Accounting case, Satyam Fraud: A Case Study of India’s Enron

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I need help to salve this case, the assignment has 10 questions most of them are found in Satyam’s fraud case and the other questions asking you go to the U.S. Audit Standards to find the AU 312.16,312.17,316.28  etc..  here are the links for the U.S. Audit Standards. This assignment is due in 12 hours! If you cant do it please don’t sent handshake! Thank you!

http://www.aicpa.org/Research/Standards/AuditAttest/Pages/clarifiedSAS.aspx (Links to an external site.)

http://pcaobus.org/Standards/Auditing/Pages/PreReorgStandards.aspx (Links to an external site.)

Accounting case, Satyam Fraud: A Case Study of India’s Enron
Satyam Fraud: A Case Study of India’s Enron Veena L. Brown, Brian E. Daugherty, and Julie S. Persellin ABSTRACT:This case provides students a unique opportunity to examine and reflect on the challenges of auditing in today’s global environment. Students examine a real- world billion dollar plus embezzlement and fraud at Satyam Corporation, an international company based in India and previously trading on the New York Stock Exchange. The case focuses on auditors’ responsibilities related to obtaining and evaluating audit evidence, particularly as it relates to confirming cash and receivables. It also explores the quality control responsibilities related to audit procedures performed by foreign affiliates of a large international audit firm. The case illustrates the role of culture in performing an audit in accordance with auditing standards issued by the U.S. Public Company Accounting Oversight Board. Additionally, case details provide opportunities for class discussions and foster students’ critical thinking skills on other auditing topics such as audit risk and planning, related party transactions, tone- at-the-top, and internal control deficiencies. By using a foreign issuer to explore these issues, the case highlights both the technical and international challenges of performing auditing procedures. Keywords: American Depositary Shares; confirmation process; culture; embezzlement; foreign issuers; fraud; quality control standards; related parties. INTRODUCTION ‘‘I t is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice, ’’and so began the letter written on January 7, 2009, by B. Ramalinga Raju, then Chairman of Satyam Computer Services Limited (Satyam), to the Board of Directors, in which he admitted to a billion dollar accounting fraud, the biggest in India’s corporate history ( SEC 2009a). The fraud involved senior officers and management, related parties, and included years of systematic inflation of both Satyam’s assets and earnings. Mr. Raju went on to write, ‘‘What started as a marginal gap between actual profit and the 419 one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of the company’s operations grew significantly. It was like riding a tiger, not knowing how to get off without being eaten’’(SEC 2009a). See Exhibit 1 for the letter. Mr. Raju was born September 16, 1954 into a traditional farming family in India. He received his M.B.A. from The Ohio State University and attended an Advanced Management Program conducted by Harvard Business School before returning to India in 1977 to make his fortune. Upon his return, he moved away from his family’s traditional agriculture business, venturing into textiles and real estate, before founding Satyam in 1987. This was the culmination of a childhood dream for Mr. Raju, a dream that would end with his resignation as CEO, and his subsequent arrest (Bloomberg Businessweekn.d.) Prior to his disgrace, Mr. Raju was a poster boy of Indian business. He was known as a philanthropist, as well as an innovator. He received numerous awards during his career including the Corporate Citizen of the Year award during the Asian Business Leadership Summit held in Hong Kong in 2002, the IT Man of the Year by Dataquest in 2001, and the Entrepreneur of the Year Award by Ernst & Young, India in 2000. In addition, he was the recipient of the Andhra Pradesh Akademi of Sciences’ Professor Y. Nayudamma Memorial Gold Medal in 1999 for his outstanding contribution in the field of computer technology (Bloomberg Businessweekn.d.) COMPANY BACKGROUND Satyam provides information technology services to a variety of customers around the world. Incorporated in the Republic of India in 1987, its principal executive offices are in Hyderabad, India. Mr. Raju served as Chairman of the Board and exercised direct operational control over all aspects of the company’s operations. His brother, Rama Raju, served as Managing Director and Chief Executive Officer (CEO). As such, he was also in a position to exercise direct control over operations. The company began with approximately 20 employees, serving mostly U.S. companies. In 2007, Satyam won the Golden Peacock Award 1(Shirur 2011) and, by 2009, Satyam was a leading Indian outsourcing company, providing services to more than a third of Fortune 500 companies. Its workforce had grown to approximately 50,000 people worldwide, with operations in 66 countries, including the U.S.‘‘Satyam serves as the back office for some of the largest banks, manufacturers, healthcare, and media companies in the world, handling everything from computer systems to customer service. Clients have included General Electric, General Motors, Nestle, and the United States government’’(Timmons and Wassener 2009). Satyam’s equity shares traded on the Bombay Stock Exchange and the National Stock Exchange of India. In May 2001, Satyam made an initial public offering of American Depositary Shares (ADS) that traded on the New York Stock Exchange (NYSE ), and whose underlying equity shares were registered pursuant to Section 12(b) of the U.S. Securities Exchange Act. SATYAM’S ACCOUNTING FRAUD On January 7, 2009, then Chairman Raju admitted to a billion dollar accounting fraud, which involved senior officers and management inflating both assets and earnings from 2003 through September 2008. The exposure of the fraud resulted in a loss to U.S. investors exceeding $450 million (Doshi 2009). The massive fraud was accomplished by falsifying over 6,000 invoices that were recorded, among other line items, as revenue, income, and accounts receivable in the company’s publicly filed financial statements. These false invoices were for services not provided 1An award given for worldwide corporate excellence, see:http://www.goldenpeacockawards.com/about-us.html 420 EXHIBIT 1 Resignation Letter Written by B. Ramalinga Raju (continued on next page) Satyam Fraud: A Case Study of India’s Enron421 and, in some cases, for customers that did not exist. Senior management provided certain employees with a‘‘super-user’’login identification and password that enabled them to access the invoice management system in a way that ensured that the revenue from the fictitious invoices was recorded, while shielding the existence of the invoices from the leaders of the business units, as they most certainly would have questioned the validity of the customers and/or the specific services provided. Acting under senior management’s orders, employees generated, on average, 100 to 200 fake invoices per month, resulting in over 6,600 false invoices over the time period of the fraud. Exhibit 2 offers a replication of Satyam’s unaudited, materially false revenues as reported in the actual court documents. In addition, 27 false invoices were also created by senior management that did not involve the use of the super-user function. In total, as a result of these fake transactions, revenue was overstated by approximately $1.2 billion during the relevant period (United States District Court for the District of Columbia [USDC] 2011). To corroborate the subsequent payment of the false invoices, Satyam’s management prepared countless false bank statements, reflecting materially false cash deposits into the company’s bank accounts, which were recorded within the cash and cash equivalent balances in Satyam’s financial statements. Additionally, to make it appear as if the company was investing its false income, management manufactured scores of additional fictitious bank statements, materially overstating both the balance, as well as interest earned, on its fixed deposits held at numerous banks. Exhibit 3 provides a listing of the fraudulent balances (USDC 2011). In addition to the fraudulent financial statements prepared by Satyam, the Company also submitted 27 materially false press releases to the public, as well as providing materially false information on at least 20 occasions during quarterly conference calls to Wall Street analysts. When the fraud was revealed, Satyam’s ADS price dropped substantially, with institutional investors located in the U.S. experiencing losses of over $450 million (USDC 2011). India’s Central Bureau of Investigation (CBI) prepared a 200-page report shedding light on what they believed were the circumstances that led up to the accounting fraud. The report alleges that Satyam insiders forged board resolutions to secure $260 million in bank loans that were diverted for personal use. The investigators assert that the embezzled funds were used to purchase over 1,000 properties, including some 6,000 acres of land, 40,000 square feet of housing plots, and 90,000 square feet of other developed real estate. It was imperative that Satyam’s financial resultsEXHIBIT 1 (continued) All errors in this text are original to the source material. 422Brown, Daugherty, and Persellin I and, therefore, share price remain healthy in order to prevent an unwelcome takeover that promised to expose the fraudulent activities; a fact that Mr. Raju confirmed in his resignation letter. The scheme unraveled when Mr. Raju, struggling to conceal the fraud, made an effort to cover it up by attempting to acquire two affiliated construction companies for $1.6 billion without shareholder approval. The companies were run by Mr. Raju’s two sons, and were purported to hold many of the illicitly acquired properties. Acquiring these companies and absorbing them into Satyam would have potentially allowed Mr. Raju to conceal the fraud by acquiring real assets for non-existent cash. However, in late 2008 many of Satyam’s foreign stakeholders, who owned 47 percent of the company, grew suspicious and dumped the stock. This sparked a 50 percent drop in the share price EXHIBIT 2 Unaudited List of Fraudulent Invoices Fiscal Year QuarterFalse InvoicesPublished Revenue False Revenue 2004 Q1 97 $121,550,000 $14,330,000 Q2 8 $131,780,000 $1,050,000 Q3 50 $148,070,000 $8,840,000 Q4 112 $164,980,000 $22,190,000 Total 267 $566,370,000 $46,320,000 2005 Q1 111 $174,990,000 $19,250,000 Q2 63 $188,920,000 $8,810,000 Q3 69 $204,680,000 $11,020,000 Q4 208 $225,000,000 $30,390,000 Total 451 $793,600,000 $68,860,000 2006 Q1 249 $246,040,000 $35,450,000 Q2 242 $267,850,000 $30,760,000 Q3 291 $281,840,000 $35,220,000 Q4 398 $300,700,000 $47,980,000 Total 1180 $1,096,300,000 $149,500,000 2007 Q1 12 $322,500,000 $30,000 Q2 30 $352,000,000 $29,050,000 Q3 237 $375,600,000 $53,850,000 Q4 375 $411,300,000 $69,970,000 Total 654 $1,461,400,000 $151,650,000 2008 Q1 473 $452,300,000 $78,100,000 Q2 486 $509,600,000 $79,070,000 Q3 730 $562,900,000 $133,130,000 Q4 794 $613,300,000 $142,030,000 Total 2483 $2,138,100,000 $430,390,000 2009 Q1 791 $637,300,000 $141,500,000 Q2 777 $652,200,000 $134,360,000 Total 1568 $1,289,500,000 $275,860,000 Grand Total 6603 $7,345,270,000 $1,122,670,000 Source: United States District Court for the District of Columbia (USDC 2011). Satyam Fraud: A Case Study of India’s Enron423 and Satyam was forced to abandon the acquisition. Three weeks later, Mr. Raju resigned and confessed to the fraud (Lakshman 2009). SATYAM’S AUDITORS Price Waterhouse Bangalore (PW Bangalore) served as Satyam’s independent registered public accounting firm from June 30, 2000, until February 12, 2009. During this time period, while PW Bangalore signed the audit opinions on the financial statements, the firm primarily used Lovelock & Lewes’s (Lovelock) engagement personnel to work on the audits. Both of these firms were part of a larger domestic Indian network of firms, all of whom were members of PricewaterhouseCoopers International Limited (PwC IL). The member firms operated their audit practice under resource sharing arrangements that facilitated the provision of audit services as a network of related audit firms. These member firms not only shared office personnel and office space, but also shared leaders, including a Territory Senior Partner and Managing Partner. In addition, five of these member firms (including PW Bangalore and Lovelock) were registered with the Public Company Accounting Oversight Board (PCAOB). 2These five firms are collectively referred to as PW India. Although the audit work on the Satyam engagement was predominantly performed by partners and EXHIBIT 3 Comparison of Actual and Fraudulent Cash, Investments in Fixed Deposits, and Interest Panel A: Cash on Deposit at Satyam’s Largest Bank—Bank of Baroda (BoB) Fiscal Year-EndBalance per (BoB) StatementsBoB Balance per SatyamBoB Balance Overstatement (Fraudulent)Reported Cash and Cash Equivalent Balance per SEC Filings 3/31/04 $3,652,232 $64,287,652 $60,635,420 $86,730,000 3/31/05 $10,268,858 $82,953,598 $72,684,740 $129,800,000 3/31/06 $6,288,103 $218,192,913 $211,904,810 $292,800,000 3/31/07 $11,452,514 $79,389,673 $67,937,159 $152,200,000 3/31/08 $10,972,784 $214,506,068 $203,533,284 $290,500,000 9/30/09 $10,836,569 $379,612,394 $368,775,825 $433,400,000 Panel B: Investments in Fixed Deposits and Related Interest Fiscal Year-EndReported Balance and InterestActual Balance and InterestFraudulent Balance and Interest 3/31/04 $252,022,199 $4,369,680 $247,652,519 3/31/05 $417,067,645 $260,436 $416,807,209 3/31/06 $432,722,174 $26,511,770 $406,210,404 3/31/07 $780,756,619 $13,365,348 $767,391,271 3/31/08 $912,660,956 $2,210,812 $910,450,144 9/30/09 $784,605,511 $2,117,546 $782,487,965 Source: United States District Court for the District of Columbia (USDC 2011). 2Rule 2100 of the PCAOB requires foreign public accounting firms that prepare or issue any audit report with respect to any issuer, or that play a substantial role in the preparation or furnishing of an audit report with respect to any issuer, be registered with the Board effective July 19, 2004. 424Brown, Daugherty, and Persellin staff associated with the Bangalore and Lovelock offices, partners from all five PW India firms billed time on the audits during the relevant period (SEC 2011). All of Satyam’s audit reports issued by PW Bangalore (the auditor of record) subsequent to its required July 2004 registration with the PCAOB were unqualified and stated that, in PW Bangalore’s opinion, Satyam’s financial statements presented fairly, in all material respects, the company’s financial position in conformity with U.S. GAAP. The reports also stated the audits were conducted in accordance with PCAOB standards. Exhibit 4 provides a copy of the audit report issued for the March 31, 2007 year-end. On January 14, 2009, Satyam submitted a Form 6-K with the SEC indicating that‘‘Price Waterhouse’s audit reports and opinions in relation to Satyam’s financial statements from the quarter ended June 30, 2000 until the quarter ended September 30, 2008 should no longer be relied upon’’(SEC 2009b). Exhibit 5 presents a copy of this document. AUDIT OF CASH AND CASH EQUIVALENTS The‘‘cash’’line items on Satyam’s 2005 through 2008 balance sheets (SEC 2005,2006,2007, 2008) consisted of‘‘cash and cash equivalents,’’as well as‘‘investments in bank deposits.’’During this time period, these balances represented the largest asset on Satyam’s balance sheet, at times comprising 50 percent or more of the company’s total reported assets. See Exhibit 6 for a detailed listing of Satyam’s assets accounts. The audit programs for the years in question indicated that the engagement team planned to send confirmations to all third parties with whom Satyam held major bank balances and interest-bearing accounts. The working papers document that confirmations were in fact sent to all banks at which Satyam purportedly had major accounts. Six banks were alleged to hold approximately 93 percent of the company’s total cash during the 2005–2008 timeframe (SEC 2011). The specific procedures followed by the audit engagement team related to the confirmation of cash were as follows: Members of the engagement team signed the confirmation requests, gave the requests to senior management, and relied on them to send the confirmation requests to the banks. Engagement personnel received some confirmation responses, in the requested format, directly from branches of certain banks that purportedly held Satyam’s largest interest-bearing fixed deposits. The engagement team also received confirmations from Satyam’s management that purported to confirm fixed deposit balances at different branches of the same banks. However, the confirmations received from Satyam management were not in the format requested by the engagement team. In addition, the bank-provided confirmation responses reflected significantly lower cash balances than Satyam represented were held in fixed deposits at the same banks, and significantly lower cash balances than what was reflected in the purported bank confirmations that Satyam provided to the engagement team. For example, during the 2008 audit, Satyam management provided the engagement team with what was represented to be a confirmation response from the Mumbai branch of a bank. This document indicated that Satyam had approximately $176 million of fixed deposits with the bank. The audit team also received, directly from the Hyderabad branch of the same bank, a confirmation response indicating that Satyam had no deposits with the bank (PCAOB 2011). See Exhibit 7 for additional differences. Audit engagement team personnel never attempted to contact any of the banks directly to address these discrepancies, which should have revealed that the balances were significantly overstated. Instead, the audit team accepted management-provided confirmations as genuine, and the limited followup that was performed related to identified discrepancies, involved examining fabricated deposit receipts, and other support supplied directly by Satyam. Members of the engagement team admitted that they had ceded control of the confirmation process to the client and indicated that they relied on representations from Satyam’s chairman and senior management Satyam Fraud: A Case Study of India’s Enron425 EXHIBIT 4 Audit Report Issued by Price Waterhouse for Year Ended March 31, 2007 All errors in this text are original to the source material. 426Brown, Daugherty, and Persellin I EXHIBIT 5 Notification from Price Waterhouse That Audit Reports Should No Longer Be Relied Upon All errors in this text are original to the source material. Satyam Fraud: A Case Study of India’s Enron427 because they believed they were honest and did not suspect that they were fabricating audit documents (SEC 2011). During Satyam’s 2008 fiscal year audit, at the request of PW India, a partner from another PwC Network Firm outside of India reviewed the electronic work papers for the 2008 Satyam audit. 3 Comments provided by this outside partner alerted members of the Satyam engagement team that its cash confirmation procedures appeared substantially deficient. Specifically, the partner informed the engagement team that their cash confirmation procedures appeared inadequate because the working papers indicated that‘‘the confirmation was obtained either directly or from copies obtained from the clients,’’advising the engagement team that they‘‘can only take credit for confirmations we send and receive directly’’(SEC 2011). The PwC Network Firm Partner did not share his comments about the cash confirmations on the Satyam engagement with PW India personnel, beyond the members of the engagement team. The quality control system of PW Bangalore and Lovelock did not require that someone outside of the engagement team be made aware of such comments in order to ensure that any issues would be properly resolved prior to issuance of the audit opinion. No action was taken by the engagement EXHIBIT 6 Satyam Computer Services Limited Consolidated Balance Sheets a ASSETSAs of March 31, 2008 2007 2006 2005 Current Assets Cash and cash equivalents 290.5 152.2 292.8 129.8 Investments in bank deposits 826.7 — 403.7 — Accounts receivable, net of allowance for doubtful debts 508.4 364.2 220.0 160.9 Unbilled revenue on contracts 81.5 38.6 41.1 17.0 Deferred income taxes 23.7 17.1 12.2 9.1 Prepaid expenses and other receivables 131.7 37.1 48.9 16.1 Total Current Assets 1,862.5 609.2 1,018.7 332.9 Investments in bank deposits — 767.6 — 411.6 Investments in associated companies 4.7 4.6 3.5 23.2 Premises and equipment, net 236.6 163.1 106.6 84.1 Goodwill, net 80.0 32.7 27.6 15.5 Intangible assets, net 15.6 7.4 6.6 — Other assets 43.9 39.5 18.2 16.8 Total Assets 2,243.3 1,624.1 1,181.2 884.1 aU.S. Dollars in millions except per share data and as stated otherwise. Source: (SEC 2005,2006,2007,2008). 3This request was in response to questions raised by the‘‘foreign filing reviewer’’of Satyam’s draft 2008 Form 20-F. Rule 3400T(b),Interim Quality Control Standards(available at:http://pcaobus.org/rules/pcaobrules/ pages/section_3.aspx#rule3400t), which states that audit firms must comply with portions of the Requirements of Membership of the AICPA SEC Practice Section (SECPS). Audit firms associated with international firms are required to seek the adoption of policies and procedures consistent with the objectives set forth in Appendix K (SECPS Section 1000.45). Those objectives include having policies and procedures for certain filings of SEC registrants, which are the clients of foreign associated firms, to be reviewed by persons knowledgeable in PCAOB standards. 428Brown, Daugherty, and Persellin team to address these concerns, even though the comments were received prior to the release of the 2008 unqualified audit report (SEC 2011). AUDIT OF ACCOUNTS RECEIVABLE—INTERNAL CONTROLS The PCAOB periodically releases observations from its inspection results of registered firms as a whole (Rule 4010 reports). The most pervasive deficiencies recently identified in auditing internal control relate to failures to: (1) identify and sufficiently test controls designed to address risks of material misstatement, (2) test the design and operating effectiveness of management review controls to monitor operating results, (3) update controls testing from an interim date to year-end, (4 ) test system generated data, (5) perform procedures regarding the use of the work of others, and (6 ) sufficiently evaluate identified control deficiencies and their effect on financial statement and internal control audits (PCAOB 2012). In connection with the 2007 audit of Satyam’s financial statements, PW India’s System and Process Assurance (SPA) personnel, working under the supervision of the audit engagement team, tested the company’s internal controls, including Information Technology internal controls. This was the first time that Satyam’s IT controls required testing under Section 404 (the effectiveness of internal control over financial reporting) of the Sarbanes-Oxley Act. This testing revealed over 170 controls-related deficiencies, including eight deficiencies that the SPA team determined were ‘‘significant,’’some of which should have indicated a heightened financial statement audit risk with respect to receivables. During the surrounding time period, Satyam’s senior management recorded over $1 billion in fictitious receivables by exploiting the weaknesses in the internal controls of the company’s accounts receivable system, which allowed for the manual entry of customer invoices via the intervention of a‘‘super user’’acting outside the regular controls of the billing and invoicing processes (SEC 2011). AUDIT OF ACCOUNTS RECEIVABLE—CONFIRMATIONS Similar to the deficiencies noted in the cash confirmation process, much of the control over the confirmation of accounts receivable was ceded to Satyam’s management. Engagement team personnel relied on Satyam’s management to send confirmation requests for the 2006, 2007, and EXHIBIT 7 Comparison of Select Cash Balances Confirmed Directly by Bank versus Satyam Management Period Ending BankConfirmation PW India Received Directly from Bank (in $ USD)Confirmation PW India Received from Satyam (in $ USD) 9/30/08 BNP Paribas $1,860,280 $100,753,498 9/30/08 HSBC No balance identified $172,000,153 6/30/08 BNP Paribas $1,919,404 $109,014,675 3/31/08 Citibank $330,172 $152,923,538 3/31/08 HDFC No balance identified $175,952,024 3/31/07 BNP Paribas $11,192,807 $108,584,687 3/31/06 BNP Paribas $13,082,509 $96,830,036 3/31/06 HSBC No balance identified $53,282,374 Source: Securities and Exchange Commission (SEC 2011). Satyam Fraud: A Case Study of India’s Enron429 2008 audits. Although the engagement team received few, if any, responses to these requests, no attempt was made to follow up on the non-responses by mailing out second confirmation requests. For example, as part of the 2007 audit, 22 confirmation requests were sent, including seven that were later exposed as fictitious customers. No customers responded to these requests (SEC 2011). In addition, during some periods, instead of employing confirmation procedures to verify accounts receivable, the engagement team implemented‘‘alternative procedures.’’These procedures consisted of obtaining information of subsequent receipt totals from management and then dividing these receipts by the total outstanding receivables as of the period end to arrive at a percentage of receivables that had been subsequently collected. During both the 2007 and 2008 audits, subsequent cash receipts testing was performed as of a date other than the fiscal year-end (PCAOB 2011). FIRM QUALITY CONTROL STANDARDS Section 20 of the PCAOB’s quality control standards (QC 20) (PCAOB 1997a) provides that a CPA firm should have a‘‘system of quality control for its accounting and auditing practice, because of the public interest in the services provided by, and the reliance placed on, the objectivity and integrity of CPAs.’’This system of QC is defined as one that ensures that its personnel comply with the applicable auditing professional standards, as well as the firm’s own quality standards. The standard also states that a firm’s system of QC should include ensuring that the segments of the firm’s audit engagements that are performed by affiliated firms are performed in compliance with PCAOB standards. Engagement performance is one element of a firm’s quality control. QC 20 maintains that policies and procedures should be established in order to provide reasonable assurance that the work performed by engagement personnel meets applicable professional standards, regulatory requirements, as well as the firm’s standard of quality. Monitoring is also required by the PCAOB as part of a firm’s quality control. The monitoring process should ensure that the firm’s quality control policies and procedures are suitably designed and are being effectively applied (PCAOB 1997b). PCAOB INSPECTION After learning that the 2007 Satyam audit engagement would be inspected by the PCAOB, prior to inspectors beginning their field work and six months after the audit documentation completion date, members of the Satyam engagement team crafted, gathered, and added documents to the 2007 audit work papers. 4ThePCAOB (2004 )provides guidance in Auditing Standard No. 3, Audit Documentation,as to the appropriate procedures related to the addition of audit documentation after the audit report release date. AUDITING STANDARDS IN INDIA PW India was required to use the auditing standards set forth by the PCAOB when performing the audit of Satyam because the company’s ADS were listed on the NYSE at the time. However, audits conducted by PW India that involve domestic issuers only are governed by auditing standards established in India. The Institute of Chartered Accountants of India (ICAI) was established in 1949 to regulate the Indian accounting profession, and the Indian Auditing and Assurance Standards Board (IAASB) was formed by ICAI in 1982. ICAI is a member of the International Federation of Accountants, and auditing standards issued by the IAASB are generally 4The PCAOB’s enforcement release may be accessed at:http://pcaobus.org/Enforcement/Decisions/Documents/ PW_India.pdf 430Brown, Daugherty, and Persellin I intended to be in harmony with International Standards on Auditing. The Auditing and Assurance Standard (AAS) issued by the ICAI governing external confirmations in India is AAS No. 30 (ICAI 2013). ACCOUNTING, AUDITING, AND CULTURE While international efforts have been made to harmonize the auditing standards used in countries around the world, the issue of the manner in which even‘‘harmonized’’standards are interpreted and implemented in different cultures still remains. Despite the fact that international auditing services are dominated by the large international audit firms (Big 4 ), there has been limited investigation of the influence that cultural differences may have on auditors’ ethical decision making (Tsui and Windsor 2001). Culture has been defined as the collective programming of individuals such that one group is distinguishable from another (Hofstede 1980). The conduct and ethical judgments of auditors have always been crucial with respect to strong corporate governance and credibility of the profession (e.g.,Mautz and Sharaf 1961;Bain and Band 1996). However, culture has been shown to differentially influence both accounting and auditing decisions (Perera 1989). Hofstede’s (1980) Culture Theory suggests nations may be distinguished on a number of dimensions. One of these dimensions is individualism versus collectivism (Hofstede 1991). In individualistic societies, individuals tend to be concerned with themselves and their immediate family, whereas collectivist societies stress the importance of cohesion within social groups (and demonstrating the priority of groups over individuals). A cross-cultural comparison of ethical attitudes of business managers in India, Korea, and the U.S. used Hofstede’s cultural dimension survey and an instrument designed by the researchers to measure the impact of culture on ethical attitudes (Christie, Kwon, Stoeberl, and Baumhart 2003). The results indicated, as predicted, that India’s business managers score significantly lower than their U.S. counterparts do on Hofstede’s individualism scale. The study also finds that there is a strong relationship between individualism and the respondents’ ethical attitudes. Nearly two-thirds of Indian respondents agreed with the statement‘‘in the business world it is difficult to make ethically sound decisions because of the high degree of competitive pressure,’’while only 21 percent of U.S. respondents expressed this belief. In addition, approximately 73 percent of Indian participants believed that‘‘in dealing with ethical problems, it is easier to know what is right than it is to do it,’’compared to 47 percent of U.S. respondents (Christie et al. 2003). Culture has also been shown to influence the ethical decision making of accountants and their belief in the likelihood their colleagues would make similar decisions (Cohen and Pant 1995). Studies of management control systems and accounting practices suggest distinct differences between nations (Bhimani 1999). It should come as no surprise that the large international firms face a continuing problem of global coordination under differing cultures (Cohen, Pant, and Sharp 1993). EPILOGUE Shortly after the fraud became public, the government of India assumed control of the company by dissolving Satyam’s, then, Board of Directors and appointing new government-nominated directors. In addition, former top managers of the company were removed and the government oversaw a bidding process to select a new controlling shareholder in Satyam. In June 2009, Satyam filed a press release announcing Mahindra Satyam as the company’s new‘‘brand identity.’’On October 4, 2010, Satyam filed a Form 25 with the SEC voluntarily removing its securities from the NYSE listing and from registration under Section 12(b) of the Securities Exchange Act. Satyam’s Satyam Fraud: A Case Study of India’s Enron431 equity shares underlying the ADS were previously deemed registered pursuant to Section 12(g) of the Exchange Act while listed on the NYSE. Subsequent to delisting, Satyam’s ADS were quoted on the OTC Market under the symbol SAYCY.PK (USDC 2011). On March 21, 2013, the Boards of Directors of Satyam Computer Services Limited (Mahindra Satyam) and Tech Mahindra Limited (Tech Mahindra) approved a proposal to merge the two companies along with other selected wholly owned subsidiaries. The new company, called Tech Mahindra, is among the top-five IT service companies in India with expected revenues of just under $3 billion. Shares of Satyam ceased to trade on July 4, 2013 in preparation for the merger (moneycontrol.com2013). Prior to the merger, Satyam cooperated with the SEC in its investigation, agreeing to pay a $10 million fine to settle the SEC’s charges, as well as satisfy requirements related to training of officers and employees concerning securities laws and accounting principles, improving its internal audit functions, and hiring an independent consultant to evaluate the company’s system of internal controls (SEC 2011). In addition, over $200 million has been paid by Satyam to settle lawsuits in the U.S. (Chand 2012). In August of 2013, The Companies Bill 2012 (Bill) was passed by India’s upper house of Parliament. It replaces corporate legislation (the Companies Act) that had been in place for 57 years. The Bill was partly motivated by the Satyam scandal and it is an attempt to (1) overhaul audit practices, (2) impose stiffer penalties for fraud, and (3) create more government oversight of businesses (Swanson 2013). PW India was prohibited by the PCAOB from accepting any new U.S. listed companies as audit clients for six months, as well as agreeing to a wide range of remedial actions including additional training, quality control, and monitoring. In addition, fines of $6 million and $1.5 million were ordered paid to the SEC and the PCAOB, respectively. These are the largest monetary penalties ever assessed against a foreign-based accounting firm in SEC and PCAOB enforcement actions. The two PW India lead engagement partners for the Satyam audits, along with several others, are defendants in a criminal trial in India arising out of the Satyam fraud. The other defendants include a number of former senior and mid-level executives of Satyam, including Ramalinga Raju—Chairman of the Board, Rama Raju—Managing Director and CEO, the former chief financial officer, the former vice president for accounts and audits, the former senior manager for treasury, the former global internal audit head, and the former assistant manager for invoicing (USDC 2011). The investigation is currently still underway more than five years after Ramalinga Raju admitted to the fraud.‘‘Nearly four years after Satyam Computer Services collapsed, the Directorate of Enforcement has filed a complaint in the CBI special court for offences under the Prevention of Money Laundering Act. The ED seeks to prosecute former Satyam Chairman B. Ramalinga Raju, 46 others (including the ten accused in the CBI charge sheet), and 166 companies, including the tainted company itself’’(The Hindu BusinessLine2013). 5 The two PW India lead partners and the two senior managers on the audit were relieved of all auditing responsibilities in January 2009. The two engagement managers resigned in February 2010, and the lead engagement partner (Subramani Gopalkrishnan) for the audits of Satyam’s fiscal years ended March 2001 to 2007 retired in March 2009. The lead partner for the 2008 audit (Talluri Srinivas) is on administrative leave pending the outcome of various proceedings against him. In 2012, Mr. Srinivas was found guilty by the ICAI of not complying with professional standards (Times of India 2012). In 2013, the Indian Supreme Court dismissed special leave petitions against both lead partners and they await criminal trials (Economic Times 2013). On March 16, 2010, the two former PW India engagement mangers were barred by the PCAOB from being associated persons of a registered public accounting firm for their failure to comply with a demand requesting their testimony in a PCAOB-related investigation into the Satyam audit engagements (SEC 2011), and were permanently barred by the ICAI in 2012 (Times of India 2012). 5 As of January 2014, there had not been a final resolution of the pending criminal trial. 432Brown, Daugherty, and Persellin
Accounting case, Satyam Fraud: A Case Study of India’s Enron
Accounting Theory Night 5 – Satyam Briefly answer the questions 1-3: Explain the fraud What was the impact on the financial statements? What accounts were wrong? What journal entries were wrong or omitted? Who took the money and how much? The Audit: Where Did They Go wrong – PW India have to follow PCAOB Audit Standards – this was India? Accounts Receivable: PCAOB standards and India Audit Standards differ little concerning Confirmations. Did PW India do anything wrong? (AU 312.16,312.17,316.28, AS No. 13…India AAS No. 30/SA 505) Finding the Fraud: Under U.S. Standards, what is the auditor’s responsibility to find Fraud? (AU 110 & AU 317) Were there any related party issues and what should PWI have done about them Did PWI control the work outsources appropriately? What about the Corporate Governance Structure and Corporate Culture Allowed the fraud to occur? Just think about this: Did the punishment fit the crime? Are there cultural issues that impact your answer or the punishment

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