Question

Fraud Article Project 1. Select an article about an accounting fraud from a book, magazine or WEB site. Try to find something unusual - avoid cases like Enron, WorldCom & Madoff. 2. How were the accounting records used to perpetrate the fraud? 3. How was the fraud discovered? 4. Why was the fraud committed? 5. What was misappropriated? 6. What was the punishment to the perpetrator(s)? A criminal conviction and sentencing is preferred. Be sure to include this in your project 7. How could this fraud have been prevented? 8. Be sure to either attach a copy of the article or link to the WEB site used as a basis for this project. 9. Only submit this project as a WORD file.

Answer 1

1. Accounting fraud selected

Satyam Systems Scandal

2. How were the accounting records used to perpetrate the fraud?

The company overstated its assets on balance sheet by $1.47 billion. Nearly $1.04 billion in bank loans and cash that was non-existent. It also under-reported its liabilities on the balance sheet. It overstated income nearly every quarter over the course of several years.

3. How was the fraud discovered?

Mr. Raju disclosed in a letter to Board of Directors of Satyam Computers Limited that he had been manipulating the company’s accounting numbers for years.

4. Why was the fraud committed?

The fraud was committed due to greed for money, power, competition, success and prestige. Increasing competition and to impress stakeholders especially investors, analysts, shareholders, and the stock market; low ethical and moral standards by top management; and, greater emphasis on short‐term performance were the reasons why the fraud was committed

5. What was misappropriated?

Mr. Raju (Chairman) revealed that he created 6,000 fake salary accounts in past few years and appropriated the money after the company deposited it. The global head of internal audit also forged board resolutions and illegally obtained loans for the company. The cash that the company raised through American Depository Receipts was not reported in the balance sheets. The cash so raised was used to purchase several thousands of acres of land, across Andhra Pradesh, to ride a booming realty market.

6. What was the punishment to the perpetrator(s)?

Mr. Raju, Mr. Raju’s brother, B. Ramu Raju, its former managing director, Srinivas Vdlamani, the company’s head of internal audit, and its CFO were arrested on criminal charges of fraud. Mr. Raju was sentenced to 7 years of imprisonment for being guilty under section 409 of Indian Penal Code relating to criminal breach of trust. The company’s auditors (PwC) were also arrested and charged for fraud. The Institute of Chartered Accountants of India (ICAI) ruled that the CFO and the auditor were guilty of professional misconduct and cancelled the membership of six chartered accountants with respect to the accounting fraud. Securities and Exchange Board of India imposed a two-year ban on PwC network entities from issuing audit certificates to any listed company in India.

7. How could this fraud have been prevented?

• More independence to the audit committee and auditors
• More powers to independent directors
• Strict reporting on insider trading
• Additional disclosures and in depth analysis of information for financial reporting
• Higher penalties and prosecution to the perpetrators
• Disclosure for shareholding percentages of the executives
• Compulsory rotation of auditors and audit firms