Case-Based Writing Assignment
Requirements and Format
The objectives of the case are that the student be able:
• To research and quote the auditing standards, SOX and other relevant literature in support your answers
• To use standard English.
• AICPA Code of Professional Conduct
• Sarbanes Oxley Act
• PCAOB Auditing Standard No. 2 & No. 5
• Statements on Auditing Standards and GAAS
• COSO Framework
• Court Cases Ultramares Doctorine and Rouch Factors and other legal cases you deem relevant
• SEC Act 1933 and SEC Exchange Act 1934
• Wharton Database
1. In your own words, please provide a paragraph summarizing the accounting fraud in the case.
2. If an investor sues PwC auditors in the US, under what statues (both common law(s) and securities acts), PwC might be found guilty? Do you think their defense(s) will stand in court?
3. Identify the client audit risk factors related to Satyam’s audit.
4. Provide the data for Satyam’s stock price per share from 1999- most recent year and EPS that you obtain from Wharton database.
? Please organize your answers to the above questions in the following format:
Case Summary – answer to question 1
Auditor’s Liability – answer to question 2
Audit Risk Factors – answer to question 3
Data from Wharton Database – excel table of Satyam’s stock price per share and EPS – answer to question 4
This assignment should be typed 12-point double spaced standard sheet paper. The answers should not exceed 10 pages but not shorter than 7 pages, including footnotes and references.
Please note that you should to be in compliance with the University Academic Integrity Policies and your final submission will be scanned through Turnitin software to assure that it is your own work and that any used materials are cited appropriately.
Please note this is an individual assignment (not team-based), you may turn in the assignment in hardcopy (preferred), or via the digital dropbox on Blackboard or email.
Grading: The grading will be based on the underlying reasoning for your answers and appropriateness and relevancy of literature quoted while addressing all the questions. Grading is also based on content and using standard English. These factors will account for 10 points of your grade in this assignment, if you choose to do Track II.
Satyam Computer Services Ltd.
Satyam Computer Services Ltd. was founded in 1987 by Ramalinga Raju. The company offers information technology (IT) services spanning various sectors, and is listed on the New York Stock Exchange and Euronext.
Satyam’s network covers 67 countries across six continents. The company employs 53,000 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 Satyam Computer Services scandal was publicly announced on 7 January 2009, when Chairman Ramalinga Raju resigned after notifying its board members and SEBI that he had falsified Satyam’s accounts.
In 2008, the company attempted to acquire two infrastructure companies founded by family members of company founder Ramalinga Raju – Maytas Infrastructure and Maytas Properties ) – for $1.6 billion, despite concerns raised by independent board directors. Both companies are owned by Raju’s sons. This eventually led to a review of the deal by the government, a veiled criticism by the vice president of India and Satyam’s clients re-evaluating their relationship with the company. Satyam’s investors lost about INR 3,400 crore in the related panic selling. The USD $1.6 billion (INR 8,000 crore) acquisition was met with skepticism as Satyam’s shares fell 55% on the New York Stock Exchange.Three members of the board of directors resigned on Monday 29th Dec 2008.
The World Bank has banned Satyam from doing business with it for 8 years due to inappropriate payments to the World Bank’s staff. The World Bank in its own statement has denied allegations of "data theft/malicious attacks", but confirmed the allegations on transactions benefiting Bank staff and inability to provide information sought on invoices submitted to the Bank.
A UK mobile payments company, Upaid Systems is suing Satyam for over 1 billion dollars on complaints of fraud, forgery and breach of contract. Reports on the SEC’s websites provide the details of this law suit.
The 2009 Accounting scandal
On 7 January 2009, company Chairman Ramalinga Raju resigned after notifying its board members and SEBI that he had falsified Satyam’s accounts. Raju confessed that Satyam’s balance sheet as of the September 30, 2008, carried inflated figures for cash and bank balances of INR 5,040 crore (as against INR 5,361 crore reflected in the books). It carried an accrued interest of INR 376 crore which was non-existent. An understated liability of INR 12,230 crore on account of funds was arranged by himself. An overstated debtors’ position of INR 490 crore (as against INR 2,651 crore in the books).
Raju claimed in the 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 stated that "What 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 in the September quarter of 2008 and official reserves of Rs 8,392 crore). 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.”
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 CID team picked up Vadlamani Srinivas, Satyam’s then-CFO, for questioning. He was arrested later and kept in judicial custody. On 11 January 2009, the government nominated noted banker Deepak Parekh, former NASSCOM chief Kiran Karnik and former Sebi member Achuthan to Satyam’s board.
Immediately following the news, Merrill Lynch (Now a subsidiary of Bank of America) terminated its engagement with the company as Credit Suisse suspended its coverage of Satyam. It was also reported that Satyam’s auditing firm PricewaterhouseCoopers will be scrutinized for complicity in this scandal. SEBI, the apex stock market regulator, also said that, if found guilty, its license to work in India may be revoked. Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate Governance under Risk Management and Compliance Issues, which was stripped from them in the aftermath of the scandal. The New York Stock Exchange has halted trading in Satyam stock as of 7 January 2009. India’s National Stock Exchange has announced that it will remove Satyam from its S&P CNX Nifty 50-share index on January 12. The founder of Satyam was arrested two days after he admitted to falsifying the firm’s accounts. Ramalinga Raju is charged with several offences, including criminal conspiracy, breach of trust, and forgery. Satyam’s shares fell to 11.50 rupees on 10 January 2009, , their lowest level since March 1998. Last year they hit a high of 544 rupees. The Indian Government has stated that it may provide temporary direct or indirect liquidity support to the company.However the life of many engineers working for Satyam is questionable specially the new recruits. On 14 January 2009, Price Waterhouse, the Indian division of PricewaterhouseCoopers, announced that its reliance on potentially false information provided by the management of Satyam may have rendered its audit reports "inaccurate and unreliable". On 22 January 2009, CID told in court that the actual number of employees is only 40,000 and not 53000 as revealed earlier and that Mr Raju had been allegedly withdrawing INR 20 crore rupees every month for paying these 13000 unknown employees.
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