How To Prevent Another Satyam Like Fraud Accounting Essay

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Satyam a leading global business and information Technology Company, delivering consulting, systems integration, and outsourcing solutions to clients in over 20 industries.

Satyam Computer Services Ltd was founded in 1987 by B.Ramalinga Raju.

The company offers information technology (IT) services spanning various sectors, and is listed on the New York Stock Exchange and Euro next.

Satyam's network covers 67 countries across six continents.

The company employs 40,000 IT professionals across development centers in India, the United States, the United Kingdom, the United Arab Emirates, Canada, Hungary, Singapore, Malaysia, China, Japan, Egypt and Australia.

It serves over 654 global companies, 185 of which are Fortune 500 corporations.

Satyam has strategic technology and marketing alliances with over 50 companies.

Apart from Hyderabad, it has development centers in India at Bangalore, Chennai, Pune, Mumbai, Nagpur, Delhi, Kolkata, Bhubaneswar, and Visakhapatnam

The Fraud

Just three months ago, India's fourth-largest software services exporter, Satyam Computer Services received a Golden Peacock Global Award from a group of Indian directors for excellence in corporate governance.

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Ramalinga Raju himself was the recipient of many an award for corporate governance and transparency

The fraud has brought to light the fact that in India the distinction between owners and management is still not very clear.

Where the owners are also the managers, such frauds are always a possibility.

Satyam is the biggest fraud in India's corporate history.

The company management, mainly disgraced chairman B Ramalinga Raju, kept everyone -- seemingly -- in the dark for a decade and tarnished shining India's image horribly, is as stupefying a fact as the Rs 7,800 crore (Rs 78 billion) scam itself.

The company's account books said that Satyam had over Rs 5,000 crore billion (Rs 50 billion) in the bank, when it did not. Raju said that he had been fudging the account books for 'several years' and despite this no one but he, and his brother, knew of this.

Satyam Scam is not something that will shatter the peace and tranquility of Indian Public. Criminals, who have swindled billions of Rupees and proudly proclaimed the same to the world at large, are not even considered worthy to be detained for questioning by the Police at that point in time. But the investor, whose hard earned money has been swindled by these criminals, is rounded up by the Police for showing disrespect to them outside their den.

Upshots

There are few axioms that we all work with, generally it is believed that there is a certain level of wholeness in those we deal with. Without trust it is almost difficult to transact business. The Satyam case corroded the individual faith in business.

Now, with this case, it is going to be more difficult for other IT service players to expand themselves. Competitors from other low cost countries such as China, Vietnam, and Eastern Europe are taking or must have taken advantage with the situation. And also would hurt the foreign money flowing into the country as well.

Sues to be Taken

To prevent and detect fraud further in an organization, there should be clear understanding that why people commit fraud, or to study basic elements of fraud. Although understanding fraud is not a hard job but to detect it and to analyze that why employees participate in fraud is not easy.

To study Fraud, investigators or company should turn on to "FRAUD TRIANGLE"

The Fraud Triangle supposes that people commit fraud because they:

Face a personal pressure

Perceive an opportunity to relieve that pressure without getting caught

Can rationalize or justify their fraudulent activities

It is important to note that the area where an organization can do the most fraud prevention is in the sphere of opportunity. This area is where good internal controls and leadership with integrity will provide an organization with the most benefits.

Actions the Audit Committee Can Take to Address the Risk of Management Override

Cultivating a Vigorous Whistleblower Program

Encourage the development of a culture in which employees view whistle blowing as a valuable contribution to an attractive workplace of integrity and their own futures.

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Employees should not feel like "tattle-tails" or "rats" for communicating potential fraud.

The automatic and direct submission to the audit committee, of all complaints involving senior management (without filtering by management or other entity personnel) is essential

Engage internal auditors to periodically evaluate the design and operating effectiveness of the hotline.

Developing a Broad Information and Feedback Network

Develop an extensive information network including:

Internal auditors

Independent auditors

Compensation committee

Key employees

General counsel

HR director

Compliance officer

Risk management officers

Divisional managers and controllers

"Walking the halls"

Consider meeting periodically with representatives from each of the groups to discuss matters affecting the financial reporting process.

Inconsistencies in information obtained from sources may signal that management override of internal controls is present.

Information obtained may be useful in brainstorming session.

Using the Code of Conduct to Assess Financial Reporting Culture

Use the Code as a benchmark for assessing whether the culture or "tone at the top" and management's actions are those required to maintain the highest levels of integrity under pressure and opportunity to commit fraud.

The audit committee should be routinely furnished with the results of any surveys of employees regarding corporate behavior and similar information obtained from external parties.

An evaluation of how management communicates information about the Code and motivates employees to comply with the Code provides information reflecting the culture or attitudes about ethical behavior within the organization

Code Violations

Ensure that Code violations are pursued

As part of an effective compliance program

Board "practices what it preaches"

Consulting and Auditing By a Common Organization

In Satyam's case auditing and consulting was done by the same company which was the strongest reason for scam.

Prevention is….

Internal auditing, many internal auditors currently find themselves performing a much broader spectrum of activities than ever before. In particular, the addition of consultative services to the internal auditor's defined set of competencies has introduced an entirely new dimension to the profession. Audit practitioners who at one time focused largely on measuring, evaluating, and reporting on the effectiveness of internal controls are now expanding their role by working with managements on ways to improve operations and add continuous value to the organization. By providing consulting services, many auditors are helping to ensure that management sees the audit function as essential to achieving organizational goals and objectives.

Although consulting work provides many new opportunities for internal auditors, it can also pose a threat to the audit function if the transition toward consultant auditing is not managed carefully. Specifically, consulting may jeopardize internal auditing traditional role as the board's trusted, independent, and neutral monitor of management's actions. The board may find that auditing consulting work with management affects its ability to review management activity objectively and to provide the board with an unbiased appraisal. Failure to effectively serve the board's needs could damage auditing credibility and, in some organizations, ultimately lead to downsizing--or even outsourcing--of the audit function.

The challenge, then, is for internal auditors to provide consulting services to management without compromising their role as monitor for the board

The Office of the City Auditor has embraced the new definition of internal auditing and provides both assurance and consulting services for the city.

For example, they often render both types of services during our audits of major information-technology projects. As monitor, they provide assurances to the commission on project compliance with city policies and procedures, risk management and project controls, and project status and accomplishments to date. As consultant, they offer advice and counsel to management relating to risk and controls, they assess the number and competency of city staff and vendor staff, and we identify and provide direction for significant milestones that must be achieved as projects move forward.

Their audit team realizes the potential conflict of interest that may arise as we perform consultative services for management. They therefore took proactive steps toward managing the potential pitfalls and leveraging the opportunities presented by our added services.

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To ensure the success of their consulting efforts, as well as the ongoing effectiveness of their assurance work, their office has implemented a number of measures to help prevent conflicts between our role as monitor for the commission and consultant to management. The following initiatives represent some of the efforts that contributed toward our strategy for success.

DEFINING THE LIMITS OF CONSULTING WORK.

They caution themselves, during meetings and at other times, to remain mindful of the fine line that often exists between consulting and actual management activity. As a group, they help each other to determine where this line is drawn on individual assignments and ensure that they do not perform management functions or make management decisions when participating as part of a team. They are also careful to avoid creating even the appearance of performing management duties, as perceptions regarding the nature of their work must be managed just as carefully as the actual work they perform.

Their position on this issue is that consulting services -- as defined by The IIA and implemented by the Standards for the Professional Practice of Internal Auditing -- represent audit work and that such work falls under the broad umbrella of the definition of internal auditing. As long as they perform these services in accordance with The IIA's Attribute and Performance Standards for consulting, they see no conflict with either Government Auditing Standards or recent government rules or law. Furthermore, much of the activity we perform as consultants would be viewed as a performance audit in Government Auditing Standards because their work provides a basis for conclusions, recommendations, and opinions.

OPENLY COMMUNICATING APPROACH.

In addition to holding face-to-face meetings, they issued a letter to the city leadership team (executive management), the city commission, and the city audit committee that explained the new definition of internal auditing and described the assurance and consulting services offered by our office. The letter also assured the commission that it would receive copies of all audit reports, as before, but noted that management would be considered the primary client for consulting services. They felt it was important to communicate this in writing so that a record would exist of our efforts to begin educating members of the organization about their new role and to prepare them for change. They wanted to build trust at all levels of city government, to distance ourselves from the traditional view that auditors have an "I got you" mentality, and to demonstrate their desire to follow issues to a positive resolution. Furthermore, to highlight the differing services they provide to each party, they state in our audit reports that comments of a consulting nature are presented for the commission's information and for management's further analysis and resolution.