What happened in Satyam and lessons for auditors
What happened in Satyam and lessons for auditors
What happened in Satyam and lessons for auditors
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ByRamki
Frauds small <strong>and</strong> BIG!• There are no small frauds, only frauds that have notexisted long enough to become big!• Joseph T. Wells• Founder <strong>and</strong> Former Chairman ACFE
White collar crime <strong>in</strong>creas<strong>in</strong>g!• White collar crime, def<strong>in</strong>ed by crim<strong>in</strong>ologist Edw<strong>in</strong>Sutherl<strong>and</strong> as• "committed by a person of respectability <strong>and</strong> highsocial status <strong>in</strong> the course of his occupation.“• Is <strong>in</strong>creas<strong>in</strong>g !• In scope <strong>and</strong> numbers!
<strong>What</strong> do we know?• No reports but bits <strong>and</strong> pieces of <strong>in</strong>fo. From CBI <strong>and</strong> SFIO reports which were published• SFIO report submitted but not available:• 12,000 pages <strong>in</strong> 30 volumes• CBI report submitted but not available:• 1532 documents• Statements of 433 witnesses• Papers packed <strong>in</strong>: 25 trunks• Charge sheet length: 300 pages• Annexures: 65000 pages• Investigation team size: 16• Scam size: Rs 7,800 cr –could be Rs 10,000 Cr• Front cos. Used by Raju: 327• Restatement of accounts by KPMG (Deloitte got out) pend<strong>in</strong>g (given permission till Mar10)• Probe by ICAI is progress<strong>in</strong>g‐ <strong>in</strong>terim report submitted?• Probe by En<strong>for</strong>cement directorate pend<strong>in</strong>g• BOB NY <strong>in</strong>vestigation is pend<strong>in</strong>g• 32 violations of Co .law found• So <strong>in</strong><strong>for</strong>mation is <strong>in</strong>complete as of date <strong>and</strong> we do not still have the total picture
<strong>What</strong> did Raju do? –bird’s eye view• Employees on bench shown as ‘work<strong>in</strong>g’• For such ‘work<strong>in</strong>g employees’ ,‘Fictitious bills’ raised• For such ‘Fictitious bills’ , ‘money shown as if received’• For “Monies shown as if received’, ‘fake bank statements’ werecreated• With ‘Fake bank statements’ a ‘fake reconciliation’ was done• ‘Money shown as if received’ shown as ‘Deposits which didnot exist’• For ‘Deposits which did not exist’ , ‘fake bank depositreceipts <strong>and</strong> confirmations ‘ were created• For ‘Deposits which did not exist’, ‘<strong>in</strong>terest shown asreceived’;• For ‘<strong>in</strong>terest shown as received’ , ‘TDS’ shown as done!
Load<strong>in</strong>g factor• <strong>Satyam</strong> published a falsified load<strong>in</strong>g factor (utilisation of staff)• Between the second quarter of 2006‐07 <strong>and</strong> that of 2008‐09, theaverage offshore category (those work<strong>in</strong>g <strong>in</strong> India) load<strong>in</strong>g factor wasshown as 74.88 per cent, whereas the actual head count load<strong>in</strong>g factorwas only 62.02 per cent.• Similarly, the company was declar<strong>in</strong>g a load factor of 96.71 per cent <strong>for</strong>the onsite category (those work<strong>in</strong>g <strong>in</strong> customer premises abroad),while it was actually 94.86 per cent.• <strong>Satyam</strong>’s payroll was h<strong>and</strong>led by its Accounts dept. The HR dept feddata on new jo<strong>in</strong>ees <strong>and</strong> people who resigned etc.• The accounts dept <strong>in</strong>flated sales by generat<strong>in</strong>g fake <strong>in</strong>voices <strong>in</strong> the<strong>in</strong>voice management system <strong>for</strong> people who were on bench• SAP SHINE was used by HR but not by accounts‐ so there was a gap• If details of employees who quit were deleted from payroll or used togenerate cash not clear
Modus oper<strong>and</strong>i <strong>for</strong> bill<strong>in</strong>g• Company’s st<strong>and</strong>ard bill<strong>in</strong>g systems subverted to generatefalse <strong>in</strong>voices to show <strong>in</strong>flated sales• 7,561 <strong>in</strong>voices found hidden <strong>in</strong> the <strong>in</strong>voice managementsystem, worth Rs 51 billion (US$1.01 billion).• Concerned bus<strong>in</strong>ess circles would not be aware of the<strong>in</strong>voices, which were 'also not dispatched to thecustomers'.• All the <strong>in</strong>voices that were hidden us<strong>in</strong>g the Super User ID<strong>in</strong> the IMS server were found to be false <strong>and</strong> fabricated.• The value of these fake <strong>in</strong>voices were shown as receivables<strong>in</strong> the books of accounts of [<strong>Satyam</strong>] thereby dishonestly<strong>in</strong>flat<strong>in</strong>g the revenues of the company.
The elaborate technology set up• Several secure networks with<strong>in</strong> the company’s office computerswere <strong>in</strong>accessible to all but a h<strong>and</strong>ful of Raju’s close associates.• Mr Raju <strong>and</strong> his cohorts had set up special password‐protected‘adm<strong>in</strong> log<strong>in</strong> id’ <strong>and</strong> ‘super log<strong>in</strong> id’, which were used to createdodgy records of the company that could only be accessed <strong>and</strong>modified by them• Loopholes <strong>in</strong> its account<strong>in</strong>g software left passwords unsecured tofacilitate fraud; software system <strong>for</strong> manag<strong>in</strong>g company’s f<strong>in</strong>ancialaccount<strong>in</strong>g functions was deliberately made very complex <strong>for</strong><strong>in</strong>flat<strong>in</strong>g profits; different departments of the company were not<strong>in</strong>tegrated electronically;• The <strong>in</strong>voice management system of <strong>Satyam</strong> had a weak passwordprotection, mak<strong>in</strong>g the system vulnerable to misuse.• There<strong>for</strong>e, fake <strong>in</strong>voices could be created by unauthorised users.
How bogus bill<strong>in</strong>g was done?• Various systems <strong>Satyam</strong> had:• Regular <strong>Satyam</strong> bills created by a computer applicationcalled ‘Operational Real Time Management (OPTIMA)’,which created <strong>and</strong> ma<strong>in</strong>ta<strong>in</strong>ed <strong>in</strong><strong>for</strong>mation on companyprojects.• The ‘<strong>Satyam</strong> Project Repository (SRP)’ system then generatedproject IDs;• An ‘Ontime’ application <strong>for</strong> enter<strong>in</strong>g the hours worked by<strong>Satyam</strong> employees;• A ‘Project Bill Management System (PBMS)’ <strong>for</strong> bill<strong>in</strong>g.• An ‘Invoice Management System (IMS)’ generated the f<strong>in</strong>al<strong>in</strong>voices.
How bogus bill<strong>in</strong>g was done?• This system structure bypassed by the abuse of an emergency‘Excel Port<strong>in</strong>g’ system, which allowed '<strong>in</strong>voices [to] begenerated directly <strong>in</strong> IMS…by port<strong>in</strong>g the data <strong>in</strong>to the IMS.'• This system was subverted by the creation of a user ID called‘Super User’ with 'the power to hide/unhide the <strong>in</strong>voicesgenerated <strong>in</strong> IMS'.• By 'logg<strong>in</strong>g <strong>in</strong> a Super User, the accused were hid<strong>in</strong>g some of the<strong>in</strong>voices that were generated through Excel Port<strong>in</strong>g.• Once an <strong>in</strong>voice is hidden the same will not be visible to theother divisions with<strong>in</strong> the company but will only be visible tothe company’s f<strong>in</strong>ance division sales team‘• Some of the 600 odd customers’ sales were doubled <strong>and</strong> shown.
Who did it ?• 33 year old assistant manager (f<strong>in</strong>ance) Srisailam "gotcreated the 7561 falsified sales <strong>in</strong>voices ..(<strong>and</strong>) hidthem from bus<strong>in</strong>ess divisions.. got the data fed<strong>in</strong>to the systems."• These <strong>in</strong>voices were "exported to Oracle F<strong>in</strong>ancialsfrom where annual f<strong>in</strong>ancial statements weregenerated."
Collection of these fake <strong>in</strong>voices!• In order to balance the collections aga<strong>in</strong>st these fictitious <strong>in</strong>voices, they werefirst shown as ‘receipts’ <strong>in</strong> the current account ma<strong>in</strong>ta<strong>in</strong>ed with the Bank ofBaroda, New York Branch <strong>and</strong> subsequently they were shown to betransferred to other bank accounts as fixed deposits• They made false bank statements to show receipts of these fake <strong>in</strong>voices• Now the bank statement had to be reconciled!• Venkatapathi Raju, senior manager (f<strong>in</strong>ance) of <strong>Satyam</strong>, “h<strong>and</strong>ed over<strong>for</strong>ged monthly statement of banks (that he received from bosses) toSrisailam <strong>for</strong> mak<strong>in</strong>g reconciliation <strong>and</strong> entries <strong>in</strong>to Oracle F<strong>in</strong>ancials.”• Also teem<strong>in</strong>g <strong>and</strong> lad<strong>in</strong>g was done• V.Raju was responsible <strong>for</strong> h<strong>and</strong>l<strong>in</strong>g the cheques of <strong>Satyam</strong> Computers. " Hereceived cheques totall<strong>in</strong>g Rs 1,425 crores dur<strong>in</strong>g 2006‐08 from 37companies <strong>and</strong> deposited them <strong>in</strong> the accounts of <strong>Satyam</strong> but failed toreflect the same <strong>in</strong> the books of accounts of the company.• Instead he got them reflected wrongly as if these monies were receivedthrough sales proceeds from Bank of Baroda, New York branch."
Fake deposit receipts• Investments shown as fixed deposit receipts (FDRs) worthcrores of rupees were fake <strong>and</strong> pr<strong>in</strong>ted from Ramal<strong>in</strong>ga Raju’spersonal device• Ramal<strong>in</strong>ga Raju regularly generated fake quarterly balanceconfirmation letters show<strong>in</strong>g the amounts of fixed deposits <strong>and</strong>the <strong>in</strong>terest accrued on them.• The fake FDRs showed huge amounts, <strong>and</strong> the <strong>in</strong>terest on thesedeposits was projected to be over Rs 375 crore, as aga<strong>in</strong>st theactual <strong>in</strong>terest <strong>in</strong>come of Rs 7.42 lakh only.• VP f<strong>in</strong>ance Ramakrishna oversaw the process of perpetration offraud <strong>and</strong> was custodian of <strong>for</strong>ged FD receipts.
Destroy<strong>in</strong>g of records• Ramakrishna got his laptop re<strong>for</strong>matted one daybe<strong>for</strong>e the confession by Ramal<strong>in</strong>ga Raju <strong>and</strong><strong>in</strong>structed juniors to delete records from thecomputers.• He also got the <strong>for</strong>ged FD receipts destroyed.• Further Srisailam ‐ <strong>in</strong> the wake of the aborted <strong>Satyam</strong>‐Maytas deal ‐ also got electronic records deleted<strong>and</strong> reversed certa<strong>in</strong> entries <strong>in</strong> the OracleF<strong>in</strong>ancials• So if the auditor does not have copies <strong>in</strong> his filesthe records won’t be found anywhere!
Share sale proceeds miss<strong>in</strong>g• Rs 760 crore raised by scam‐ta<strong>in</strong>ted <strong>Satyam</strong> Computer throughshare sales <strong>in</strong> 2001 <strong>in</strong> the US referred by SFIO to theEn<strong>for</strong>cement Directorate <strong>for</strong> further <strong>in</strong>quiry, after they failed totrace the amount.• <strong>Satyam</strong> promoters have showed that the money was parkedwith Citibank, but no such accounts were found with the saidbank• Unanswered questions:• How could such a huge sum just vanish?• How can Citi bank “show their <strong>in</strong>ability to provide this <strong>in</strong><strong>for</strong>mationon the plea that all such transfers are routed through Citibank'ssystem account No. 10996665 Citibank, N. A. Bahra<strong>in</strong>."• <strong>What</strong> is special about Bahra<strong>in</strong> that Citi itself does not know what<strong>happened</strong> after Bahra<strong>in</strong>?• How did company disclose utilisation of proceeds?• ?????!!!!
BOB NY branch• The SFIO has recommended an <strong>in</strong>vestigation <strong>in</strong>to Bank ofBaroda’s role <strong>in</strong> the <strong>Satyam</strong> scam.• <strong>Satyam</strong> account, numbered 120559, <strong>in</strong> New York was usedby the company to camouflage fictitious collections —when the cash did not exist — <strong>and</strong> that the accountstatements were falsified <strong>and</strong> so was the quarterly ‘balancesheet’ with regard to this account.• <strong>Satyam</strong> would show the fictitious balance <strong>in</strong> the account<strong>and</strong> would later show the money be<strong>in</strong>g diverted <strong>and</strong> be<strong>in</strong>gshown as fixed deposits with other banks.• SFIO says prima‐facie evidence suggests <strong>in</strong>volvement ofsome of the bank officials <strong>and</strong> has recommended anenquiry on the part of the M<strong>in</strong>istry of Corporate Affairs
Fraud/<strong>for</strong>gery is not new at <strong>Satyam</strong>• A <strong>Satyam</strong> subsidiary had worked on develop<strong>in</strong>g software<strong>for</strong> mobile prepaid technology <strong>for</strong> Upaid.• To obta<strong>in</strong> the patent, Upaid required the signature of 20<strong>Satyam</strong> employees <strong>and</strong> Upaid received the signatures from<strong>Satyam</strong> <strong>and</strong> the patent <strong>in</strong> due course.• Upaid then sued Verizon <strong>and</strong> Qualcom <strong>for</strong> us<strong>in</strong>g patentedtechnology; <strong>and</strong> Upaid got a rude shock.• An ex‐<strong>Satyam</strong> employee, who had worked on the prepaidmobile technology, now a Verizon employee, po<strong>in</strong>ted outthat his signature which was on the patent application,was <strong>for</strong>ged.• Upaid then sued <strong>Satyam</strong> <strong>for</strong> $1 billion.
Other angles to <strong>in</strong>vestigation• ED look<strong>in</strong>g afresh <strong>in</strong>to <strong>in</strong>volvement of <strong>Satyam</strong> <strong>in</strong> Ketan Parekhsecurities scam• CBI approach<strong>in</strong>g US, Mauritius <strong>and</strong> European countries to seekdetails of bank accounts <strong>in</strong>cl. Bank of Baroda's New York branch• CBI has located suspicious <strong>for</strong>eign bank a/cs <strong>in</strong> USA held <strong>in</strong> thename of non Indians‐ Rs 60 cr channelled <strong>in</strong>to these a/cs. As theseare <strong>for</strong>eign banks a/cs CBI has to rely on Interpol to unravel thedetails• CBI look<strong>in</strong>g at expenses to see if there have been misappropriationof funds• The Union home m<strong>in</strong>istry's Government Exam<strong>in</strong>er of QuestionedDocuments (GEQD) has confirmed the <strong>for</strong>gery committed by Raju
Other angles of <strong>in</strong>vestigation• The CBI, which suspects that l<strong>and</strong> was bought with money siphonedaway from <strong>Satyam</strong>, has now sent special teams to identify <strong>and</strong> freezeall these l<strong>and</strong> assets."We are now prepar<strong>in</strong>g a dossier on what can be called the <strong>Satyam</strong>‐Raju l<strong>and</strong> bank. Most of the pieces of l<strong>and</strong> <strong>in</strong> the control of Raju are<strong>in</strong> the sizes of five to six acre plot each."• The CAG has mentioned <strong>in</strong> the report, 2009‐2010, that “<strong>Satyam</strong>Computer Services Ltd, <strong>in</strong> Hyderabad II Commissionerate, engaged <strong>in</strong>render<strong>in</strong>g of consult<strong>in</strong>g eng<strong>in</strong>eers services, manpower recruitmentagency services, etc, took wrong credit of Rs 4.15 crore dur<strong>in</strong>g theperiod between February 2006 <strong>and</strong> July 2007, of the service tax paid onhealth <strong>in</strong>surance services obta<strong>in</strong>ed from <strong>in</strong>surance companies <strong>for</strong> thewelfare of their employees
Other angles to <strong>in</strong>vestigation• The United States Securities <strong>and</strong> Exchange Commission (SEC), thefederal agency to regulate the securities <strong>in</strong>dustry <strong>in</strong> the Unites States,has sought India's permission to probe the <strong>Satyam</strong> fraud case• A highly placed source <strong>in</strong> the CBI confirmed the hawala trail of moneyfrom <strong>Satyam</strong> Computers traced by the agency.• The accused persons <strong>in</strong> the multi‐crore scam allegedly routed some Rs 12crore every month through hawala channels outside India s<strong>in</strong>ce 2002 tillthe scam was unearthed. The money was illegally sent out of the countryevery month lead<strong>in</strong>g to the loss of some Rs 1,008 crores s<strong>in</strong>ce 2002 till2008.• CBI counsel Balla Rav<strong>in</strong>dranath argued that the accounts of Rajus <strong>in</strong>HDFC Bank were suspected to conta<strong>in</strong> funds diverted by <strong>Satyam</strong>.
Moneys lent• Ramal<strong>in</strong>ga Raju's brother Suryanarayana Raju hasstaked a claim to Rs 1230 crore• There is no evidence that Raju lent Rs 1230 cr to<strong>Satyam</strong> as he had claimed.• Recently Maytas has made a dem<strong>and</strong> <strong>for</strong> Rs 600 croressaid to have been paid to <strong>Satyam</strong> (Rs 380 cr <strong>in</strong> onecompany <strong>and</strong> Rs 220 cr <strong>in</strong> another as ICDs)• Which promptly has been denied by Mah<strong>in</strong>dra <strong>Satyam</strong>
Restatement will take time• The re‐statement of accounts will take a long time asthey have to go back to six years.• Many documents are not available <strong>in</strong> the company,many have been torn or misplaced <strong>and</strong> someconfiscated by <strong>in</strong>vestigat<strong>in</strong>g authorities.• Deepak Parekh• Expected <strong>in</strong> Mar 2010
Charges aga<strong>in</strong>st PW• 135 “control deficiencies” identified <strong>in</strong> the <strong>in</strong>tegrated audit conducted<strong>in</strong> accordance with the st<strong>and</strong>ards of the Public Company Account<strong>in</strong>gOversight Board. Auditors “did not br<strong>in</strong>g these controlled deficienciesto the notice of audit committee <strong>and</strong> thereby, facilitated thecont<strong>in</strong>uance of the fraudulent practices unabated.”• In<strong>for</strong>mation technology report stated: IT systems <strong>in</strong> <strong>Satyam</strong> were subject tomanipulation. It was also suggested that, given these deficiencies, substantial <strong>and</strong>elaborate exam<strong>in</strong>ation of f<strong>in</strong>ancials should be done.• Auditors “deliberately did not make any extensive changes <strong>in</strong> the audit plan, whichclearly establishes his motives <strong>and</strong> <strong>in</strong>tentions <strong>in</strong> allow<strong>in</strong>g the fraudulent practicesto cont<strong>in</strong>ue.”• Auditors received certificates of deposit from <strong>Satyam</strong>’s banks that were <strong>in</strong> “greatvariance with the figures provided by the company’s management” but signed offthe fudged accounts• Auditors compensated through “exorbitant audit fee” of Rs 3.67 crore <strong>in</strong> 2006‐07<strong>and</strong> Rs 3.73 crore <strong>in</strong> 2007‐08. In comparison, the audit fee paid by Wipro <strong>and</strong>Infosys <strong>in</strong> 2007‐08 was Rs 1.1 crore <strong>and</strong> Rs 83 lakh, respectively
Another possible charge aga<strong>in</strong>st PWC global• Was PWC a strategic partner with <strong>Satyam</strong>‐ a blog says quot<strong>in</strong>g a Gartnerreport:• Did the strategic importance of <strong>Satyam</strong> as a systems <strong>in</strong>tegration partner<strong>and</strong> technical resource cause global PwC leadership to overlook, look theother way, or not take action on reports of poor quality or lack of<strong>in</strong>dependence by Price Waterhouse India partners <strong>and</strong> others?• Did PwC leadership ‐ US, global, <strong>and</strong> Indian‐ enable <strong>and</strong> perhapspromote complicity <strong>in</strong> the fraud called "India's Enron" <strong>for</strong> the sake of theirconsult<strong>in</strong>g bus<strong>in</strong>ess strategy?• PWC says: We have read the Gartner report <strong>in</strong> detail <strong>and</strong> f<strong>in</strong>d no justification<strong>for</strong> the comment that “the Gartner report <strong>in</strong>dicates that PwC was <strong>in</strong> a strategicpartnership with <strong>Satyam</strong>”.• In a rejo<strong>in</strong>der Ritwik Mukherjee replies: The Gartner report that we quotedsaid the opposite of what Price Waterhouse now contends!• Only an <strong>in</strong>vestigation will reveal who is right.
SEBI on PW• Sebi has found “grave professional lapses on the part of the <strong>auditors</strong>”, which are“directly tied <strong>in</strong>to <strong>and</strong> <strong>in</strong>separably a part of the fraud perpetrated <strong>in</strong> the capital market”• <strong>Satyam</strong> BS was <strong>in</strong> fact audited by Lovelock <strong>and</strong> Lewes <strong>and</strong> not PW (Then how did they sign asPW?)• Audit fees though deposited <strong>in</strong> PW Bangalore was transferred to Lovelock <strong>and</strong> Lewes!• It is from L&L that Gopalakrishnan <strong>and</strong> Talluri withdrew moneys!• The partners of PW denied any association with PW Bangalore• Gopalakrishnan <strong>and</strong> Talluri were not authorized to sign any BS on behalf of PW!• The <strong>auditors</strong> wrongly signed as PW <strong>and</strong> outsourced work to L&L• Entire audit team is from L&L• Rajan who is also a partner of PW Bangalore said “PW had no manpower <strong>and</strong> as part of <strong>in</strong>ternalarrangement outsources work to L&L’• Next day news:• “<strong>Satyam</strong> Computer Services was audited by Price Waterhouse Bangalore,” the globalaudit<strong>in</strong>g firm PWC said <strong>in</strong> an email to PTI.• Confusion prevails here also!
Recommendations of SFIO• Auditors be rotated every five years,• Auditors’ appo<strong>in</strong>tment as well as remuneration be h<strong>and</strong>ledby an <strong>in</strong>dependent agency• Extend the scope of peer review to <strong>in</strong>clude audit processesas well as audit plans.• Discipl<strong>in</strong>ary proceed<strong>in</strong>gs aga<strong>in</strong>st statutory <strong>auditors</strong> beh<strong>and</strong>led by an <strong>in</strong>dependent oversight board• Bank statements‐ "All credit transactions <strong>in</strong> the accounts (ofbanks) that are generated through clear<strong>in</strong>g must reveal thedetails of credit as is done <strong>in</strong> the case of debit clear<strong>in</strong>gtransactions.“• Need to adopt a uni<strong>for</strong>m practice by all the commercial banks/<strong>for</strong>eignbanks while issu<strong>in</strong>g balance confirmation certificates to their customers
Regulators• Bank<strong>in</strong>g <strong>and</strong> market regulators are consider<strong>in</strong>g aproposal authoris<strong>in</strong>g <strong>auditors</strong> to directly verify f<strong>in</strong>ancial<strong>in</strong><strong>for</strong>mation of their clients with banks where theyhold accounts• F<strong>in</strong>‐m<strong>in</strong> go<strong>in</strong>g hi‐tech‐will use computer aided tools todetect frauds. (CAIT) ;• IT dept will use it to identify duplicate values, checksequenc<strong>in</strong>g <strong>and</strong> detect gaps, summarise fields etc. List ofpurchasers who give fictitious entries <strong>for</strong> others to <strong>in</strong>flatepurchases <strong>and</strong> tool will be used to detect such purchasesbased on name, ph no. VST no. etc ‐First test<strong>in</strong>g atHyderabad
Regulators‐SEBI• The Securities <strong>and</strong> Exchange Board of India (Sebi),which is prob<strong>in</strong>g the account<strong>in</strong>g scam at <strong>Satyam</strong>Computer Services Ltd, seems to favour prohibit<strong>in</strong>gPrice Waterhouse <strong>and</strong> its arrested partners S.Gopalakrishnan <strong>and</strong> Sr<strong>in</strong>ivas Talluri from audit<strong>in</strong>gany listed Indian firm or <strong>in</strong>termediary <strong>for</strong> a “certa<strong>in</strong>period”
ICAI• The F<strong>in</strong>ancial Report<strong>in</strong>g Review Board appo<strong>in</strong>ted aPanel of Reviewers to review five years’ generalpurpose f<strong>in</strong>ancial statements of <strong>Satyam</strong> ComputerServices Ltd. The Panel has already held six meet<strong>in</strong>gs<strong>and</strong> is presently consider<strong>in</strong>g the general purposef<strong>in</strong>ancial statement of the company.• High Powered Committee has so far written letters to94 firms of Chartered Accountants, which are knownto have affiliation with <strong>in</strong>ternational entities
Back to basics audit• Emile Woolf a famous audit<strong>in</strong>g expert says: “Gett<strong>in</strong>gback to basic checks may be the only way <strong>for</strong>account<strong>in</strong>g firms to avoid flawed audits• Uday Chitale <strong>and</strong> Murtuza Vaijihi po<strong>in</strong>t out <strong>in</strong> a BCAJarticle from their case book :.. had the <strong>auditors</strong>merely opened the company’s private cash book , theywould have seen columns blatantly record<strong>in</strong>g thef<strong>in</strong>ance director’s (FD) substantial personalexpenditure <strong>and</strong> illicit loans to f<strong>in</strong>ance deptpersonnel. Instead they relied on ‘high level ITsystems reviews’ <strong>in</strong> which FD oblig<strong>in</strong>gly collaborated.
Liv<strong>in</strong>g <strong>in</strong> opulence then <strong>and</strong> NOW!• Then:• The offices of Mr. Raju <strong>and</strong> his brother today are empty on the top floor ofthe company's Hyderabad headquarters.• The penthouse has showers, bedrooms <strong>and</strong> a Japanese garden, (but anexpert <strong>in</strong> vastu ‐‐ India's version of feng shui ‐‐ has declared its design adisaster! )• Now undertrial number 882, Chanchalguda Central Prison, Hyderabad:• separate kitchen <strong>and</strong> fresh cooked food• shuttle court• cell phone /laptop usage• m<strong>in</strong>eral water <strong>and</strong> fruit juices to dr<strong>in</strong>k, a clean bed, an <strong>in</strong>dependent toilet,water cooler, radio, television, newspapers <strong>and</strong> magaz<strong>in</strong>es (can it be true?!)• Their consultant Venkateshwara Rao of Krishi Co‐op bank arrested <strong>for</strong> Rs 40cr bankfraud• N.B: These apply to Raju’s <strong>and</strong> not the <strong>auditors</strong> who must really be undergo<strong>in</strong>ghell
The dozen <strong>lessons</strong> of <strong>Satyam</strong>• Thou shalt not:• Overlook computer system weaknesses <strong>and</strong> complex systems• Overlook ‘super user id’s’ <strong>and</strong> loose password controls or fail to study logs <strong>for</strong> super userid’s• Accept confirmations provided by Company‐ go the direct route• Overlook differences <strong>in</strong> confirmations• Overlook the ‘roach theory’ –if there are small differences /errors/frauds bigger onescould be hid<strong>in</strong>g• Forget that anyone of any stature could act with monumental recklessness, selfishness<strong>and</strong> self destructiveness as Ramal<strong>in</strong>ga Raju has proved –that all the awards mean noth<strong>in</strong>g• Fail to rotate the key staff <strong>and</strong> partners <strong>in</strong> audits –familiarity breeds complacence• Forget that anyth<strong>in</strong>g can be faked <strong>in</strong> this modern technology oriented world orunderestimate the fraudster• Forget that there is noth<strong>in</strong>g like good old fashioned audit where one looks at files, papers,check book entries with source documents etc.• Forget to br<strong>in</strong>g to the attention of audit committee all material <strong>in</strong>ternal controlweaknesses esp. computer system weaknesses• Take fees which are very high compared to peer group company audits• Audit work papers must be taken <strong>and</strong> preserved carefully as Company can destroy all itsrecords‐ it is our only saviour
The most important lesson• Learn to say ‘no’ when you should• Ex CFO of Health south who now realises (too late)that he should have said no.• He now mows lawns <strong>for</strong> a liv<strong>in</strong>g <strong>and</strong> gives lectures onhis story to students!
The last word• “Due to the efficient manner <strong>in</strong> which our M<strong>in</strong>istry ofCorporate Affairs (MCA) functioned, not a s<strong>in</strong>glestakeholder suffered, <strong>and</strong> <strong>in</strong> quite an understatedway, <strong>in</strong> a public‐private partnership <strong>in</strong>itiative whichhad few parallels, the company was rescued.”• Sudhakar V. Balach<strong>and</strong>ran, an assistant professor ofaccount<strong>in</strong>g at Columbia Bus<strong>in</strong>ess School, said theUnited States could learn a lot from India’s rapidresponse to <strong>Satyam</strong>• The Government did a very swift <strong>and</strong> good job• The world acknowledges that!
Source• Various news papers• Various journals• Various websites <strong>and</strong> blogs• From Jan 09 to Aug 09