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Corporate Governance and Its Importance

Discuss about the Significance of Audit Committee Roles.

Corporate Governance is associated with endorsing the business fairness, clearness and accountability. The corporate governance denotes a set of structure, principles and process though which an organization is governed. The subject of corporate governance before two decades was considered to be an unidentified concept (Mishra and Malhotra 2016). The theory came into light in late 80s and in the early 90s when most of the nation’s corporate governance was surrounded by dishonourable practices and uncertain problems. The failures of Harris Scarfe, Bond Corporation and Satyam India have exposed the gaps in auditing that contributed to the downfall of these companies.

Fraud is considered as the global phenomenon that impacts all the continents all the sectors a nation. Fraud introduces extensive variety of illegal practices and unlawful acts encompassing worldwide dishonesty or falsification. Numerous failures have led to reformation procedure and introduces public accounting information. The purpose of this report is to determine the ethical behaviour of the auditor and the managers of Satyam (India). The report will be studying the downfall of Satyam (India) and would be highlighting the failures of management and audit.

Mr Medcraft is the retired Australian securities and Investment securities commissioner that have stressed on the poor auditing of the company accounts. Mr Medcraft have cautioned to not have another big auditing scandal by assuring that the financial statement must be free from material misstatement (Niemi et al. 2016). Mr Medcraft have expressed his uncertainties regarding the true presentation of financial information. According to Mr Medcraft statement a major financial crisis in the areas of audit could be on the horizon if the level of trust is not maintained in the financial statement. There are instances where the major auditing firms such as KPMG, PWC, Deloitte and EY have failed to provide reasonable amount of assurance that the books of accounts are free from material misstatement. Mr Medcraft has noticed that there was a lack of scepticism and commonly lacked challenges.

According to Mr Medcraft over the last six years has conducted number of high intensity surveillance with more than thousands have been investigated and imprisoned more than 80 people (Davies and Aston 2017). Mr Medcraft has stated that a tougher actions against the corporate criminals should be imposed along instead of imposing civil penalties.

In the statement made by Mr Medcraft there is a grave lack of professionalism and professional scepticism in the roles and responsibilities of the auditors. Mr Medcraft has stated that Australian companies are required to escape any form of major auditing scandals which can stain the profession of audit. 

Fraud: A Global Phenomenon

An important component of business is audit and Satyam cannot be considered an exception to this report. The audit report contains the auditor’s opinion that are related to financial report (Mohapatra, Graham and Nandialath 2015). As a result of this an organization is obligatory required to follow a certain set of standards of auditing and process in the preparation of audit report. The primary purpose of taking the audit report of Satyam is to offer the users of financial report with the required information relating to a business financial performance.

Numerous users of financial report for Satyam comprised of investors, auditors, customers, creditors and lenders. The users used the financial report to undertake different types of decision. The auditor’s report was a failure in observing any kind of fraud and error and asserted that the Satyam’s audit did not contain any material misstatement (Narayanaswamy, Raghunandan and Rama 2015). PWC was the chief auditor of Satyam since 2001 and incorrectly provided a false view of financial statements of Satyam Computers by adhering with the necessary auditing standards and financial reporting regulations. PWC has failed to ethically perform the auditing responsibilities in respect with the necessary auditing standards.

The key audit matters and auditor’s opinion that were presented in the financial reports of Satyam Computers were entirely different from that was presented. Evidences from the findings suggest that PWC in audit of Satyam (India) have contributed immensely in the fraudulent activity of the company (Niazi and Ali 2015). The fraudulent practices adopted by PWC handed them with a fine of $6 million by the US Securities and Exchange Commission. Both the US Securities and Exchange Commission and SEBI barred PWC for two years to conduct any form of audit as the company has failed to abide by the required auditing standards and process.

PWC in the audit of Satyam (India) failed to adhere with the auditing principles at the time of carrying out the audit process and grievously led to the fall of company. The auditors have overlooked the materiality misstatement that were present in financial statement (De Santis 2016). This failed in reflecting the true and fair view of the financial report of the organization. With false books of accounts and the case of insider trading have immeasurably contributed in the fall of Satyam (India).

Satyam Computer Service Ltd was regarded as one of the most highly successful company in the Indian IT service industry. The corporation was founded in 1987 and grew at a rapid pace as the global business (Eliot, 2016). The company delivered IT and business process outsources amenities that covered across numerous segments. Satyam (India) was awarded with the global excellence in corporate accountability and was estimated that the company would grow at the compound rate of 6.4%.

The Role of Auditors in Business Ethics

Problems in Satyam commenced during December 2008 when the Chairman introduced a surprised move to announce a bid of $1.6 billion for to Maytas companies. The chairman asserted that he wanted to employ the available amount of cash for investors benefit. The investors expressed their grievances and market forces forced the company to retreat inside the span of 12 hours. This resulted the share price to fall by 55% and ultimately raised concerned relating to the corporate governance of Satyam (Bagshaw, 2013). The share prices chop down more by 14% to the lowermost in the four-year span. The chairman of the Satyam (India) admitted about $1.6 billion fraud committed. Following the week of scandalous admission, PWC being the auditors of Satyam (India) ultimately confessed that the audit reports was incorrect and were prepared on the wrong financial report provided by the Satyam (India) management

The Satyam (India) board of directors comprised of nine members and five of the members of board were independent. During the SEC filing Satyam (India) revealed that it does not have financial expert in its board and management which further raised concerns that surrounded the lack of independence of the board of directors. Additionally the board of directors lacked knowledge regarding the fall in the holdings of Satyam (India) significantly over the period of three years resulting in the disclosure of fraud (Arens et al. 2016). The management were accountable for establishment and maintenance of effective control relating to the probabilities of any kind of fraud in trading.

The unfolding of the scam following the confession by chairman highlighted fraudulent and unethical character. Concerning the corporate culture of Satyam (India) there was neither any clear nor any implied code of ethics. Widespread evidence of bribery, fraud and exchange of favours both indoor and outdoor of the business were apparent on frequent basis (Bell, Causholli, and Knechel 2015). The World Bank in a public statement criticized Satyam (India) for its unethical culture of work and imposed the charges relating to theft of data together with bribing of workforce. Satyam (India) was banned from conducting any business for a span of eight years with ethical standards of the company being very poor.

Evidences from the investigation report suggest that promoters of the Satyam (India) have indulged in terrible form of insider trading of the company’s share for creating a large pool of bank (Bhasin 2016). The funds that were derived from shares were used to purchase the lands in the family members name and all the members of the company were held equally responsible for offloading their shares to the purchase lands. Through the inflated books of accounts, the company falsely posted a strong financial position in the market. During this time, the promoters firmly held the objective of offloading the shares on constant intervals. The promoters not only manipulated the values of shares to derive individual gains but also cheated the shareholders and financiers.

Satyam (India): An Overview

The balance sheet of the Satyam (India) carried an accrued interest however in reality that were non-existent. The numbers of accrued interest were recorded in the balance sheet to supress the discovery of such non-presence fixed deposits on the account of exaggerated revenues (Brown, Daugherty and Persellin 2014). Investigations suggest that Satyam (India) deliberately paid higher amount of taxes for the non-existent amount of accrued interests which was the significant loss for the company. The promoters constantly generated the periodic bank reports to be fed in the bankbooks. Satyam (India) reported a higher sum of current account balances for numerous years.

The Satyam (India) board were unsuccessful in questioning the approach and usage of leverage in reorganising the company. The management and the board of directors were very sluggish to take actions when it became evidently clear that the organization was in fiscal misery. The board of directors also failed to act on the serious evidence that were related to the financial wrong doings before Satyam (India) eventually collapsed (Chambers and Odar 2015). The chairman bid of Maytas properties led to strong market reaction as the share prices declined strongly against the bid and raised concerns regarding the corporate governance of Satyam. This resulted some of the independent director to withdraw from the board.  

The Satyam (India) books of accounts were audited by the international auditing firms PWC from the year June 2000 till the discovery of fraud. There were numerous commentators that have showered their criticism against PWC severely for being failure in detecting the fraud (Chan and Vasarhelyi 2018). It is understood that the auditors failed to autonomously authenticate with the banks where Satyam (India) was believed to have deposits. Furthermore, the fraudulent activities continued for years and involved both the manipulation of the balance sheet and income statements. Whenever Satyam required more fund fulfil the estimates of analyst, the company simply created fictitious sources and continued to do on regular basis without the auditors ever realising the scam that raised the question whether PWC was complicit in the fraudulent activities.

The PWC audited the financial statements of Satyam for a span of around nine years and failed to uncover any kind of fraud while Merrill Lynch identified the fraud as the portion of its due diligence in a span of 10 days (Mohapatra, Graham and Nandialath 2015). The audit committee of Satyam failed to comply with its duty to act on the expose by whistle blower.

Poor Auditing Practices at Satyam

The actual role of audit committee is to make sure that the fiscal reports deliver a fair view of the organization financial position. The audit committee is accountable for disclosing the financial statements and providing creditable picture of the organization (Mishra and Malhotra 2016). Instances of scams and disappointment of the internal control system in the business by the audit committee raised question on their role. Acting in time upon the receipt of info by the whistle blower could have served as the SOS for the company however the audit committee decided to remain silent and failed miserably to perform their duty.

Conclusion:

The case of Satyam (India) fraud has crushed the visions of shareholders, surprised the government and resulted in enquiry of accounting practices of the statutory auditors and governance standard. From the above mentioned wreckage numerous corporate governance and auditing failures have been highlighted. Though many of the corporate governance problems have been identified in the nation such as USA, UK and European nations but these nations have strongly reacted to the corporate failures along with the code of conduct. Similar forms of audit reformation is required in Australia as in the words of Mr Medcraft there is a harsh need for policy measures to prevent further unethical activity by top management and auditors completely.

Reference List:

Arens, A.A., Elder, R.J., Beasley, M.S. and Hogan, C.E., 2016. Auditing and assurance services. Pearson.

Bagshaw, K. (2013) Audit and assurance essentials for professional accountancy exams. Advanced audit and assurance. Wokingham, Berkshire.

Bell, T.B., Causholli, M. and Knechel, W.R., 2015. Audit firm tenure, non?audit services, and internal assessments of audit quality. Journal of Accounting Research, 53(3), pp.461-509.

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.

Brown, V.L., Daugherty, B.E. and Persellin, J.S., 2014. Satyam fraud: A case study of India's Enron. Issues in Accounting Education, 29(3), pp.419-442.

Chambers, A.D. and Odar, M., 2015. A new vision for internal audit. Managerial Auditing Journal, 30(1), pp.34-55.

Chan, D.Y. and Vasarhelyi, M.A., 2018. Innovation and practice of continuous auditing. In Continuous Auditing: Theory and Application (pp. 271-283). Emerald Publishing Limited.

Davies, M. and Aston, J., 2017. Auditing fundamentals. Pearson Higher Ed.

De Santis, F., 2016. FACTORS AFFECTING THE ROLE OF AUDITORS IN PRACTICE: A FIELD STUDY.

Eliot, G. (2016). The mill on the Floss. New York: Open Road Integrated Media.

Mishra, M. and Malhotra, A.K., 2016. Significance of Audit Committee Roles in India: A Study of Auditors’ Perception Using Analytic Hierarchy Process. Journal Accounting Business and Management-International, 23(2), pp.13-20.

Mohapatra, P.S., Graham, A. and Nandialath, A., 2015. Did PwC lose reputation post audit failure at Satyam Computer Services? Evidence from the Indian audit market. International Journal of Accounting and Finance, 5(1), pp.48-61.

Narayanaswamy, R., Raghunandan, K. and Rama, D.V., 2015. Satyam Failure and Changes in Indian Audit Committees. Journal of Accounting, Auditing & Finance, 30(4), pp.529-540.

Niazi, A. and Ali, M., 2015. The Debacle of Satyam Computers Ltd.: A Case Study from Management’s Perspective. Universal Journal of Industrial and Business Management, 3(2), pp.58-65.

Niemi, L., Kneckel, R., Ojala, H. and Collis, J., 2016. Unintended consequences of changes in the regulatory landscape on the statutory audit process. In 12th Annual Workshop on Financial Reporting in Europe.

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