Act 557 - India's Enron

Assignment Choice #2

India’s Enron

Julianne Gruber

ACT 557

Colorado State University-Global Campus

Instructor: John Karaffa

India’s Enron

        The Satyam Scandal is known as India’s Enron. It has become known that there isn’t any place in the world that is safe from fraud. It happens everywhere and can be committed by anyone. In 2009 Raju wrote a letter to the Securities and Exchange Board (SEC) of India and to his shareholders that he had been manipulating the company’s earnings (Balachandran, 2015). Fraud is been a major problem worldwide and research has shown that the growing number of frauds have undermined the integrity of financial regards. The importance of ethics and corporate governance is only increasing especially with the increasing rate of white-collar crimes. Fraud is committed in large part due to human greed, ambition, and hunger for power, money, frame, and glory (Bhasin, 2013).  The cause of Satyam almost demise was due to what is called the tunneling effect. Tunneling is a fraud scheme, which is created by the company’s own management or major shareholders and it may or may not be illegal (Cascarino, 2015). Illegal tunneling is fraudulently pumping out valuable property and assets into the fraudsters own private firm. It also covers the crime of putting the organizations equity into third party hands. Raju committed cash flow tunneling, asset tunneling, and equity tunneling.

Red Flags

        The Satyam Scandal presents a few red flags. Merrill Lynch discovered in 10 days what PwC potentially missed over a period of 9 years. Most accounting professionals would have noticed the large amount of cash of $1.04 billion that Satyam claimed in its balance sheet as non interest bearing and investigated it. PwC did not further investigate which is a necessary action. To many this raised the question that PwC was complicit in this fraud. Even if PwC didn’t catch it in the first year it has been revealed that the fraud went on for a number of years and involved both the manipulation of balance sheets and income statements. Missing these red flags for many years can only imply that PwC knew about the fraud or they are not in compliance with applicable auditing standards (Bhasin, 2013). Following the fraud investigation Merrill Lynch terminated engagement with Satyam, and PwC was stripped of their license to operate.

Groups Affected by this Fraud

        This is considered a major fraud scandal and affected many individuals and groups of people. This fraudulent act although committed by a few affected the many. The investigation led to charges against several groups of peoples. These people included Raju, Raju’s brother, managing director, the company’s head of internal audit, the CFO, and PwC. The main victims included but are not limited to the employees, clients, shareholders, bankers, and the Indian Government. The Indian markets did recover and Satyam does continue to operate currently.