Essay Sample on Corporate Accounting Fraud: A Growing Problem

Introduction

Whether small, medium, or large, companies are susceptible to frauds. Corporate accounting fraud is one of the common types of fraud in many companies and has been on the rise. Accounting fraud happens when a company intentionally manipulates financial statements. The manipulation may be conducted either by the employee, accountant, or the corporation. When the financial statements are manipulated, the investors and shareholders make the wrong decision based on incorrect financial information. Satyam Corporation was involved in accounting fraud, but unluckily they were exposed.

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Circumstances Under Which Satyam’s Fraud Was Exposed

Satyam failure was exposed when the Maytas Infra acquisition, where Satyam would take 51 percent of the shares failed (Gaur, and Nisha). The company also had planned to take a 100 percent stake in Maytas properties, and the board had approved the acquisitions. The two construction companies were being financed by the two owners of Satyam's chairman. Raju's family held 35 percent in Maytas Properties and 6 percent in Maytas Infra.

The second circumstance that led to the exposure of the corporation failure was lack of support from the investors. The price of the shares decreased by 30 percent and investors as well as media had no confidence in the corporate governance of Satyam (Gaur, and Nisha). World bank declared that the company could not conduct any business with itself. Additionally, an independent director to the company resigned although he didn't oppose the acquisition. The climax of the expose was emails from a person who alleged to be an executive in the company. He sent emails to board members, indicating that there were several financial irregularities in the company. Ramlinga Raju confirmed this through his resignation letter.

Reasons for the Fraud

Companies engage in financial fraud for reasons such as protection of the reputation (Chan). One of the reasons why Satyam was involved in financial fraud was due to increasing competition in the information technology sector. The company was also making a 3 percent profit, so they had to overstate the revenue to ensure that the price of the shares did not increase. With such a low profit, the company was facing a threat of a takeover hence the reason why they decided to overstate the profit with approximately 17 percent (Gaur, and Nisha). Sometimes managers are compelled to make unwise decisions to paint a good picture of the organization (Certo, Brian, and Laszlo 116).

Secondly, Raju thought by covering the low returns was in the best interests of those concerned and that he could fix the issue before the stakeholders know what was going on. He probably overstated the revenue to win the trust of those who took loans from to fix the situation. Additionally, the stakeholders would find it hard to believe that such a reputable company would make a 3 percent profit while competitors made a profit of at least 20 percent (Gaur, and Nisha). Raju may also have used the company money and decided to clear the mess by overstating the profit so that the stakeholders wouldn't suspect.

How Fraud Was Able to Occur

The fraud was able to occur even though the company carried audit at three levels. There was the internal audit committee headed by the Chief Finance Officer, an external audit conducted by PwC and board audit committee (Gaur, and Nisha). The company was able to survive all the audits for seven years; it was seen as the most reputable company. One of the reasons why the fraud was not discovered for seven years was because the hired auditors maintained confidentiality. Price Waterhouse did not report irregularities related to cash and bank balances.

Auditors are expected to conduct a cash audit, which is among the forms of audit that are easy to conduct (Tricker, RI, and Robert ). The auditors also did not obtain bank statements which could have verified the amount of money that the company had on the bank account. The auditors also did not dig deep to establish why the corporation had debt amounting to INR .36 billion, yet they had INR 44.62 billion (Gaur, and Nisha). The company could have comfortably offset the debt because as per the overstated accounts, they did not have problems with revenue. Also, the money that the company claimed to have earned was not used in any way. The auditors played a significant role in hiding the fraud because they should have asked themselves why the company does not use the money it claims to have.

Corporate Governance Mechanisms Adopted by Satyam

Satyam adopted three governance mechanisms, namely internal audit, external audit, as well as the board audit committee (Gaur, and Nisha). The internal committee was headed by the Chief Finance Officer who colluded with Rau in conducting financial fraud because he was aware of the financial gap. Price Waterhouse, who was the external auditor, was paid higher fees than what other firms were charging so that they could hide the accounting irregularities. The board had appointed an independent board member but just like the other two teams of auditors; they failed in preventing the fraud.

Characteristics of an Effective Board of Directors

A board of directors can prevent financial fraud if they are well constituted. One characteristic of an effective board of directors is diversity. The members can be from different professions, races, and gender (Hitt, Ireland, and Hoskisson 344). It is not easy to convince such people to hide financial irregularities. The second characteristic of an effective board is continuous assessment of performance. This can be done using established processes to make sure that they are not compelled to hide financial fraud (Bronner 91). The other characteristic of a board of directors that can help prevent financial fraud is professionalism, which helps in shaping and maintaining organizational culture.

Lessons Learnt About the Audit Committee

Companies can learn a lot from the Satyam audit committee. One of the lessons is that the company should investigate all the financial inaccuracies. The fraud in the company started with small errors, and the company thought it could sort it by overstating the profit values (Gaur, and Nisha). However, small errors ruined the company's reputation. Other companies should learn from this mistake and investigate any imbalances, no matter how small it is.

Additionally, companies should have strong corporate governance. Companies should carefully choose the executive managers because they are ambassadors of the company. If top managers are corrupt, it means that they will create a bad culture.

Other Governance Mechanisms That Can Be Adopted

Satyam adopted internal audit, external audit, and board audit committee governance mechanisms, but they all failed in preventing financial fraud (Gaur, and Nisha). To ensure that there is compliance, a company can adopt ownership concentration. This mechanism adopt large block shareholding where the shareholders own a minimum of 5 percent of the shares ((Hitt, Ireland, and Hoskisson 340). This mechanism is effective in ensuring that the company is financially compliant because the shareholders control the decisions of the company. The board of directors and executive compensation can be used to ensure compliance.

Conclusion

In conclusion, financial fraud has been on the rise, and companies try to hide the financial accounting irregularities to safeguard its reputation. Companies collaborate with auditors to ensure that the shareholders do not know that the company is not making significant profits because if they do, they will sell their shares. To ensure that the board of directors effectively prevents financial fraud, it should consist of members from diverse backgrounds. They should also be professionals who are willing and able to create a culture that does not condone financial irregularities.

Works Cited

Bronner, Rolf. "Pathologies of decision-making: causes, forms, and handling." Management International Review 43.1 (2003): 85-101.

Certo, S. Trevis, Brian L. Connelly, and Laszlo Tihanyi. "Managers and their not-so rational decisions." Business Horizons 51.2 (2008): 113-119.

Chan, Chia-Ying, Hsiangping Tsai, and Kuo-An Li. "Why do executives commit financial fraud? Executive perquisites and corporate governance implications." 24th European Financial Management Association Meeting. 2015.

Hitt, Michael A., Ireland, Duane R., and Hoskisson, Robert E. Management_ Concepts And Cases_ Competitiveness And Globalization. Cengage Learning (2015): 331-356.

Gaur, Ajai S., and Nisha Kohli. "GOVERNANCE FAILURE AT SATYAM." Srjis.com. N.p., 2011. Web. 25 July 2019.

Tricker, RI Bob, and Robert Ian Tricker. Corporate governance: Principles, policies, and practices. Oxford University Press, USA, 2015.