Weak Corporate Governance And Corporate Failure Accounting Essay

The term ‘gorvernance ‘ derives from the Latin ‘gubernare ‘ , intending to ‘steer ‘ . In general corporate administration is the manner by which companies are regulated, controlled and directed. Corporate administration merely means what is right and what is incorrect for a company and how the company executives should work. Standards and rules of corporate administration are non codified in any individual papers. Corporate administration has undergone enormous alterations following the recent corporate prostrations and economic scenario.

Cadbury study ( 1992 ) recommended a codification of best pattern which the boards of all listed companies registered in UK should follow[ 2 ]. There were assorted others studies and commissions every bit good reexamining corporate administration such as Greenbury study ( 1995 ) , Hampel study ( 1998 ) , Combined codification ( 1998 ) , Turnbull ( 1999 ) , Myners ( 2001 ) , Higgs ( 2003 ) , Smith ( 2003 ) , Combined codification ( 2003 ) and many more in UK every bit good as in whole of the Europe.

OECD which means administration for economic co-operation and development provided with the criterions & A ; guidelines of corporate administration for all its member provinces. About in all the studies and codes stockholders involvement is protected every bit good as the protection is besides given for the stakeholders involvement. In the recent signifier of corporate administration rights, liabilities and responsibilities of executives is besides provided. Commissariats are besides provided for the compulsory being of independent executive managers in a company for the protection of stockholders involvements.

Importance of stockholder activism is besides being highlighted. The alterations in the criterions and rules of the corporate administration have been made after looking into assorted corporate prostrations through out the universe so as to cut down such prostrations and guarantee security to the stockholders and the society. ENRON is considered to be the biggest corporate prostration in the universe so far which compelled the framers of the corporate administration to rethink and do some alterations in the model.

Enron was the tenth largest company in USA filed for the bankruptcy as a consequence of the weak corporate administration and deceitful activities of the executives. Parmalat is another large illustration of corporate failure considered to be as ‘European Enron ” . Both Enron and Parmalat highlighted the indispensable maps of non executive audit and revelation[ 3 ]. The failure besides showed that how weak corporate administration of a company effects society as a whole. In this class work we will be discoursing about the failure and the fraud of Satyam computing machines limited.

Satyam Computers was the 4th largest IT Company in India. The laminitis president B Ramalinga Raju committed a fraud of 5000 Crores of rupees and stunned everyone. The failure and the fraud is certainly an illustration of weak corporate administration, monopoly of individual executives and deceitful behavior of hearers and weak portion holder activism. Raju, 53, confessed in a missive to Satyam ‘s board of managers to blow uping net incomes for old ages with “ fabricated ” assets and non-existent hard currency[ 4 ].

Now we will discourse in brief how company started, reached the highs of success and how a individual individual made a fraud of around 5000 crore rupees. The “ Satyam computing machines ” was established on 24th of June 1987 with headquaters in Hyderabad, with employee strength of 20 people founded by B Ramalingam Raju. B Ramalinga Raju was born in a husbandmans household & A ; started his concern with edifice building and fabric industry. Subsequently converted his concern into IT industry and formed “ Satyam computing machines ” .

Satyam Computers was runing in 66 states with 53000 employees. Satyam specialised in the field of concern package, back office outsourcing and consulting services. Satyam was listed on Mumbai and New York stock exchange. Satyam computing machines won the aureate Inachis io award from group of Indian managers for excellence in corporate administration, Satyam computing machines won an award from the London based universe council for corporate administration for excellence in corporate administration.

Raju won the Ernst & A ; Young 2007 enterpriser of the twelvemonth award[ 5 ]. Satyam was named as the functionary package supplier for the FIFA universe cup 2010 in South Africa and 2014 event in Brazil. Satyam served for around 700 companies including 185 fortune companies. Satyam made half of its gross from United States entirely. Satyam had been the caput of the Indian outsourcing house and a giant in the IT industry, and committed India ‘s biggest of all time corporate dirt which has same consequence as of Mumbai bomb blasts.

It may non hold killed anyone but had the same impact on everyone ‘s head. Everything was traveling all right with the company. The lone incident which indicated the ruin was when the World Bank blacklisted Satyam computing machines for corrupting its functionaries and the other factor which ignited the whole fraud to be exposed was the rejection of Raju ‘s offer by the portion holders to buy two buildings houses called “ Maytas belongingss ” and “ Maytas infra ” owned by his boies. This was the last measure by the Raju to conceal the fiscal abnormalities.

Shareholder ‘s rebellion harmed Raju ‘s credibleness and dropped down Satyam ‘s portion monetary values. Satyam which means ‘truth ‘ in Hindi breached its kernel when on the 7th of January 2008 the company ‘s laminitis president B Ramalingam Raju unfolded the fraud of $ 1 billion committed by him and resigned from the station of president. He admitted that company ‘s net incomes had been falsely inflated for old ages which were non in being and fictious. He admitted that approximately 94 % of the hard currency listed in the company ‘s balance sheet ne’er existed.

He subsequently stated that he made a last effort to cover up the hard currency in the company ‘s balance sheet by purchasing two companies of his boy that is “ Maytas belongingss and Mayats infra ” but the company board of managers rejected his offer. The trade was for $ 1. 6 billion and this was the last effort to cover up the Satyam losingss. These acquisitions were to make full up the company ‘s unreal assets with the existent 1s. Raju said he and his household has non taken even a individual rupee from the company ‘s histories[ 6 ].

Harmonizing to Raju there was entire fraud of around 7000 crore rupees. Company overstated his assets and net incomes to affect and pull investors. This overstating in the companies balance sheet by the rising prices of net incomes was to acquire more money from the investors so as to derive more wealth to catch from other rivals and the desire to maintain the company at the top. Harmonizing to Raju this cushioning of company ‘s balance sheet started few old ages ago and at that place was a fringy spread between the existent net incomes and what was shown in the company ‘s balance sheet.

He tried a batch to cover up the losingss but it was like “ siting a tiger, non cognizing how to acquire off without being eaten ”[ 7 ]. Actually company was working mulct and the fiscal wellness besides looked all right “ Satyam reported a 46. 3 % rise in the gross to $ 2. 1billion ”[ 8 ]. Raju announced to do them better in the following twelvemonth. Raju had an thought in his head to cover up the bogus net income in the company ‘s balance sheet by buying the two companies of his boy. Company would hold shown that they have invested the portion of the net income which is shown in the balance in purchasing these two companies.

The trade was expected to be of the same capital as the exaggeration of net income in the company ‘s balance sheet and he could hold purchased his ain two companies and would hold shown that he purchased them from the company ‘s net income sum. This was the existent program of B Ramalingam Raju how to change over the ne’er bing net incomes into the existent 1s. His thought was good but he could n’t do this trade existent because of the resistance by other board of managers and portion holders. But in no manner we can support a fraud whether it was for the benefit of the company or against the company.

What Raju did was illegal in the eyes of jurisprudence and he had to be punished for the same. His thought of demoing bogus net incomes and altered balance sheets led to the prostration of the company. Soon after the confession of the company ‘s president at that place was a prostration in the Indian market and the sensex fell down by more than 5 % and Satyam ‘s portions fell down by about 70 % . Indian rupee fell down in the international market. New York stock exchange stopped working with Satyam any longer. `

India ‘s national stock exchange has expelled Satyam from all its equity indices and the Bombay Stock exchange is expected to follow a suit ”[ 9 ]. Several other securities firm houses like Religare and Angel broking boycotted Satyam. The impact of the Satyam fraud could be seen on other Indian houses and companies as good. Investors became cautious before puting there money in portions. Foreign investors started wavering a batch in puting any money in India. It has harmed the image of the full Indian economic system in the international market. It raised several inquiries on the corporate administration ordinances in India.

Corporate administration includes how the work should be done in a company, how the executives should be regulated, function of hearers, portion holders activism, function of independent executive managers and much more. Corporate administration is related to the full working of the company. In the instance of Satyam every bit good there were many loopholes and marks of weak corporate administration which led to the failure of the company. First mark of weak corporate administration was the concentration of power in the custodies of a individual executive that is Chairman ( B Ramalingam Raju ) .

He was moving independently without confer withing other executives in the company. Harmonizing to his confessional statement merely he was known with the non-existing net incomes in the company ‘s balance sheet and what of all time fraud was traveling on in the company. This means all the work was regulated by a individual individual merely who was keeping less than 10 % of portions in the company and all the other executives were soundless and inactive. Second and the most of import mark of weak corporate administration was the leery function of hearers.

Satyam ‘s fraud is besides called as an accounting dirt. Satyam ‘s history books were audited by internationally recognised auditing house “ Pricewaterhousecoopers ” . How is it possible that they did n’t come to cognize about the fiscal abnormalities in the company ‘s histories. This was non the first clip when work of this scrutinizing house was in inquiry. In 2005, the Reserve Bank of India barred PwC from bank audits after it found that the house under provided for non-performing assets of Global Trust Bank[ 10 ].

Hearers ne’er of all time complained about any of the fiscal abnormalities in Satyam. The 3rd mark of weak corporate administration was the function of independent executive managers. Though company ‘s board was holding right figure of independent managers and even one of them was the former professor of university of Harvard, even they ne’er came to cognize about anything. In fact there chief responsibility was to protect the rights of the portion holders. Even they missed out all the frauds traveling on in the company.

The 4th mark of failure of corporate administration in Satyam ‘s fraud is the deficiency of portion holder activism. None of the portion holders of all time bothered or stepped frontward to ask and give their sentiment in the working of the executives merely one foreign investor stepped frontward to halt Raju ‘s program of purchasing other two companies which exposed the whole fraud. Another factor was the cringle holes in the policies or the working of the authorities machinery. Government besides ne’er bothered to care about asking the assets and the outgos of the company.

They ne’er checked the balance sheet of the Satyam and assets consequently. These are the marks of weak corporate administration which allowed such a fraud to go on which non merely harmed the Satyam employees or stockholders it effected the whole economic system and society nationally every bit good as internationally. Satyam ‘s failure is a outstanding mark of treachery by one of the key and iconic figures in the state, Mr. B Ramalinga Raju[ 11 ]. This dirt affected the Indian economic system and the IT sector every bit good.

Investings in India by foreign investors decreased as they started wavering before puting in India. One should understand that “ Satyam ‘s cozenage is non something that will shatter the peace and tranquility of Indian public beyond fix ”[ 12 ]. It is besides non right to see Satyam as a failure. It was a fraud really what happened in Satyam and that resulted in autumn of company ‘s portion value. Principles and criterions of corporate administration provided by different commissions and codifications should be observed really carefully.

Each and every attempt should be made to work on them. There should be rigorous regulations for the auditing and authorities should ever maintain an oculus on the working of the hearers and the company. Independent managers should be appointed by proper constituted commissions and authorities regulative governments. Share holder activism is the most indispensable portion of corporate administration and it should be followed as good. Concentration of power should ne’er be in the custodies of one or a few individuals.

It should be checked by the concerned governments that all the major determinations are being taken by the bulk of the board and in audience of the stockholders, who are the existent proprietors of the company. It is the investing of the stockholders which is assigned to the board with a fiducial responsibility to move for the net income maximization of these people. It is non possible to reason such a fraud. Whatever of all time happened was non merely a fraud or failure of corporate administration but it was more than that. This event degraded the image of Indian IT industry in the whole universe.

Though authorities of India made some efforts to rinse off the discolorations of Satyam by supplying 2000 crore of rupees and set uping a new board for Satyam. Whole IT industry and Government of India has though appealed to whole universe that this sort of incident will non go on in India once more. Lets see will the local investors and international investors show at that place involvement in puting in this sector once more specially in Satyam computing machines. Let us see how the things go after this and hope for the best.