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Governance Failure at Satyam Case Solution

Solution Id Length Case Author Case Publisher
2463 1464 Words (7 Pages) Ajai Gaur, Nisha Kohli Ivey Publishing : W11095
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Rama Raju created Satyam Computer Services Limited in 1087 with his brother B. Rama Raju. Chairman of the Board Ramalinga Raju was also a software developer. However, even though Raju was a worldwide technological leader, he will be recognized for the worst corporate fraud in Indian history. Satyam, which means "truth" in English, is sarcastic. It is clear that despite what the name implies, this company's business activities and ethics were not in line with its name. After a few years of steady expansion, things started to go awry, though. To become a publicly listed firm, Satyam had to go from being a privately held corporation. It was stripped of its ISO9001 accreditation and other honors after the controversy. In over 67 countries, Satyam employed 53,000 IT experts in 2008. In addition, a total of $2.1 billion in sales was reported by the corporation.

Following questions are answered in this case study solution

  1. Critically evaluate the ownership structure and board composition of Satyam Computers before its crisis.

  2. Discuss the circumstances under which Satyam's fraud was exposed, and the reasons for fraud.

  3. There have been many audit failures globally, and Satyam is also a case of unethical accounting and failed auditing practices. Critically discuss the responsibility of the main groups responsible for financial reporting in relation to Satyam's scandal.

Case Analysis for Governance Failure at Satyam

1. Critically evaluate the ownership structure and board composition of Satyam Computers before its crisis.

Ownership Structure - Merits

As a family business, Satyam's promoters' shareholding has decreased over time, resulting in a more diverse ownership structure. Shares held by foreign institutional investors ranged from 40 to 50 percent. This is mostly due to Satyam's win of the Golden Peacock Award and other prizes, which led to a rise in the number of shareholders before the crisis began. These institutional investors have a vested interest in keeping tabs on Satyam's management because of their sizeable position in the company. As a consequence, Satyam is in great demand for a corporate board structure that is "excellent."

Ownership Structure - Demerits

Raju family (promoters) lowered their shareholding from 20.74 percent to 8.74 percent. This is an unusual pattern that might point to fraud inside the organisation. Institutional investors are more likely to keep tabs on Satyam's management since the company's stake in Satyam is so significant. However, they may lack the necessary expertise to keep an eye on their bosses. For this reason, Satyam's core business is based in the United States, which is a long distance away from the majority of overseas institutional investors. As a consequence, managers and foreign institutional investors may have different levels of knowledge about the company. The fact that foreign institutional investors' shares in the firm increased over the period leading up to the crisis, while promoters' stakes decreased, helps to understand why.

A look into the ownership structure of Satyam found that the promoters (Raju family) had a minor stake in the firm. This means that they may not always behave in the best interest of all shareholders and conduct fraud. This explains why the scam may go undetected for so long because of the ineffective/inactive involvement of foreign institutional investors and auditing weaknesses.

Board Composition – Merits

Five independent and four internal board members were on Satyam's board. There were more than half non-independent directors on the board. There were just two "promoter stockholders," the Raju brothers, and two other members of the board. As long as the board structure conforms to Indian laws and regulations, the board may make its own decisions.

All of the board members are well-qualified and well-known in their respective fields. Experts in their fields include Harvard Business School professors, former bureaucrats, and engineers. In this way, it is clear that the board's structure was created to be advantageous.

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