Roles and Responsibilities of Auditors and Management: A Case Study of Satyam Computer

This report analyzes and evaluates the ethical roles of auditors and management using the case study of Satyam Computer. It discusses the responsibilities of auditors and management, the purpose and audit report of Satyam Computer, and the extent of compliance with audit purposes. The report concludes that it is highly required for the management and auditors of the companies to do their jobs by complying with the required professional standards and principles.

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

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

2AUDITING
Introduction
The process of Auditing can be described as the process to conduct an
inspection on the financial statements of the business organizations in order to make
sure that they are free from material misstatements. Thus, the main aim of the audit
profession is to know the users of the financial information about the correct financial
position of the business entities through their audit opinion (William Jr, Glover and
Prawitt 2016). Before putting trust on the financial information of the companies, the
users of financial information like investors, lenders, creditors are others consider the
audit report of those companies. Hence, in order to provide an unbiased audit opinion,
the auditors of the companies are required to comply with the required auditing ethical
standards (Leung et al. 2014). This report takes an honest attempt to conduct an
analysis and evaluation on the ethical roles of the auditors as well as the management
of the companies. There are many corporate collapses all over the world caused by the
unethical professional practices of the management and auditors. The collapse of
Satyam Computer in India in the year 2008 can be presented as one of those major
corporate collapsed caused by both the management and auditor’s fault. Thus, for the
report, the case of Satyam Computer is taken into consideration.
Answer to Question 1
Reason for the Statement
The provided article shows the deep concern of Mr. G. Medcraft on the roles and
responsibilities of the auditors while conducting the audit operations (abc.net.au 2018).

3AUDITING
Mr. G. Medcraft is the former chairman of Australian Securities and Exchange
Commission (ASIC). The provided article shows a hint of warning for the accounting
governing committees of Australia from the side of Mr. G. Medcraft on the degrading
roles of the auditors (abc.net.au 2018). He has been found to say that the users of
financial statements can no longer put the trust and faith on the audited financial
information due to the fact that the auditors are performing their roles and
responsibilities as required (abc.net.au 2018). In this context, it needs to be mentioned
that the auditors have the obligation to perform certain roles and responsibilities. The
primary role or function of the auditors is to plan and perform the audit operations in
order to get obtain sufficient evidence on the fact that the financial statements of the
companies are free from material misstatements.
The next responsibility lies in determining the fact that whether there is any fraud
or error responsible for the material misstatements, if any. Most importantly, while
performing the audit operations, the obligation on the auditors is to fully comply with the
ethical standards and principles of audit profession as provided in Accounting
Professional & Ethical Standards Board Limited, APES 110 (apesb.org.au 2018).
However, in the provided article, Mr. G. Medcraft has been spotted by mentioning that
there is a lack of professionalism and professional scepticism from the auditors
(abc.net.au 2018). Thus, his recommendation towards the big four audit firm is to uplift
the audit standard in case they want to avoid any Enron type of case in Australia
(abc.net.au 2018). Thus, based on the above discussion, one fact is clear that the users
of financial information will not be able to put their trust and faith in the financial
information if they auditors fail to perform their roles and responsibilities ethically.

4AUDITING
Purpose and Audit Report of Satyam Computer
It needs to be mentioned that some major purposes work behind the preparation
of audit report and the same purpose are also applicable in case of Satyam Compute.
Audit reports can be considered as a written opinion of the auditors on the financial
situation of the business entities (Wealleans 2017). In case of Satyam Compute, the
desired purpose of the auditors, Price Waterhouse cooper (PwC), was to provide the
users with the true financial information for helping them in various decision-making
process. The major internal and external users of the financial information of Satyam
Compute were employees, customers, investors, banks, lenders, creditors, suppliers,
and government and taxation authority (Groomer and Murthy 2018). The provided audit
report by PwC on the financial position of Satyam Compute did not show any presence
of material misstatements caused by errors and fraud; and the auditors provide
unqualified audit opinion. In that audit report, the auditors of PwC mentioned that fact
that Satyam Compute complied with all required accounting standards and principles
while preparing their financial statements. As per the audit report, PwC also complied
with all the required auditing and ethical standards for conducting the audit operation of
Satyam Compute (Martin, Sanders and Scalan 2014).
Extent of Compliance with the Audit Purposes
From the above discussion, it can be seen that there was not any material
misstatements in the financial reports of Satyam Compute and PwC complied with all
the required auditing standards. However, the situation was different in reality from what
the auditors mentioned (Gurov and Milgunova 2016). Later, it was found that the
auditors of PwC did massive manipulation in the major accounts of Satyam Compute by

5AUDITING
involving with the management of the company. In the presence of this reason, PwC
had to pay a fine of $6 million to United States Securities and Exchange Commission. It
was also fund that the auditors of PwC did not comply with the required standards and
principles of auditing; and, in the presence of this factor, the Security Exchange Board
of India (SEBI) put a halt in the audit operations of PwC
(cfo.economictimes.indiatimes.com 2018). Thus, the above discussion clears the fact
that there was illegal relationship between the management of Satyam Compute and
the auditors of PwC in the presence of their personal benefits (Stefan-Duicu and Stefan-
Duicu 2015). For this reason, the auditors of PwC majorly overlooked the presence of
material misstatements in the financial statements of Satyam Compute. In this context,
it needs to be mentioned that the auditors must follow the ethical principles of AASB
110 while conducting the audit operations (apesb.org.au 2018). Due to non-compliance
with the required auditing standards and principles, the audit opinion of PwC did not
serve the purpose for the users of financial information.
Answer to Question 2
Management’s Role
In the process of auditing, the management of the business entities have role to
play apart from the auditors. It is the major responsibility of the management of the
business entities to prepare and present the required financial statements and to
comply with the accounting standards for this purpose. They also need to provide their
opinion on the prepared financial statements. Another major responsibility of the
management of the companies lies in establishing and marinating effective internal

6AUDITING
control for reducing the possibility of material misstatements due to fraud and errors.
Thus, the management of Satyam Compute was supposed to follow these roles and
responsibilities. However, in case of Satyam Compute, major misconducts can be
noticed from the side of the management as there are many proofs of the involvement
of the management of Satyam Compute with various illegal activities. Some of these
major misconducts are discussed below:
Insider Trading: The investigation result of Crime Investigation Department (CID)
shows the involvement of the management of Satyam Compute in the actions of insider
trading of the company share in order to purchase lands. The owner of the company
used the fake name of 330 companies and 30 individuals in order to raise money for
purchasing land and caught by the authority in the process of insider trading (Bhasin
2015).
False Book and Incorrect Accounting System: The financial statements of Satyam
Computer included different financial elements having not existence. For example, the
balance sheet of the company as on 7.9.2007 included Rs. 376 crore of non-existent
accrued interest. Moreover, the management of the company was found guilty for
manipulating the current accounts deposits (Bhasin 2016.).
Unethical Conduct: The main motive of B. Ramanlinga Raju, the owner of Satyam
Compute, was to earn excessive amount of money in illegal ways like the non-payment
of taxes, adoption of incorrect accounting procedures and many others. Apart from this,
lack of positive corporate culture was there in the company. Satyam Compute was

7AUDITING
accused for different illegal actions like bribery, exchange of favour, corruption and
many others (Bhasin 2016).
Ineffective Role of Directors: Lack of objectivity and professionalism was there in the
attitudes and roles of the independent directors of Satyam Computer. For this reason,
they failed in increasing the overall effectiveness of the business of Satyam Computer
(Cheng, Padgett and Parekh 2013).
Insufficient Board: It needs to be mentioned that the owner of Satyam Computer was
responsible for the selection of the board of directors of the company and for this
reason; he selected chairman-friendly directors in the board so that they can be
beneficial for personal interests. These directors overlooked the wrong strategy of the
management of the company.
Thus, from the above discussion, it can be observed that there was lack of
ethics, integrity and professionalism in the roles and functions of the management team
of Satyam Computer. In addition, the less important role of the directors failed to save
the business from this large collapse.
Auditors Role
The earlier discussion sheds light on the fact that the main responsibility of the
auditors lies in the examination of the financial statements of the companies in order to
save them from material misstatements. This particular role leads to the collection of
sufficient evidence by the auditors in order to make sure that there are not any material
misstatements. Most importantly, the auditors need to follow the standards and
principles of audit ethics (Klassen, Lisowsky and Mescall 2015).

8AUDITING
However, exception of these conditions can be seen in case of Satyam
Computer. The role of auditors is to inform the shareholders and other authorise related
to the adverse financial condition of the companies as auditors represent them.
However, in case of Satyam Computer, the auditors of PwC did not inform the
shareholders of the company about the information delivered by the whistleblowers as
they remain silent for their personal benefits. Thus, PwC violated the principles of
Objectivity as per APES 110, section 120 (apesb.org.au 2018). This is one of the
reasons why the role of PwC in Satyam Computer is same as the role of Arthur
Anderson in Enron collapse. Based on the whole situation, the auditors are needed to
form their own internal control testing mechanism (Nicolaescu 2013). However, in case
of Satyam Computer, the auditors of PwC adopted the provided mechanism of the
management of the company for internal control testing and compromised the audit
professionalism. The auditors encountered major loopholes in the internal control
system of Satyam Computer; but, for their own financial benefits, they did not disclose
this fact to the shareholders. Thus, as per APES 110, Section 130, the auditors of PwC
compromised the principles of Professional Competence and Due Care
(apesb.org.au 2018).
There was not any attempt by the auditors of Satyam Computer for the checking
of different invoices of the business. For example, it can be mentioned that they did not
crosscheck the sundry debtor balances. The implemented audit procedures of PwC
failed in the inception of different financial items like balance of the cash book, balance
of the current accounts, values of fixed deposits and others (Klassen, Lisowsky and
Mescall 2015). The auditors simply considered the management’s developed accounts

9AUDITING
instead of physical verification. With these all actions, the auditors of PwC violated the
principle of Professional Behaviour as per APES 110, Section 150 (apesb.org.au
2018).
Conclusion
From the above whole discussion, one aspect is clear that both the auditors and
the management of Satyam Computer did not fulfil their desired roles and
responsibilities. It can be observed that the management of Satyam Computer was
involved in different types of illegal activities like insider trading, inaccurate accounting
process and others that affected the integrity and professionalism of the management.
At the same time, it can also be observed that the auditors of PwC did not do their
required audit job for their personal benefits. They did shake hand with the management
of the company for the desire of illegal gains and all the effects of these management
and auditing misconducts reflected through the collapse of Satyam Computer. Thus,
based on the whole discussion, it can be concluded that it is highly required for the
management and auditors of the companies to do their jobs by complying with the
required professional standards and principles.

10AUDITING
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 9 Apr. 2018].
Apesb.org.au. (2018). APES 110 Code of Ethics for Professional Accountants. [online]
Available at:
https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed
9 Apr. 2018].
Bhasin, M.L., 2015. Corporate accounting fraud: A case study of Satyam Computers
Limited.
Bhasin, M.L., 2016. Creative Accounting Practices at Satyam Computers Limited: A
Case Study of India’s Enron. International Journal of Business and Social
Research, 6(6), pp.24-48.
Bhasin, M.L., 2016. Fraudulent Financial Reporting Practices: Case Study of Satyam
Computer Limited. The Journal of Economics, Marketing and Management, 4(3), pp.12-
24.
Cheng, S.S., Padgett, D.R.G. and Parekh, V., 2013. Crisis Response across Borders: A
Comparative Study of Two Companies' Image Repair Discourse. International Journal
of Business and Social Science, 4(5).

11AUDITING
ETCFO.com. (2018). PW can carry out existing clients' audit work till March 2019: SAT -
ETCFO. [online] Available at: https://cfo.economictimes.indiatimes.com/news/pw-can-
carry-out-existing-clients-audit-work-till-march-2019-sat/62934152 [Accessed 9 Apr.
2018].
Groomer, S.M. and Murthy, U.S., 2018. Continuous auditing of database applications:
An embedded audit module approach. In Continuous Auditing: Theory and
Application (pp. 105-124). Emerald Publishing Limited.
Gurov, V. and Milgunova, I., 2016. Improving of assessment methodology of the audited
organizations performance at the stage of audit planning. Економічний часопис-ХХІ,
(157), pp.115-118.
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
Review, 91(1), pp.179-205.
Leung, P., Coram, P., Cooper, B.J. and Richardson, P., 2014. Modern Auditing and
Assurance Services 6e. Wiley.
Martin, K., Sanders, E. and Scalan, G., 2014. The potential impact of COSO internal
control integrated framework revision on internal audit structured SOX work
programs. Research in Accounting Regulation, 26(1), pp.110-117.
Nicolaescu, E., 2013. INTERNAL AUDITORS'ROLE IN DETECTING
FRAUD. Contemporary Readings in Law and Social Justice, 5(1), p.106.

12AUDITING
Stefan-Duicu, A. and Stefan-Duicu, V.M., 2015. Development and regulatory factor of
professional bodies in the audit activity. Procedia Economics and Finance, 26, pp.268-
271.
Wealleans, D., 2017. The quality audit for ISO 9001: 2000: a practical guide. Gower.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A
systematic approach. McGraw-Hill Education.

13AUDITING