Audit and Assurance Service: Role of Management and Auditors in the Collapse of Satyam

This report analyzes the role of management and auditors in the collapse of Satyam, a large IT service company in India. It discusses the background of the case, the beginning of problems, unethical governance flaws, and the role of auditors. The report concludes with lessons learned from the financial scam caused by the Chairman of Satyam.

Running head: AUIDIT AND ASSURANCE SERVICE
Audit and Assurance Service
Name of the Student
Name of the University
Authors Note
Course ID

1AUIDIT AND ASSURANCE SERVICE
Table of Contents
Introduction:..................................................................................................................2
Purpose of statement by Mr Medcraft:.........................................................................2
Objective of Satyam Audit:...........................................................................................3
Extent of meeting the audit objective:..........................................................................3
Evaluation of Satyam Company Management and Role of Auditors:..........................4
Background to case:.................................................................................................4
Beginning of problems:.............................................................................................4
Role of management:...................................................................................................5
Unethical governance flaws:.....................................................................................5
The case of insider trading:.......................................................................................6
A charge of falsified accounting records and fake accounting:................................6
Lax board of Satyam:................................................................................................7
Role of auditors.............................................................................................................8
Fake performance of Audit:.......................................................................................8
Conclusion:...................................................................................................................9
Reference List:............................................................................................................10

2AUIDIT AND ASSURANCE SERVICE
Introduction:
Fraud is regarded as the worldwide phenomenon that creates an impact on all
the sectors of the economy, fraud includes wide range of illegal practices and acts
that consists of the deception of misrepresentation. In other words, mistakes cannot
be termed as fraud (Vasarhelyi and Halper 2018). Fraud refers to the group of
unscrupulous people that manipulates or influence the activities of the business with
the purpose of making money. The current report is based on the analysis of the role
of management and auditors in true presentation of books of accounts. The report
will placing emphasis on the collapse of Satyam from the failure of auditors and
management of the company.
Purpose of statement by Mr Medcraft:
Mr Medcraft was the formed charman of Australian Securities and Exchange
Commission and is largely concerned regarding the roles and responsibilities of the
auditors at the time of performing auditing functions. Mr Medcraft has issued
cautioned that another auditing scandal may be at the horizon if the auditors does
not assure the true and fair view of the financial statement (William, Glover and
Prawitt 2016). Mr Medcraft has expressed his uncertainties relating to the fair
presentation of financial statements. As per Mr Medcraft there numerous instances
where major auditing firms such as KPMG, Deloitte, PWC and E&Y have failed to
offer sufficient amount of assurance that the books of accounts are free from any
material misstatement. Mr Medcraft has identified a lack of professional scepticism
and usually lacked challenges.
Over the span of six years Mr Medcraft has performed several in depth
intensity surveillance with more than hardens have been investigated and

3AUIDIT AND ASSURANCE SERVICE
imprisoned close to 80 individuals. According to Mr Medcraft there is a need for
higher level of tougher actions against the corporate frauds rather than simply
imposing civil penalties (Wright 2017). A statement made by Mr Medcraft there is a
serious lack of professional scepticism among the auditor’s roles and responsibilities.
According to Mr Medcraft Australian organizations require impose severe auditing
principles as this would help in avoiding the stains on the auditing profession.
Objective of Satyam Audit:
Audit forms the vital aspect of business and Satyam is not exempted from
this. The audit report consists of the auditor’s opinion that is associated to the
financial report. The organizations are forced to adhere with the required auditing
standards in the preparation of audit report. The chief objective of performing
Satyam audit is to provide the financial report users with the required information
necessary to understand business performance.
There were several forms of users of financial report for Satyam. These
usually consists of the auditors, customers, shareholders, lenders and creditors (Roy
2015). The auditor’s report of PWC asserted that Satyam books of accounts are free
from material misstatement and error however in actual scenario the auditors
reported differed drastically. Ever since the year 2000, PWC was the principal
auditor of Satyam and provided a falsified financial statement. PWC was ethically
successful in performing the audit accountabilities in relation to required standards of
audit.
Extent of meeting the audit objective:
The opinion of auditors and vital audit subject was completely different from
the actual state of affairs presented in the financial report. Findings suggest that

4AUIDIT AND ASSURANCE SERVICE
PWC contributed in the decline of Satyam as they significantly contributed to the
fraudulent activities (Soh and Martinov-Bennie 2015). The US SEC handed the
Satyam with a fine of $ 6million and also slapped ban from conducting audit for a
period of two years since PWC was a failure in adhering to the necessary auditing
standards.
The auditors of PWC ignored the aspects of materiality misstatement and
failed to reflect a correct view of the financial report of Satyam (Tassadaq and Malik
2015). With cases of falsified bookkeeping of information and the case of insider
trading were held immensely accountable in the decline of Satyam.
Evaluation of Satyam Company Management and Role of Auditors:
Background to case:
Satyam was the large and highly successful IT service company in India. The
company formed in 1987 and expanded rapidly. Satyam provided higher amount of
IT and business process outsources that spanned through numerous sectors (Pai
and Tolleson 2015). Satyam (India) was also awarded with the global excellence in
the areas of corporate accountability and was projected to be the fasted growing
company in India.
Beginning of problems:
Problems began in Satyam when the chairman decided to acquire the Maytas
companies for a bid of $1.6 billion. Several investors expressed their discontent and
forcing the company to withdraw its bid in 12 hours (Pandit, Conway and Baker
2017). The share prices fell significantly by 55% and bought forward questions of
weak corporate governance. The price of shares fell further by 14% and finally the
chairman admitted of committing fraud of $1.6 billion. PWC being the main auditors

5AUIDIT AND ASSURANCE SERVICE
of Satyam confessed finally by stating that the audit report were false and was
prepared on incorrect information given by Satyam management.
Role of management:
The board of directors for Satyam comprised of nine members with five of the
board members were independent. While filing with SEC it was revealed by Satyam
that it does not have the financial expert on the board. This led to the growing
concerns regarding lack of board of director’s role in the lack of independence
(Rezaee et al. 2018). The failed transaction of purchasing Maytas Properties and
Maytas ltd gave the investors with the impression that there is not active monitoring
of Satyam activities. The board mus have flagged some of the activities which the
auditors of PWC missed. The failure of board of directors provide that they should
have expressed the concerned upon the knowledge that the chairman has
decreased the holdings of Satyam to a significant extent over the span of three years
that resulted in the disclosure of fraud.
Unethical governance flaws:
The founder of Satyam in 2009 revealed a shocking truth that the founder has
been for a long period of time concealing the fraud of $1.47 billion on the balance
sheet of Satyam. The clarifying of act ahead the confession discloses the deceitful
and unprincipled activities that remain disguised for quite a few years. There was no
form of obvious or understood code of ethics to bind the corporate culture of Satyam
(Gattiker 2013). Flaws in governance can be noticed as the management of the
company commonly engaged in bribery activities, exchange of favours inside and
outside of companies that seems to have occurred at a frequent level. The World
Bank in its disclosure publically criticized the unethical culture of work and

6AUIDIT AND ASSURANCE SERVICE
announced the imposition of charges of stealing vital information and bribery of staff.
The moral ethics in the business were comparatively poor.
The CEO and the CFO of the have been charged with driving ahead their self-
interest rather than the business’s interest (Griffith 2015). Prior to the confession of
fraud the CEO and CFO were vigorously selling a part of their shares in the
business.
The case of insider trading:
Investigations performed by the central authorities suggest that the promoters
have engaged in the foulest form of insider trading of the Satyam shares so that they
can raise money to construct a large land of bank. The funds that were collected by
the chairman were used to purchase the land in the name of 330 companies
(Groomer and Murthy 2018). The promoters based on the inflated books of accounts
impersonated a healthy monetary position of the corporation in market. During this
time the promoters of Satyam maintained the purpose of divesting their
shareholdings at regular intermissions. Therefore, the promoters not only
manipulated the prices of shares for their private gains but also duped the investors
and shareholders.
A charge of falsified accounting records and fake accounting:
As per the findings the balance sheet of Satyam carried an accrued interest
that was never existent. The figures of accrued interest were falsely recorded in the
balance sheet to supress the revelation of non-presence of fixed deposits based on
the inflated profits (Klassen, Lisowsky and Mescall 2015). Evidences from the
investigations suggest that the corporation had purposely paid higher amount of tax
for the non-existent of accumulated interest which constituted a considerable amount

7AUIDIT AND ASSURANCE SERVICE
of loss for the company. As revealed Satyam has falsely created an impression of
higher fixed deposits which in actual was relatively low.
The SFIO report suggest that fabrication of deposits of current account was
largely prepared through numerous banks in India. The promoters on constant basis
generated the monthly statement of bank to feed the bankbooks (Leung et al. 2014).
Additionally, Satyam management falsely generated validations of the bank balance
on the conclusion of every quarter against the non-existing fixed deposits and
interest thereon. Perhaps the evidences suggest that Satyam stated higher sum of
current account balances for numerous years.
Lax board of Satyam:
The board of Satyam contained the composition of friendly chairman that
failed to raise query regarding the administration policy of Satyam and usage of
leverage in re-forming their business. The lax board of Satyam were tremendously
sluggish to react when it was very much evident that the corporation was under
financial distress (Media 2012). The board of directors of Satyam were ignorant or
failure in reacting upon learning about the critical facts associated to wrong financial
practices prior to the ultimate collapse of the company.
In a bid to acquire the Maytas companies the price of the Satyam market
share increased intensely against the tender however the share values declined by
55% raising concerns relating to the management and corporate governance
(Messier, Glover and Prawitt 2015). This led the independent directors to come into
the action by withdrawing from the board. The unconvinced role of the Satyam
independent directors resulted in the failure of corporate governance that hindered
the objectivity of the oversight functions of Satyam.

8AUIDIT AND ASSURANCE SERVICE

9AUIDIT AND ASSURANCE SERVICE
Role of auditors
The deceitful role of PWC led to the failure of Satyam is in accordance with
the act by Arthur Anderson in the fall of Enron. The chairman admitted that they have
fudged the books of accounts for numerous years that ultimately puts statutory
auditors role in doubt (Groomer and Murthy 2018). The reports of SFIO specified that
the statutory auditors as a replacement for using the autonomous testing apparatus
employed the Satyam instruments for investigation and ultimately jeopardized the
standards for financial reporting. The global head of internal audit stated that the
resources of internal audit was not corresponding to the size of the organization.
PWC on regular basis disregarded the fact and qualified the company. The
auditors of PWC neither checked the invoices nor did they paid sufficient attention in
the verification of sundry debtors which was overstated (Leung et al. 2014). The
statutory auditors failed to discharge their duty when it can to verify the balances of
cash and bank of both the current and fixed deposits. The common public were
reliant for correct information on statutory auditors report but they not only failure in
their occupation but also played a poor role in preparing a fraud audit report to
perpetrate fudged, manipulated and cooked books of accounts.
Fake performance of Audit:
Numerous factors contributed to fraud of Satyam (India) with the auditors
being held as the prime contributors. The international auditing firms were auditing
the books of accounts of Satyam for several years until the frauds were discovered.
Numerous commentators have lashed their criticism on PWC for being failure in
detecting the fraud (Griffith 2015). It is worth mentioning that the auditors have been
failure in independently verifying the fraud with large sum of money in bank as

10AUIDIT AND ASSURANCE SERVICE
deposits. The fraudulent activities of auditors continued for number of years and
consisted of manipulation of balance sheet and income statement.
Conclusion:
On a conclusive note a lesson has been learned from the financial scam
caused by the Chairman of Satyam. It is widely known that the corporate
organizations of all the size around the world are susceptible to frauds and
accounting scandals. Unquestionably, numerous types of frauds and scams reduces
the creditability of the financial information that is used by the investors in making
decisions. Perhaps no other financial fraud has greater negative impact on the
profession of auditing and accounting than Enron and more recently India’s Satyam.
Mr. G. Medcraft in its statement has rightly asserted that auditor’s role lacks
responsibilities and requires severe implementation of measures.

11AUIDIT AND ASSURANCE SERVICE
Reference List:
Gattiker, U. (2013). Social Media Audit. New York, NY: Springer.
Griffith, E.E., 2015. How Do Auditors Use Valuation Specialists When Auditing Fair
Values?. Unpublished paper, The University of Wisconsin-Madison.
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.
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.
Media, B. (2012). ACCA F8 - Audit and Assurance (GBR) - Study Text 2013.
London: BPP Learning Media.
Messier, W.F., Glover, S.M. and Prawitt, D.F., 2015. Auditing & Assurance Services:
A Systematic Approach. Qing hua da xue chu ban she.
Pai, K. and Tolleson, T.D., 2015. India's Satyam Scandal: Evidence the Too Large to
Indict Mindset of Accounting Regulators Is a Global Phenomenon. Review of
Business & Finance Studies, 6(2), p.35.
Pandit, G.M., Conway, G.M. and Baker, C.R., 2017. Audit committee requirements in
six major capital markets: How far have we come?. International Journal of
Disclosure and Governance, 14(1), pp.30-61.

12AUIDIT AND ASSURANCE SERVICE
Rezaee, Z., Sharbatoghlie, A., Elam, R. and McMickle, P.L., 2018. Continuous
auditing: Building automated auditing capability. In Continuous Auditing: Theory and
Application (pp. 169-190). Emerald Publishing Limited.
Roy, M.N., 2015. Statutory Auditors' Independence in Corporate Accounting
Scandals: A Case Study of Satyam Computer Services Ltd. Prabandhan: Indian
Journal of Management, 8(2), pp.35-48.
Soh, D.S. and Martinov-Bennie, N., 2015. Internal auditors’ perceptions of their role
in environmental, social and governance assurance and consulting. Managerial
Auditing Journal, 30(1), pp.80-111.
Tassadaq, F. and Malik, Q.A., 2015. Creative Accounting & Financial Reporting:
Model Development & Empirical Testing. International Journal of Economics and
Financial Issues, 5(2).
Vasarhelyi, M.A. and Halper, F.B., 2018. The continuous audit of online systems.
In Continuous Auditing: Theory and Application (pp. 87-104). Emerald Publishing
Limited.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A
systematic approach. McGraw-Hill Education.
Wright, C., 2017. Fundamentals of Assurance for Lean Projects: An overview for
auditors and project teams.