Auditing: Roles and Responsibilities of Auditors and Management - Satyam Computer Case Study

This report analyses the ethical behavioural aspects of the auditors and the management. For the purpose of this report, the famous case of Satyam Computer Collapse is considered. The collapse of Satyam Computer is famous for the failure of both auditors and the management of the company. The report evaluates the purpose of auditing by relating the statement of G. Medcraft. The next part of the report evaluates the role of management and auditors in the collapse of Satyam Computer.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Introduction........................................................................................................................2
Answer to Question 1........................................................................................................2
Reason for Making the Statement.................................................................................2
Purpose and Audit Report of Satyam Computer...........................................................4
Extent of satisfying the Audit Purposes.........................................................................5
Answer to Question 2........................................................................................................5
Role of Management......................................................................................................5
Role of Auditors..............................................................................................................7
Conclusion.........................................................................................................................9
References.......................................................................................................................10

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Introduction
In the business organizations of twenty-first centuries, Auditing is considered as
one of the major success factors. Auditing refers to the process of inspecting the
financial statements of the companies in order to make sure that they are free from
material missstements (William Jr, Glover and Prawitt 2016). The report of the auditors
is a useful tool for determining the extent to which financial information of the
companies convey the financial position of the companies. Based on the absurdity of
the auditors, the users of financial statements put trust on the financial information
published in different kinds of financial statements (Leung et al. 2014). For this reason,
the auditors are required to comply with all the required ethical principles of audit
standard for the smooth conduct of the audit operations. The main aim of this report is
to analyse the ethical behavioural aspects of the auditors and the management. For the
purpose of this report, the famous case of Satyam Computer Collapse is considered.
The collapse of Satyam Computer is famous for the failure of both auditors and the
management of the company. The first part of the report evaluates the purpose of
auditing by relating the statement of G. Medcraft. The next art of the report evaluates
the role of management and auditors in the collapse of Satyam Computer.
Answer to Question 1
Reason for Making the Statement
Mr. G. Medcraft is the former chainman of Australian Securities and Exchange
Commission (ASIC) and he is deeply concerned about the roles and responsibilities of

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the auditors while perming the audit operations (abc.net.au 2018). From the provide
article, it can be observed that G. Medcraft is giving warning to the Australian
accounting authority related to the roles and responsibilities of the auditors. In this
article, he has also shown his concern related to the dependency and trust on the
financial information. In this context, it is required to be mentioned that there are some
specific responsibilities and roles of the auditors (abc.net.au 2018). The main
responsibility of the auditors involves in the planning and performing the audit
operations in order to obtain sufficient evidence for getting assurance about the financial
statements of the companies are free from material missstements (Knechel and Salterio
2016). In case of the presence of material missstements, the auditors are required to
determine that whether they have been occurred from errors or fraud (Sanderson 2013).
At the time of performing the audit operations, it is required for the auditors to comply
with the audit ethical principles for the generation of influence free or biased free audit
opinion. However, in the provided article, G. Medcraft has mentioned that there is a lack
of professionalism and professional scepticism in the responsibilities of the auditors. He
has also mentioned the fact that the big four audit companies of Australia are required
to bring improvements in the audit standards for avoiding any Enron kind of situation in
Australia (Christensen, Glover and Wood 2013). Based on the above discussion, it
needs to be mentioned that in case the auditors do not perform their roles and
responsibilities, the community people will not be able to put trust on the financial
information of the companies (abc.net.au 2018). Thus, in the presence of all these
reasons, G. Medcraft made this statement.

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Purpose and Audit Report of Satyam Computer
It needs to be mentioned that there are some major purposes of audit report in
the business organizations and there is not an exception of this fact in case of Satyam
Computer. In this context, it needs to be mentioned that audit report is the written
opinion of the auditors related to the financial statements of the companies. For this
reason, the companies are required to follow the specific form for the preparation of
audit report (Robert Knechel, Vanstraelen and Zerni 2015). In case of Satyam
Computer, the main purpose of the company for the preparation of the audit report is to
provides the users with the correct financial information related to the financial position
of the company. Satyam Computer ha different users of the financial statements like the
investors, employees, customers, lenders, creditors, banks, taxation authorities and
others; and all these users use the financial information for the purpose of different
kinds of decision-making process. In the issued audit report of Satyam Computer, it was
observed that there was not any kind of fraud and errors in the financial statements
(Lennox, Schmidt and Thompson 2017). Thus, it implies that the financial statements of
Satyam Computer were free from any kind of material misstatements. Apart from this, in
the audit report, the auditors of Satyam Computer, Price Waterhouse Cooper (PWC)
stated that all the financial statements of Satyam Computer were developed with
accordance with the required standards and regulations of financial reporting. Apart
from thus, from the audit report, PWC was found to be stated that they did conduct the
audit operation by complying with the required audit standards.

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Extent of satisfying the Audit Purposes
In actual, the situation was totally different from what the auditors mentioned in
the audit report of Satyam Computer. It was found the auditors of Satyam Computer;
PWC was majorly involved with the company in the manipulation of the financial
statements of the company. For this reason, the United States Securities and Exchange
Commission find PWC with an amount of $6 million (Lai 2013). Apart from this, US
SEC, and Securities and Exchange Board of India (SEBI) barred the audit operations of
PWC by stating the fact that auditors did not comply with the standards and principles of
audit profession. Thus, from the above discussion, it can be observed that the auditors
of Satyam Computer did not comply with the necessary standards and principles of
audit profession while conducting the audit operations. Due to this, the auditors
overlooked the major financial frauds of the company in the presence of major financial
influence (Gayno et al. 2016). Thus, the audited financial statements of Satyam
Computer did not reflect the major material missstements. For this reason, financial
statements of Satyam Computer did not reflect the true financial conduction of the
company. Hence, based on the whole discussion, it can be observed that the audit
report of Satyam Computer did not serve the desired purpose of audit reports.
Answer to Question 2
Role of Management
It needs to be mentioned that the managements of the companies have some
particular role to play in auditing and in other aspects of the business operations. The
main responsibility of the management is the preparation of financial statements after

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complying with the required accounting standards and principles. They are also required
to express an opinion on the financial statements. The management is largely
responsible for the establishment and maintenance of effective internal control in order
to reduce the possibilities of any kind of fraud activities or trading. All these aspects are
also applicable for the management of Satyam Computer (Badolato, Donelson and Ege
2014).
However, the situation is different in case of Satyam Computer as the
management of the company was noticed not fulfilling the desired roles and
responsibilities. It can be observed that the management of Satyam Computer was
involved in different kinds of illegal activities. They are discussed below:
Unethical Conduct: It needs to be mentioned that the management head and founder
of Satyam Computer, B. Ramalinga Raju. His main aim was to earn money with the
help of different illegal activities like not paying tax, false accounting books and others.
There was not any positive corporate culture for the management of Satyam Computer.
The management of the company was largely responsible for bribery, corruption,
exchange of favour and others (Welford 2016).
Insider Trading: From the investigation of Crime Investigation Department (CID) of the
State Police and Central agencies, the management of Satyam Computer was involved
in the process of insider trading of the shares of them in order to build a large land bank.
The management team of Satyam Computer used the raised money to buy lands in the
names of 330 companies and 30 individuals. This can be considered as a major
instance of insider trading (Helmreich and Merritt 2017).

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False Book and Wrong Accounting: It needs to be mentioned that the balance sheet
of Satyam Computer as on 7 September 2007 shoed accrued interest amounted Rs.
376 crore that did not have any resistance in actual. Apart from this, the management of
the company was also involved in the falsification of current account deposits (Welford
2016).
Insufficient Board: It was seen that the board of directors of Satyam Computer was
composed of chairman-friendly directors and they literally failed to question the strategy
of the senior management. In addition, they were also very slow to act (Helmreich and
Merritt 2017).
Unconvinced Role of Independent Directors: There was lack of objectivity in the role
of the independent directors and the board failed to improve the effectiveness of the
company. Thus, based on the above discussion, it can be seen that the management of
the company failed to act ethically for the overall success of the company (Helmreich
and Merritt 2017).
Role of Auditors
As per the earlier discussion, the main responsibility of the auditors is to inspect
the financial statements of the companies in order to be ensured that they are free from
material misstatements. For this reason, they are required to obtain sufficient financial
information and they must comply with the principles and standards of audit ethics
(Klassen, Lisowsky and Mescall 2015).
However, different situation can be observed from the audit operations of Satyam
Computer. In case of Satyam Computer, it was required for the auditors to inform the

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shareholders and the regulatory authority about the information supplied by the
whistleblower. However, the auditors did choose to remain silent due to have financial
interests in the property of Satyam Computer. It needs to be mentioned that PwC
played a fraudulent role in the audit operations and the role of PwC in Satyam
Computer matches the role of Arthur Anderson in the collapse of Enron (Broberg 2013).
It is the responsibility of the auditors to develop their own independent testing
mechanism and not to consider the reporting mechanism of the client. However, in case
of Satyam Computer, it can be observed that PwC used the provided tool by Satyam
Computer that lead to the compromise of auditing standards. While doing the audit
operations of Satyam Computer, PwC came across that fact that there was deficiencies
in the internal control process of the company that can contributed to fraud risk (Broberg
2013).
In spite f knowing all these facts, the auditors did not report this fact to the
shareholders. The auditors of PwC did not take any attempt to check the invoice of the
company. In addition, they did not even inspect the balance of sundry debtors. It can
also be seen that the statutory audit process of Satyam Computer failed in the
verification of cash and book balance, current account and fixed deposits (Jibrin,
Blessing and Danjuma 2014). It is required for the auditors to conduct the physical
verification of various financial assets rather than simply relying on the books prepared
by the company. However, in case of Satyam Computer, it can be observed that the
auditors of PwC did not do any physical verification of the assets (Broberg 2013). Thus,
based on the above discussion, it can be observed that the auditors of Satyam
Computer did not fulfil their roles in Satyam Computer.

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Conclusion
From the above discussion, it can be observed that Mr. G. Medcraft made the
provide statement due to the lack in the roles and responsibilities of the auditors. It can
be seen from the discussion that the auditor of Satyam Computer, PwC did not mention
the material missstements in the financial statements of Satyam Computer. However, in
actual, the auditors did not show the correct financial situation of the company as there
was the presence of major material missstements. In addition, it can also be seen that
the management of Satyam Computer failed in their major management activities. The
management of the company of Satyam Computer involved in various illegal activities
like unethical conduct, insider trading, falsification in financial accounts and many
others. Apart from this, it can also be seen that the auditors of Satyam Computer failed
in their roles and resomnsbilty.

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References
ABC News. (2017). Poor auditing could be 'canary in the coal mine' for financial crisis:
ASIC. [online] Available at: http://www.abc.net.au/news/2017-11-03/asic-boss-
concerned-over-poor-auditing/9114490 [Accessed 7 Apr. 2018].
Badolato, P.G., Donelson, D.C. and Ege, M., 2014. Audit committee financial expertise
and earnings management: The role of status. Journal of Accounting and
Economics, 58(2-3), pp.208-230.
Broberg, P., 2013. What do auditors do?. Mercury Magazine, 5, pp.102-107.
Christensen, B.E., Glover, S.M. and Wood, D.A., 2013. Extreme estimation uncertainty
and audit assurance. Current Issues in Auditing, 7(1), pp.P36-P42.
Gaynor, L.M., Kelton, A.S., Mercer, M. and Yohn, T.L., 2016. Understanding the relation
between financial reporting quality and audit quality. Auditing: A Journal of Practice &
Theory, 35(4), pp.1-22.
Helmreich, R.L. and Merritt, A.C., 2017, November. 11 Safety and error management:
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Jibrin, M.S., Blessing, S.E. and Danjuma, I., 2014. The role of auditors in the recent
Nigerian banking crisis. International Journal of Academic Research in Business and
Social Sciences, 4(3), p.231

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Klassen, K.J., Lisowsky, P. and Mescall, D., 2015. The role of auditors, non-auditors,
and internal tax departments in corporate tax aggressiveness. The Accounting
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Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
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Leung, P., Coram, P., Cooper, B.J. and Richardson, P., 2014. Modern Auditing and
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Robert Knechel, W., Vanstraelen, A. and Zerni, M., 2015. Does the identity of
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Sanderson, I., 2013. Tools for IT governance assurance: using recent updates of
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Welford, R., 2016. Corporate environmental management 1: Systems and strategies.
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systematic approach. McGraw-Hill Education.

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