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ON
REPORT ON
CORPORATE
FRAUD
REPORT ON
CORPORATE FRAUDS
INDEX
INTRODUCTION
CORPORATE FRAUDS
TOP 10 EXCLUSIVE CORPORATE FRAUDS
SATYAM SCAM – BAAP IN INDIA
FINDINGS AND SUGGESTIONS
SUMMARY
CONCLUSION
BIBLIOGRAPHY
INTRODUCTION
Accounting frauds, or corporate accounting frauds, are political and
business scandals which arise with the disclosure of misdeeds by trusted
executives of large public corporations. Such misdeeds typically involve
complex methods for misusing or misdirecting funds, overstating
revenues, understating expenses, overstating the value of corporate assets
or underreporting the existence of liabilities, sometimes with the
cooperation of officials in other corporations or affiliates. When people
think about fraud, their minds immediately make up images of shady
conmen, extracting money from the elderly and the unsuspecting. A few
might conjure images of the sweet talking lad, who swindles money using
"schemes" or the new age internet scammer who might use technology to
dupe online customers or bankers using various schemes like phishing
etc. But the greatest amount of fraud - measured in terms of monetary
value - is done by the corporations of the modern world. Let's take a brief
look at two of the world's biggest and most high profile corporate frauds
in recent times.
Corporate frauds are political and business scandals which arise with the
disclosure of misdeeds by trusted executives of large public corporations.
Such misdeeds typically involve complex methods for misusing or
misdirecting funds, overstating revenues, understating expenses, overstating
the value of corporate assets or underreporting the existence of liabilities,
sometimes with the cooperation of officials in other corporations or affiliates
The first thing that crops up in the minds of people when the word
accounting fraud is mentioned is that of the energy company, Enron. Enron,
a multi billion dollar company, was becoming one of the largest energy
trading companies in the world. Few suspected that such a huge
conglomerate would face one of the biggest crashes in recent history. In fact
many magazines had even praised Enron as one of the most innovative
companies.. The company had managed to hoodwink everyone, from its
employees, to investors to financial analysts and regulators, including the
governments of various countries. The reason for the fraud was that the
company had, over a period of time, started to lose more money as its cash
flow dried up. To cover up the losses, the company, with the connivance of
its accountancy firm Arthur Anderson, tried to "cook the books", showing
profits out of nowhere and using techniques, that were later described as
innovative accounting practices. It was also seriously involved in various
bribery scandals in different countries.
As news started to get out via whistle blowers, the company was in deep
trouble and it filed for bankruptcy, the largest in American history. Share
prices fell from nearly $90 to less than 30 cents as news spread of its failure.
Many of its employees - who ironically had rated it as the best company to
work for, in a previous report - also found they had lost their entire life
savings. Many investors and stakeholders were furious and the crash caused
a ripple in the stock markets in 2001. The company and its accountancy firm
were soon wound up and criminal investigations were initiated.
Insider trading
Another method of corporate scamming is the insider trading done by many
companies. An insider trade involves selling or buying shares of a company,
where a person has either exclusive or first access to information that would
not be available to the public. This results in an unfair advantage for the
person since he/she can dump shares before the collapse or buy them for a
cheap rate and sell again after the market turns bullish, depending on the
insider "news" on the company. This type of trading is illegal throughout the
world. Enron incidentally was involved in insider trading as well. But the
most high profile case is that of Martha Stewart, a billionaire whose fortunes
were built around advice to homemakers. Martha Stewart, who admitted her
guilt and was sentenced to 5 months in jail, sold her shares in a
pharmaceutical company ImClone as news that the company's important
patent application had been rejected. She managed to sell the shares before
the news reached everyone and thus managed to get out before the share
prices of the pharmacy company collapsed.
Enron's stock price, which hit a high of US$90 per share in mid-2000,
caused shareholders to lose nearly $11 billion when it plummeted to less
than a $1 by the end of November 2001. The U.S. Securities and Exchange
Commission (SEC) began an investigation, and Dynegy offered to purchase
the company at a fire sale price. When the deal fell through, Enron filed for
bankruptcy on December 2, 2001 under Chapter 11 of the United States
Bankruptcy Code, and with assets of $63.4 billion, it was the largest
corporate bankruptcy in U.S. history until WorldCom's 2002 bankruptcy
2. BERNIE MADOFF
On 29 June, 2009, Bernie Madoff was sentenced to 150 years in prison, the
maximum sentence that could be given to anyone convicted of corporate
fraud. He ran an amazing ‘Ponzi” scheme for his clients, showing falsified
profits, and gains with the money that they had given him for investment.
SEC authorities believe the actual net fraud will be between $ 14 & $17
billion.
3. Subprime Mortgage Crisis
This was not the crisis of a single corporate but it led to the demise of many
other corporate. The repercussions can still be felt throughout the US and
even Europe. It has had an adverse effect on most of the banks and financial
institutions, and has led to large scale reform in the financial sector rules and
regulations.
4. Satyam Computers
India’s biggest corporate scam was disclosed when Ramalinga Raju, the
CEO of Satyam Computers declared that the company’s profits had been
overstated for many years. Inflated bank figures, understated liabilities and
over 10,000 non-existent employees were among the many fraudulent
practices being indulged in to cross 7000 crone rupees.
5. Worldcom
On July 21, 2002, when Worldcom filed for bankruptcy under Chapter 11, it
was USA’s largest corporate failure. The accounting scandal covered $ 11
billion and it seems the workings of the company were masked by painting a
false picture of growing profits and margins. In 2004, it emerged from the
bankruptcy proceedings with $5.7 billion in debt and $ 6 billion in cash.
6. Barlow Clowes
7. Daewoo
9. AIG
10. Phar-Mor
In 1992, Phar-Mor had over 300 stores and over 25,000 employees. It ran a
successful chain of discount drugstores throughout America, and it ran on a
policy of small profits, but large quantities of merchandise. However, the
owners in 1992 were accused of large scale embezzlement, deceptive
inventories and fudged data.
SATYAM SCAM - BAAP IN INDIA
(satyam-asatyam)
Raju claimed in the same letter that neither he nor the managing director had
benefited financially from the inflated revenues. He claimed that none of the
board members had any knowledge of the situation in which the company
was placed.
He started as a marginal gap between actual operating profit and the one
reflected in the books of accounts continued to grow over the years. It has
attained unmanageable proportions as the size of company operations grew
significantly (annualised revenue run rate of Rs 11,276 crore (US$ 2.32
billion) in the September quarter of 2008 and official reserves of Rs 8,392
crore (US$ 1.73 billion)). As the promoters held a small percentage of
equity, the concern was that poor performance would result in a takeover,
thereby exposing the gap. The aborted Maytas acquisition deal was the last
attempt to fill the fictitious assets with real ones. It was like riding a tiger,
not knowing how to get off without being eaten.
Aftermath
Raju had appointed a task force to address the Maytas situation in the last
few days before revealing the news of the accounting fraud. After the
scandal broke, the then-board members elected Ram Mynampati to be
Satyam's interim CEO. Mynampati's statement on Satyam's website said:
"We are obviously shocked by the contents of the letter. The senior leaders
of Satyam stand united in their commitment to customers, associates,
suppliers and all shareholders. We have gathered together at Hyderabad to
strategize the way forward in light of this startling revelation."
On 10 January 2009, the Company Law Board decided to bar the current
board of Satyam from functioning and appoint 10 nominal directors. "The
current board has failed to do what they are supposed to do. The credibility
of the IT industry should not be allowed to suffer." said Corporate Affairs
Minister Prem Chand Gupta. Chartered accountants regulator ICAI issued
show-cause notice to Satyam's auditor PricewaterhouseCoopers (PwC) on
the accounts fudging. "We have asked PwC to reply within 21 days," ICAI
President Ved Jain said.
On the same day, the Crime Investigation Department (CID) team picked up
Vadlamani Srinivas, Satyam's then-CFO, for questioning. He was arrested
later and kept in judicial custody
Analysts in India have termed the Satyam scandal as India's own Enron
scandal.
Satyam's shares fell to 11.50 rupees on 10 January 2009, their lowest level
since March 1998, compared to a high of 544 rupees in 2008. In New York
Stock Exchange Satyam shares peaked in 2008 at US$ 29.10; by March
2009 they were trading around US $1.80.
The Indian Government has stated that it may provide temporary direct or
indirect liquidity support to the company. However, whether employment
will continue at pre-crisis levels, particularly for new recruits, is
questionable .
On 22 January 2009, CID told in court that the actual number of employees
is only 40,000 and not 53,000 as reported earlier and that Mr. Raju had been
allegedly withdrawing INR 20 crore rupees every month for paying these
13,000 non-existent employees CEO and special advisors
On 5th february 2009, the six-member board appointed by the Government
of India named A. S. Murthy as the new CEO of the firm with immediate
effect. Murthy, an electrical engineer, has been with Satyam since January
1994 and was heading the Global Delivery Section before being appointed as
CEO of the company. The two-day-long board meeting also appointed Homi
Khusrokhan (formerly with Tata Chemicals) and Partho Datta, a Chartered
Accountant as special advisors
SUMMARY
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