Governance Failure at Satyam
Many were the factors that contributed to the fraud, but I believe it is possible to analyze the Satyam case under two main different perspectives. The first addresses the conditions that made possible, and eventually stimulated, the existence of the accounting fraud perpetrated from the company top management. The second one is about the issue of gaps in the company's control framework, which failed miserably in identify and properly address the problems in company financial statements.
Analyzing the first aspect listed above, seems that Satyam scandal originated, in first place, due to a lack of moral and ethical standards from the company top management, as well as the board of directors, which have worsened, rather than mitigate, agency conflicts between shareholders and managers. Many were the evidences in this sense, from the bribery charges, that led to a ban from the World Bank, to the unsuccessful attempt to acquire a construction and a real state firms owned by the company promoters’ relatives, in a clear sign of conflict of interests, that was originally approved by the board. In fact, if was not for the whistleblower, no one knows how far they would go with the sham.
Someone could argue that an exacerbated focus on short-term performance, the competitive market environment, and consequent pressure from analysts to meet market projections and maintain the company share prices overvalued, motivated the directors to start the results embezzlement process, pledging to do this to protect the firm from a potential hostile takeover. However, obviously none of these should be an excuse to neglect their duties towards various stakeholders.
Besides this, it is difficult to believe that none of those involved in the fraud did not earn any personal financial benefit, as stated by Mr. Raju on his letter. Even that they did not have sold their stocks position, most likely their compensation package was more generous than it should have been, once misrepresented
Analyzing the first aspect listed above, seems that Satyam scandal originated, in first place, due to a lack of moral and ethical standards from the company top management, as well as the board of directors, which have worsened, rather than mitigate, agency conflicts between shareholders and managers. Many were the evidences in this sense, from the bribery charges, that led to a ban from the World Bank, to the unsuccessful attempt to acquire a construction and a real state firms owned by the company promoters’ relatives, in a clear sign of conflict of interests, that was originally approved by the board. In fact, if was not for the whistleblower, no one knows how far they would go with the sham.
Someone could argue that an exacerbated focus on short-term performance, the competitive market environment, and consequent pressure from analysts to meet market projections and maintain the company share prices overvalued, motivated the directors to start the results embezzlement process, pledging to do this to protect the firm from a potential hostile takeover. However, obviously none of these should be an excuse to neglect their duties towards various stakeholders.
Besides this, it is difficult to believe that none of those involved in the fraud did not earn any personal financial benefit, as stated by Mr. Raju on his letter. Even that they did not have sold their stocks position, most likely their compensation package was more generous than it should have been, once misrepresented