research paper bridges two different streams i.e. Economics and Informationsystem. Research Question for this paper is:1. What are the factors (Subjective norm, Social Factor, Image) that determine userintention towards the usage of online communities?LITERATURE REVIEWDue to the rise in the usage of Information communication technology, internet has beenconsidered as an important part of individuals’ daily life (like cell phones, communities). It helpsin communication with the other individual (Kwai and Wagner, 2008) through major websiteslike Yahoo, MSN, and Google. In addition organization are building and maintaining the officialblogs/communities that is used to communicate with the employees and customer. In some casesblogs/online communities are considered as an Information system for user that is used forcapturing and sharing information. Delon and Mclean (2004) reported that the quality parametersof information system help in determining the user intention towards the adoption and usage ofinformation system, but the number of current user also affects the intention of the new users andis termed as network externality effect (Katz and Shapiro 1985).Network Externality EffectThe term network externality effect has been discussed between 1985 -1995 by Katz & Shapiroand Farrell and Saloner (Blind, 2004) under the stream of economics. It is defined as “the effectthat one user of a good or service has on the value of that product to other people, i.e. theintention of user to use a product or service is dependent on the number of others using it”(Wikimedia Foundation, 2012). The best example is of a telephone, cell phones or onlinecommunities like: Face book, twitter, and Google + where the numbers of users are increasingday by the day, and people opt to use the technology after being influenced by other individuals /referent group.7Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comUnified Theory of Acceptance and Use of TechnologyIn past, Davis et al., (1989) has proposed Technology acceptance model, where ease of use andusefulness were used as a determinant of user behavior. Following this Thompson et al., (1991)used facilitating condition as a determinant of user behavior towards Personal Computer. Inrelation, in 2000 Venkatesh and Davis reported image and relevance to job as a determinant ofusefulness, along with the social influence which was a new construct, hence proposed a revisedmodel “Technology acceptance model-2” (TAM-2). These researches were conducted to makeorganization understand factors responsible of user behavior.Keeping in view the research conducted in Past Venkatesh et al., (2003) proposed a Unifiedtheory of acceptance and use of technology (UTAUT) where researchers concatenated eight (8)different theories. UTAUT (Unified theory of Acceptance and use of technology) consist of four(4) major constructs (Performance Expectancy, Effort Expectancy, Social Influence, andFacilitating Condition) that determines user intention towards technology usage. The currentresearch is limited to a single construct of UTAUT (Unified theory of Acceptance and use oftechnology) i.e. Social Influence, where its three dimensions: Subjective norm, Social Factor, andImage are used to evaluate user intention towards technology usage.Social Influence and User IntentionResearchers in past has considered social influence as a significant factor for determining userattitude and intention towards technology usage (Venkatesh et al., 2003, 2012). Social Influenceis defined as “a change in an individual thoughts, feelings, attitude or behavior that results frominteraction with another individual or a group” Rashotte (2006). Venkatesh et al., (2003)evaluated the impact of social influence on user intention ignoring its three main elements, i.e.subjective norm, social factor and image. In Future direction researcher reported that a study isneeded to be conducted, which evaluates the impact of each element of the main construct on userintention. Therefore the current study proposed a model (Figure: 1) based on the elements of oneof the construct: social influence, that will be used to test user intention.Subjective NormSocial FactorUser IntentionImageFigure 1: Proposed research model depicting the influence of three dimensions of Social Influence (Subjective Norms,Social factor and Image) on User Intensions towards technology acceptance.Subjective Norm and User IntentionSubjective Norm is defined as “the person’s perceptions the most people who are important tohim think he should or should not perform the behavior in question” (Fishben and Ajzen 1975).The term subjective norm and social factor was first time used as a construct in theory ofreasoned action (Fishben and Ajzen, 1975) and theory of Interpersonal Behavior (Trianadis,1971). In 1978, Salancik and Pfeffer were first to use subjective norm in the field of managementto determine individuals job attitude. And with the help of Technology Acceptance Model (Davis8Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comet al., 1989) Subjective norm was introduced in the field of Information system. Following this anumber of researches has been and still in progress where subjective norm is used as determinantto evaluate user behavior. These theories and models explain that individual behavior is based onhis perceptions regarding the perceived expectation of other individuals / referent group or thepeople who are important to him. Therefore the following hypothesis is proposedHypothesis 1: Subjective Norm positively influence User Intention towards usage of OnlineCommunitiesSocial Factor and User IntentionSocial Factor is defined as “the individual’s internalization of the reference groups' subjectiveculture, and specific interpersonal agreements that the individual has made with others, in specificsocial situations" (Trianadis, 1980). By “reference group subjective culture” researcher basicallymean norms (i.e. instructions that are perceived to be suitable by oneself and other member ofdifferent culture in an environment / situation), roles (i.e. a behavior that one has to hold for aparticular position in a society or system) and self concept (i.e. “abstract categories with highlyemotional components”). Research revealed that social factor significantly influence userintention (Trianadis, 1980). Hence the following hypothesis is builtHypothesis 2: Social Factor positively influence User Intention towards usage of OnlineCommunitiesImage and User IntentionRogers (1995) reported that Moore and Benbasat has used a spirit of image while definingrelative advantage i.e. “The degree to which using an innovation is perceived as being better thanusing its precursor”, but after extensive research it was considered as a separate construct fromrelative advantage. Image is defined as “The degree to which use of an innovation is perceived toenhance one’s image or status in one’s social system” (Moore and Benbasat 1991). Like a latestmobile phone of “Apple” with extensive features, along with a new Car and Wrist watch i.e. GoldPlatted holding diamonds in it are supposed to enhance ones image in a society. Therefore in thecurrent study it is supposed that an individual pose positive intention towards the usage of onlinecommunity only if he finds that it will support him in building his image in society / group.Therefore the following hypothesis is proposedHypothesis 3: Image positively influence User Intention towards usage of Online CommunitiesMETHODThe rationale behind conducting this research is to evaluate the factors responsible fordetermining user intention towards technology usage (i.e. Online Communities). The respondentswho use online communities were selected for the study. Survey was conducted and soquestionnaires were distributed.Data Source and SampleThe target population was individuals who use online communities and are extensive users of it.250 Questionnaires were distributed among the selected respondents of public and privateuniversities in Pakistan. Survey was conducted in total five universities that include three Publicand two Private Universities. Purposive sampling technique was used in this research, where9Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comthose individuals were selected that is related to the specific situation (Jupp, 2006). Within thePurposive Sampling technique, Random sampling technique was used.The reason for selecting purposive sampling technique is to select those respondents who useOnline Communities extensively, and have complete knowledge of it. About 250 questionnaireswere distributed out of which almost 220 questionnaires were selected for conducting statisticaltest. Respondents were insured that their response will remain anonyms and will be used incurrent research only.Respondents selected for conducting the research were students and teachers of Universities, whouse online communities/blogs for lecture preparation and solving assignment. DemographicVariables were used where Educational Qualification of the respondents was evaluated. Studentswho are enrolled in Masters and Research Degrees were selected, Whereas Qualification ofteachers ranges from Masters to doctoral Degree. Out of 220 Respondents 65% were Male and35% were female of the total population i.e. 143 were Male and 77 were Female. Among 220respondents 112 (51%) respondents were students and 108 (49%) respondents were Teachers.Questionnaires were distributed in 3 different departments including Management Sciences,Engineering and Computer Science. Out of which 30% (66 out of 220) of respondents belong toEngineering Department, 35% (77out of 220) belongs to Computer Science Department and 35%(77 out of 220) belongs to Management Science Department. All the respondents own Cellphones and Computer / Laptop, use internet daily, and visit online communities/blogs almost 3-4times a week. Table 1 depicts the descriptive statistics.Table 1: Descriptive StatisticsCategory Frequency PercentageGenderMale 143 65%Female 77 35%Total 220 100%PositionTeacher 108 49%Student 112 51%Total 220 100%DepartmentManagement Science 77 35%Computer Sciences 77 35%Engineering 66 30%Total 220 100%MeasuresData was collected using Questionnaire developed in English. Close ended items were used tomeasure users’ response. Instrument was fragmented into two sections. First portion comprises ofDemographic Variables including University name, Position (Teacher / Student), Gender (Male /Female), and Frequency of Usage. Second portion consist of items related to Independent andDependent Variable.10Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comIndependent VariableSubjective NormIn current Study determinant Subjective Norm was measured by using 2-item scale developed byFishbein and Ajzen, (1975); Davis et al., (1989); Ajzen, (1991); Taylor and Todd, (1995 a, 1995b) and adopted by Venkatesh et al., (2003). The items were used to test: user perception related toindividual who is important in his life think he should or should not use the online community.Five point likert-scale was used to measure the items that ranged from 1: Strongly Disagree to 5:Strongly Agree. Cronbach Alpha was run to test the reliability of the measure and depicts alphavalue of α=0.89.Social FactorFour-item scale was used to measure social factor, developed by Thompson et al., (1991) andadopted by Venkatesh et al., (2003). The items test the influence or support of the referencegroups towards the usage of online community for preparation of lecture and solving assignment.Five point likert-scale was used and Cronbach Alpha was run depicting alpha value of α=0.85.ImageTo measure image three-item scale was used developed by Moore and Benbasat (1991) andadopted by Venkatesh et al., (2003) to test UTAUT. The items were tested using Five point likertscale and depicts alpha value of α=0.86.Dependent VariableUser IntentionUser Intention towards the usage of technology was measured using three item scale adopted byVenkatesh et al., (2003). Items were “ I intend to use Online Community in the next month”, “ Ipredict I would use the system in the next month”, and “I plan to use the system in the nextmonths”. The respondents were asked to respond using Five-point Likert scale from 1=StronglyDisagree to 5=Strongly Agree. Cronbach Alpha was run to test the reliability of the scale and itdepicts the alpha value of α=0.91.ProceduresAfter collecting questionnaire from the respondents, filled questionnaires were separated fromunfilled or partially filled questionnaires. SPSS-16 was used to conduct the statistical test. Inorder to obtain the frequency results, descriptive statistics was obtained.RESULTS AND ANALYSISReliability AnalysisCronbach Alpha was used to test the stability and consistency of instrument (Cavana, et.al.,2000). It helps in depicting the internal consistency of the instrument. Cavana et al., (2000)reported that Alpha value ranging from 0.80 to 1 is considered good, the value ranging in 0.70considered as moderate, where as the coefficient value ranging in 0.60 is considered poor.11Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comKeeping in view the above values Reliability test was conducted on the selected items anddepicted that all the items resulted reliable ranging above 0.80.Factor AnalysisFactor Analysis was run to test the validity of instrument. Cooper and Schindler (2001) describedFactor Analysis as “a statistical tool that help in identify the right measuring instruments and toguarantee the variability of research results”. Figure 2 depicts the factor loading of theirrespective items in each construct. It shows how strongly the items are linked to respectiveconstruct. Factor loading ranging from above 0.5 to 1 depicts that a link exist between the itemand the construct. The more it’s nearer to 1.0 the more it depicts strong link.SNi 0.88SNii 0.94Subjective NormSFi 0.81SFii 0.79SFiii 0.85SFiv 0.80Social FactorUser IntentionIBi 0.83IBii 0.69ImageIBiii 0.58Regression AnalysisFigure 2: Factor loading for each ItemMultiple Regression was run using SPSS, inorder to evaluate the relationship betweenIndependent Variable and Dependent Variable. R 2 value was calculated and it describes that thecurrent model only depicts 40% of the variation, hence insuring that there are various otherdeterminants (Ease of use, usefulness, facilitating condition, personality) that helps indetermining user intention towards technology usage. Three hypotheses were proposed and weretested, out of which two depicts positive relationship i.e. subjective norm and social factor aresignificantly linked with user intention; whereas image / status symbol poses a slightlyinsignificant relationship with user intention.Hypothesis 1: Subjective Norm positively influence User Intention towards usage ofOnline CommunitiesAfter conducting the regression analysis, it was statistically found that subjective norm ispositively related to user intention towards using Online Communities for preparing lectures andsolving assignments. The results depict the coefficient value of 0.79 describing that increase in12Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comone unit of user intention to use online communities’ results in the increase of 79 units ofsubjective norm. In addition results depict a significant P value of 0.002, hence explaining thatsubjective norm is a strong predictor of User Intention.Hypothesis 2: Social Factor positively influence User Intention towards usage ofOnline CommunitiesThe results of Multiple Regression revealed that Social Factor positively influence user Intentiontowards the usage of Online Communities. The results depict the Coefficient Value of 0.75 withSignificance Value of 0.03, hence depicting that an increase in one unit of User Intention resultsin the increase in 75 units of Social Factor. The significance value of 0.03 explains that socialfactor positively influences user Intention.Hypothesis 3: Image positively influence User Intention towards usage of OnlineCommunitiesThe result of statistical analysis depicts the coefficient Value of 0.51 with a P value of 0.067,hence explaining that image is negatively related to user intention as the P value is above 0.05.Table 2: Hypothesis Testing SummaryLink Standardized Coefficient Hypothesis TestingSubjective norm User Intention 0.79 SupportedSocial Factor User Intention 0.75 SupportedImage User Intention 0.51 Not SupportedCONCLUSIONThe current study evaluates the impact of social influence on User Intention. In UTAUT, aresearch was conducted using social Influence as a major construct, ignoring its three mainelements. Venkatesh et al., (2003) in future directions reported to conduct a research usingelements as a determinant of User Intention, inorder to understand the influence of each element.Therefore in the current study relationship between the elements of social influence and UserIntention was tested and the result depicts that out of three, two elements (Subjective Norm,Social Factor) positively influence user intention towards using Online Communities forpreparing lectures and solving assignments. The study concludes that teachers and students ofuniversities do not aim to use online communities for image building or for status symbol. Ratherthey are influence by the referent group or social gathering, who make them feel that it will helpthem in solving their assignments, will help them in preparation of the quiz, projects and lectures.In addition, research depicts that Online Communities are equally important to teachers andstudents of Engineering Department, Management Sciences Department and Computer SciencesDepartment.LIMITATION AND FUTURE DIRECTIONThe limitations in the current study are: (1) the research didn’t incorporate a demographicvariable to calculate the difference in the number of users visiting online communities for sharingknowledge or seeking knowledge. (2) Study fails to explain the influence of individualpersonality on the suggested links, (3) research was limited to universities only. Therefore thefuture study should consist of organization where online communities are used as a medium of13Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comcommunication / knowledge sharing within the organization. In addition Big 5 personality traitsshould be used as a moderating variable inorder to view the influence of individual difference onsuggested links.REFERENCES:Ajzen, I. (1991). The Theory of Planned Behavior,” Organizational Behavior and HumanDecision Processes, 50(2), 179-211.Blind, K (2004). The economics of standards: theory, evidence, policy, Edward Elgar Publishing.Cavana, R.Y., Delahaye, B.L., & Sekaran, U. (2000). Applied Research: Qualitative andQuantitative Methods, John Wiley & Sons Inc, Sydney.Cooper, D. R., & Schindler, P.S. (2001). Business research method, McGraw Hill, New York,NY.Davis, F.D. (1989). Perceived Usefulness, Perceived Ease of Use, and User Acceptance ofInformation Technology, MIS Quarterly, 13(3), 319-340.Davis, F.D., Bagozzi, R.P. & Warshaw, P.R. (1989). User Acceptance of Computer Technology:A Comparison of Two Theoretical Models, Management Science, 35(8), 982-1003.DeLone, W.H., & McLean, E.R. (2004). Measuring E-Commerce Success: Applying the DeLone& McLean Information Systems Success Model, International Journal of ElectronicCommerce, 9(1), 31-47.Fishbein, M. & Ajzen, I. (1975). Belief, Attitude, Intention and Behavior: An Introduction toTheory and Research, Addison-Wesley Publishing Company, Reading, MA.Jupp, V., (2006). The SAGE Dictionary of Social Research Methods, Sage Publication, England.Katz, Michael & Carl Shapiro, (1985). Network Externalities, Competition andCompatibility, American Economic Review, 75(3), 424-440.Kwai, F, & Wagner. C. (2008). Weblogging: A study of social computing and its impact onorganizations, Decision Support Systems, 45, 242–250.Lau, S., & Woods, P. C. (2009). Understanding learner acceptance of learning objects: The rolesof learning object characteristics and individual differences, British Journal ofEducational Technology, 40(6), 1059-1075.Legris, P., Ingham, J., & Collerette, P. (2002). Why do people use information technology? Acritical review of the technology acceptance model, Information & Management, 40,191-204.Moore, G. C., & Benbasat, I. (1991). Development of an Instrument to Measure the Perceptionsof Adopting an Information Technology Innovation, Information Systems Research, 2(3),192-222.Rashotte, L. (2006). Social Influence. Retrieved September 29, 2012, from:http://www.blackwellpublishing.com/sociology/docs/BEOS_S1413.pdf.14Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comRogers, E. (1995). Diffusion of Innovations, The Free Press, New York, NY.Salancik, G. R. & Pfeffer, J. (1978). A social information processing approach to job attitudesand task design, Administrative Science Quarterly, 23, 224-243.Taylor, S., and Todd, P. A. (1995a). Assessing IT Usage: The Role of Prior Experience, MISQuarterly, 19(2), 561-570.Taylor, S., & Todd, P. A. (1995b). Understanding Information Technology Usage: A Test ofCompeting Models, Information Systems Research, 6(4), 144-176.Thompson, R. L., Higgins, C. A., & Howell, J. M. (1991). Personal Computing: Toward aConceptual Model of Utilization, MIS Quarterly, 16(1), 125-143.Triandis, H.C. (1980). Values, Attitudes, and Interpersonal Behavior. Nebraska Symposium onMotivation, University of Nebraska Press, Lincoln, NE.Triandis,H.C. (1971). Attitude and Attitude Change, John Wiley and Sons, Inc., New York, NY.Venkatesh, V., & Davis, F. D. (2000). A Theoretical Extension of the Technology AcceptanceModel: Four Longitudinal Field Studies, Management Science, 45(2), 186-204.Venkatesh, V., Morris, M. G., Davis, G. B., & Davis, F. D. (2003). User Acceptance ofInformation Technology: Toward a Unified View, MIS Quarterly 27(3), 425-478.Venkatesh, V., Thong, J., Xu, X., (2012). Consumer acceptance and use of informationtechnology: extending the unified theory of acceptance and use of technology, MISQuarterly, 36(1), 157-178.Wikimedia Foundation (2012). Network Effect. Retrieved October 10, 2012, from:http://en.wikipedia.org/wiki/Network_effect.15Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comCorporate Accounting Frauds: A Case Studyof Satyam Computers LimitedMadan BhasinProfessor in Accounting,Bang College of Business, KIMEP University,Almaty, Republic of KazakhstanABSTRACTCorporate entities of all sizes, across the globe, are easily susceptible tofrauds at any points of time. From Enron, WorldCom and Satyam, itappears that corporate accounting fraud is a major problem that isincreasing, both in its frequency and severity. According to ACFE GlobalFraud Study 2012, “The typical organization loses 5% of its revenues tofraud each year. Applied to the 2011 Gross World Product, this figuretranslates to a potential projected annual fraud loss of more than $3.5trillion.” However, research evidence has shown that growing number offrauds have undermined the integrity of financial reports, contributed tosubstantial economic losses, and eroded investors’ confidence regardingthe usefulness and reliability of financial statements. The increasing rateof white-collar crimes “demands stiff penalties, exemplary punishments,and effective enforcement of law with the right spirit.”Keywords: Corporate accounting frauds, Satyam computers, case study, India,corporate governance, accounting and auditing standards.An attempt is made to examine and analyze in-depth the Satyam Computer’s “creative-accounting” scandal, which brought to limelight theimportance of ‘ethics’ and corporate ‘governance’. The fraud committed by the founders of Satyam in 2009 is a testament to the fact that “thescience of conduct is swayed in large by human greed, ambition, and hunger for power, money, fame and glory.” Scandals from Enron to therecent financial crisis have, time and again proved, that “there is an urgent need for good conduct based on strong corporate governance,ethics and accounting & auditing standards.” Unlike Enron, which sank due to ‘agency’ problem, Satyam was brought to its knee due to ‘tunneling’ effect. TheSatyam scandal highlights the importance of securities laws and CG in emerging markets. Indeed, Satyam fraud “spurred the government ofIndia to tighten the CG norms to prevent recurrence of similar frauds in future.” Thus, major financial reporting frauds need to be studied for‘lessons-learned’ and ‘strategies-to-follow’ to reduce the incidents of such frauds in the future.INTRODUCTIONInternational Journal ofContemporary Business StudiesVol: 3, No: 10. October, 2012Pp.16-42©Academy of Knowledge ProcessFraud is a worldwide phenomenon that affects all continents and all sectors of theeconomy. Fraud encompasses a wide-range of illicit practices and illegal actsinvolving intentional deception or misrepresentation. According to the Associationof Certified Fraud Examiners (ACFE, 2010), fraud is “a deception ormisrepresentation that an individual or entity makes knowing thatmisrepresentation could result in some unauthorized benefit to the individual or tothe entity or some other party.” In other words, mistakes are not fraud. Indeed, in16Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comfraud, groups of unscrupulous individuals manipulate, or influence the activities of a targetbusiness with the intention of making money, or obtaining goods through illegal or unfair means.Fraud cheats the target organization of its legitimate income and results in a loss of goods,money, and even goodwill and reputation. Fraud often employs illegal and immoral, or unfairmeans. It is essential that organizations build processes, procedures and controls that do notneedlessly put employees in a position to commit fraud and that effectively detect fraudulentactivity if it occurs.Fraud is a deliberated action done by one or more persons from the society’s leadership,employees or third parts, action which involves the use of false pretence in order to obtain anillegal or unjust advantage. The auditor will be concerned with the fraudulent actions leading to asignificant falsification of financial situations. The fraud involving persons from the leadershiplevel is known under the name “managerial fraud” and the one involving only entity’s employeesis named “fraud by employees’ association”. The IFAC’s International Audit Standards-240(2009) defines two types of fraud relevant for the auditor: (a) Falsifications that are caused by themisrepresentation of the assets; and (b) Falsifications that are caused by the fraudulent financialreporting, meaning the basic action that has provoked a falsification of the financial situationswas done intentionally or/and unintentionally. Financial statement fraud is also known asfraudulent financial reporting, and is a type of fraud that causes a material misstatement in thefinancial statements. It can include deliberate falsification of accounting records; omission oftransactions, balances or disclosures from the financial statements; or the misapplication offinancial reporting standards. This is often carried out with the intention of presenting thefinancial statements with a particular bias, for example concealing liabilities in order to improveany analysis of liquidity and gearing.MAGNITUDE OF FRAUDOrganizations of all types and sizes are subject to fraud. On a number of occasions over the pastfew decades, major public companies have experienced financial reporting fraud, resulting inturmoil in the U.S. capital markets, a loss of shareholder value, and, in some cases, thebankruptcy of the company itself. Although it is generally accepted that the Sarbanes-Oxley Acthas improved corporate governance and decreased the incidence of fraud, recent studies andsurveys indicate that investors and management continue to have concerns about financialstatement fraud. For example:• The Association of Certified Fraud Examiners’ (ACFE) “2010 Report to the Nations onOccupational Fraud and Abuse” found that financial statement fraud, while representingless than five percent of the cases of fraud in its report, was by far the most costly, with amedian loss of $1.7 million per incident. Survey participants estimated that the typicalorganization loses 5% of its revenues to fraud each year. Applied to the 2011 GrossWorld Product, this figure translates to a potential projected annual fraud loss of morethan $3.5 trillion. The median loss caused by the occupational fraud cases in our studywas $140,000. More than one-fifth of these cases caused losses of at least $1 million. Thefrauds reported to us lasted a median of 18 months before being detected.• “Fraudulent Financial Reporting: 1998–2007,” from the Committee of SponsoringOrganizations of the Treadway Commission (the 2010 COSO Fraud Report), analyzed347 frauds investigated by the U.S. Securities and Exchange Commission (SEC) from1998 to 2007 and found that the median dollar amount of each instance of fraud hadincreased three times from the level in a similar 1999 study, from a median of $4.1million in the 1999 study to $12 million. In addition, the median size of the company17Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.cominvolved in fraudulent financial reporting increased approximately six-fold, from $16million to $93 million in total assets and from $13 million to $72 million in revenues.• A “2009 KPMG Survey” of 204 executives of U.S. companies with annual revenues of$250 million or more found that 65 percent of the respondents considered fraud to be asignificant risk to their organizations in the next year, and more than one-third of thoseidentified financial reporting fraud as one of the highest risks.• Fifty-six percent of the approximately 2,100 business professionals surveyed during a“Deloitte Forensic Center” webcast about reducing fraud risk predicted that morefinancial statement fraud would be uncovered in 2010 and 2011 as compared to theprevious three years. Almost half of those surveyed (46 percent) pointed to the recessionas the reason for this increase.• According to “Annual Fraud Indicator 2012” conducted by the National Fraud Authority(U.K.), “The scale of fraud losses in 2012, against all victims in the UK, is in the regionof £73 billion per annum. In 2006, 2010 and 2011, it was £13, 30 and 38 billions,respectively. The 2012 estimate is significantly greater than the previous figures becauseit includes new and improved estimates in a number of areas, in particular against theprivate sector. Fraud harms all areas of the UK economy.”The 2010 ACFE Report is based on 1,843 fraud cases examined by its members in more than 100countries between January 2008 and December 2009. The Report identified the entity typeswhich were victims of fraud, as shown in Table 1. It also presented data with respect to victimsize, measured in terms of number of employees. For small organizations (under 100 employees),the frequency of fraud cases exceeded that of larger organizations, and the median loss wascomparable to that for the largest of the four size categories reported. The Report cites the limitedamount of financial and human resources available for fraud prevention in small organizations asa major driver of the results. In addition, leadership of small organizations typically has closerrelationships with, and trust in, their employees, and thus, may engage in less oversight. Internalcontrols are the first-line of defense against fraud. When strong controls are lacking, or whencontrols are in place but are not actually followed, the environment for fraud is enhanced.Table 1: Fraud Victims by Type of Organization and Entity SizeType of Organization Percent of Fraud Cases Median Loss in $Private companies 42.1 231,000Public companies 32.1 200,000Government 16.3 100,000Not-for-profit 9.6 90,000Size of EntityLess than 100 employees 30.8 155,000100 –999 employees 22.8 200,0001,000 – 9,999 employees 25.9 139,000More than 10,000 employees 20.6 164,000(Source: Association of Certified Fraud Examiners, 2010 “Report to the Nation on OccupationalFraud and Abuse,” pp. 27-29, http:/www.acfe.com/rttn/rttn-2010.pdf)Moreover, financial statement fraud was a contributing factor to the recent financial crisis and itthreatened the efficiency, liquidity and safety of both debt and capital markets (Black, 2010).Furthermore, it has significantly increased uncertainty and volatility in financial markets, shakinginvestor confidence worldwide. FSF also reduces the creditability of financial information thatinvestors use in investment decisions. When taking into account the loss of investor confidence,as well as, reputational damage and potential fines and criminal actions, it is clear why financial18Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.commisstatements should be every manager’s worst fraud-related nightmare (E&Y, 2009). However,the terms “fraudulent financial reporting” and “financial statement fraud” are interchangeablythroughout this paper.Past research has shown that corporate environment most likely to lead to an accounting scandalmanifests significant growth and accounting practices that are already pushing the envelope ofearnings smoothing (Crutchley et al., 2007). The primary responsibility for the prevention anddetection of frauds and errors belongs to the ‘leadership’, as well as, to the ‘management’ of thecorporation. The accent falls on preventing frauds, and it can determine individuals to not commitfraud because of the possibility to be discovered and punished. The creation of a culture of theorganization and ethical behavior is necessary in any corporation/society and it must becommunicated and sustained by the persons in charge of leadership (surveillance, control,management). The active surveillance of those in charge of the leadership means a continuity ofthe internal control, the analysis of the financial situations’ safety, the efficiency and efficacy ofoperations, of the conformity with the legislation and regulations in use.WHP COMMITS FRAUDS?As Reuber and Fischer (2010) states: “Everyday, there are revelations of organizations behavingin discreditable ways.” Observers of organizations may assume that firms will suffer a loss ofreputation if they are caught engaging in actions that violate social, moral, or legal codes, such asflaunting accounting regulations, supporting fraudulent practices, damaging the environment ordeploying discriminatory hiring practices. There are three groups of business people who commitfinancial statement frauds. They range from senior management (CEO and CFO); mid- andlower-level management and organizational criminals (Crumbley, 2003). CEOs and CFOscommit accounting frauds to conceal true business performance, to preserve personal status andcontrol and to maintain personal income and wealth. Mid- and lower-level employees falsifyfinancial statements related to their area of responsibility (subsidiary, division or other unit) toconceal poor performance and/or to earn performance-based bonuses. Organizational criminalsfalsify financial statements to obtain loans or to inflate a stock they plan to sell in a “pump-anddump”scheme. Methods of financial statement schemes range from fictitious or fabricatedrevenues; altering the times at which revenues are recognized; improper asset valuations andreporting; concealing liabilities and expenses; and improper financial statement disclosures(Wells, 2005). Sometimes these actions result in damage to an organization’s reputation.While many changes in financial audit processes have stemmed from financial fraud ormanipulations, history and related research repeatedly demonstrates that a financial audit simplycannot be relied upon to detect fraud at any significant level. The Association of Certified FraudExaminers (ACFE) conducts research on fraud and provides a report on the results biennially,entitled “Report to the Nation.” The statistics in these reports (ACFE 2002, 2004, 2006)consistently states that about 10–12 percent of all detected frauds are discovered by financialauditors (11.5 percent, 10.9 percent, and 12.0 percent, respectively). The KPMG Fraud Survey(KPMG 1994, 1998, 2003) consistently reports lower but substantively similar detection rates (5percent, 4 percent, and 12 percent, respectively). The dismal reliability of financial audits todetect fraud can be explained very simply. They are not designed or executed to detect frauds.Statistically, one could infer that about 10 percent of all frauds are material, and because financialaudit procedures are designed to detect material misstatements, then a 10 percent detection ratewould be logical.19Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comCONSEQUENCES OF FRAUDULENT FINANCIAL REPORTINGFraudulent financial reporting can have significant consequences for the organization and itsstakeholders, as well as for public confidence in the capital markets. Periodic high-profile casesof fraudulent financial reporting also raise concerns about the credibility of the U.S. financialreporting process and call into question the roles of management, auditors, regulators, andanalysts, among others (Telberg, 2003).Moreover, fraud impacts organizations in several areas: financial, operational and psychological.While the monetary loss owing to fraud is significant, the full impact of fraud on an organizationcan be staggering. In fact, the losses to reputation, goodwill, and customer relations can bedevastating. When fraudulent financial reporting occurs, serious consequences ensue. Thedamage that results is also widespread, with a sometimes devastating ‘ripple’ effect. Thoseaffected may range from the ‘immediate’ victims (the company’s stockholders and creditors) tothe more ‘remote’ (those harmed when investor confidence in the stock market is shaken).Between these two extremes, many others may be affected: ‘employees’ who suffer job loss ordiminished pension fund value; ‘depositors’ in financial institutions; the company’s‘underwriters, auditors, attorneys, and insurers’; and even honest ‘competitors’ whose reputationssuffer by association. As fraud can be perpetrated by any employee within an organization or bythose from the outside, therefore, it is important to have an effective “fraud management”program in place to safeguard your organization’s assets and reputation. Thus, prevention andearlier detection of fraudulent financial reporting must start with the entity that prepares financialreports.The wave of financial scandals at the turn of the 21st century elevated the awareness of fraud andthe auditor’s responsibilities for detecting it. The frequency of financial statement fraud has notseemed to decline since the passage of the Sarbanes-Oxley Act in July 2002 (Hogan et al., 2008).For example, The 4 th Biennial Global Economic Crime Survey (2007) of more than 3,000corporate officers in 34 countries conducted by PricewaterhouseCoopers (PwC) reveals that “inthe post-Sarbanes-Oxley era, more financial statement frauds have been discovered and reported,as evidenced by a 140% increase in the discovered number of financial misrepresentations (from10% of companies reporting financial misrepresentation in the 2003 survey to 24% in the 2005survey). The increase in fraud discoveries may be due to an increase in the amount of fraud beingcommitted and/or also due to more stringent controls and risk management systems beingimplemented,” (PricewaterhouseCoopers 2005). The high incidence of fraud is a serious concernfor investors as fraudulent financial reports can have a substantial negative impact on acompany’s existence as well as market value. For instance, the lost market capitalization of 30high-profile financial scandals caused by fraud from 1997 to 2004 is more than $900 billion,which represents a loss of 77% of market value for these firms, while recognizing that the initialmarket values were likely inflated as a result of the financial statement fraud.No doubt, recent corporate accounting scandals and the resultant outcry for transparency andhonesty in reporting have given rise to two disparate yet logical outcomes. First, ‘forensic’accounting skills have become crucial in untangling the complicated accounting maneuvers thathave obfuscated financial statements. Second, public demand for change and subsequentregulatory action has transformed ‘corporate governance’ (henceforth, CG) scenario. Therefore,more and more company officers and directors are under ethical and legal scrutiny. In fact, boththese trends have “the common goal of addressing the investors’ concerns about the transparentfinancial reporting system.” The failure of the corporate communication structure has made thefinancial community realize that there is a great need for ‘skilled’ professionals that can identify,20Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comexpose, and prevent ‘structural’ weaknesses in three key areas: poor CG, flawed internal controls,and fraudulent financial statements. “Forensic accounting skills are becoming increasingly reliedupon within a corporate reporting system that emphasizes its accountability and responsibility tostakeholders” (Bhasin, 2008). Following the legislative and regulatory reforms of corporateAmerica, resulting from the Sarbanes-Oxley Act of 2002, reforms were also initiated worldwide.Largely in response to the Enron and WorldCom scandals, Congress passed the Sarbanes-OxleyAct (SOX) in July 2002. SOX, in part, sought to provide whistle-blowers greater legal protection.As Bowen et al. (2010) states, “Notable anecdotal evidence suggests that whistle-blowers canmake a difference. For example, two whistle-blowers, Cynthia Cooper and Sherron Watkins,played significant roles in exposing accounting frauds at WorldCom and Enron, respectively, andwere named as the 2002 persons of the year by Time magazine.”Given the current state of the economy and recent corporate scandals, fraud is still a top concernfor corporate executives. In fact, the sweeping regulations of Sarbanes-Oxley, designed to helpprevent and detect corporate fraud, have exposed fraudulent practices that previously may havegone undetected. Additionally, more corporate executives are paying fines and serving prisontime than ever before. No industry is immune to fraudulent situations and the negative publicitythat swirls around them. The implications for management are clear: every organization isvulnerable to fraud, and managers must know how to detect it, or at least, when to suspect it.THE REVIEW OF LITERATUREStarting in the late 1990s, a wave of corporate frauds in the United States occurred with Enron’sfailure perhaps being the emblematic example. Jeffords (1992) examined 910 cases of fraudssubmitted to the “Internal Auditor” during the nine-year period from 1981 to 1989 to assess thespecific risk factors cited in the Treadway Commission Report. He concluded that“approximately 63 percent of the 910 fraud cases are classified under the internal control risks.”Calderon and Green (1994) made an analysis of 114 actual cases of corporate fraud published inthe “Internal Auditor” during 1986 to 1990. They found that limited separation of duties, falsedocumentation, and inadequate (or non-existent) control accounted for 60% of the fraud cases.Moreover, the study found that professional and managerial employees were involved in 45% ofthe cases. In addition, Smith (1995) offered a ‘typology’ of individuals who embezzle. Heindicated that embezzlers are “opportunist’s type”, who quickly detects the lack of weakness ininternal control and seizes the opportunity to use the deficiency to his benefit. To deterembezzlement, he recommended: (a) institute strong internal control policies, which reduce theopportunity of crime, and (b) conduct an aggressive and thorough background check prior toemployment.Bologna and Lindquist (1996) in their study cited the ‘environmental’ factors that enhance theprobability of embezzlement of funds. However, Ziegenfuss (1996) performed a study todetermine the amount and type of fraud occurring in ‘state and local’ governments. His studyrevealed that the most frequently occurring types of fraud are misappropriation of assets, theft,false representation; and false invoice. On the other hand, Haugen and Selin (1999) in their studydiscussed the value of ‘internal’ controls, which depends largely on management’s integrity.Adding to the situation of poor internal controls, the readily available computer technology alsoassisted in the crime, and the opportunity to commit fraud becomes a reality.Sharma and Brahma (2000) have emphasized on ‘bankers’ responsibility on frauds; bank fraudscould crop-up in all spheres of bank’s dealing. Major cause for perpetration of fraud is laxity in21Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comobservance in laid-down system and procedures by supervising staff. Harris and William (2004),however, examined the reasons for ‘loan’ frauds in banks and emphasized on due diligenceprogram. They indicated that lack of an effective internal audit staff at the company, frequentturnover of management or directors, appointment of unqualified persons in key audit or financeposts, customer’s reluctance to provide requested information or financial statements andfictitious or conflicting data provided by the customers are the main reasons for loan frauds.Beirstaker, Brody, Pacini (2005) in their study proposed numerous fraud protection and detectiontechniques. Rezaee (2005), however, finds five interactive factors that explain several highprofile‘financial statement’ frauds. These factors are: cooks, recipes, incentives, monitoring andend results (CRIME). Moreover, Willison (2006) examined the causes that led to the breakdownof ‘Barring’ Bank. The collapse resulted due to the failures in management, financial andoperational controls of Baring Banks.Choo and Tan (2007) explained corporate fraud by relating the ‘fraud-triangle’ to the “brokentrust theory” and to an “American Dream” theory, which originates from the sociologicalliterature, while Schrand and Zechman (2007) relate executive over-confidence to thecommitment of fraud. In fact, research results by Crutchley et al., (2007) have shown that“corporate environment most likely to lead to an accounting scandal manifests significant growthand accounting practices that are already pushing the envelope of ‘earnings smoothing’. Firmsoperating in this environment seem more likely to tip over the edge into fraud if there are feweroutsiders on the audit committee and outside directors appear overcommitted.” Moreover, Bhasin(2008) examined the reasons for ‘check’ frauds, the magnitude of frauds in Indian banks, and themanner, in which the expertise of internal auditors can be integrated, in order to detect andprevent frauds in banks. In addition to considering the common types of fraud signals, auditorscan take several ‘proactive’ steps to combat frauds.Chen (2010) in his study examined the proposition that “a major cause of the leading financialaccounting scandals that received much publicity around the world was ‘unethical’ leadership inthe companies and compares the role of unethical leaders in a variety of scenarios. Through theuse of computer simulation models, it shows how a combination of CEO’s narcissism, financialincentive, shareholders’ expectations and subordinate silence as well as CEO’s dishonesty can domuch to explain some of the findings highlighted in recent high-profile financial accountingscandals.” According to a research study performed by Cecchini et al., (2010), the authorsprovided a methodology for detecting ‘management’ fraud using basic financial data based on‘support vector machines’. A large empirical data set was collected, which included quantitativefinancial attributes for fraudulent and non-fraudulent public companies. They concluded that“Support vector machines using the financial kernel correctly labeled 80% of the fraudulent casesand 90.6% of the non-fraudulent cases on a holdout set. The results also show that themethodology has predictive value because, using only historical data, it was able to distinguishfraudulent from non-fraudulent companies in subsequent years.”An examination of prior literature reveals that the likelihood of committing fraud has typicallybeen investigated using financial and/or governance variables. The moral, ethical, psychologicaland sociological aspects of fraud have also been covered by the literature. Moreover, somestudies also suggested that psychological and moral components are important for gaining anunderstanding of what causes unethical behavior to occur that could eventually lead to fraud. Alarge majority of these studies were performed in developed, Western countries. However, themanager’s behavior in fraud commitment has been relatively unexplored so far. Accordingly, theoverarching objective of this paper is to examine managers’ unethical behaviors in documented22Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comcorporate fraud cases on the basis of press articles, which constitute an ex-post evaluation ofalleged or acknowledged fraud cases. Unfortunately, no study has been conducted to examinebehavioral aspects of manager’s in the perpetuation of corporate frauds in the context of adeveloping economy, like India. Hence, the present study seeks to fill this gap and contributes tothe literature.RESEARCH METHODOLOGYFinancial reporting practice can be developed by reference to a particular setting in which it isembedded. Therefore, ‘qualitative’ research could be seen useful to explore and describefraudulent financial reporting practice. Here, two issues are crucial. First, to understand why andhow a ‘specific’ company is committed to fraudulent financial reporting practice an appropriate“interpretive” research approach is needed. Second, case study conducted as part of this study,looked specifically at the largest fraud case in India, involving Satyam Computer Services(Satyam). Labelled as “India’s Enron” by the Indian media, the issue involved fraud and financialstatement manipulation over a 10-year period, predominantly by the chairman, Ramalinga Raju(henceforth, Mr. Raju). It is India’s fourth largest software services exporter having operations in66 countries. The Satyam accounting fraud has, for the first time, comprehensively exposed thefailure of the regulatory oversight mechanism in India. No doubt, to design better accountingsystems, we need to understand how accounting systems operate in their social, political andeconomic contexts.OBJECTIVES OF STUDY AND SOURCES OF INFORMATIONRecently, the accounting fraud of Satyam rocked the world; some even named it as Indian Enron.Satyam fraud is India’s biggest corporate scandal since the early 1990s and its first high-profilecasualty since the start of the global financial crisis. The main objectives of this study are to: (1)identify the prominent American and foreign companies involved in fraudulent financialreporting practices and the nature of accounting irregularities they committed; (2) highlight theSatyam Computers Limited’s accounting scandal by portraying the sequence of events, theaftermath of events, the key parties involved, and major follow-up actions undertaken in India;and (3) what lesions can be learned from Satyam scam?To complement prior literature, we examined “documented behaviors in cases of corporatescandals, using the evidence taken from press articles (such as managers’ quotes and journalists’analyses).” In this context, research-based evidence by Miller (2006) has shown that “press fulfillthe role of a monitor or watchdog for accounting frauds by rebroadcasting information from otherinformation intermediaries (analysts, auditors, and lawsuits) and by undertaking originalinvestigation and analysis.” In addition, we prepared the “Corporate Scandal Fact Sheet,” whichincludes a list of ‘short’ vignettes on companies, and the names of the main characters involved inthe corporate fraud scandals. To attain the above stated research objectives we applied a“content” analysis to the “press” articles.In terms of information collection ‘methodology’, we searched for evidence from the U.S. presscoverage contained in the “Factiva” database (also called Dow Jones Factiva). It is a nonacademicdatabase of international news containing 20,000 worldwide full-text publicationsincluding The Financial Times, The Wall Street Journal, as well as the continuous informationfrom Reuters, Dow Jones, and the Associated Press. We also used SEC documents, to understandthe technical and accounting aspects of the corporate fraud. For some companies, we also usedthe restatement reports. Thus, present study is primarily based on “secondary” sources of data,23Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com(EBSCO host database), gathered from the related literature published in the journals, newspaper,books, statements, reports. However, as stated earlier, the nature of study is “primarilyqualitative, descriptive and analytical.” However, no quantitative and statistical tools have beenused for analysis of this case study.GLOBAL CASES OF CORPORATE FRAUDS AND ACCOUNTING FAILURESFinancial scandals have plagued our society since before the Industrial Revolution. During thelast few decades, there have been numerous financial frauds and scandals, which were milestoneswith historical significance. For instance, in the 1970s, the equity funding scandal was uncovered.In this context, Pearson et al., (2008) remarked, “Equity funding scandal is significant because itis one of the first major financial scandals, where computers were used to assist in perpetrating afraud. The CEO and other conspirators kept track of the ‘phony’ insurance policies by assigningspecial ‘codes’ to them.” The public has witnessed a number of well-known examples ofaccounting scandals and bankruptcy involving large and prestigious companies in ‘developed’countries. The media has reported scandals and bankruptcies in companies, such as, Sunbeam, K-mart, Enron, Global Crossing (USA), BCCI, Maxwell, Polly Peck (UK) and HIH Insurance(Australia). Besides scandals in developed countries, which have sophisticated capital marketsand regulations, similar cases can be also seen in ‘developing’ countries with ‘emerging’ capitalmarkets. Asian countries have also experienced similar cases, such as, PT Bank Bali and SinarMas Group (Indonesia), Bangkok Bank of Commerce (Thailand), United Engineers Bhd(Malaysia), Samsung Electronics and Hyundai (Korea). The corporate collapses of recent times,culminating with massive collapses, such as, those of Enron in the U.S., HIH in Australia, andSatyam in India, have suggested that there are major ‘systemic’ problems facing the way in whichcorporations and CG operate.The recent high-profile accounting scandals involving major companies worldwide, such as,Enron, WorldCom, Parmalat and most recently, India’s Satyam along with recent outcries overthe excessive remuneration paid to some CEOs have raised questions about the relationshipbetween ethical leadership, financial incentives and financial misreporting (Chen, 2010). Duringthe recent series of corporate fraudulent financial reporting incidents in the U.S., similar corporatescandals were disclosed in several other countries. Almost all cases of foreign corporateaccounting frauds were committed by entities that conducted their businesses in more than onecountry, and most of these entities are also listed on U.S. stock exchanges. The list of corporatefinancial accounting scandals in the U.S. is extensive, and each one was the result of one or more“creative-accounting” irregularities. Table 2 identifies a sample of U.S. companies thatcommitted such fraud and the nature of their fraudulent financial reporting activities (Badawi,2003). Overseas, nine major international companies, based in eight different countries have alsocommitted financial accounting frauds. Table 3 identifies these nine international companies andthe nature of the accounting irregularities they committed (Taub 2004).Table 2: A Sample of Cases of Corporate Accounting Frauds in the USAAdelphia CommunicationsFounding family collected $3.1 billion in off-balance-sheet loans backed bycompany. Earnings were overstated by capitalization of expenses and hidingdebt.AOL Time WarnerBarter deals and advertisements sold on behalf of others were recorded asrevenue to keep its growth rate high. Sales were also boosted via “roundtrip”deals with advertisers and suppliers.Bristol-Myers SquibbInflated 2001 revenues by $1.5 billion by “channel stuffing,” forcing orgiving inappropriate incentives to wholesalers to accept more inventory thanthey needed, to enable company to meet its 2001 sales targets.CMS EnergyExecuted “round-trip (buy and sell)” trades to artificially boost energy24Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comtrading volume and revenues.EnronTops the list of biggest US corporate collapses. Company boosted profitsand hid debts totalling over $1 billion over several years by improperlyusing partnerships. It also manipulated the Texas power and Californiaenergy markets and bribed foreign governments to win contracts abroad.Qwest CommunicationsInflated revenues using network capacity “swaps” and improper accountingfor long-term deals. The SEC is investigating whether the company wasaware of his actions, and possible improper use of company funds andrelated-party transactions, as well as improper merger accounting practices.WorldCom To cover losses, top executives overstated earnings by capitalizing $9billion of telecom operating expenses and thus overstating profits and assetsover five quarters beginning 2001. Founder Bernard Ebbers received $400million in off-the-books loans.XeroxOverstated earnings for five years, boosting income by $1.5 billion, bymisapplication of various accounting rules.(Source: Badawi, I. (2003) “Global Corporate Accounting Frauds and Action for Reforms,” Review of Business,page 9)Other frauds of significant interest include ZZZZ Best (1986), Phar-Mor (1992), Cendant (1998),Waste Management (1998), Sunbeam (2002), Parmalat (2003), along with a host of others.According to “Accounting Scandals,” the long list reached a critical mass in 2002 in the U.S.Perhaps no financial frauds had a greater impact on accounting and auditing than Enron andWorldCom. In the case of WorldCom, for example, it can be seen that in 2002 WorldCom filedthe largest bankruptcy in accounting history, revealing that management fraudulently misstatedearnings. Arthur Andersen, WorldCom’s auditor, failed to notice US$3.85 billion shifting offunds to cover up revenue shortages. The Enron case also showed a similar pattern of earningsmanagement. Enron had “aggressive earnings targets and entered into numerous complextransactions to achieve those targets.” Arthur Andersen, a well-known accounting firm, let theline between consulting and auditing blur. The collapse of large companies worldwide (HIHinsurance, Enron, WorldCom) have sparked lively interest in the amount of consultancy fees thatexternal auditors receive in addition to audit fees. In the Australia environment, HIH insurancepaid Andersen A$1.7 million for audit services and A$1.6 million for consultancy services for the1999–2000 financial year. As a consequence, it has been argued that the role of external auditorshas been subject to the influence of the board of directors of the company. As Jennings (2003)concluded, “The Enron collapse showed a similar relationship between Andersen and Enron. Infact, while the Enron/Andersen relationship was extreme, its individual components provideindications of how a relationship can become so muddled that auditor independence issacrificed.” The above evidence shows that auditors were not independent and this can lead tolow-quality financial reporting.In general, it can be claimed that the above accounting scandals occurred because of ‘integrated’factors, such as, lack of auditor independence, weak law enforcement, dishonest management,weak internal control, and inability of CG mechanism in monitoring management behaviors.Unfortunately, it is also true that most frauds are perpetrated by people in positions of trust in theaccounting, finance, and IT functions (Carpenter et al., 2011). Consequently, there should bealternative tools to detect the possibility of financial frauds. ‘Forensic’ accounting can be seen asone of such tools. As Pearson et al., (2008) states, “An understanding of effective fraud andforensic accounting techniques can assist forensic accountants in identifying illegal activity anddiscovering and preserving evidence.” Hence, it is important to understand that the role of aforensic accountant is different from that of regular auditor. It is widely known that an auditordetermines compliance with auditing standards and considers the possibility of fraud. Someregulators have apparently noticed the need for forensic accounting. For example, the Sarbanes-Oxley Act (SOX), the Statement on Auditing Standards-99 (SAS 99), and the Public Company25Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comAccounting Oversight Board (PCAOB) have not removed the pressures on CFOs to manipulateaccounting statements (Gornik et al, 2005). The PCAOB recommends that an auditor shouldperform at least one walkthrough for each major class of transactions. However, SAS 99 does notrequire the use of forensic specialists but does recommend brainstorming, increased professionalskepticism, and unpredictable audit tests. Thus, a ‘proactive’ fraud approach involves a review ofinternal controls and the identification of the areas most subject to fraud.Table 3: A Sample of Cases of Corporate Accounting Frauds OverseasAdecco International The world’s largest international employment services company, it was formed in(Switzerland)Switzerland in 1996. The company confirmed existence of weakness in internal controlsystems and accounting of Adecco staffing operations in certain countries, especially inthe U.S. Manipulation involved IT system security, reconciliation of payroll bankaccounts, accounts receivable and documentation in revenue recognition. Theseirregularities forced an indefinite delay in the company’s profit figures, whicheventually caused a significant decline in the company’s stock prices in Switzerlandand the U.S.; and intervention of the SEC.Ahold NVCompany is the world’s third largest food retailer and food services group after Wal-Mart and Carrefour. Ahold U.S.A. is the regional office in the U.S. On July 27, 2004,(Tbe Netherlands)the Dutch parent company announced that the SEC brought charges against four formerexecutives of its U.S. food services operations relating to accounting fraud andconspiracy. U.S. executives were accused by the SEC of orchestrating an accountingfraud that battered the food distributor and its Dutch parent company by inflating thecompany's earnings by roughly $800 million over a two-year period. The invented costsavings technique recorded fictitious rebates know as “promotional allowances” thatnever existed, to give the appearance of cost savings, which in turn boosted profits.Asea Brown Boveri(Sweden)Elan (Ireland)Global Crossing Ltd.(Bermuda)Nortel Networks Corp.(Canada)Parmalat (Itlay)Royal Dutch/ShellGroupExecutives also faced charges of filing false documents with the SEC.The Swedish-Swiss firm Asea Brown Boveri was seen as “a paradigm of Europeancapitalism at its best.” In 2002, it suddenly turned into a “Swedish version of Enron.”Company discovered that after CEO Percy Barnevik resigned, he secretly cashed in a$148 million severance package for himself and his successor, Goran Lindahl.A pharmaceutical company listed on Nasdaq. In January 2004, company admittedimproperly using off-balance-sheet vehicles, placing it under SEC investigation. It alsosuffered a setback on a drug developed to treat Alzheimer's disease. The CFO andChairman left the company, but were retained as consultants.One of the hottest telecom companies and only five years old, it engaged in “networkcapacity swapping activities” with other carriers to inflate revenues. It then shreddeddocuments related to these accounting practices.The Canadian company, headquartered in Ontario, is the largest telecom equipmentmaker and provider in North America. Company remained tied up in a long SEC reviewof its financial results for 2001-2003, and the first-half of 2004, due to materialweaknesses in internal controls. Several top executives were fired as securitiesregulators performed investigations. In 2004, the company delayed restating itsfinancial results for the third time, as it underwent investigations. Former top executivesare suspected of committing accounting irregularities, aimed at inflating earnings,which helped make the company the largest telecom equipment supplier. Underinvestigation is the appropriateness of the company’s reserve accounts, whether therewas an intentional inflation of reserves, which would be released to earnings in lateryears and the company’s questionable bonus program.Parmalat, a global food and dairy conglomerate, is Italy’s eighth-largest company andthe No. 3 provider of dairy (and cookie-maker) in the US. In Dec. 2003, a bank accountwith Bank of America holding 3.9 billion was revealed not to exist. More than 50individuals were investigated. They were suspected of committing fraud and falsefinancial accounting, which contributed to the company’s bankruptcy. The companyacknowledged a multi-billion-dollar gap in its balance sheet accounts. Parmalat’s jailedfounder estimated the size of deficiency in its finances at $10 billion, and admitted thathe shifted $620 million from the company’s coffers to unprofitable travel businessesthat were controlled by his family.Shell, the third largest oil company, is a global group of energy and petrochemicalcompanies, operating in more than 145 countries. In July 2004, the company reported26Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.compaying a total of $150 million in fines to the SEC and its British counterpart, theFinancial Services Authority, following investigations into the company’soverstatement of its oil and gas reserves. Since Jan. 2004, the company was subject tointense criticism and scrutiny when executives made the first of four restatementsrelated to its oil and gas reserves. Shell agreed with Britain’s FSA’s findings that itabused the provisions of the FSM Act. It paid 17 million pounds in fines, the largest theregulator has ever levied. Shell also agreed to an SEC order that finds that the companyviolated antifraud reporting, record-keeping and internal control provisions of USfederal securities laws. The company also was investigated by the US Department ofJustice and by Netherlands regulators.Vivendi UniversalThe SEC accused this Paris-based company of misleading investors in its news releases(France)and financial statements. Management was engaged in misconduct trying to meetearnings goals and intentionally violated certain accounting principles to inflate profits.For 18 months, senior executives refused to acknowledge the company’s liquidityproblems and earnings shortfalls. Its former CEO transformed the company from awater utility into a film and media empire but saddled it with huge debts (33 billion),which were difficult to pay. On Dec. 23, 2003, the company agreed to pay $50 millionto settle accusations by the SEC and it did not have to revise any financial statements.(Source: Badawi, I. (2003) “Global Corporate Accounting Frauds and Action for Reforms,” Review of Business,pp. 12-13.)The corporate scandals of the last few years came as a ‘shock’ not just because of the enormity offailures, but also because of the discovery that ‘questionable’ accounting practice was far “moreinsidious and widespread than previously envisioned.” A definite link between these accountingfailures and poor CG, thus, is beginning to emerge. For instance, Badawi (2003) very aptlyobserves: “Adelphia, for example, was given a very low 24% rating by Institutional ShareholderServices on its CG score. In Europe, Parmalat and Royal Ahold were ranked in the bottomquartile of companies in the index provided by Governance Metrics International.” Similarly, theCorporate Library had issued early failure warnings in respect of both WorldCom and Enron. Anincreasing number of researchers now are finding that poor CG is a leading factor in poorperformance, manipulated financial reports, and unhappy stakeholders. Corporations andregulatory bodies are currently trying to analyze and correct any existing defects in their reportingsystem. In addition, discussion on the relevance of forensic accounting in detecting accountingscandals has emerged in recent year.The fraud cases described above implies that these corporations have failed to supply accurateinformation to their investors, and to provide appropriate disclosures of any transactions thatwould impact their financial position and operating results. To quote Razaee (2005), “The recentaccounting scandals have induced a crisis of confidence in financial reporting practice andeffectiveness of CG mechanisms. Accordingly, a number of efforts have been conducted toprevent the possibility of similar scandals in the forthcoming future.”CORPORATE ACCOUNTING SCANDAL AT SATYAM COMPUTERSERVICES LIMITED: A CASE STUDY OF INDIA’S ENRONBACKGROUNDIronically, Satyam means “truth” in the ancient Indian language “Sanskrit” (Basilico et al., 2012).Satyam won the “Golden Peacock Award” for the best governed company in 2007 and in 2009.From being India’s IT “crown jewel” and the country’s “fourth largest” company with highprofilecustomers, the outsourcing firm Satyam Computers has become embroiled in the nation’sbiggest corporate scam in living memory (Ahmad, et al., 2010). Mr. Ramalinga Raju (Chairman27Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comand Founder of Satyam; henceforth called ‘Raju’), who has been arrested and has confessed to a$1.47 billion (or Rs. 7,800 crore) fraud, admitted that he had made up profits for years. Accordingto reports, Raju and his brother, B. Rama Raju, who was the Managing Director, “hid thedeception from the company’s board, senior managers, and auditors.” The case of Satyam’saccounting fraud has been dubbed as “India’s Enron”. In order to evaluate and understand theseverity of Satyam’s fraud, it is important to understand factors that contributed to the ‘unethical’decisions made by the company’s executives. First, it is necessary to detail the rise of Satyam as acompetitor within the global IT services market-place. Second, it is helpful to evaluate thedriving-forces behind Satyam’s decisions: Ramalinga Raju. Finally, attempt to learn some‘lessons’ from Satyam fraud for the future.EMERGENCE OF SATYAM COMPUTER SERVICESSatyam Computer Services Limited was a ‘rising-star’ in the Indian ‘outsourced’ IT-servicesindustry. The company was formed in 1987 in Hyderabad (India) by Mr. Ramalinga Raju. Thefirm began with 20 employees and grew rapidly as a ‘global’ business. It offered IT and businessprocess outsourcing (BPO) services spanning various sectors. Satyam was as an example of“India’s growing success.” Satyam won numerous awards for innovation, governance, andcorporate accountability. As Agrawal and Sharma (2009) states, “In 2007, Ernst & Youngawarded Mr. Raju with the ‘Entrepreneur of the Year’ award. On April 14, 2008, Satyam wonawards from MZ Consult’s for being a ‘leader in India in CG and accountability’. In September2008, the World Council for Corporate Governance awarded Satyam with the ‘Global PeacockAward’ for global excellence in corporate accountability.” Unfortunately, less than five monthsafter winning the Global Peacock Award, Satyam became the centerpiece of a ‘massive’accounting fraud.By 2003, Satyam’s IT services businesses included 13,120 technical associates servicing over 300customers worldwide. At that time, the world-wide IT services market was estimated at nearly$400 billion, with an estimated annual compound growth rate of 6.4%. “The markets majordrivers at that point in time were the increased importance of IT services to businesses worldwide;the impact of the Internet on eBusiness; the emergence of a high‐quality IT servicesindustry in India and their methodologies; and, the growing need of IT services providers whocould provide a range of services.” (Caraballo, 2010) To effectively compete, both againstdomestic and global competitors, the company embarked on a variety of multi‐pronged businessgrowth strategies.From 2003-2008, in nearly all financial metrics of interest to investors, the company grewmeasurably. Satyam generated USD $467 million in total sales. By March 2008, the company hadgrown to USD $2.1 billion. The company demonstrated “an annual compound growth rate of35% over that period.” Operating profits averaged 21%. Earnings per share similarly grew, from$0.12 to $0.62, at a compound annual growth rate of 40%. Over the same period (2003‐2009), thecompany was trading at an average trailing EBITDA multiple of 15.36. Finally, beginning inJanuary 2003, at a share price of 138.08 INR, Satyam’s stock would peak at 526.25 INR–a 300%improvement in share price after nearly five years (www.capitaliq.com). Satyam clearlygenerated significant corporate growth and shareholder value. The company was a leading star–and a recognizable name–in a global IT marketplace. The external environment in which Satyamoperated was indeed beneficial to the company’s growth. But, the numbers did not represent thefull picture. Exhibit 1 lists some of the critical events for Satyam between 1987 and 2009. Thecase of Satyam accounting fraud has been dubbed as “India’s Enron”.28Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comExhibit 1: Satyam TimelineJune 24, 1987: Satyam Computers is launched in Hyderabad1991: Debuts in Bombay Stock Exchange with an IPO over-subscribed 17 times.2001: Gets listed on NYSE: Revenue crosses $1 billion.2008: Revenue crosses $2 billion.December 16, 2008: Satyam Computers announces buying of a 100 per cent stake in twocompanies owned by the Chairman Ramalinga Raju’s sons–Maytas Properties and Maytas Infra.The proposed $1.6 billion deal is aborted seven-hours later due to a revolt by investors, whooppose the takeover. But Satyam shares plunge 55% in trading on the New York StockExchange.December 23: The World Bank bars Satyam from doing business with the bank’s directcontracts for a period of 8 years in one of the most severe penalties by a client against an Indianoutsourcing company. In a statement, the bank says: “Satyam was declared ineligible forcontracts for providing improper benefits to Bank staff and for failing to maintain documentationto support fees charged for its subcontractors.” On the day the stock drops a further 13.6%, it islowest in more than four-and-a-half years.December 25: Satyam demands an apology and a full explanation from the World Bank for thestatements, which damaged investor confidence, according to the outsourcer. Interestingly,Satyam does not question the company being barred from contracts, or ask for the revocation ofthe bar, but instead objects to statements made by bank representatives. It also does not addressthe charges under which the World Bank said it was making Satyam ineligible for futurecontracts.December 26: Mangalam Srinivasan, an independent director at Satyam, resigns following theWorld Bank’s critical statements.December 28: Three more directors quit. Satyam postpones a board meeting, where it isexpected to announce a management shakeup, from December 29 to January 10. The move aimsto give the group more time to mull options beyond just a possible share buyback. Satyam alsoappoints Merrill Lynch to review ‘strategic options to enhance shareholder value.’January 2, 2009: Promoters’ stake falls from 8.64% to 5.13% as institutions with whom thestake was pledged, dump the shares.January 6, 2009: Promoters’ stake falls to 3.6%.January 7, 2009: Ramalinga Raju resigns, admitting that the company inflated its financialresults. He says the company’s cash and bank shown in balance sheet have been inflated andfudged to the tune of INR 50,400 million. Other Indian outsourcers rush to assure credibility toclients and investors. The Indian IT industry body, National Association of Software and ServiceCompanies, jumps to defend the reputation of the Indian IT industry as a whole.January 8: Satyam attempts to placate customers and investors that it can keep the companyafloat, after its former CEO admitted to India’s biggest-ever financial scam. But law firms IzardNobel and Vianale & Vianale file “class-action suits on behalf of US shareholders,” in the firstlegal actions taken against the management of Satyam in the wake of the fraud.January 11: The Indian government steps into the Satyam outsourcing scandal and installs threepeople to a new board in a bid to salvage the firm. The board is comprised of Deepak S Parekh,the Executive Chairman of home-loan lender, Housing Development Finance Corporation(HDFC), C. Achuthan, Director at the country’s National Stock Exchange, and former memberof the Securities and Exchange Board of India, and Kiran Karnik, Former President ofNASSCOM.January 12: The new board at Satyam holds a press conference, where it discloses that it islooking at ways to raise funds for the company and keep it afloat during the crisis. One suchmethod to raise cash could be to ask many of its Triple A-rated clients to make advancepayments for services.(Source: Shirur, S. (2011) “Tunneling vs Agency Effect: A Case Study of Enron and Satyam,” Vikalpa,Volume 36, No. 3, July -September, page 11)29Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comMR. RAMALINGA RAJU AND THE SATYAM SCANDALOn January 7, 2009, Mr. Raju disclosed in a letter, as shown in Exhibit 2, to Satyam ComputersLimited Board of Directors that “he had been manipulating the company’s accounting numbersfor years.” Mr. Raju claimed that he overstated assets on Satyam’s balance sheet by $1.47 billion.Nearly $1.04 billion in bank loans and cash that the company claimed to own was non-existent.Satyam also underreported liabilities on its balance sheet. Satyam overstated income nearly everyquarter over the course of several years in order to meet analyst expectations. For example, theresults announced on October 17, 2009 overstated quarterly revenues by 75 percent and profits by97 percent. Mr. Raju and the company’s global head of internal audit used a number of differenttechniques to perpetrate the fraud. As Ramachandran (2009) pointed out, “Using his personalcomputer, Mr. Raju created numerous bank statements to advance the fraud. Mr. Raju falsifiedthe bank accounts to inflate the balance sheet with balances that did not exist. He inflated theincome statement by claiming interest income from the fake bank accounts. Mr. Raju alsorevealed that he created 6,000 fake salary accounts over the past few years and appropriated themoney after the company deposited it. The company’s global head of internal audit created fakecustomer identities and generated fake invoices against their names to inflate revenue. The globalhead of internal audit also forged board resolutions and illegally obtained loans for the company.”It also appeared that the cash that the company raised through American Depository Receipts inthe United States never made it to the balance sheets (www.outlookindia.com).Exhibit 2: Satyam’s Founder, Chairman and CEO, Mr. Raju’s Letter to his Board of DirectorsTo The Board of Directors,Satyam Computer Services Ltd.From: B. Ramalinga RajuChairman, Satyam Computer Services Ltd.January 7, 2009Dear Board Members,It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like tobring the following facts to your notice:1. The Balance Sheet carries as of September 30, 2008:(a) Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5,361 crorereflected in the books); (b) An accrued interest of Rs. 376 crore which is non-existent; (c) Anunderstated liability of Rs. 1,230 crore on account of funds arranged by me; and (d) An over stateddebtors position of Rs. 490 crore (as against Rs. 2,651 reflected in the books).2. For the September quarter (Q2), we reported a revenue of Rs.2,700 crore and an operating marginof Rs. 649 crore (24% of revenues) as against the actual revenues of Rs. 2,112 crore and an actualoperating margin of Rs. 61 Crore (3% of revenues). This has resulted in artificial cash and bankbalances going up by Rs. 588 crore in Q2 alone.The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of lastseveral years (limited only to Satyam standalone, books of subsidiaries reflecting trueperformance). What started as a marginal gap between actual operating profit and the one reflectedin the books of accounts continued to grow over the years. It has attained unmanageableproportions as the size of company operations grew significantly (annualized revenue run rate ofRs. 11,276 crore in the September quarter, 2008 and official reserves of Rs. 8,392 crore). Thedifferential in the real profits and the one reflected in the books was further accentuated by the factthat the company had to carry additional resources and assets to justify higher level of operations—thereby significantly increasing the costs.Every attempt made to eliminate the gap failed. As the promoters held a small percentage ofequity, the concern was that poor performance would result in a take-over, thereby exposing thegap. It was like riding a tiger, not knowing how to get off without being eaten.30Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comThe aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones.Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit.Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But thatwas not to be. What followed in the last several days is common knowledge.I would like the Board to know:1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the lasteight years—excepting for a small proportion declared and sold for philanthropic purposes.2. That in the last two years a net amount of Rs. 1,230 crore was arranged to Satyam (not reflected inthe books of Satyam) to keep the operations going by resorting to pledging all the promoter sharesand raising funds from known sources by giving all kinds of assurances (Statement enclosed, onlyto the members of the board). Significant dividend payments, acquisitions, capital expenditure toprovide for growth did not help matters. Every attempt was made to keep the wheel moving and toensure prompt payment of salaries to the associates. The last straw was the selling of most of thepledged share by the lenders on account of margin triggers.3. That neither me, nor the Managing Director took even one rupee/dollar from the company andhave not benefitted in financial terms on account of the inflated results.4. None of the board members, past or present, had any knowledge of the situation in which thecompany is placed. Even business leaders and senior executives in the company, such as, RamMynampati, Subu D, T.R. Anand, Keshab Panda, Virender Agarwal, A.S. Murthy, Hari T, SVKrishnan, Vijay Prasad, Manish Mehta, Murali V, Sriram Papani, Kiran Kavale, Joe Lagioia,Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as againstthe books of accounts. None of my or Managing Director’s immediate or extended familymembers has any idea about these issues.Having put these facts before you, I leave it to the wisdom of the board to take the matters forward.However, I am also taking the liberty to recommend the following steps:1. A Task Force has been formed in the last few days to address the situation arising out of the failedMaytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam:Subu D, T.R. Anand, Keshab Panda and Virender Agarwal, representing business functions, andA.S. Murthy, Hari T and Murali V representing support functions. I suggest that Ram Mynampatibe made the Chairman of this Task Force to immediately address some of the operational matterson hand. Ram can also act as an interim CEO reporting to the board.2. Merrill Lynch can be entrusted with the task of quickly exploring some Merger opportunities.3. You may have a ‘restatement of accounts’ prepared by the auditors in light of the facts that I haveplaced before you. I have promoted and have been associated with Satyam for well over twentyyears now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500companies as customers and operations in 66 countries. Satyam has established an excellentleadership and competency base at all levels. I sincerely apologize to all Satyamites andstakeholders, who have made Satyam a special organization, for the current situation. I amconfident they will stand by the company in this hour of crisis. In light of the above, I ferventlyappeal to the board to hold together to take some important steps. Mr. T.R. Prasad is well placedto mobilize support from the government at this crucial time. With the hope that members of theTask Force and the financial advisor, Merrill Lynch (now Bank of America) will stand by thecompany at this crucial hour, I am marking copies of this statement to them as well.Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue inthis position only till such time the current board is expanded. My continuance is just to ensureenhancement of the board over the next several days or as early as possible.I am now prepared to subject myself to the laws of the land and face consequences thereof.Signature(B. Ramalinga Raju)(Source: Bombay Security Exchange ,and Security and Exchange Board of India, available atwww.sebi.gov.in)31Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comGreed for money, power, competition, success and prestige compelled Mr. Raju to “ride thetiger,” which led to violation of all duties imposed on them as fiduciaries–the duty of care, theduty of negligence, the duty of loyalty, the duty of disclosure towards the stakeholders.According to Damodaran (2012), “The Satyam scandal is a classic case of negligence of fiduciaryduties, total collapse of ethical standards, and a lack of corporate social responsibility. It is humangreed and desire that led to fraud. This type of behavior can be traced to: greed overshadowingthe responsibility to meet fiduciary duties; fierce competition and the need to impressstakeholders especially investors, analysts, shareholders, and the stock market; low ethical andmoral standards by top management; and, greater emphasis on short‐term performance.”According to CBI, the Indian crime investigation agency, the fraud activity dates back from April1999, when the company embarked on a road to double‐digit annual growth. As of December2008, Satyam had a total market capitalization of $3.2 billion dollars.Satyam planned to acquire a 51% stake in Maytas Infrastructure Limited, a leading infrastructuredevelopment, construction and project management company, for $300 million. Here, the Rajus’shad a 37% stake. The total turnover was $350 million and a net profit of $20 million. Raju’s alsohad a 35% share in Maytas Properties, another real-estate investment firm. Satyam revenuesexceeded $1 billion in 2006. In April, 2008 Satyam became the first Indian company to publishIFRS audited financials. On December 16, 2008, the Satyam board, including its five independentdirectors had approved the founder’s proposal to buy the stake in Maytas Infrastructure and all ofMaytas Properties, which were owned by family members of Satyam’s Chairman, RamalingaRaju, as fully owned subsidiary for $1.6 billion. Without shareholder approval, the directors wentahead with the management’s decision. The decision of acquisition was, however, reversedtwelve hours after investors sold Satyam’s stock and threatened action against the management.This was followed by the law-suits filed in the U.S. contesting Maytas deal. The World Bankbanned Satyam from conducting business for 8 years due to inappropriate payments to staff andinability to provide information sought on invoices (www.slideshare.net). Four independentdirectors quit the Satyam board and SEBI ordered promoters to disclose pledged shares to stockexchange.According to ‘Investors Protection and Redressal’ Forum, “Investment bank DSP Merrill Lynch,which was appointed by Satyam to look for a partner or buyer for the company, ultimately blewthe whistle and terminated its engagement with the company soon after it found financialirregularities” (Blakely, 2009). In the context of whistle-blowing, Bowen et al., (2010) concludesthat “Our results suggest whistle-blowing is far from a trivial nuisance for targeted firms, and onaverage, appears to be a useful mechanism for uncovering agency issues.” On 7 January 2009,Saytam’s Chairman, Ramalinga Raju, resigned after notifying board members and the Securitiesand Exchange Board of India (SEBI) that Satyam’s accounts had been falsified. Raju confessedthat Satyam’s balance sheet of September 30, 2008, contained the following irregularies (seeTable-4): “He faked figures to the extent of Rs. 5,040 crore of non-existent cash and bankbalances as against Rs. 5,361 crore in the books, accrued interest of Rs. 376 crore (non-existent),understated liability of Rs. 1,230 crore on account of funds raised by Raju, and an overstateddebtor’s position of Rs. 490 crore. He accepted that Satyam had reported revenue of Rs. 2,700crore and an operating margin of Rs. 649 crore, while the actual revenue was Rs. 2,112 crore andthe margin was Rs. 61 crore.” In other words, Raju: (a) inflated figures for cash and bankbalances of US$1.04 billion vs. US$1.1 billion reflected in the books; (b) an accrued interest ofUS$77.46 million which was non‐existent; (c) an understated liability of US$253.38 million onaccount of funds was arranged by himself; and (d) an overstated debtors' position of US$100.94million vs. US$546.11 million in the books.32Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comRaju claimed in the same letter that “neither he nor the managing director had benefitedfinancially from the inflated revenues, and none of the board members had any knowledge of thesituation in which the company was placed.” The fraud took place to divert company funds intoreal-estate investment, keep high earnings per share, raise executive compensation, and makehuge profits by selling stake at inflated price. In this context, Kirpalani (2009) stated, “The gap inthe balance sheet had arisen purely on account of inflated profits over a period that lasted severalyears starting in April 1999.” “What accounted as a marginal gap between actual operating profitand the one reflected in the books of accounts continued to grow over the years. This gap reachedunmanageable proportions as company operations grew significantly,” Ragu explained in hisletter to the board and shareholders. He went on to explain, “Every attempt to eliminate the gapfailed, and the aborted Maytas acquisition deal was the last attempt to fill the fictitious assets withreal ones. But the investors thought it was a brazen attempt to siphon cash out of Satyam, inwhich the Raju family held a small stake, into firms the family held tightly (D’Monte, 2008).Table 4 depicts some parts of the Satyam’s fabricated ‘Balance Sheet and Income Statement’ andshows the ‘difference’ between ‘actual’ and ‘reported’ finances.Table 4: Fabricated Balance Sheet and Income Statement of Satyam: As of September 30,2008(Rs. in crore)Actual Reported DifferenceCash and Bank Balances 321 5,361 5,040Accrued Interest on bank FDs Nil 376.5 376Understated Liability 1,230 None 1,230Overstated Debtors 2,161 2,651 490Total Nil Nil 7,136Revenues (Q2 FY 2009) 2,112 2,700 588Operating Profits 61 649 588Fortunately, the Satyam deal with Matyas was ‘salvageable’. It could have been saved only if“the deal had been allowed to go through, as Satyam would have been able to use Maytas’assetsto shore up its own books.” Raju, who showed ‘artificial’ cash on his books, had planned to usethis ‘non-existent’ cash to acquire the two Maytas companies (Besson, 2009). As part of their“tunneling” strategy, the Satyam promoters had substantially reduced their holdings in companyfrom 25.6% in March 2001 to 8.74% in March 2008. Furthermore, as the promoters held a verysmall percentage of equity (mere 2.18%) on December 2008, as shown in Table 5, the concernwas that poor performance would result in a takeover bid, thereby exposing the gap. It was like“riding a tiger, not knowing how to get off without being eaten.” The aborted Maytas acquisitiondeal was the final, desperate effort to cover up the accounting fraud by bringing some real assetsinto the business. When that failed, Raju confessed the fraud. Given the stake the Rajus held inMatyas, pursuing the deal would not have been terribly difficult from the perspective of the Rajufamily. As pointed out by Shirur (2011), “Unlike Enron, which sank due to agency problem,Satyam was brought to its knee due to tunneling. The company with a huge cash pile, withpromoters still controlling it with a small per cent of shares (less than 3%), and trying to absorb areal-estate company in which they have a majority stake is a deadly combination pointing primafacie to tunneling.” The reason why Ramalinga Raju claims that he did it was because every yearhe was fudging revenue figures and since expenditure figures could not be fudged so easily, thegap between ‘actual’ profit and ‘book’ profit got widened every year. In order to close this gap,he had to buy Maytas Infrastructure and Maytas Properties. In this way, ‘fictitious’ profits couldbe absorbed through a ‘self-dealing’ process. The auditors, bankers, and SEBI, the marketwatchdog, were all blamed for their role in the accounting fraud.33Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comTable 5: Promoter’s Shareholding Pattern in Satyam from 2001 to 2008Particulars March2001March2002March2003March2004March2005March2006March2007Promoter’sholding inpercentageMarch2008Dec.200825.6 22.26 20.74 17.35 15.67 14.02 8.79 8.74 2.18THE AUDITORS ROLE AND FACTORS CONTRIBUTING TO FRAUDGlobal auditing firm, PricewaterhouseCoopers (PwC), audited Satyam’s books from June 2000until the discovery of the fraud in 2009. Several commentators criticized PwC harshly for failingto detect the fraud (Winkler, 2010). Indeed, PwC signed Satyam’s financial statements and wasresponsible for the numbers under the Indian law. One particularly troubling item concerned the$1.04 billion that Satyam claimed to have on its balance sheet in “non-interest-bearing” deposits.According to accounting professionals, “any reasonable company would have either invested themoney into an interest-bearing account, or returned the excess cash to the shareholders. The largeamount of cash thus should have been a ‘red-flag’ for the auditors that further verification andtesting was necessary. Furthermore, it appears that the auditors did not independently verify withthe banks in which Satyam claimed to have deposits” (Blakely, 2009).Additionally, the Satyam fraud went on for a number of years and involved both the manipulationof balance sheets and income statements. Whenever Satyam needed more income to meet analystestimates, it simply created ‘fictitious’ sources and it did so numerous times, without the auditorsever discovering the fraud. Suspiciously, Satyam also paid PwC twice what other firms wouldcharge for the audit, which raises questions about whether PwC was complicit in the fraud.Furthermore, PwC audited the company for nearly 9 years and did not uncover the fraud, whereasMerrill Lynch discovered the fraud as part of its due diligence in merely 10 days (ThaindianNews, 2009). Missing these “red-flags” implied either that the auditors were grossly inept or incollusion with the company in committing the fraud. PWC initially asserted that it performed allof the company's audits in accordance with applicable auditing standards.Numerous factored contributed to the Satyam fraud. The independent board members of Satyam,the institutional investor community, the SEBI, retail investors, and the external auditor—none ofthem, including professional investors with detailed information and models available to them,detected the malfeasance. The following is a list of factors that contributed to the fraud: greed,ambitious corporate growth, deceptive reporting practices—lack of transparency, excessiveinterest in maintaining stock prices, executive incentives, stock market expectations, nature ofaccounting rules, ESOPs issued to those who prepared fake bills, high risk deals that went sour,audit failures (internal and external), aggressiveness of investment and commercial banks, ratingagencies and investors, weak independent directors and audit committee, and whistle-blowerpolicy not being effective.AFTERMATH OF SATYAM SCANDALImmediately following the news of the fraud, Merrill Lynch terminated its engagement withSatyam, Credit Suisse suspended its coverage of Satyam, and PricewaterhouseCoopers (PwC)came under intense scrutiny and its license to operate was revoked. Coveted awards won bySatyam and its executive management were stripped from the company (Agarwal and Sharma,2009). Satyam’s shares fell to 11.50 rupees on January 10, 2009, their lowest level since March34Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com1998, compared to a high of 544 rupees in 2008. In the New York Stock Exchange, Satyamshares peaked in 2008 at US$ 29.10; by March 2009 they were trading around US $1.80. Thus,investors lost $2.82 billion in Satyam (BBC News, 2009). Unfortunately, Satyam significantlyinflated its earnings and assets for years and rolling down Indian stock markets and throwing theindustry into turmoil (Timmons and Wassener, 2009). Criminal charges were brought against Mr.Raju, including: criminal conspiracy, breach of trust, and forgery. After the Satyam fiasco and therole played by PwC, investors became wary of those companies who are clients of PwC(Blakely), which resulted in fall in share prices of around 100 companies varying between 5‐15%.The news of the scandal (quickly compared with the collapse of Enron) sent jitters through theIndian stock market, and the benchmark Sensex index fell more than 5%. Shares in Satyam fellmore than 70%. The chart titled as “Fall from grace,” shown in Exhibit 3 depicts the Satyam’sstock decline between December 2008 and January 2009:Exhibit 3: Stock Charting of Satyam from December 2008 to January 2009Immediately after Raju’s revelation about the accounting fraud, ‘new’ board members wereappointed and they started working towards a solution that would prevent the total collapse of thefirm. Indian officials acted quickly to try to save Satyam from the same fate that met Enron andWorldCom, when they experienced large accounting scandals. The Indian government“immediately started an investigation, while at the same time limiting its direct participation, withSatyam because it did not want to appear like it was responsible for the fraud, or attempting tocover up the fraud.” The government appointed a ‘new’ board of directors for Satyam to try tosave the company. The Board’s goal was “to sell the company within 100 days.” To devise a planof sale, the board met with bankers, accountants, lawyers, and government officials immediately.It worked diligently to bring stability and confidence back to the company to ensure the sale ofthe company within the 100-day time frame. To accomplish the sale, the board hired GoldmanSachs and Avendus Capital and charged them with selling the company in the shortest timepossible.By mid-March, several major players in the IT field had gained enough confidence in Satyam’soperations to participate in an auction process for Satyam. The Securities and Exchange Board ofIndia (SEBI) appointed a retired Supreme Court Justice, Justice Bharucha, to oversee the processand instill confidence in the transaction. Several companies bid on Satyam on April 13, 2009. Thewinning bidder, Tech Mahindra, bought Satyam for $1.13 per share—less than a third of its stockmarket value before Mr. Raju revealed the fraud—and salvaged its operations (Dagar, 2009).35Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comBoth Tech Mahindra and the SEBI are now fully aware of the full extent of the fraud and Indiawill not pursue further investigations. The stock has again stabilized from its fall on November26, 2009 and, as part of Tech Mahindra, Saytam is once again on its way toward a bright future.INVESTIGATION: CRIMINAL, CIVIL CHARGES AND VICTIMSThe investigation that followed the revelation of the fraud has led to charges against severaldifferent groups of people involved with Satyam. Indian authorities arrested Mr. Raju, Mr. Raju’sbrother, B. Ramu Raju, its former managing director, Srinivas Vdlamani, the company’s head ofinternal audit, and its CFO on criminal charges of fraud. Indian authorities also arrested andcharged several of the company’s auditors (PwC) with fraud. The Institute of CharteredAccountants of India (ICAI) ruled that “the CFO and the auditor were guilty of professionalmisconduct.” The CBI is also in the course of investigating the CEO’s overseas assets. Therewere also several civil charges filed in the U.S. against Satyam by the holders of its ADRs. Theinvestigation also implicated several Indian politicians. Both civil and criminal litigation casescontinue in India and civil litigation continues in the United States. Some of the main victims,according to Manoharan (2011), were:• Employees of Satyam spent anxious moments and sleep-less nights as they facednon‐payment of salaries, project cancellations, layoffs and equally-bleak prospects ofoutside employment opportunities. They were stranded in many ways: morally,financially, legally, and socially.• Clients of Satyam expressed loss of trust and reviewed their contracts, preferring to gowith other competitors. Several global clients, like Cisco, Telstra and World Bankcancelled their contracts with the Satyam. “Customers were shocked and worriedabout the project continuity, confidentiality and cost overrun.”• Shareholders lost their valuable investments and there was doubt about revival ofIndia, as a preferred investment destination. The VC and MD of Mahindra, in astatement, said that the development had “resulted in incalculable andunjustifiable damage to Brand India and Brand-IT, in particular.”• Bankers were concerned about recovery of financial and non-financial exposureand recalled facilities.• Indian Government was worried about its image of the nation and IT-sectoraffecting faith to invest, or to do business in the county.In the aftermath of Satyam, India’s markets recovered and Satyam now lives on. India’s stockmarket is currently trading near record highs, as it appears that a global economic recovery istaking place. Civil litigation and criminal charges continue against Satyam. Tech Mahindrapurchased 51% of Satyam on April 16, 2009, successfully saving the firm from a completecollapse. As Winkler states (2010), “With the right changes, India can minimize the rate andsizeof accounting fraud in the Indian capital markets.”CORPORATE GOVERNANCE ISSUES AT SATYAMOn a quarterly basis, Satyam earnings grew. Mr. Raju admitted that the fraud which he committedamounted to nearly $276 million. In the process, Satyam grossly violated all rules of corporategovernance (Chakrabarti, 2008). The Satyam scam had been the example for following “poor”36Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comCG practices. It had failed to show good relation with the shareholders and employees. As Kahn(2009) stated, “CG issue at Satyam arose because of non-fulfillment of obligation of the companytowards the various stakeholders. Of specific interest are the following: distinguishing the roles ofboard and management; separation of the roles of the CEO and chairman; appointment to theboard; directors and executive compensation; protection of shareholders rights and theirexecutives.” In fact, shareholders never had the opportunity to give their consent prior to theannouncement of the Matyas deal and ‘falsified’ documents with grossly ‘inflated’ financialreports were delivered to them. Ultimately, shareholders were at a loss and felt cheated. Surely,questions about management’s credibility were raised, in addition to the non‐payment of advancetaxes to the government. Together, these issues raise questions about Satyam’s financial health.LESSONS LEARNED FROM SATYAM SCAMThe 2009 Satyam scandal in India highlighted the nefarious potential of an improperly governedcorporate leader. As the fallout continues, and the effects were felt throughout the globaleconomy, the prevailing hope is that some good can come from the scandal in terms of lessonslearned (Behan, 2009). Here are some lessons learned from the Satyam Scandal:• Investigate All Inaccuracies: The fraud scheme at Satyam started very small, eventuallygrowing into $276 million white-elephant in the room. Indeed, a lot of fraud schemesinitially start out small, with the perpetrator thinking that small changes here and therewould not make a big difference, and is less likely to be detected. This sends a messageto a lot of companies: if your accounts are not balancing, or if something seemsinaccurate (even just a tiny bit), it is worth investigating. Dividing responsibilities acrossa team of people makes it easier to detect irregularities or misappropriated funds.• Ruined reputations: Fraud does not just look bad on a company; it looks bad on thewhole industry and a country. “India’s biggest corporate scandal in memory threatensfuture foreign investment flows into Asia’s third-largest economy and casts a cloud overgrowth in its once-booming outsourcing sector. The news sent Indian equity markets intoa tail-spin, with Bombay’s main benchmark index tumbling 7.3% and the Indian rupeefell” (IMF, 2010). Now, because of the Satyam scandal, Indian rivals will come undergreater scrutiny by the regulators, investors and customers.• Corporate Governance needs to be stronger: The Satyam case is just another examplesupporting the need for stronger CG. All public-companies must be careful whenselecting executives and top-level managers. These are the people who set the tone forthe company: if there is corruption at the top, it is bound to trickle-down. Also, separatethe role of CEO and Chairman of the Board. Splitting up the roles, thus, helps avoidsituations like the one at Satyam.The Satyam Computer Services’ scandal brought to light the importance of ethics and itsrelevance to corporate culture. The fraud committed by the founders of Satyam is a testament tothe fact that “the science of conduct” is swayed in large by human greed, ambition, and hungerfor power, money, fame and glory. Scandals from Enron to the recent financial crisis have timeand time again proven that there is a need for good conduct based on strong ethics. Notsurprising, such frauds can happen, at any time, all over the world. Satyam fraud spurred thegovernment of India to tighten CG norms to prevent recurrence of similar frauds in the nearfuture. The government took prompt actions to protect the interest of the investors and safeguardthe credibility of India and the nation’s image across the world.37Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comCONCLUSIONFraud is a deception. Whatever industry the fraud is situated in, or whatever kind of fraud youvisualize, “deception is always the core of fraud”. Fraud is “a million dollar business and it isincreasing every year.” Applied to the 2011 Gross World Product, as per ACFE Survey, thisfigure translates to a potential projected annual fraud loss of more than $3.5 trillion. Both internaland external fraud present a substantial cost to our economy worldwide. It is widely accepted thatcorporate entities of all sizes across the world are susceptible to accounting scandals and frauds.From Enron and WorldCom in 2001 to Madoff and Satyam in 2009, accounting fraud has been adominate news item in the past decade. Despite intense efforts to stamp out corruption,misappropriation of assets, and fraudulent financial reporting, it appears that fraud in its variousforms is a problem that is increasing, both in frequency and severity. Financial statement fraudwas a contributing factor to the recent financial crisis and threatens the efficiency, liquidity, andsafety of both debt and capital markets (Black, 2010). Furthermore, frauds and scandals havesignificantly increased uncertainty and volatility in the financial markets, thereby shakinginvestor confidence worldwide. It also reduced the creditability of financial information thatinvestors use in investment decisions (Rezaee and Kedia, 2012). However, there has been ampleevidence that rising number of frauds have undermined the integrity of financial reports,contributed to substantial economic losses, and eroded investors’ confidence in the usefulness andreliability of financial statements. Given the current state of the economy and recent corporatescandals, fraud is still a top concern for corporate executives. Hence, major financial reportingfrauds need to be studied for lessons learned and strategies to be followed so as to avoid (orreduce) the incidence of such frauds in the coming future.Recent corporate frauds and the outcry for transparency and honesty in reporting have given riseto two outcomes. First, forensic accounting skills have become very crucial in untangling thecomplicated accounting maneuvers that have obfuscated financial statements. Second, publicdemand for change and subsequent regulatory action has transformed CG scenario across theglobe. In fact, both these trends have the common goal of addressing the investors’ concernsabout the transparent financial reporting system. The failure of the corporate communicationstructure, therefore, has made the financial community realize that “there is a great need forskilled professionals that can identify, expose, and prevent structural weaknesses in three keyareas: poor corporate governance, flawed internal controls, and fraudulent financial statements.”Undoubtedly, forensic accounting skills are becoming increasingly relied upon within a corporatereporting system that emphasizes its accountability and responsibility to stakeholders (Bhasin,2008). In addition, the CG framework needs to be first of all strengthened and then implementedin “letter as well as in right spirit.” The increasing rate of white-collar crimes, without doubt,demands stiff penalties and punishments.Perhaps, no financial fraud had a greater impact on accounting and auditing profession thanEnron, WorldCom, and recently, India’s Enron: “Satyam”. Unlike Enron, which sank due to“agency” problem, Satyam was brought to its knee due to “tunneling”. All these frauds have ledto the passage of the Sarbanes-Oxley Act in July 2002, and a new federal agency and financialstandard-setting body, the Public Companies Accounting Oversight Board (PCAOB). It also wasthe impetus for the American Institute of Certified Public Accountants’ (AICPA) adoption ofSAS No. 99, “Consideration of Fraud in a Financial Statement Audit.” But it may be that thegreatest impact of Enron and WorldCom was in the significant increased focus and awarenessrelated to fraud. It establishes external auditors’ responsibility to plan and perform audits toprovide a reasonable assurance that the audited financial statements are free of material frauds.38Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comAs part of this research study, one of the key objective was “to examine and analyze in-depth theSatyam Computers Limited’s accounting scandal by portraying the sequence of events, theaftermath of events, the key parties involved, major reforms undertaken in India, and learn somelessons from it.” Unlike Enron, which sank due to “agency” problem, Satyam was brought to itsknee due to “tunneling”. The Satyam scandal highlights the importance of securities laws and CGin emerging markets. There is a broad consensus that emerging market countries must strive tocreate a regulatory environment in their securities markets that fosters effective CG. India hasmanaged its transition into a global economy well, and although it suffers from CG issues, it isnot alone as both developed countries and emerging countries experience accounting and CGscandals. The Satyam scandal brought to light, once again, the importance of ethics and itsrelevance to corporate culture. The fraud committed by the founders of Satyam is a testament tothe fact that “the science of conduct is swayed in large by human greed, ambition, and hunger forpower, money, fame and glory.” All kind of scandals/frauds have proven that there is a need forgood conduct based on strong ethics. The Indian government, in Satyam case, took very quickactions to protect the interest of the investors, safeguard the credibility of India, and the nation’simage across the world. Moreover, Satyam fraud has forced the government to re‐write CG rulesand tightened the norms for auditors and accountants. The Indian affiliate of PwC “routinelyfailed to follow the most basic audit procedures. The SEC and the PCAOB fined the affiliate,PwC India, $7.5 million in what was described as the largest American penalty ever against aforeign accounting firm.” (Norris, 2011) According to President, ICAI (January 25, 2011), “TheSatyam scam was not an accounting or auditing failure, but one of CG. This apex body had foundthe two PWC auditors prima-facie guilty of professional misconduct.” The CBI, whichinvestigated the Satyam fraud case, also charged the two auditors with “complicity in thecommission of the fraud by consciously overlooking the accounting irregularities”.The culture at Satyam, especially dominated by the board, symbolized an unethical culture. Onone hand, his rise to stardom in the corporate world, coupled with immense pressure to impressinvestors, made Mr. Raju a “compelled leader to deliver outstanding results.” On the contrary,Mr. Raju had to suppress his own morals and values in favor of the greater good of the company.The board connived with his actions and stood as a blind spectator; the lure of big compensationto members further encouraged such behavior. But, in the end, truth is sought and those violatingthe legal, ethical, and societal norms are taken to task as per process of law. The publicconfession of fraud by Mr. Ramalinga Raju speaks of integrity still left in him as an individual.His acceptance of guilt and blame for the whole fiasco shows a bright spot of an otherwise“tampered” character. After quitting as Satyam’s Chairman, Raju said, “I am now prepared tosubject myself to the laws of land and face consequences thereof.” Mr. Raju had many ethicaldilemmas to face, but his persistent immoral reasoning brought his own demise. The fraud finallyhad to end and the implications were having far reaching consequences. Thus, Satyam scam wasnot an accounting or auditing failure, but one of CG. Undoubtedly, the government of India tookprompt actions to protect the interest of the investors and safeguard the credibility of India andthe nation’s image across the world. In addition, the CG framework needs to be strengthened,implemented both in “letter as well as in right spirit,” and enforced vigorously to curb whitecollarcrimes.It is universally accepted that “lasting solutions can be found by transforming humanconsciousness through an inner discipline and higher moral reasoning.” An integrated, valuebasedvision of leadership and ‘effective’ governance will go a long-way in creating “good” CG.A transformed organizational culture, which pays highest attention to ethical conduct and moralvalues, will strengthen sustainable roots of the company. Transparency and effective auditing andregulatory checks, through internal and external auditors and monitoring agencies, will also help39Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comto establish long-lasting credibility for a company. Companies must take a step-back whenpresented with challenging decisions and individuals must listen to “the little voice in their headin complying with the ‘law’ and to their heart in dealing with ‘people’.” Transparency in financialreporting, as a moral duty and ethical code of conduct, are also very important for companies toadhere to in order to uphold ethical standards.REFERENCESACFE (2008, 2010), “Report to the Nation on Occupational fraud and abuse,” The Association ofCertified Fraud Examiners, available atAmerican Institute of Certified Public Accountants (2002), “SAP-99: Consideration of Fraud in aFinancial Statement Audit,” Auditing Standard Board, AICPA,available at http://www.aicpa.org/info/sarbanes_oxley_summary.html.Agrawal, S. and Sharma, R. (2009). Beat this: Satyam won awards for corporate governance,internal audit. VCCircle. Available at www.vccircle.com/news.Ahmad, T., Malawat, T., Kochar, Y. and Roy, A. (2010), “Satyam Scam in the Contemporarycorporate world: A case study in Indian Perspective,” IUP Journal. Available at SSRN,pp. 1-48.Badawi, I. (2003) “Global Corporate Accounting Frauds and Action for Reforms,” Review ofBusiness, pp. 8-14.Behan, B. (2009). Governance lessons from India's Satyam. Business Week, 16 January.Basilico, E., Grove, H, and Patelli, L. (2012), “Asia’s Enron: Satyam (Sanskrit word for truth),”Journal of Forensic & Investigative Accounting, Volume 4, issue 2, pp. 142-160.Beirstaker, J.L., Brody, R.G. and Pacini, C. (2006) “Accountants’ perceptions regarding frauddetection and prevention methods”, Managerial Auditing Journal, Vol. 21 Issue 5,pp.520-535.Bhasin, M. L. (2008), “Corporate Governance and Role of the Forensic Accountant, TheChartered Secretary Journal, Volume XXXVIII, No. 10, October 2008, published byThe Institute of Company Secretaries of India, New Delhi, pp. 1361-1368.Black, W. K. 2010. Epidemics of “Control Fraud” lead to Recurrent, Intensifying Bubbles andCrises, working paper, University of Missouri-Kansas City, SSRN-id 1590447.Bologna, G.J. and Lindquist (1996), “Fraud Auditing and Forensic Accounting: New Tools andTechniques,” Wiley & Sons, New Jersey.Bowen, R.M., Call, A.C and Rajgopal, S. (2010), “Whistle-blowing: target firm characteristicsand economic consequences,” The Accounting Review, volume 85, no. 4, pp. 1239-1271.Blakely, R. (2009). Investors raise questions over PWC Satyam audit. Times Online.Carpenter, T.D., Durtschi, C. and Gaynor, L.M. (2011), “The incremental benefits of a forensicaccounting course on skepticism and fraud-related judgments,” Issues in AccountingEducation, American accounting association, Volume 26, no. 1, pp. 1-21.Caraballo, C., Cheerla, A., and Jafari, O. (2010), “Satyam: The Brotherly Demise,” The GeorgeWashington University, May.Calderon, T. G., and B. P. Green. (1994). “Signaling Fraud by Using Analytical Procedures,”Ohio CPA Journal, April, pp. 27-38.Cecchini, M., Aytug, H., Koehler, G.J. and Pathak, P. (2010), “Detecting management fraud inpublic companies,” Management Science, Volume 56, no. 7, july, pp. 1146-1160.Cressey, D.R. (2009), “The fraud triangle and what you can do about it,” The CertifiedAccountant, First quarter, issue 37, pp. 69-70.Crumbley, D.L., Heitger, L.E., and Smith, G.S., “Forensic and Investigative Accounting,”Chicago: CCH Incorporated, 2003.40Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comCrutchley, C.E., Jensen, M.R.H., and Marshall (2007), “Climate for scandal: corp[orateenvironments that contribute to accounting fraud,” The Financial Review, Volume 42,The Eastern Finance Association, pp.53-73.Chen, S. (2010) “The role of ethical leadership versus institutional constraints: a simulation studyof financial misreporting by CEOs,” Journal of Business Ethics, Springer, volume 93, pp.33-52.Chakrabarti, R., Megginson, W., Yadav & Pradeep K. (2008). Corporate Governance in India.Journal of Applied Corporate Finance, Volume 20 Number 1, pg 59.Choo, F. and Tan, K. (2007) ‘An “American Dream” Theory of Corporate Executive Fraud’,Accounting Forum, Issue 31: pp. 203-215.COSO (2010), “Fraudulent financial reporting: 1987-2007,” Committee of SponsoringOrganizations of the Treadway Commission, available at http://www.coso.org.D’Monte, L. (2008). Satyam: just what went wrong? Rediff India Abroad.Dagar, S.S. (2009). How Satyam was sold The untold story: How the IT services major wasrescued against all odds. Business Today reconstructs the events of the 14 crucial weeksthat led up to the sale. Business Today, July.Damodaran, M. (2009), “Listed firms to get new conduct code,” Financial Chronicle, available athttp://wrd.mydigitalfc.com.Deloitte Forensic Center (2011), “Fraud, Bribery and Corruption Practices Survey,” available athttp://www.deloitte.com.Ernst & Young, (2009), “Detecting financial statement fraud: what every manager needs toknow,” E&Y LLP, pp.1-8. Available at www.ey.com.Gornik-Tomaszewski, S. and McCarthy, I., “Response to Corporate Fraud in the United Statesand Europe: Towards a Consistent Approach to Regulation,” Review of Business, Vol.26, No.2, Spring 2005.Haugen, S. and Selin, J.R. (1999) “Identifying and controlling computer crime and employeefraud”, Industrial Management & Data Systems, Vol. 99, Issue 8, pp.340-344.Hogan, C.E., Razaee, Z, Riley, R.A. and Velury, U.K. (2008), “Financial statement fraud:insights from the academic literature,” Auditing: A Journal of Practice & Theory,Volume 27, no. 2, November, pp. 231-252.IFAC (2009), “International Standard on Auditing (240): The auditor’s responsibility relating tofraud in an audit of financial statements,” Available at http://www.ifac.org.Thaindian News (2009). DSP Merrill lynch terminates engagement with Satyam.ICAI (2009). ICIA finds ex Satyam CFO, Price Waterhouse auditors guilty. Outlook India.com,Jeffords, R. (1999), “How useful are the Treadway risk factors?”, Internal Auditor, Volume 49,No. 3, June 1992.Kripalani, M. (2009). India’s Madoff Satyam scandal rocks outsourcing industry. Business Week.KPMG Fraud Survey 2009, 2003, 1998, 1994. Available at www.kpmginstiutes.com.Kahn, J. (2009). The Crisis exposes all the flaws. Newsweek.Manoharan, T.N. (2011), “Financial Statement Fraud and Corporate Governance,” 11 November.Available at www.slideserve.com.Miller, G.S. (2006), “The press as a watchdog for accounting fraud,” Journal of AccountingResearch, volume 44, no. 5, December, pp. 1001- 1033.Norris, F. (2011), “Indian Accounting Firm is Fined $7.5 million over fraud at Satyam,” The NewYork Times, April 5, 2011.National Fraud Authority (2012), Annual Fraud Indicator, March. Available atwww.homeoffice.gov.uk.Pearson, T.A. and Singleton, T.W. (2008), “Fraud and forensic accounting in the digitalenvironment,” Issues in Accounting Education, Volume 23, no. 4, November, pp. 545-559.41Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comPublic Company Accounting Oversight Board, 2003 available at http://www.pcaobus.org.PricewaterhouseCoopers (PwC, 2005, 2007), “Global Economic Crime Survey.” Available at:http://www.pwc.com.Ramachadran, S. (2009). Raju brings down Satyam, shakes India. Asia Times Online Ltd.Reuber, A.R. and Fischer, E. (2009), “Organizations behaving badly: when are discreditableactions likely to damage organizational reputation?” Journal of Business Ethics, Springer,Volume 93, pp. 39-50.Rezaee, Z. (2005). Causes, consequences, and deterrence of financial statement fraud. CriticalPerspectives on Accounting, 16(3), 277-298.Rezaee, Z. and Kedia, B.L. (2012), “Role of Corporate Governance participants in preventing anddetecting financial statement fraud,” Journal of Forensic & Investigative Accounting,volume 4, no. 2, pp. 176-205.Schrand and Zechman (2007), “Executive overconfidence and the slippery road to fraud,”http://faculty.chicagobooth.edu.Sharma, S. and Brahma (2000), “A Role of Insider in banking Fraud,” available at http;//manuputra .com.Shirur, S. (2011), “Tunneling vs agency effect: a case study of Enron and Satyam,” Vikalpa,Volume 36, no. 3, July, September, pp. 9-20.Smith, E. R.(1995). Smith, E. R.(1995). A positive approach to dealing with embezzlement. TheWhite Paper, August/September, pp. 17-18.Taub, S. “Scandals Prompt Global Action: The OECD Rewrites Draft,” www.CFO.com, January20, 2004.Telberg, R. “Credibility Crisis Needs Global Curve,” Al Large, August 11, 2003,www.cpa2bis.com.Timmons, H. and Wassener, B. (2009), “Satyam chief admits huge fraud,” January 8, New YorkTimes Online, available at www.nytimes.com.Willison, R. (2006) “Understanding the offender/environment dynamic for computer crimes”,Information Technology & People, Volume 19, Issue 2, pp.170 - 186Wells, J.T. “Principles of Fraud Examination,” NY, John Wiley & Sons, Inc. 2005.Winkler, D. India’s Satyam Accounting Scandal, February 1, 2010, The University of IowaCenter for International Finance and Development. Available online athttp://blogs.law.uiowa.edu.Ziegenfuss, D.E. (1996) “State and local government fraud survey for 1995”, ManagerialAuditing Journal, Volume 11, Issue 9, pp.50-55.42Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comImpact of Human Resource ManagementPractices on Organizational Performance inNigeria: An Empirical Study of EcobankNigeria Plc in the Last Five YearsFadiora Richard GbolahanMBA Human Resources Management DissertationDepartment Of Management SciencesNational Open University Of Nigeria Lagos NigeriaABSTRACTThis research study examines the impact of human resource managementpractices on organizational performance in Nigeria focusing on Ecobank NigeriaPlc in the last five years. A total of 50 samples were drawn from the bankpopulation at its corporate head office in Lagos. Out of the 50 self-reportedquestionnaires administered in this research, 35 were returned upon which thedata analyses were based. The primary data collected through questionnaireresponses in this research were analyzed using Chi-square statistical techniques.Secondary data were consulted by reviewing Ecobank’s Annual Reports andFinancial Statements. Selected HR Metrics such as Revenue Factor, HumanCapital Value Added (HCVA), and Human Capital Return on Investment(HCROI) were used to analyze the secondary data respectively. The findings ofthis research have shown that Ecobank Nigeria Plc has a well-articulated humanresource management policies and practices. Chi-square analysis indicated apositive and statistically significant association of Ecobank’s human resourcemanagement practices with organizational performance, (x 2 = 29.11, p

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com1. INTRODUCTIONHuman Resources Management is the process of developing, applying and evaluating policies,procedures, methods and programs relating to the employment, motivation, maintenance, andmanagement of people in the organization. Human resources management include activities likestrategic HRM, human capital management, corporate social responsibility, human resourceplanning, recruitment, selection, training and development, reward management, performancemanagement, employee relations, health safety and employee well-being as well as provision ofemployee services. It comprises a set of practices and policies designed to maximizeorganizational integration, employee commitment, flexibility and quality of work (Armstrong,2009). Effective human resource practices relate to company performance by contributing toemployee and customer satisfaction, innovation, productivity, and development of a favourablereputation of the firm in the industry. A number of researchers have reported that HR practicesare positively linked with organizational and employee performance, but little evidence isavailable about HR practices and employee performance from developing countries like Nigeria.Researchers have argued that human resources may be seen as a source of sustained competitiveadvantage for organizations (Barney, 1991; Becker & Gerhart, 1996). The underlying assumptionis that human resources are unique to the extent that competitors cannot imitate them. Researchhas led to the identification of a number of human resource management practices that contributeto company performance across different organizations (Huselid, 1995). In a literature review,Delery & Doty (1996) identified seven such practices that have been consistently consideredHRM practices. They defined HRM practices as those that are theoretically or empirically relatedto overall organizational performance. These practices include internal career opportunities,formal training systems, results-oriented appraisals, employment security, participation, jobdescriptions, and profit sharing. This approach has come to be known as the “best practices” oruniversalistic approach. Within the best practices approach to strategic HRM, the first practice,internal career opportunities, refers to the organizational preference for hiring primarily fromwithin. Second, training systems refers to whether organizations provide extensive trainingopportunities for their employees or whether they depend on selection and socialization processesto obtain required skills. Third, appraisals are conceptualized in terms of outcome-basedperformance ratings and the extent to which subordinate views are taken into account in theseratings. Fourth, employment security reflects the degree to which employees feel secure aboutcontinued employment in their jobs. Although formalized employment security is generally onthe decline, organizations may have either an implicit or an explicit policy. Fifth, employeeparticipation, both in terms of taking part in decision making and having opportunities tocommunicate suggestions for improvement, has emerged as a strategic HRM practice. Sixth, jobdescription refers to the extent jobs are tightly and clearly defined so that employees know whatis expected of them. Finally, profit sharing reflects the concern for overall organizationalperformance on a sustainable basis (Delery & Doty, 1996).Recent surveys have indicated that investments in the development of local employees are viewedby foreign investors as important sources of competitive advantage (Shekshnia, 1998). Hence,these employees may become an important resource which, due to the scarcity of such humanassets, is even harder to duplicate in a society like Nigeria than in other developed countries.According to Fajana (2009), Nigeria is one of African countries troubled by abundant labour andscarce talent. Attracting, developing, and retaining best talents has always become a challengeamidst changing political and economic realities of the day. Consequently, Fajana & Ige (2009)argued that the desire for top performance has driven the need for effective management ofavailable human resources. Over the years, researchers have suggested many HRM practices that44Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comhave the potential to improve and sustain organizational performance. These practices includeemphasis on employee selection based on fit with the company’s culture, emphasis on behaviour,attitude, and necessary technical skills required by the job, compensation contingent onperformance, and employee empowerment to foster team work, among others. Patterson et al.,(1997) observed that HR practices explained significant variations in profitability andproductivity in organizations. Similarly, Purcell et al., (2003) pointed out that the most successfulcompanies had 'the big idea', they had a clear vision and a set of integrated values. They wereconcerned with sustaining performance and flexibility which reveals a clear evidence of positiveattitudes towards HR policies and practices, level of satisfaction, motivation and commitment, aswell as overall operational performance.2. LITERATURE REVIEWIn recent years, human resources have been recognized as an important source of sustainedcompetitive advantage. Much of the empirical and theoretical works on human resources havebeen grounded in the Resource-Based View (RBV) of the firm. This theory maintains that inorder to develop a sustainable competitive advantage, organization must create resources in amanner that is valuable, rare, inimitable, and non-substitutable. Barney (1991), has argued thatbecause the resources that have historically provided organizations with competitive advantageare easily and rapidly imitated, the human resources of the organization may be an extremelyimportant source of sustained competitive advantage. The RBV of the firm is a theoreticalparadigm originating in the field of strategic management. The RBV assumes that resources andattributes of the firm are more important to sustained competitive advantage than industrystructure and competitors’ actions. Resources have been defined as “the tangible and intangibleassets a firm uses to choose and implement its strategies” (Barney, 1995). This broad definitionincludes human, organizational, financial, and physical resources.According to Barney (1995), competitive advantage arises when firms within an industry areheterogeneous with respect to the strategic resources they control, and when these resources arenot perfectly mobile across firms, and thus, heterogeneity can be long lasting. Technology,natural resources and economies of scale can create value, RBV argued that these sources ofvalue are increasingly available to almost anyone anywhere and they are easy to copy, whilsthuman resources as defined by Wright & McMahan (1992), as the pool of employees under thefirm’s control in a direct employment relationship, can provide the firm with a source ofcompetitive advantage with respect to its competitors. The first of these criteria is the value addedto the company’s production processes, the contribution made by each employee having its effecton the results obtained by the organization as a whole. Also, since employees are not all the same,their characteristics are in limited supply in the market. In addition, these human resources aredifficult to imitate. Since it is not easy to identify the exact source of the competitive advantageand reproduce the basic conditions necessary for it to occur. Finally, this human resources is noteasily replaced, though short-term substitutes may be found, it is unlikely that they will result in asustainable competitive advantage like the one provided by humans. Barney (1991) argued thatorganizations may not obtain the maximum utility from their employees because the employeesare not contributing to their fullest potential. It was argued that organizations, through the effectsof their HRM practices could maximize the knowledge, skills, and abilities of employees. From astrategic perspective, Resource-Based View (RBW), suggests that resource advantage of valuableknowledge, unique skill sets, and decision-making capability result in a firm's competitiveadvantage within the market place (Offstein et al., 2005). The RBW was originally proposed as ashift from an organizational product perspective to a resource perspective in order to betterexplain strategic management of business. From a resource-based view, an appropriate HR45Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comsystem creates and develops organizational capabilities that become sources of competitiveadvantage (Lou & Ngo, 2004). Intensive competition, shorter product life cycles and volatileproduct and market environments have contributed to the complexity faced by businesses. Theseemerging changes in global economic environment will present some interesting challenges andopportunities to organizations. Some organizations will go under, while some will continue toexist, and some will not only continue but flourish. As a result, firms constantly search for newersources of competitive advantage, and one of the most important being human resourcemanagement. HRM has the potential to improve and sustain organizational performance bydetermining the organization's fate (Terpstra, 1994).Recent academic research has attempted to demonstrate the impact of HRM on firm performanceand the relationship between the practices and firm outcomes is discussed best in the strategichuman resource management literature (Pfeffer, 1998; Rogers & White, 1998). Early studieslinked individual HR practices such as training, selection, performance appraisal andcompensation to firm financial performance (Milkovich, 1992; Huselid, 1995; Guest, 1997).Traditional HRM factors alone are no longer sufficient in maintaining firm strategy. Even thoughHR departments have historically been bureaucratic within organizations, its role has beenfocused on pursuing more flexible and creative means to deliver services in constantly changingenvironments (Lepak & Snell, 1999). HR professionals are increasingly expected to becomemuch more responsive, efficient, and ultimately make a strategic contribution to their company.Designing and integrating human resources systems is one of the ways to ensure the creation ofvalue for customers and sustain organizational effectiveness. The notion of best practices inhuman resource management has received a lot of attention in recent years. It has been suggestedthat there is a universal set of human resource best practices that can maintain a firm'sperformance (Lau & Ngo, 2004).There is a growing evidence that corporate HRM practices are associated with high financialperformance, and can encourage employee behavior and attitudes towards strengthening thecompetitive strategy of an organization (Hiltrop, 1996). Due to external and internal forces,various contingencies can be found which put identifying "best practice" into question. However,today's more effective HR managers look for information and ideas on best practices and theyignore paradoxes that mask the truth about best practice. One of the three paradoxes identified byFitzenz (1997) is the expectation of managers to find simple solutions to today's complexbusiness problems. The second paradox is that the visible program is neither generalizable nor abest practice. In most cases, follow-up studies show that the practice was not repeatable with thesame or better results. Final paradox is the irony of seeking enlightenment about the future fromstudying the past. For instance, some HR practices are related to financial outcomes while someothers may relate more to staff turnover (Lau & Ngo, 2004).Successful firms create a bundle of employee practices to reinforce the organizations` strategicposition (Enz & Signaw, 2000). Hiltrop (1999), in his research asked the HR managers andpersonnel officers in 319 companies in Western Europe about HR policies and practices of theirfirm and found out that employment security, opportunities for training and development,recruitment and selection from within, career development and teamwork, participation andproactive personnel planning are the most important practices. In fact the role of HR is to acquire,develop, manage, motivate and gain the commitment of the employees. The focal point is how todetermine the best practice in various HR-related decisions (Baruch, 1998). In a comprehensivestudy on best practices in the lodging industry, Enz & Signaw (2000) examined five categories ofHR best practices; (i) Leader development, (ii) Training and knowledge building, (iii) Employeeempowerment, (iv) Employee recognition and (v) Cost management. Similarly, Jayaram et al.,46Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com(1999) stated that the broad range of human resource management practices affectingperformance can be classified into five major topics: (i) Top management commitment; (ii)Communication of goals; (iii) Employee training; (iv) Cross functional teams; and (v) GeneralHRM practices. This classification implies that human resources management practices can beanalyzed using the five broad groupings of practices (Jayaram et al., 1999). On the other hand,Pfeffer (1998) has proposed seven HRM practices that are expected to enhance organizationalperformance. The practices he proposed are: (i) Employment security. (ii) Selective hiring of newpersonnel. (iii) Self-managed teams and decentralization of decision making as the basicprinciples of organizational design. (iv) Comparatively high compensation contingent onorganizational performance. (v) Extensive training to provide skilled and motivated workforce.(vi) Reduced status differentials and barriers, including dress, language, office arrangements, andwage differences across levels. (vii) Extensive sharing of financial and performance informationthroughout the organization (Pfeffer, 1998).In a knowledge-based competitive economy, the adoption of appropriate HRM practices isimportant to ensure effective strategy implementation. HRM practices create procedures thatconstitute the building of employees` knowledge and skills throughout the organization topromote valued and unique organizational competencies which support competitive advantage(Werbel & DeMarie, 2005). Strategic human resource management has become a more centralissue to management literature from empirical research view linking HRM practices with firmperformance and profitability (Delaney & Huselid, 1996; Becker & Gerhart, 1996). The focus ofthis study is to examine the impact of human resources management practices on the performanceof Ecobank in the last five years. To a very large extent, the philosophy and approaches to HRMpractices are underpinned by the resource-based view, which states that it is the range ofresources in an organization, including its human resources, that produces its unique characterand creates competitive advantage. According to Barney (1995), competitive advantage arisesfirst when firms within an industry are heterogeneous with respect to the strategic resources theycontrol, and second, when these resources are not perfectly mobile across firms and thusheterogeneity can be long lasting. Creating sustained competitive advantage therefore depends onthe unique resources and capabilities that a firm brings to competition in its environment. Theseresources include all the experience, knowledge, judgment, risk-taking propensity and wisdom ofindividuals associated with the firm.For a firm resource to have the potential for creating sustained competitive advantage it shouldhave four attributes: it must be valuable, rare, imperfectly imitable and non-substitutable. Todiscover these resources and capabilities, managers must look inside their firm for valuable, rareand costly-to-imitate resources, and then exploit these resources through their organization.Wright et al., (2001) noted that there are three important components of HRM that constitute aresource for the firm and are influenced by HR practices: (i) The human capital pool - the stock ofemployee knowledge, skills, motivation and behaviours. (ii) The flow of human capital throughthe firm - the movement of people and of knowledge. (iii) The dynamic processes through whichorganizations change and renew themselves. They suggested that HR practices are the primarylevers through which the firm can change the pool of human capital as well as attempt to changethe employee behaviours that lead to organizational success. Resource-based HRM can producewhat Boxall & Purcell (2003) referred to as human resource advantage. The aim is to developstrategic capability. This means strategic fit between resources and opportunities, obtaining addedvalue from the effective deployment of resources, and developing people who can think and planstrategically in the sense that they understand the key strategic issues and ensure that what theydo supports the achievement of the business’s strategic goals. In line with human capital theory,the resource-based view emphasizes that investment in people increases their value to the firm.47Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comThe strategic goal emerging from the resource-based view according to Boxall (1996), will be to‘create firms which are more intelligent and flexible than their competitors’ by hiring anddeveloping more talented staff and by extending their skills base. Resource-based strategy istherefore concerned with the enhancement of the human or intellectual capital of the firm.As Ulrich (1998) commented: ‘Knowledge has become a direct competitive advantage forcompanies selling ideas and relationships. The challenge to organizations is to ensure that theyhave the capability to find, assimilate, compensate and retain the talented individuals they need.’The significance of the resource-based view of the firm is that it highlights the importance ofhuman capital management approach to HRM and provides the justification for investing inpeople through resourcing, talent management, and learning and development programmes as ameans of enhancing organizational capability.3. RESEARCH METHODCase study method was chosen for this research. Case study is an empirical inquiry thatinvestigates a contemporary phenomenon within its real-life context, especially when theboundaries between phenomenon and context are not clearly evident. A case is what a researcherfocuses on in order to investigate a phenomenon. It can be an individual, a group such as afamily, or a class, or an office; an institution such as a school, a company, a large scalecommunity such as a town, an industry or a profession (Gillham, 2000; Melvok, 2005). Thisapproach is also popular in business research as it allows detailed investigation of a specific casebut on the cost of generalizability. It is concerned with the development of detailed, intensiveknowledge about a single case, or a small number of related cases (Robson, 1993). The case studyapproach has the ability to generate answers to the question “why” as well as “what” and “how”.The data collection methods may include questionnaires, interviews, observations anddocumentary analysis (Saunders et al., 2000).3.1 Research Hypothesesi. H1: Recruitment and selection practices are not positively related to Ecobank performance inthe last five years.ii. H2: Training and development practices are not positively related to the performance ofEcobank in the last five years.iii. H3: Performance appraisal systems are not positively related to the performance of Ecobankin the last five years.iv. H4: Compensation and reward practices are not positively related to Ecobank performance inthe last five years.3.2 Study PopulationThis research was conducted at Ecobank Nigeria Plc at its corporate head office in Lagos, usingall the organization employees as the study population. These included all the senior personnel,junior officers, as well as all the contract staff of Ecobank respectively. A detailed structuredquestionnaire was prepared and distributed among all the members of this population.3.3 Sample Size and ProcedureA total of 50 employees of Ecobank Nigeria Plc at its corporate head office in Lagos was sampledto analyse the impact of human resources management practices on the performance of Ecobankin the last five years. The sampling procedure was a purposive sample in a non-probabilisticselection technique. However 35 questionnaires were returned fully attended, representing 70%response rate of Ecobank HR staff. This formed the basis of the data analysis.48Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com3.4 Research InstrumentsHuman Resources Management practices was measured in this research using a modified 20 itemquestionnaire that has been used for previous research purpose, while organizational performancewas measured using a 10 item questionnaire. These research instrument has been validated byearlier researchers to be ideal for measuring HRM practices that include recruitment andselection, training and development, performance appraisal, compensation and reward, andorganizational performance. The Cronbach’s Coefficients Alphas for HRM practices tested in thisstudy ranged from 0.78 to 0.86 respectively, which is clearly acceptable (Nunnally, 1978). Theresponse was required on a five point Likert scale.3.5 Psychometric Properties of Research Instruments3.5.1 Employee Recruitment and Selection InventoryRecruitment and selection of employees is the process that firms will need to take into accountthe variation of external labor market conditions. In this study, recruitment and selection areconsidered as one construct for ‘acquisition of firm employees’. This inventory has 5 items whichinclude ‘hiring employee with specialised skills’, ‘hiring people with creative thinking skills’,‘recruitment and selection process fit the candidates with the jobs’, ‘organisation preferspromotion from within (as opposed to external) when filling vacant position’. These items havebeen developed and used earlier by many researchers and the Cronbach Alpha for this scale was0.79 (Muhammed, 2010; Siengthai & Bechter, 2001; Purcell & Hutchinson, 2007).3.5.2 Employee Training and Development InventoryThis inventory has 5 items which include ‘new employees familiarise with organisational normsand values (orientation)’, ‘organisation provides continuous training for updating employee skillsand knowledge’, ‘training programmes are constantly revised or updated to fit with presentrequirement’, ‘employees are offered opportunities for professional growth’. These items wereused by many researchers and the Cronbach Alpha for this scale was 0.81 (Muhammed, 2010;Huselid, 1995; Siengthai & Bechter, 2001; and Dechawatanapaisal, 2005).3.5.3 Employee Performance Appraisal InventoryThis inventory has 5 items which include ‘employee evaluation criteria are clear’, ‘performanceappraisal is result oriented’, ‘feedback is provided on a regular basis by the management’,‘employees satisfied with performance appraisal result’, ‘employees commitment towards theirwork performance’. These items were developed and used by several authors and the CronbachAlpha for this scale was 0.85 (Muhammed, 2010; Pfeffer, 1998; Ngo et al., 1998).3.5.4 Employee Compensation and Reward InventoryThis inventory has 5 items which include ‘compensation system level with employees’knowledge and skill’, ‘compensation system is competitive’, ‘good job performance is noticedand rewarded’, ‘top management cares about workers’ overall satisfaction and well-being atwork’. These items were used by previous researchers and the Cronbach Alpha for this scale was0.79 (1998; Paul & Anantharaman, 2003; Collins & Smith, 2003; and Minbaeva, 2005).3.5.5 Organizational Performance InventoryIn this study firm performance was measured by a 10 item inventory. Some of these items are‘employee turnover’, ‘adoption of new technology’, ‘organisational goal achievement’, ‘HRMpractices’, ‘customer satisfaction’, ‘employee incentives’, ‘workplace environment’, ‘nonfinancial benefits’etc. The response format was required on a five point Likert scale. TheCronbach Alpha value for this scale was 0.82.49Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com3.6 Data Collection ProcedurePrimary data was collected by questionnaire administration on the respondents in the HR Unit ofEcobank Nigeria Plc at its corporate head office in Lagos. Expressed authorization was soughtfrom the Director of Human Resources before conducting the survey. Also, secondary data onhuman resources management practices was obtained by reviewing Ecobank’s five financialyears annual reports from 2006 to 2010.3.7 Treatment of DataDescriptive statistics was used to analyse the primary data collected from this study. A nonparametricstatistical method of Chi-square was used. The secondary data was analysed using HRMetrics such as Revenue per Employee (which measures human capital effectiveness in the areaof productivity and sales revenue generated by each full-time employee); Human Capital Returnon Investment (HCROI - which shows the amount of profit derived from investments in labour,the leverage on labour cost); and Human Capital Value Added (HCVA - which shows theproductivity attributable to human effort in an organization) respectively.4. DEMOGRAPHIC CHARACTERISTIC OF SAMPLEThis section provides information on the primary data collected in this research and thedemographic characteristics of the respondents. The distribution of respondents by sex, age, yearsof employment, academic qualification, and staff category are presentented in tables and chartsbelow:Legend: SA= Strongly Agree: A= Agree: N= Neutral: D= Disagree: SD= Strongly Disagree:MIS= Mean Item ScoreTable 4. Descriptive Statistics of Primary DataNo. SA A N D SD MIS1.(22.9%)8(60%)21(11.4%)4(5.7%)2-0 42.(34.3%)12(25.7%)9(25.7%)9(14.3%)5-0 3.83.(34.3%)12(54.3%)19(8.6%)3(2.9%)1-0 4.24.(25.7%)9(54.3%)19(11.4%)4(8.6%)3-0 4.45.(11.4%)4(51.4%)18(25.7%)9(11.4%)4-0 3.66.(34.3%)12(54.3%)19(11.4%)4-0-0 4.27.(34.3%)12(54.3%)19(8.6%)3-0(2.9%)1 4.28.(25.7%)9(57.1%)20(17.1%)6-0-0 4.19.(8.6%)3(51.4%)18(31.4%)11(5.7%)2(2.9%)1 3.610.(8.6%)3(60%)21(22.9%)8(5.7%)2(2.9%)1 3.7(54.3%) (45.7%) - - -50Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com11. 19 16 0 0 0 4.512.(17.1%)6(54.3%)19(20%)7(8.6%)3-0 3.913.(17.1%)6(45.7%)16(20%)7(11.4%)4(5.7%)2 3.614.(11.4%)4(62.9%)22(14.3%)5(8.6%)3-0 3.715.(8.6%)3(45.7%)16(25.7%)9(14.3%)5(5.7%)2 3.416.(11.4%)4(68.6%)24(14.3%)5(5.7%)2-0 3.917.(11.4%)4(54.3%)19(31.4%)11(2.9%)1-0 3.718.(14.3%)5(68.6%)24(14.3%)5(2.9%)1-0 3.919.(5.7%)2(25.7%)9(34.3%)12(25.7%)9(8.6%)3 2.920.(8.6%)3(51.4%)18(25.7%)9(11.4%)4(2.9%)1 3.521.(5.7%)2(65.71%)23(22.9%)8(5.7%)2-0 3.722.-0(62.9%)22(22.9%)8(11.4%)4(2.9%)1 3.523.(5.7%)2(71.4%)25(14.3%)5(8.6%)3-0 3.724.(8.6%)3(62.9%)22(22.9%)8(5.7%)2-0 3.725.(11.4%)4(57.1%)20(17.1%)6(14.3%)5-0 3.726.(22.9%)8(60%)21(17.1%)6-0-0 4.127.(14.3%)5(65.71%)23(17.1%)6(2.9%)1-0 3.928.(28.6%)10(62.9%)22(8.6%)3-0-0 4.229.(25.7%)9(62.9%)22(11.4%)4-0-0 4.130.(42.9%)15(40%)14(11.4%)4(5.7%)2-0 4.2Source: Field Survey @ Ecobank Nigeria Plc Lagos, 2012.4.2 Presentation of Secondary DataThis section shows the analyses of the secondary data used in this research. The Annual Reportsof Ecobank Nigeria Plc for the financial years of 2006 to 2010 were carefully reviewed andanalysed using some selected HR metrics in order to inform a valid conclusion on Ecobank'shuman resource performance indicators. Revenue Factor - which measures human capitaleffectiveness and productivity was analysed to reveal the actual revenue generated by each fulltimeemployee of Ecobank; Human Capital Value Added - which shows the operating profit perfull-time employee was used to reveal the profitability attributable to Ecobank's human effort;51Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comwhile Human Capital Return on Investment - a measure of the return on capital invested in labourwas also used to reveal the leverage on Ecobank's labour cost.Table 4.2.1 Summary of Ecobank Financial Statements (2006 - 2010)Total Revenue(N'million)Operating Expenses(N'million)Labour Cost(N'million)Year58,313 30,521 13,107 201059,864 30,614 13,423 200955,156 25,974 14,113 200832,709 15,469 8,612 200717,258 9,149 4,402 2006Source: ECOBANK Annual Reports (2006 - 2010)Table 4.2.2 Summary of Ecobank EmployeesAverage NumberEmployee Category 2010 2009 2008 2007 2006Executive Directors 6 5 3 3 3Management 118 130 138 130 125Non-management 2,652 2,917 2,727 2,319 1,942Total 2,776 3,052 2,868 2,449 2,070Source: ECOBANK Annual Reports (2006 - 2010)4.3 HR Metrics Analyses1. Revenue FactorTotal RevenueFTEsN58,313,000,0002776 = N21,006,124 - 2010N59,864,000,0003052 = N19,614,697 - 2009N55,156,000,0002868 = N19,231,520 - 2008N32,709,000,0002,449 = N13,356,063 - 2007N17,258,000,0002,070 = N8,337,198 - 20062. Human Capital Value Added52Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comTotal Revenue - Nonhuman ExpensesFTEsN58,313,000,000 - N17,414,000,0002776 = N14,733,069 - 2010N59,864,000,000 - N17,191,000,0003052 = N13,981,979 - 2009N55,156,000,000 - N11,861,000,0002868 = N15,095,886 - 2008N32,709,000,000 - N6,857,000,0002,449 = N10,556,145 - 2007N17,258,000,000 – N4,747,000,0002,070 = N6,043,961 - 20063. Human Capital Return On InvestmentTotal Revenue-Nonhuman ExpensesLabour CostN58,313,000,000 - N17,414,000,000N13,107,000,000 = 3.1% - 2010N59,864,000,000 - N17,191,000,000N13,423,000,000 = 3.2% - 2009N55,156,000,000 - N11,861,000,000N14,113,000,000 = 3.1% - 2008N32,709,000,000 – N6,857,000,000N8,612,000,000 = 3.0% - 2007N17,258,000,000 – N4,747,000,000N4,402,000,000 = 2.8% - 20065. DISCUSSIONThis research was conducted to empirically analyze the impact of human resource managementpractices on organizational performance in Nigeria, focusing on Ecobank Nigeria Plc. The studywas intended to explain the various human resource management practices that add values andcontributed to Ecobank's success as a formidable enterprise in the banking sub-sector of theNigerian economy in the last five years. Results of this study offered empirical support for theexistence of a positive and statistically significant relationship of HRM practices such asrecruitment and selection, training and development, performance appraisal, and compensationand reward on the performance of corporate organizations in Nigeria. The study has helped toincrease our understanding of how appropriate HRM practices contribute to organizationalperformance in Nigeria, given the extent of the prevailing global economic recession. In a53Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comknowledge-based competitive economy, the adoption of appropriate HRM practices is importantto ensure effective strategy implementation. HRM practices create procedures that constitute thebuilding of employees` knowledge and skills throughout the organization to promote unique andvalued organizational competencies which support competitive advantage (Werbel & DeMarie,2005). Similarly, Enz & Signaw, (2000) observed that successful firms create a bundle ofemployee practices to reinforce the organizations` strategic position.In the context of this research, recruitment and selection practices were found to be positivelyrelated to Ecobank performance in the last five years. Recruitment and selection primarily aims atattracting maximum number of highly talented applicants and selecting the best to achieve longtermcompetitiveness. A stringent recruitment and selection practices provides those employeeswho are selected with a sense of elitism, imparts high expectations of performance and sends amessage of the importance of the people to the organization (Pfeffer, 1994). To sustain the highlevel of competitive advantage, a firm requires talented and skilled workers that must be engagedand maintained in the economic interest of the organization. Cascio (2006) argued that withoutexcellent induction, the execution of organizational strategy may vacillate. Effective selectionsystem based on modern and need-based tests is essential to affect desirable selection.Compatibility of individual and organizational values (person-organizational fit) is an essentialdimension that should receive priority for sustained retention. Matching an individual to thedemands of the job (person-job fit) yields sustainable results in many instances (Jyothi &Venkatesh, 2006). Merit-based and transparent induction system enhances organizationalcredibility and makes the workforce loyal to the organization. In addition it communicatesprospects of excellent performance and conveys the employees’ oriented value of the firm.Delany & Huselid (1996) established that practicing an effective recruitment and selectionprocess has positive relationship with organizational performance. Huselid (1995) found thatorganisational productivity and high performance depends on the selection of the right person,which is also a pathway to reduced turnover. In an evolving knowledge economy, competenciesdevelopment forms an essential dimension of a firm’s competitiveness. Knowledgeable andhighly skilled employees improve productivity, enhance quality of products and services, affectpositive changes in processes and deliver quality service to customers.Similarly, training and development practices were also found to be positively related to Ecobankperformance in the last five years. Training and development generate tangible outcome likeimproved productivity, quality output, and resource optimization; and intangible results in termsof enhanced self esteem, high morale, and satisfaction of employees due to acquisition ofadditional knowledge, skills, and abilities. Since employee roles and responsibilities shift rapidlyin line with environmental demands, it follows that some sort of training and developmentconcerning new roles is vital to the success of the employees and the business enterprise (Cardon& Stevens, 2004). Employee development can be expected to be an important determinant ofcompany performance. Blair & Sisakhti (2007) found that expenditures on training anddevelopment yield enormous benefits, and as Bitner & Zeithmal (2001) observed, investment inemployee training yields strategic advantage to the organization. Dynamic environment andchanging customers' needs require a unique set of approach and technique, as well as up-to-dateskills to provide differentiated and superior services. Changing business environment necessitatesthat learning organizations should invest in employees' training and development so as to enhanceorganizational capability in responding positively to the dynamic environmental demands(Jarventaus, 2007). According to Tai (2006), training and development plays a crucial role inincreasing work adaptability, ability, flexibility, maintaining necessary competence, motivatingemployees, and influencing employees productivity. Strong evidence exits in literature thatorganization with effective training programme experience lower employee turnover (Fey et al.,54Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com2000). Researchers have also established that comprehensive training and development activitiesare positively related to productivity, reduce staff intention to leave, and improving organizationaleffectiveness (Lee & Bruvold, 2003).Also, in this study, performance appraisal systems were found to be positively related to Ecobankperformance in the last five years. Performance appraisal is based on demonstrated achievementof performance objectives established pertaining to a specified job within a given time period.This process plays a vital role in influencing the perception of employees about self and abouttheir contribution toward organizational goals. Bdernardin & Russel (1993) argued that widercommunication of performance appraisal policies within organizational is essential to makeemployees well informed about their role expectation as a contribution to organizationalperformance (Landy & Far, 1980). Haunstein (1998) argued that the process of appraisingperformance should be based on objective and quantifiable results. The performance appraisalsystem should be based on ethics, fairness, objectivity, inclusiveness, standardization, and shouldbe widely communicated (Bernardin et al., 1998; Webb, 2004). Regular monitoring of employeeperformance and constant feedback about performance outcome is essential to get the desiredresults. Researchers established that employees’ participation in setting performance goals, clarityabout performance standards, flexibility of the system in responding to the changing needs, andemployees' right to appeal against performance evaluation are vital attributes of an effectiveperformance appraisal systems that contribute toward superior employee performance (Islam &Rasad, 2006; Wu, 2005). Stone (2002) observed that in the rapidly-changing competitiveenvironment, organisations need to keep improving performance in order to survive. Theeffective process of monitoring performance and the feedback between employees andsupervisors strengthens their relationships and promote better industrial harmony (Cook &Crossman, 2004).Lastly, the findings of this study has also shown that compensation and reward practices werepositively related to Ecobank performance in the last five years. Compensation refers to allmonetary payments and all commodities used instead of money to reward employees.Compensation is viewed from total rewards perspective as it encompasses psychological rewards,learning opportunities, and recognition, in addition to monetary rewards of base pay andincentives (Heneman et al., 2000). A comprehensive compensation mix augmented by aneffective system of disbursement plays an important role in attracting the best candidates, shapingemployees behaviour and performance outcome, and facilitating retention of talents. Mathis &Jackson (2004) argued that a balanced, fair and competitive compensation and reward systemaffect the retention of employees. Huselid (1995) observed that the compensation system isrecognised as employee merit and it is widely linked with firm outcomes. The expectancy theory(Vroom, 1964) suggests that rewards, that can be understood as a form of direct and indirectcompensation packages, have potential to influence employee work motivation. A valence-basedreward philosophy act as the driver of both individual and team performance (Dreher &Dougherty, 2005). Jyothi & Venkatesh (2006) found that competency-based pay and rewardsimproves quality of products and services, improves employees’ behaviour, and reduces accidentsrates in the organization, thereby making strong contribution toward organizational performance.Researchers have evaluated the relationship of compensation and reward, and organizationalperformance. These studies concluded that an effective compensation and reward systemincreases sales, reduce staff turnover, and improve firms’ performance (Dreher & Dougherty,2005; Gomez-Mejia et al., 1988).55Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com6. CONCLUSIONThis study has examined the impact of human resources management practices on theperformance of Ecobank Nigeria Plc in the last five years. From the analyses of primary data usedin this research, it was found that 82.9% the of respondents agreed that Ecobank recruits only thebest applicant for a particular job; 62.8% were of the view that Ecobank prefers to promoteinternally (as opposed to external) when filling vacant position; while 71.5% accepted thatEcobank HRM practices influence organizational productivity. Hence, it was concluded thatrecruitment and selection practices are positively related to Ecobank performance in the last fiveyears, (x 2 = 25, p

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comsystem improves quality and productivity. An organization's performance appraisal system that iscomprehensive, fair and customer-focused improves business performance in the long-run (Sang,2005). Similarly, Rahman (2006) found that comprehensive performance appraisal systemenhances employees’ commitment to the organization's goal, employees understand theirperformance expecations and how to sustain them.Finally, from the primary data collected in this research, 80% of the respondents agreed thatEcobank employees’ compensation is competitive; 60% were of the opinion that Ecobank caresabout workers’ overall satisfaction and well-being at work; while 88.6% believed that theirworkplace environment influence productivity. It was concluded that compensation and rewardpractices are positively related to Ecobank performance in the last five years, (x 2 = 35.97, p

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International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comMicrocredit and Job Creation:Evidence from Tunisian ContextAbir MrabetPhD in Economics, Faculty of Economics and Management of Sfax,Airport Road, 3018 Sfax-Tunisia.Sonia Ghorbel ZouariProfessor, University of Economics and Management of Sfax,Airport Road, 3018 Sfax-Tunisia.ABSTRACTThis paper aims to investigate the efficience of microcredit policy, accorded byBTS to micro entrepreneurs, in financing micro enterprises and creating job inTunisia and particularly in Sfax. So our empirical study was conducted by asurvey of a representative sample of 100 beneficiaries of BTS operating indifferent sectors in sfax region, discriminant analysis demonstrates that jobcreation is related mainly to internal variable: micro enterprise age, activitysectors, etc than other variables such as; amount of credit, education level ofmicro entrepreneur.Key words: microfinance, job creation, BTS1. INTRODUCTIONIn many developing countries, lack of jobs, lack of management of unemployment by thegovernment and the failure of traditional aid caused an increasing poverty into a populationexcluded from the formal sector. These factors have created a favorable environment for thedevelopment of self employment activities. In fact, individuals living in poverty continue to seekways to improve their standard of living. Through entrepreneurship, they can develop theircapacities, manage activities of self employment and become productive. Self employment hasbecome in many developing countries the only way to survive and flourish for the majority of thepopulation. In recent decades, thousands of small economic units, designed micro enterprisesappeared, they need funding for the development of their activities. For micro entrepreneurs,obtaining the necessary financial resources to start or expand their businesses is often aninsurmountable obstacle. They do not have the required material guaranties; they are excludedfrom formal financial institutions. With their limited funds, micro entrepreneurs cannot start theiractivities. The growth of employment in micro enterprises is more important thantheir production because it increases the social welfare by generating income forthe workforce. The problems of employment and unemployment have alwaysbeen one of the challenges that Tunisia has faced since the independence. Thenumbers are increasing from one year to another. Thus, the unemployment rateInternational Journal ofContemporary Business StudiesVol: 3, No: 10. October, 2012Pp.64-80©Academy of Knowledge Processfor 1989-90 has been estimated at 16.7% of the workforce. However, three typesof unemployment in Tunisia can be distinguished: (i) cyclical unemploymentwhich characterizes the labor force employed in agriculture, buildings and publicworks. (ii) Unemployment integration which is constituted by the first job64Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comseekers. This type of unemployment particularly affects young people. (iii) Structuralunemployment generally constituted by unqualified workers who are unemployed for more than 2years. In Tunisia, the increase of unemployment results from a dysfunction of structural labormarket, reflecting the unbalanced evolution between supply and demand for labor andinstitutional rigidities that characterizes the segmentation of this market. The surveys conductedduring the 1980s demonstrated that the informal sector is not only an essential element of thelabor market but also a central aspect of social and economic system. In Tunisia, the proportionthat represents informal employment of total employment is 42.2% in 1980.Conscious of the roleof micro enterprises in creating jobs and reducing employment, the government decided toremove obstacles that they confront and to provide the necessary financial support for theircreation, promotion and development. In this paper we try to present in the first section theorigins of microfinance and its evolution, then we present the theory of micro finance and microcredit. In the third section, we present the role of micro enterprises in the creation of job, then wepresent the major features of Tunisian experience in micro finance. In the fifth and the sixthsections, we present data selection and our main results.1. Origins of MicrofinanceMicrofinance is a concept that has taken shape in Europe to propagate around the world andparticularly in Africa. The Asian origin is very recent, with Professor Muhammad Yunus ofBangladesh, who has defended this type of credit in front of international financial institutions.1.1. European OriginIn 1849, a Mayor Prussian, Friedreich Wilhelm Raiffeisen, founded in North Rhine the firstcooperative of savings and loans, an institution which provides saving services to the poor andworking population excluded from the conventional bank. The saving deposits allows theextension of credit to other clients (Sébastien Boyé et al, 2006). Subsequently, another type ofcooperation has grown in this time in rural areas in Europe at the end of the 19th century. Fromthe 1860s, theses organizations have taken the name of agricultural cooperatives or savings andloans. It was a generic name to design the worker’s associations, such as popular banks, mutual orcooperative unions.1.2. Asian Origin: the Grameen Bank, an original model of modernmicrofinanceIn the 1970s, with the Grameen Bank, Muhammad Yunus develops micro credit in Bangladeshand opens the door for many other experiences in the worlds. Institutions are created to providepoor resources to create their livelihood and tools to manage associated risk (Brigit Helms, 2006).In fact, the Grameen Bank demonstrated that not only does the poor repay their loans, but theycan pay high interest with the institution covering its costs (Boyé et al, 2006). Muhammad Yunusclaimed: “I did not intend to create a bank, but I was wondering how the poor people canimprove their living conditions. In 1974, we have a famine, I was disgusted by the inutility ofeconomic expertise that I was teaching, I knew someone who wanted to borrow towardsexpanding his business, but no bank accepted. I solved the problem by lending from my pocket,but it was a personal solution. I was looking for an institutional solution. I offered myself as aguarantor, obtained money from the bank and gave to the people. At the same time, I began todevelop some rules of functioning. It was working and I have increased my bank loans. Therepayment was 100%; but the bank was not persuaded by the demonstration: what you do is toosmall scale. That proves nothing, so I did it in seven villages, but the bank did not believe it.Then, I made these loans in an entire district that bankers had identified for me. They were stillnot convinced. So I decided to create my own bank…”65Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com1.3. African OriginAfrican people organized themselves to help each other in order to be freed from poverty:Working in groups: Some families, when they are submerged by field work, resort to their parentsor friends to help them. At this occasion, they can prepare food or drinks for their guests. This isone of the fruits of the African microfinance based on solidarity and credit in nature.The tontines: is that a group of people contribute to give to one of them and alternately. Womencontinued to make recourse to this loan; this allows making large purchases. The advantage is thatthere are no interest rates. Yet, the disadvantage of tontine is that they waited their turn for a longtime. In fact, the success of the tontine is based on the principe of strict equality, trust and nonhierarchical control.Ambulant bankers (moneylenders): they are people who lend money, often at enormous interestrates, especially for certain officers against the detention of their documents of wages or property.Clients of these types of lenders are constantly in debt. All they have earned were used to payprevious debts. This situation destabilizes the situations of borrowers, and they become more andmore poor.Villagers Fund: the Village Savings fund and Credit are ‘small banks’ which involve the villagersfor securing their savings, in providing credit to individuals or groups members. The villagersdecide in common the set of operating rules of their fund. Designating one or several managers,while a loan committee was designed to examine and decide on the provision of credits.2. MICROFINANCE AND MICROCREDITThe coming of micro-finance sector has been fully explained by a failure of the banking sector tofinance the poor (Coquard, 2000 ; Hugon, 1996 ; Morduch, 2000).In most developing countries,the emergence of the microfinance sector has followed the financial liberalization wave at the endof the 70s, whose theoretical foundations are rooted in the works of McKinnon (1973) and Shaw(1973). In fact, microfinance has been aimed at bridging the gap created by both the privatebanks, where the poor represent an unprofitable and expensive market, and by developing bankswhich are liquidated because they are inefficient (Labie et al. 2005).According to Otero (2000, p.8), microfinance is “the provision of financial services forpopulation with low-income, poor and very poor in a situation of self-employment”. Referring toLedgerwood (1999), these financial services generally include savings and credit and otherfinancial services like insurance and payment services. Microfinance is defined according toSchreiner and Colombet (2001, p.339) as: “the attempt to improve access to small deposits andsmall loans for poor households neglected by banks.”According to the World Bank (2000), “Microfinance is to provide families in a precariouseconomic situation with small loans to help them engage in productive activities”microfinance has several objectives (Else et Gallagher, 2000):(i)Economic development and job creation: the objective is to create jobs either within a territoryor within a specific social group, such as women: therefore, these institutions focus on businessesthat create jobs.(ii) Community or Local Development: the objective is to encourage and facilitatebusiness creation in disadvantaged economies. (iii) The fight against poverty and exclusionthrough self-employment: the objective is to support the creation of businesses that can provide adecent income to the family, either as the only source of income or as additional income. Theterms of microcredit and microfinance are interchangeably used, but the distinction between themis important because both terms are often confused. According to Sinha (1998, p.2) “microcreditrefers to small loans, whereas microfinance is appropriate where NGOs and MFIs1 supplementthe loans with other financial services (savings, insurance, etc)”. Micro credit represents a66Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comcomponent of microfinance and it implies the providing of credit to poor peoples. By contrast,microfinance implies additional non-credit financial services like: savings, pensions, insurance,and payment services. Since its appearance with Grameen Bank, initiatives have been establishedin several regions of countries as well as national and international cooperation for developingand financing microcredit. Daley-Harris, 2006 defines microcredit as "a new strategy to combatpoverty in the world, offering unsecured loans to people living in extreme poverty."3. MICRO ENTERPRISES AND JOB CREATIONMicroenterprises are very small businesses employing between 1 and 10 people, it is an importantsource of income and work for the poor. This definition is insufficient to classify microenterprisesinto formal or informal sectors. In Tunisia, H. Sidhom (2002) et F. Sboui (2002) have conductedan investigation into microenterprises and they found that there is no formal sector but severaldifferentiated segments. Microenterprises have some characteristics such as: They are informal,i.e. they are not registered or not approved by competent authorities and they do not pay taxes ontheir activities . They use traditional technologies. They are managed by their owners and they donot maintain formal accounting records.Micro entrepreneurs do not have access to traditional bank loans; the credits which they need fortheir activities are very small, generally including 25 to 1000 dollars. Bankers think that microentrepreneurs are very risky due to their incapacity to produce material warranties, the way theymanage their account and their informal status. Sources of credit available to micro entrepreneursare confined to family members, traders and other informal lenders.Maria Nowak, founder of the Association for the Right to Economic Initiative (France), statesthat:“The main difference (microcredit), compared to conventional credit, is it emphasis on a newtarget: the poor and the excluded. It recognizes their talents, their needs and their ability to repayloans. Rather than eliminate, in advance customers for loans because the methods, criteria andwarranties are not adapted to their situation. It invented appropriate methods and warranties.Instead of imposing the object of their loan, () it listens to their needs. It allows to demonstratethat people excluded from bank credit, like others, have in entrepreneurial spirit, capacity forjudgment, Etc” 1In 1993, at the industrialized countries and at the developing countries, the UNDP noted a newphenomenon of growth without employment. Everywhere, in the world, the major problem is thepredominance of unemployment. Multinationals carried out an important investment but didn’tcreate jobs, due to the intense competition imposed by globalization, Giant enterprises can’tprovide jobs for people and they are forced to reduce their production costs and so the number ofemployees. The efforts made by governments are enormous but pressures occur particularly onbalanced budget. For this, we note that job creation by the administration is very limited. In thiscontext, some theoreticians talk about the return of entrepreneurship or micro entrepreneurship,which creates its own business on the basis of innovations, as argued by Schumpeter.4. TUNISIAN EXPERIENCE IN MICRO FINANCEMicro financing has been adopted since the independence (1956) in priority sectors for economicdevelopment. However, the emergence of specialized MFI was in the early 1990s. In 1999, three1 Portail Microfinance,http://www.lamicrofinance.org/section/faq?PHPSESSID=e9ec088cc4261905026f943265ddf2a0#167Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comimportant events play an important role in developing the micro credit in Tunisia; the decision ofpromoting microcredit made by the president of republic, the promulgation of the law n°99-67 inJuly 2008, that establishes the legal terms of microcredit by associations, create a mechanismwhich supports micro enterprises managed by women. The first essays focused on theagricultural sector by the creation of the Saving Box and Credit in 1962 and 1968 whose primarymission is financing cooperative agriculture.4.1. Micro agricultural creditThe goal of the‘Saving Box and Credit’ is the collection of individual hoarding and providingloans to cooperative members. Despite of the difficult weather conditions, the poor managementand the absence of guarantee funds to support crisis, the cooperative experience has succeeded.Delinquencies became heavy and therefore the cooperative experience was coming to end. In thebeginning of the 1970s, another system of financing agricultural micro projects was establishedby Mutual Guarantee Societies .The system does not lend but endorse the adherents to creditinstitution to obtain funds. It was engaged in covering 25% of loans. This system has shownbetter success but it was limited to agriculture. Hence the need for the creation of financingmechanisms oriented to micro enterprises.4.2. National Fund For Employment 21-21:This fund is created in 2000, it operates in financing all operations able to develop the skills ofjob seekers and increase the opportunity for their integration, particularly through, programs ofprofessional and social integration of people without professional qualifications, self employmentof specific activities in favor of job seekers with professional qualifications, programs forgraduates to develop their capacities in professional life, operations rehabilitation, training andprofessional integration. Until the end of 2001, the number of beneficiaries of assistance from thefund achieved 112000 people.4.3. National Solidarity Fund (FSN)It is a special fund of public treasury established by the finance law n° 92-122 in 29 December1992. It’s based on the idea that the sustainable development finds its plenitude only when thepoor people have access to essential attributes of human dignity, which requires the fight againstexclusion and enhance the spirit of solidarity between all members of community. FSNintroduced in ‘dark areas’ employment and production programs and can create a stable source ofincomes for inhabitants.4.4. The Fund Of Professional Insertion and Adaptation (FIAP)This fund was created in1990, it’s considered as an important mechanism of insertion. It’saddressed to diverse population. It includes enterprises in need of skilled labor, potentialpromoters and workers in difficulties. FIAP involves six instruments; insertion and adaptation inenterprises: for a period of eleven months, its goal is to provide training for people havingprimary or secondary level, training and installation: this training is for a period of one year, it’saddressed to new entrepreneurs, development of enterprises: this instrument aims to improvequalification of staff and organization of the production. It’s addressed to production and serviceenterprises, subcontracting enterprises in training and insertion: the goal is to help createbusinesses and associations of training and insertion, improvement and retraining of staff ofenterprises in difficulties in order to facilitate their re-insertion( is designed to workers affectedby layoffs).68Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com4.5. Micro credit system and the role of NGO (Non GovernmentalOrganizations)The micro credit system is created in Marsh 1999, it’s managed by the BTS (Tunisian SolidarityBank) and NGO (Non Governmental Organisations). The mission of micro credit is to helppeople whose desire to create or to expand their micro enterprises and improve their lifeconditions. During 7 months after starting, it provides more than 1,700 loans exceeding 13million dinars and financing about 5000 projects (creation, expansion, improving lifeconditions...). 200 ONG of development support new enterprises in vulnerable areas.4.6. The National Fund For The Promotion Of Handicraft and SmallTrades (FONAPRAM)In the context of promoting employment policy and encouraging small trades, this fund tends topromote investment projects in the productive sector of small trades. Beneficiaries of this aid areevery Tunisian person having professional qualifications and official working. The FONAPRAMis not lending institutions, but fictitious institutions which are managed by several banks. Sinceits foundation until 1993, this structure has participated in financing 14.610 projects and creating58.440 jobs.4.7. Tunisian Solidarity Bank (BTS)The BTS was created to strengthen the micro credit in favor of people not eligible for traditionalbanking system, lack of loan guarantees. Its culture is inspired by a set of principles of microfinance. Micro credit is addressed to individuals who are in need and also people who are able toexercise an activity in all sectors (agriculture, handicraft, small trades and services) and thosewho don’t have a work. The maximum amount of micro credits is 4000 dinars, they are providedto finance the acquisition of small equipment, necessary inputs for production. An amount of 700dinars is provided for those seeking to improve their life conditions.5. METHODOLOGY AND DATA SELECTIONIn this section, we try empirically to analyze the role played by micro credit to finance microenterprises in Sfax. First, from the survey carried out on micro enterprises in Sfax, we try topresent the major characteristics of entrepreneurship and microenterprises and the role ofmicrocredit in creating job by a descriptive analysis which allows us to know the distribution ofall variables . The sample consists in interviewing 100 micro entrepreneurs in the region of Sfaxwho are obtaining micro credits to create their micro enterprises operating in different sectorssuch as: agriculture, handicraft, commercial, services and small activities. Secondly, we usediscriminant analysis to determine the explanatory variables of creation job by micro enterprisesand finally, we apply the variables considered in the discriminant analysis to logit model in orderto determine the contribution of each variable.Characteristics of micro entrepreneursThe 100 respondents are composed of 70, 9% males against 29, 1% females (table I). Regardingage, the majority of respondents were aged under 30, so this group is dominated by young microentrepreneurs. The predominance is for beneficiaries having a primary and a secondary level (38,4%), while the minority has a higher level (15, 2%) and 8, 1% of the total are illiterate. At asectorial level, agricultural sector represents 33% of financing micro projects. Then commercialactivities with a part of 24% followed by small trades (20%) and services 14% and the lower partfor crafts with only 9%. We can notice that craft sector is managed by women (table II).69Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comSources of financing micro enterprises52% of the sample have obtained micro credit as a source of financing their activities, while 27%have used supplement sources of financing such as: loans from friends, from family andothers…while 9% have obtained a bank credit (table III).The average age of micro enterprises is 2.62%. The new enterprises (1-2 years) is the dominant inthe sample with a share of 71%, whereas the older (5 years and more) presents the minority with11%. The majority of micro enterprises represents 89% of the sample, they are at the survivalphase which 29% are managed by women, Whereas, only 11% of the sample are in the growthphase (table IV).Employees number repartitionAt the phase of starting activities, 74% of the sample prefer to work alone, while 26% engagedwith them 2 or 3 employees. The most sector creators of jobs are services, small trades andcommerce, while less than 5% of the sample is presented by the sector of handicrafts andagriculture. At the date of survey, we noted the same thing; services, small trades and commerceare the most creators of jobs, in service sector, 4% of micro entrepreneurs work alone, while theother 10% engage with them 3 or 4 persons. In handicrafts sector, 8% of micro entrepreneurswork alone and 13% engage with them 2 or 3 persons and finally in the commerce sector 10%work alone while 14% involve with them 2 or 3 persons. The majority of respondents 68.7%declared that they don’t need to increase the number of staff. Contrariwise, 31.3% of respondentsdeclared that they need supplementary employees, with 13.1% seek qualified employees and18.2% seek unqualified and trainees employees (table V).The average monthly turnoverThe micro entrepreneurs achieving a monthly turnover average (600-1000 dinars) represent 33%of the sample with 10% female, their monthly expenditures average is between (200- 500 dinars),so these micro entrepreneurs achieve an acceptable benefit. The minority represented by 18% ofthe sample produces a monthly average turnover of 5000 and more and spends an average of1000 and more.Most of the micro entrepreneurs (33% of the sample) obtained a small amount of micro credit(1000 dinars). We can notice from this table that the majority has obtained a small amount ofmicro credit (1000-2500), while the minority has obtained a micro credit between 3000- 4000dinars. Those who obtained 4000 dinars have a superior level. It is observed that 77% ofrespondents said that micro credit is insufficient to operate, while 33% said that it’s sufficient(table VI).The importance of BTSWe try through this survey to identify the conception of BTS for micro entrepreneurs. On thissubject, almost all (97% of respondents) considered that BTS is an association that helps poor andthose who do not borrow from banks. The Other 3 % considered BTS is a commercial bankbecause it receives interest against micro credit. In the absence of BTS, 74% of respondentsdeclared that they would abandon their project, while 26% declared that they will make recourseto other lenders like family or friends.6. DISCRIMINANT ANALYSIS RESULTSTo determine the explanatory variables of employment creation by micro enterprise supported bymicro finance, we will apply to our sample a discriminant analysis. The sample was classified70Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.cominto two groups; a class of employees (G1) where micro entrepreneurs hire employees. This classcontains 46 microenterprises, and a class of non employees (G2) where micro entrepreneurs don’thire employees and it contains 52 micro enterprises. Averages and standard deviation can beobserved in the table of “statistics of groups” (table VII). We noted from this table the differencein averages and standard deviation between the two groups. For example: activity sector: 2.42 ingroup 1 and 3.37 in group 2, it means that the majority of micro enterprises of group 1 operate incommercial sector, while handicraft and services sector are the dominated sector in group 2. Theaverage of the number of employees at the date of survey for group 1 takes value 1 which meansthat micro entrepreneurs prefer to work alone, by contrast in Group 2, the average of the numberof employees at the date of survey is 2.70, which means that micro entrepreneurs employ withthem 2 or 3 workers.The F test and lambda Wilks can be observed in the table of ‘equality of average ‘test of groups.Moreover, the most discriminant variables in the analyses should have a high value in the Fishertest and significance which will tend to 0 or null. So we can identify from table 8 variables suchas: level of education, activity sector, actual situation of the micro enterprise, number ofemployees in start up, number of employees at the date of survey, need of increasing staff,funding sources, as the most discriminant variables because they have on the one hand the highervalue Fisher test and on the other hand their significance tend to 0.The estimation of the validity of discriminant analysis is based on the following indicators; testBox, overall correlation, wilks’Lambda.The M must be the highest possibility. The significance of the F test must tend to 0. If it’s higherthan 0.05, the analysis is not valid. But in the Box test, we noted that M is high. Moreover, thesignificance of Fisher test is low (F

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comβ 1: micro enterprises ageβ2: activity sectorβ3: number of employees in start-upβ4: number of employees in date of surveyβ5: need of increasing staffLogit modelWe suppose that there is a latent variable Y i such us: y=1 if y i >=0 and Y=0 if y i

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comof economic development that focused specifically on micro enterprises which have a fiscal andfinancial problem. Inspired by the set of principles of micro finance, the new social theory isbased firstly on the model of welfare state considered as the single agent for social change and onthe model of state which ensures solidarity.The process of development is based principally on microcredit policy; the Tunisian Bank ofSolidarity plays a crucial role in funding micro businesses. The study of a small survey of somebeneficiaries of micro credit provide the following results: the targeted population is relativelyyoung and mostly inactive before the intervention of the Tunisian Bank of Solidarity. More thanthe half of the sample are male and have a primary and secondary level. Micro businessesfinancing have improved the living conditions of beneficiaries and some of them have evensaved. Moreover, this business has generated employment and self-employment. We concludethat job creation is associated with some internal variables of small enterprises (micro enterprisesage, number employees in start activity and the date of survey, activity sector, need ofaugmenting staff). However, the external variables of the micro enterprises such as: environment,partnership, exportation, technology, had also a great influence on job creation. So, it’s importantto adopt a large sample involved 24 states of Tunisia to identify the determinants of employmentas well a study of the dynamics of microenterprises financed by BTS has the same importance.Acknowledgments:My thanks go to BTS associations for consistently helping me to obtain the necessary information abouttheir beneficiaries of micro credits and to contact them.REFERENCESBanque mondial (2000). “Rapport sur le développement dans le monde 2000-2001, combattre lapauvreté ”. Oxford University Press pour la B.M, New York.Brigit, Helms (2006). “Building Inclusive Financial Systems”. The international Bank forreconstruction and development, The Word Bank, Washington.Charmes (2000). “the contribution of informal sector to GDP in developing countries:assessment, estimates, Methods, Orientations for the future”. 4 th Meeting of the DelhiGroup on informal sector Statistics. Geneva 28- 30 August 2000 ( P14).Coquart, Philippe (2000) “ La micro finance : une intervention pour répondre aux besoin despauvres qui s’inscrit bien dans la stratégie de lutte contre la pauvreté et les inégalités”.Epargne sans frontière, Technique financière et développement (TFD). n°59-60, Juillet-Octobre.Daley,Harris (2006) “state of the micro crédit Summit campaign report”. Micro credit SummitCampaign. Washington.Else and Gallagher (2000) “An Overview of the Microentreprise Development Field in the U.S”.A contribution of the International Labor Organization.Hugon,P (1996) “ les innovations dans les sphéres financiéres informelles et semi-formelles enAfrique Subsaharienne”. Mondes en Développement. (Vol 24, p94).Labie, M. and Mees, M (2005) “Le paradigme commercial en Microfinance et ses effets surL’inclusion sociale”. SOS FAIM, Zoom Microfinance n°16, septembre.Ledgerwood, J (1999) “Microfinance Handbook”. An Institutional and Financial Perspective.M.C, Kinon., R, I (1973) “Money and capital in economic development”. Washinston, D, C,Brookings institution’s. JuneMorduch, Jonathan (2000) “The micro finance Schism”. World en Développement. (Vol 28(4),PP 617-629).73Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comMuhammad Yunus (1992) “Base Arrière”. Fondation pour le Progrès de l’Homme.septembre.Otero, M (2000) “Réorienter la microfinance vers le développement”. Revue TechniquesFinancières et développement n°59-60, Juillet–Octobre.Sboui, F (1997) “le secteur informel urbain en Tunisie : hétérogénéité des structures etcontribution au développement”. Thèse de doctorat sciences économiques. UniversitéMontesquieu- Bordeau.Schreiner, M (1999) “Self employment, Microenterprises and the poorest”. Social ServiceReview.Schreiner, M and H.H. Colombet (2001) “from urban to rural: lessons for Microfinance fromArgentina”. Development Policy Review. (Vol 19, N°3, p339).Sébastien, Boyé., Jeremy, Hajdenberg., Christine, Poursat., Eyrolles (2006) “ Le guide de lamicrofinance”portail de la microfinanceShaw, E (1973) “Financial Deepening in Economic Development”. New York, Oxford UniversityPress.Sidhom, H (2002) “les nouvelles orientations des stratégies de développement : le développementpar les petits métiers en Tunisie”. Cahiers du GRATICE n°22, L’économie informelle auMaghreb, Université Paris XII.Sinha (1998) “Microcredit: impact, targeting and sustainability”. IDS Bulletin, volume 29, issuen°4.Wallace, D, Wattles. 2008. “la science pour devenir riche”. , Paris Version originale éditée auxUSA en 1910.Table I: Sexe and age repartitionSexeTotalMale Femaleage 18-29 Effectif 23 14 37Age percentage 62,2% 37,8% 100,0%30-39 Effectif 18 10 28Age percentage 64,3% 35,7% 100,0%40-49 Effectif 13 6 19Age percentage 68,4% 31,6% 100,0%50 and more Effectif 13 3 16Age percentage 81,3% 18,8% 100,0%Total Effectif 67 33 100Age percentage 67,0% 33,0% 100,0%Table II: Activities sectors repartitionsector Male Female TotalAgriculture 28% 5% 33%Handicraft 2% 7% 9%Services 2% 6% 14%Small trades 13% 7% 20%Commercial 16% 8% 24%total 67% 33% 100%Table III: Age of micro enterprisesYears number 1-2 3-4 5 and more totalMale 49% 9% 9% 67%Female 22% 9% 2% 33%74Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comtotal 71% 18% 11% 100%Table IV: Actual situation of enterprises repartitionMicroenterprise Survive Growth totalsituationMale 60% 7% 67%Female 29% 4% 33%Total 89% 11% 100%Table V: Need to increase the number of staffIncrease NoQualified Non qualified trainees totaleffectifemployees employeesMale 45.5% 7.1% 7.1% 7.1% 66.7%Female 23.2% 6.1% 1% 3% 33.3%Total 68.7% 13.1% 8.1% 10.1% 100%Table VI: The amount of micro credit repartitionAmount 1000 1500 2000 2500 3000 3500 4000 TotalDinars Dinars Dinars Dinars Dinars Dinars DinarsMale 7% 7% 4% 5% 4% 3% 7% 67%Female 6% 5% 5% 8% 3% 3% 3% 33%Total 33% 22% 9% 13% 7% 6% 10% 100%Table VII:statistics of groupMedian Standard error Valid N (list)Y Non weighted weightedNot hiring sexe 1,31 ,466 52 52,000instruction 2,46 ,699 52 52,000micro entreprise age 2,40 2,260 52 52,000Last activity 4,08 2,641 52 52,000Loan amount 2,67 1,968 52 52,000Loan object 1,42 ,499 52 52,000saving 1,54 ,503 52 52,000Activity sector 2,42 1,526 52 52,000Actual situation of micro enterprise 1,02 ,139 52 52,000Number of employee in starting activity 1,12 ,323 52 52,000Number employee now 1,00 ,000 52 52,000turnover 2,31 1,058 52 52,000AGE 2,15 1,092 52 52,000Increasing staff ,29 ,776 52 52,000Financing 4,31 2,245 52 52,000hiring sexe 1,33 ,474 46 46,000instruction 2,78 ,941 46 46,000micro entreprise age 2,87 2,817 46 46,000Last activity 4,50 2,747 46 46,000Loan amount 3,39 2,081 46 46,000Loan object 1,48 ,505 46 46,000Saving 1,41 ,498 46 46,000Activity sector 3,37 1,420 46 46,000Actual situation of micro enterprise 1,22 ,417 46 46,00075Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comNumber of employee in starting activity 1,65 ,994 46 46,000Number of employee now 2,70 1,459 46 46,000Turnover 2,65 ,994 46 46,000AGE 2,00 1,033 46 46,000Increasing staff 1,00 1,155 46 46,000FINANCing 5,70 1,547 46 46,000Total Sexe 1,32 ,467 98 98,000Instruction 2,61 ,833 98 98,000micro entreprise age 2,62 2,534 98 98,000Last activity 4,28 2,686 98 98,000Loan amount 3,01 2,043 98 98,000Loan object 1,45 ,500 98 98,000Saving 1,48 ,502 98 98,000Activity sector 2,87 1,544 98 98,000Actual situation of micro enterprise 1,11 ,317 98 98,000Number of employee in starting activity 1,37 ,765 98 98,000Number employee now 1,80 1,308 98 98,000Turnover 2,47 1,037 98 98,000AGE 2,08 1,062 98 98,000Increasing staff ,62 1,031 98 98,000Financing 4,96 2,061 98 98,000Table VIII: Test resultsM Box 25.766FapproximatelyDdl 1Ddl2Significance25.522127361.123,000Table IX: Equality tests of average groupsWilks Lambda F ddl1 ddl2 SignificanceSexe 1,000 ,037 1 96 ,847Instruction ,963 3,731 1 96 ,056micro entreprise age ,992 ,823 1 96 ,367Last activity ,994 ,603 1 96 ,439Loan amount ,969 3,080 1 96 ,082Loan object ,997 ,295 1 96 ,588Saving ,984 1,531 1 96 ,219Activity sector ,905 10,024 1 96 ,002Actual situation of micro enterprise ,902 10,448 1 96 ,002Number of employee in starting activity ,876 13,573 1 96 ,000Number of employee now ,577 70,370 1 96 ,000Turnover ,972 2,739 1 96 ,101AGE ,995 ,510 1 96 ,47776Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comIncreasing staff ,880 13,084 1 96 ,000Financing ,886 12,373 1 96 ,001Table X: Wilks LambdaNumber of variables Lambda ddl1 ddl2 ddl3 F exactPas Statistics ddl1 ddl2 Significance1 1 ,577 1 1 96 70,370 1 96,000 ,0002 2 ,537 2 1 96 40,975 2 95,000 ,0003 3 ,496 3 1 96 31,788 3 94,000 ,0004 4 ,454 4 1 96 27,946 4 93,000 ,0005 5 ,428 5 1 96 24,602 5 92,000 ,000Table XI: Wilks LambdaFunction test Wilks Lambda Khi-deux ddl Significance1 ,428 79,371 5 ,000Table XII: Coefficients of classification functionsY: not hiring hiringMicro enterprise age ,379 ,678Activity sector 1,106 1,760Employees in start activity 1,072 -1,311Employees in date of suvey ,628 3,636Increase of staff ,119 1,067constant -3,419 -8,997Table XIII: Logit resultscoeff Std.error Z P>|z| [95% confYicientinterval]Dz.4581753*** .2701099 1.70 0.090 .9875811.071230Ageproj.0523209* .1004393 0.52 0.002 .24917822.144536Augefft.538504** .2607951 2.06 0.039 0.2735511.049653Nbrsldem 1.711963* .6349342 2.70 0.007 .46751482.956411Sector.3736652** .1581318 2.36 0.018 .0637326.6835977Cont-3.54334* .8637494 -4.10 0.000 -5.2362581.850422Number of obs = 100Pseudo R2 = 0.2263LR.Chi2(5) = 31.34Significance at level of *1%, **5%, *** 10%77Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comSURVEY1. Identification of the micro enterprise(1) Micro entrepreneur name:(2) Activity sector:1. Agriculture2. Craft3. Commercial4. Services2. Historic of micro enterprise(1) Micro enterprise is owned by:1. Individual2. Family3. Private company4. Other,…5.(2) Where do you execute your business1. In your home2. In other location3. Local annex to home4. Independent location(3) The location of micro enterprise:1. Properties2. Rented (loué)3. Other(4) Do you think that your micro enterprise is in a survival or a growth stage:1. Survival2. Growth(5) How many workers do you have when you started your business?(6) How many workers do you have now?(7) What is your average monthly turnover?(8) What is the amount of total expenditures per month?(9) How do you affect the benefit made?Part of the profit earned in percentageConsumptionReinvestmentSavingOther(10) Do you need to increase the staff?1. Yes2. No(11) If you need to increase staff, what do you need?1. Qualified workers2. Unqualified workers3. trainees(12) What is the source of financing in start activity?1. Your money2. Loan from your family3. Loan from friends78Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com4. From bank5. From BTSII. Identification of micro entrepreneur(1) Age(2) Sexe1. Male2. Female(3) Educational level1. Illiterate2. Primary3. Secondary4. High level• Family characteristics of the micro entrepreneur(4) What is your family situation?1. Single2. Married3. Divorced4. Widower(5) Who is the chief of family1. The micro entrepreneur2. Mother3. Father4. Other• Micro entrepreneur characteristics(6) Where are you born?1. In the same town where you live now2. In another city of sfax3. Other(7) How long have you been living in sfax?(8) How long are you the owner of this micro enterprise?(9) Did you create this micro enterprise?1. Yes2. No(10) Your activity before establishing micro enterprise?1. Unemployed2. Commerce3. Agriculture4. Small businesses5. Others(11) Have you attended a professional training?1. Yes2. No(12) What is the duration of training?(13) What is the activity domain of formation?III. Use of the loan(1) Number of loans received by customerLoan numberamount79Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com(2) In which activity have you invested the last loan obtained from BTS?1. Agriculture2. Commerce3. Craft4. Service5. Other(3) What has been the purpose of your first loan?1. New investment2. Extension of business(4) Do you think that the BTS loan is sufficient?1. Yes2. NO(5) Did you find difficulties to borrow from BTS?1. Yes2. No(6) How do you manage to repay your loans?1. Through the benefit of micro enterprise2. You borrow from other(7) Do you arrive to save?1. Yes2. No(8) Do you have problems of payment?1. Yes2. No(9) Do you think that BTS is:1. An assistance organization2. Commercial bank(10) In case of the inexistence of BTS, you make recourse to:1. Other lenders2. Abandon the project3. Work as an employee80Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comHandling Technological Innovations:China OverviewBekmurodov Adham SharipovichProfessor,Banking and Finance Academy,Tashkent-100000, UzbekistanAhunjonov Umidjon Maxamadumarovich(Corresponding author)PhD Research FellowWuhan University of TechnologyWuhan-430070, P.R ChinaABSTRACTUndertaken research is of phenomenological nature. We attempt to explore theretrospective and current trends in management of technological innovations inChina by our inductive approach and arrive at conclusions. Most of theinformation that contained in the research work comes from the secondarysources including books, journals, and available report data from Chinese andforeign governmental or agential official websites. The paper embraces fourlogically interrelated parts. In the first section of the paper, we analyze differenttheoretical bases to build our own suppositions. The second part sets out todiscuss how China is handling technological innovations to build innovationdriveneconomy, while the third part explores some challenges that China isconfronting on its path to further proceed towards the intended target. The lastpart shares our own personal standpoints and conclusions.Keywords: Industrialization, Learning, Clusters, Technological innovation,China, Challenges of economic development1. CONTEXTInternational Journal ofContemporary Business StudiesVol: 3, No: 10. October, 2012Pp.81-90©Academy of Knowledge Process1.1. The Main Engine of Growth: Industrial and Postindustrial SocietiesThroughout history, societies have led a long path of economic development which was not veryeasy to attain for the successful ones and still very challenging for the latecomers. If we take amoment of reflection upon the history of economic development of current modern humansocieties, we can establish that the process of industrialization has always been the key push inthe creation of today’s giant and powerful economies of Europe, the USA, Japan and manyothers. Based on several empirical and theoretical arguments, Adam (2011) classifies severalfeatures to suggest that industrialization was the main engine of growth for the emergence ofeconomic powers:(1) Per capita income is positively correlated to the degree ofindustrialization(2) Productivity is much higher in manufacturing than in agricultural sector(3) Technological advance is born in the manufacturing sector and diffusesacross other sectors(4) There are stronger linkage and spillover effects in manufacturing81Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com(5) Compared to agriculture, the manufacturing sector offers specialopportunities for capital accumulation(6) As per capita income rises, the share of expenditures on manufacturedgoods in total expenditures increases, while the share of agriculturalexpenditures decreasesIn general, nowadays, the term “industrialized society” is deemed synonymous with wealth,technological leadership, economic and political power and international dominance. However, inthe early 1970s a new term “postindustrial society” appeared in economic science field to betterillustrate noteworthy changes in some central attributes of advanced industrial societies, thechanging character of knowledge, technology, occupations and the market in the social structuraland economic dimensions of industrial societies (Robert, 2000). In other words, over the last fiftyyears, one of the main changes that occurred in the target of economic growth strategies of“industrialized societies” was the shift of emphasis towards technological innovations (Raja,2010).Many studies have found innovation to be of pivotal importance in the viability and prosperity ofeconomies given the ever-increasing challenges of globalization and global competition. Centrefor Process Excellence and Innovation (CPEI, 2012) defines competitiveness as two capabilities:to innovate and develop cutting-edge technologies and products; and to deploy and to better theoperational processes those efficiently produce and deliver these goods and services to thecustomer. Improvements in economic growth and the quality of life are believed to be facilitatedby stimulating and intensifying technological innovation (TIA, 2010). Designating innovation asone of the pillars of country’s twelve competitiveness measurement units, World EconomicForum (2011) highlights critical importance of innovation among others stating that in the longrunstandards of living can be improved only with innovation. CII (Confederation of IndianIndustry) points innovation to be the only way for Indian industry to have sustainable andinclusive growth. Four main elements are categorized (Jan, 2007) in the national context to becritically important for the countries to be in harmony with global trends. One of them is thedevelopment of the strong “innovation system”. Innovations are seen as the crucial factor for jobcreation, growth and sustainable wealth generation in business firms and in the country as awhole (Goran, 2009).Supposition-I. Underpinned by industrialization, technological innovations have evolved to be thekey factor for the countries and their companies of postindustrial era to attain stable growth andprosperity in the long-term.1.2. Learning for Technological InnovationIndustrialization being the fundamental base for economic development, growth rates can only befurther sustained through fostering innovations throughout economy. While economic advantageduring the Industrial Revolution in the large part was associated with natural resources, Nationaldevelopment in the Digital era can only be achieved with “creative” minds (GII, 2011). Thus,technological capabilities (learning), technology absorption and diffusion are regarded to be thebackbones of industrialization and international competitiveness without which it can be arduousif not impossible to build innovative economy (Dani, 2006). Then, it is altogether fitting to posethe question “How can we achieve knowledge-based economy which better bolsters the birth oftechnological innovations as an output.Changing attitude towards the relative importance of knowledge embodied in human capital andtechnology has brought up many different approaches as to how to create knowledge- basedinnovative economy. A prime example is National Innovation System first introduced by82Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comFreeman (1987). The system implies active cooperation among many actors (industries,government institutions and universities) whose interaction results in overall increase in learningcapacity and innovative performance of the nation accordingly. Analyzing USA’s NIScharacteristics, Irwin (2006) points out three main actors in NIS; (a) industries as a primaryperformer of R&D, (b) universities as a primary performer of basic research, (c) Federalgovernment as a primary source of funds for basic research. Examining the successfuldevelopment history of South Korea, Linsu (2000) remarks high rates of investments in physicaland human capital to raise modern planners, managers and engineers out of inexperiencedimitators of the 1960s. According to Technology Alliance Group (TA, 2012), for economies tosustain a vivacious innovation economy that can benefit all, they should facilitate an excellenteducation system, strong research capacity and a robust entrepreneurial environment.In point of fact, the world’s most innovations are concentrated in just a few places around theglobe (Richard, 2005). The author further states that innovation remains difficult without acritical mass of financiers, entrepreneurs, and scientists, often nourished by world-classuniversities and flexible corporations.Supposition-II. Learning for technological innovation embraces active cooperation of manydifferent actors targeting to better use of human intellect.1.3. Industrialization for Technological InnovationSince the importance of human intellect to better perform in innovativeness began to be morerecognized and valued, we have observed a high growing tendency of high-tech productioncompared with that of other manufacturing industries within the global economy (CSD, 2007).According to the Pavitt’s (Pavitt, 1984) taxonomy, high-tech industry belongs to science basedsector of manufacturing and is characterized with its high R&D intensity (OECD, 2011).There are several underlying reasons why high-tech production is increasingly on the focal pointof many nations in their path to economic prosperity (Lawrence, 2007).• High-tech firms are more related to innovations. The more innovative firms, the morelikely they are to survive and prosper. Innovative firms can readily obtain market share,create new markets with their novel products and employ resources more productively.• High-tech industries are associated with high value-added production. With more successrate in foreign markets, high-tech firms can support higher compensation to theirworkers.• With its spillover effects, high-tech industry benefits other commercial sectors that oftenlead to productivity gains, business expansions, and the creation of high paying jobs.The growth tendency in high-tech production in the world total can also be well explained withthe theory of development stages described in The Global Competitiveness Report (2011).According to this theory, factor driven, efficiency driven and innovation-driven economiesdistinctly stand out:• Factor-driven profile economies compete based on their factor endowments - mainlyunskilled labor and natural resources.• Efficiency-driven profile economies compete with efficiency and quality. Theseeconomic features can be reached by better education and training, efficient goodsmarkets, well-functioning labor and developed financial markets, the ability to harnessthe benefits of existing technologies, and large domestic or foreign markets.• Innovation-driven profile economies can compete only by producing new and differentgoods using the most sophisticated production processes and by innovating new ones.Industrialization being a bridge to transform a country from factor-driven to efficiency-driven,then to innovation-driven, high-tech industry is specially addressed because of its innovationinherent,high value-added and spillover features.83Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comSupposition – III. High-tech industry plays an important role in attaining stable growth andsustainable economy.1.4. Industrial StructureRealizing indispensible power of innovations in growth and competitiveness, almost all leadingcountries started investing heavily in research and development (R&D). However, observationsreveal that still a small number of geographic locations mostly dominate the global innovationprocess in specific sectors and technological areas (Porter, 1990). This further encouragedscholars to find out the underlying reason of these particular locations being more competitivethan the others. Thus, “cluster” effect is brought up; geographical proximity creates fasterinteraction between in-cluster companies and more efficient flows of goods, services, ideas, andskills follow thereby yielding high levels of productivity growth and rapid rates of innovation inboth processes and products (Idea, 2008).Although interpretations of driving forces behind emergence and development of early clustersmarkedly diverge among researchers, the sheer volume of productivity and innovativeness of inclustercompanies is generally agreed. Agglomeration advantages such as networks, knowledgespillovers, and human capital mobility make clustered firms more productive than other outsidefirms (Erik, n.d.). Therefore, when it is considered to increase innovative capacity of the nation interms of new-to-the-world innovations, these three important factors; (i) innovation infrastructure(ii) the industrial cluster environment (iii) the linkage between these previous two are highlynecessary (Furman, 2002). Industrial clusters are not only viewed from the angle of highinnovativeness (clusters belong to both high and low-value added industries), but also theircontribution to the development, the detraction of poverty through impacts on the local economyin which they function. (UNIDO, 2004).Supposition – IV. Cluster effects can bring difficult-to-imitate capabilities to the firms operatinginside.2. INDUSTRIALIZATION AND TECHNOLOGY MANAGEMENT IN CHINAUpon the introduction of its open market policy in 1978, China started to integrate into the worldeconomy with astonishingly high speeds. From the very beginning of its opening to the world,China represented a high pace of increase in its GDP growth, an average of 10.1 percent growththroughout the last 30 years (the World Bank), and by the end of 2010 China overtook Japan(Japan used to hold the title of being the second largest economy since 1968) in terms of its GDPand turned out to be the second largest economy second to USA in the world (Tomoko, 2010).Can these indicators represent that China is the world leader in Science and Technology and hoststhe manufacturing hub for the world and its biggest multinational corporations? The moreprobable answer by many might be “not”. More precisely, not all the inference can be drawnusing simply some general statistical numbers. This can be seen in another example; between2001 and 2007 high-tech goods exports from USA to China more than doubled and at the sametime this indicator more than quadrupled from China to USA (AeA). Yet, we should not overseethe fact that 86 % (2006) of high-tech goods are being produced by partially or wholly foreigninvestedfirms, mostly by American originated ones (Xing, 2010). However, at the same time,China has devised a plan to be “an innovation-oriented country” by 2020, a “world’s leadingscience power” by 2050 which requires solid industrial base and science-technological capacity(Cong, 2006).84Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.com2.1. China - on the way to innovation-driven economySince embracing open economy policy, China has taken and led numerous measures to boost itscapacity to create “indigenous innovations” by lending more weight to the development ofScience and Technology potential of the nation. Establishment of Ministry of Science andTechnology (MOST), Chinese Academy of Science (CAS) and National Natural ScienceFoundation of China and launch of different national programs in different periods including TheKey Technologies R&D Program, 863 Program, 973 Program, The Spark Program and TorchProgram and many other S&T oriented programs indicate how China is desiring its Science andTechnology capacity to grow (China in brief). China’s science and technology power isunderpinned by the network of 5400 national governmental institutions, 3400 university-affiliatedresearch institutions, 13000 research institutions under large state enterprises, and 41000 nongovernmentalresearch-oriented enterprises (Jiang Yu, 2010). Analyzing the early results ofsubsequent Science and Technology policies over the last 30 years we can see noticeable increasein scientific power of the nation: 293066 pieces of Chinese resident patent applications submittedto the World Intellectual Property offices around the world (fewer than 5% is submitted abroad)placed China in the top position in the world in 2010 (WIPO, 2010). Formulated with the aim offurther developing its science and technology base to foster innovation-based development,China’s 15- year Plan of being innovation-oriented country until 2020 outlines several relatedpolicies including increasing GDP share up to 2.5 % into R&D sphere by 2020, raising thecontribution of technological advance in economic growth to more than 60 %, limiting relianceon imported technology to no more than 30 percent of value added, becoming a leading countryin terms of invention patents and scientific papers citation gained by Chinese citizens (Denis,2007).2.2. Economic and Technological Development Zones of ChinaChina’s strong industrial base has been created mainly on the face of its several state-levelEconomic and Technological Development Zones (ETDZ). China is home to seven SpecialEconomic Zones (administrative divisions), 131 state-level ETDZs and over 1,500 industrialparks (Wanda, 2007). Reasonably, the meaning of forming special zones has also changed.Whereas it was just involving foreign funds as a crucial target in the beginning stage of thispolicy, now the focus has largely shifted to technology innovation (Zhang, 2012). After theimplementation of the national “Torch Program” in 1988, China has enjoyed an outstandingperformance in high-tech industrialization as well; 56 High-tech Industrial Development Zoneswith great high-tech achievements (CADZ, 2009) were established to date. Some of the bestETDZs of China are described below:2.2.1. Beijing Zhongguancun Science ParkBeijing Zhongguancun Science Park is based in the capital of China and is regarded the premierscience and technology development “incubator” of the country. Its history dates back to the“Zhongguancun Electronics Street” in the early 1980s, which later was officially recognized in1988 as “High-tech Development Experimental Zone” and was formally approved as China’s firststate-level high-tech development zone in 1999. The zone is comprised of several clustersincluding aerospace industry cluster, electronic information industry cluster, new materialindustry cluster, new energy vehicle industry cluster, new energy, energy conservation andenvironmental protection industry cluster, equipment industry cluster, emerging cultural andcreative industry cluster and biological industry clusters. The area is surrounded by a 32 highereducational institutions, 206 national and provincial research institutions such as The ChineseAcademy of Sciences, Beijing and Qinghua Universities and so on. The park’s total revenue inthe late 2009 was 1.3 trillion Yuan and the number of patent applications submitted was 16547 in2008 (SIPO, 2009). The area attracts more than one third of the nation's entrepreneurial85Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.cominvestments. Until now more than 15,000 overseas returnees have established more than 6,000enterprises in the park. Almost 200 branches and R&D centers of the world's Top 500 companieshave set their offices in the Zhongguancun Science Park. A number of companies registered inthe Zhongguancun Science Park have been listed on NASDAQ, New York Stock Exchange andHong Kong Exchanges and Clearing Ltd (ZGC, 2012).2.2.2. Shenzhen Special Economic ZoneShenzhen Special Economic Zone was founded in 1980 as the first special economic zone inChina. Shenzhen Special Economic Zone covers four of the six districts of Shenzhen City inGuangdong Province with a total area of 493 km². Once a small fishing village, the Zone enjoyedan annual economic growth rate of 25.8 percent compared with 9.8 percent for the whole Chinawithin last 30 years claiming country’s highest GDP per capita of about 14615 $ in 2010, whichmade Shenzhen one of the most prosperous of all the Chinese cities. Shenzhen Special EconomicZone accommodates Shenzhen Hi-Tech Industrial Park and Shenzhen software Park, whoseindustrial range covers many of high-tech industries like biotechnology and pharmaceuticals,building and construction materials, chemicals production and processing, computer software,electronics assembly, industrial equipment production, medical equipment andtelecommunications equipment. In the year of 2010, Shenzhen Hi-Tech Industrial Park achieved agross industrial output of 301.42 billion Yuan, of which export value accounts for 15.468 billionUS dollars (Wikipedia, 2010) Shenzhen is considered as one of the fastest-growing cities in theworld (USCS, 2008).2.2.3. Xi'an High-Tech Industries Development ZoneThis Industrial Development Zone opened was conceived in 1991. The main goal of thisDevelopment Zone is to spur the development of predominantly high-tech industry;communication industry, photovoltaic industry, power equipments, electronic components,automotive manufacturing, industry of advanced materials, bio-medicine and software industry incentral and north-west China. So far, the Zone has added 997 foreign-funded enterprises, ofwhich 609 high-tech ones, to its already existing 7619 local companies list. Its companies employa total number of 287,140.employees (2011). In the year of 2011, the Zone gained about 19,716transformed scientific and technical achievements with 90 percent of registered intellectualproperty rights and it is highly recognized with its outstanding share in developing Chineseindependent innovations. In 2010, the total industrial output hit the point of 263.4 billion with 31percent increase compared to previous year. As of 2006, XHTZ was chosen by the ChineseGovernment as one of the six high-tech zones to be further transformed into “First-class HightechDevelopment Zones” in the country (XDZ, 2011).3. CHALLENGES TO CHINA’S STRATEGY IN MANAGING TECHNOLOGICALINNOVATIONSChina is taking all the measures to capitalize on its innovation-driven economy, yet there are stillmany obstacles to be dealt with properly.3.1. Industrial PollutionChinese miracle of economic growth has been highly debated over the past years. In themeantime, side effects of massive industrialization have started taking its toll; pollution-relateddisease burden, pollution-exacerbated water scarcity, waste-water irrigation and concerned loss offishery, crops and excessive degradation of natural resources have surfaced to be a real concern.China hit the highest record number of deaths attributed to air pollution in the world with 700,000person in a year and this number is expected to rise to additional 550,000 in 2020 (Jeffrey, 2008);86Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comaround 190 million people are believed to be sick from drinking contaminated water (Elizabeth,2007). The aforesaid numbers partly represent the effects of industrialization on human health butsome other sides of the environmental issues are also equally severe. OctoberGenerally, there might be two side effects of this situation to China’s strategy of buildinginnovation-oriented society: (a) A healthy workforce being vital to a country’s competitivenessand productivity (GCR, 2011) and main base in generation of innovations in the country, it ishard to bring up “innovative talents” of the future in a highly unhealthy environment. (b)Worsening environmental degradation may force the government to divert the attention andinvestment from its 15 -Year Plan related projects (AeA, 2007).3.2. Unquestioned Deference to AuthorityAlthough many of the scholars acknowledge driving power of Chinese government’s “visiblehand” in attaining such a great development in a relatively short period of time, many othersquestion motivational power of authoritarian government system to further support “innovators”economy. Highlighting underpinning role of horizontal networking within different actors ofinnovation (research institutions, financiers, partners, suppliers and customers) in favoringknowledge, capital, product and talent exchange to make innovations happen, Gilboy (2004)questions the vertically structured Chinese political system in encouraging innovativeness.Rodney (2008) also states this problem as, “Openness matters – in innovation, in education, in allrealms of scholarships and the arts, and in debates about progress within politics” and accentuatesfreedoms which remain constrained in China.3.3. Unsupportive Education SystemEducation is an important base in forming future innovators. Through our exploration of severalarticles, we have found a number of authors doubting the quality of Chinese education in thisrespect. Many tend to criticize Chinese education system in raising future talents for its favor ofrote teaching. Sargent (2006) asserts the current system is not good enough to foster problemsolving,innovation and creativity skills in students. Additionally, the overly strict rules followedby boredom which can lead to rote memorization for examination are deemed to be one of themain reasons why dropout rates are high in China (Hongmei et.al, 2011).3.4. Lack of managerial skillsExperienced managers are the key vessels watering innovation to grow. However, Shui (2009)mentions a low rank of China in terms of process and management skills and highlights the lackof managerial experience as one of China’s major weaknesses in IT industry.3.5. Customer’s Quality AppreciationReadiness of customers to pay for a better quality product is the main incentive for the producersto conduct research on further betterment of their products, thus to be more innovative. SinceChina is still a middle income country, there are not many wealthy local customers whoappreciate high-end brand products and are willing to pay for it. Emphasizing the importance ofdomestic user-producer linkages in fosterage of innovations, Tilman (2007) points outunderdeveloped loops of this interaction in the case of China. Thus, the purpose of technologydevelopment in enterprises is being limited to merely meeting present market demand rather thandeveloping potential markets.3.6. Loose Protection of Intellectual Property RightsAccording to the results of CEA survey (2007), most new products are generally imitated within ayear. Apparently, this period is even shorter in China. Hout (2006) specifies that due to weak87Copyright © 2012. Academy of Knowledge Process

International Journal of Contemporary Business StudiesVol: 3, No: 10. October, 2012 ISSN 2156-7506Available online at http://www.akpinsight.webs.comintellectual property rights in China, many producers are losing their incentive to innovate. Basedon his review of selected articles from leading journals on intellectual property rights, Hanni(2012) finds that almost all the articles on China scope pertain to the protection of intellectualproperty.3.7. Loose intensity of relationship among actors of innovationDensity and quality of collaborations among main actors (industry, academia and public orgovernment research institutes) of innovation can be a determinant of innovations in terms ofquality and quantity. However, these linkages are still relatively weak in China (Mu, 2008).Motohashi (2007) also confirms that the degree and quality of research-oriented cooperationbetween university (research institutes) and industry are lower as opposed to developed countries.4. CONCLUSIONChina has showed a tremendous development pace throughout these last 30 years. Its “opendoors” policy has proved to be efficient and contributed a lot to the prosperity of the country.Thirty years of open policy has helped China build its strong manufacturing based economy andthis economy demonstrates its strength to the world within many different aspects. At the sametime, China’s recent plan on building its innovation based economy has raised even morediscussions among its partners and competitors. However, this plan cannot be easily realized inthe face of many different obstacles. If problems concerning industrial pollution, autocraticcontrol, quality of education, intellectual property rights and loose relationship among actors ofinnovation will timely be recognized by the government and attentively dealt with, then, Chinahas a solid base to reach its target.REFERENCESAdam Szirmai. (2011). Industrialization as an engine of growth in developing countries; 1950-2005. Journal of Structural change and Economic Dynamics (Article in press).American Electronics Association (AeA). (2007). China’s 15 Year Science and Technology Plan,Retrieved from http//www.aeanet.org/csCentre for Process Excellence and Innovation. Retrieved fromhttp//www.innovation.jbs.cam.ac.uk/China in brief. (2005). The Scientific and Technological Structure. Retrieved fromhttp//www.china.org.cnCong Cao et.al (2006). China’s 15 year science and technology plan. Retrieved fromhttp//www.levin.suny.edu/pdf/physics%20Today-2006.pdfConsumer Electronics Association “The Business of Consumer Technologies: What the FutureHolds,” Shawn Dubravac, Retrieved from http//www.CE.orgDani Rodrik. (2006). What’s so special about China’s exports? China & World Economy.14(5):1–19.Denis, F.S., Cao, C. and Richard, P.S. (2007). “China’s new science and technology strategy:implications for foreign firms”, China Currents, Vol. 6 No. 2.Economy E. (2007). The great leap backward. Foreign Affairs (September/October): 38.Edgar F. Borgatta (chief editor), Rhonda J. V. Montgomery. (2000). Encyclopedia of Sociology,Postindustrial Society article by Robert Fiala, Macmillan Reference USA, 3481 p.Erik Strojer Madsen and Valdemar Smith Industrial clusters, firm location and productivity,Retrieved from http//www.hha.dk/nat/wper/03-26_esmvs.pdfExecutive Committee, Commission on Strategic Development (CSD). (2007). Development ofHigh Technology Industries in Hong Kong, Retrieved from http//www.cpu.gov.hk88Copyright © 2012. Academy of Knowledge Process

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