Project Report On

Accounting Scams in India in Recent Time: Lessons for Government of India

SUBMITTED BY

EXECUTIVE SUMMARY

Corporate entities of all sizes, across the globe, are easily susceptible to frauds at any points of time. From Enron, WorldCom and Satyam, it appears that corporate accounting fraud is a major problem that is increasing, both in its frequency and severity. According to ACFE Global Fraud Study 2012, The typical organization loses 5% of its revenues to fraud each year. Applied to the 2011 Gross World Product, this figure translates to a potential projected annual fraud loss of more than $3.5 trillion. However, research evidence has shown that growing number of frauds have undermined the integrity of financial reports, contributed to substantial economic losses, and eroded investors confidence regarding the usefulness and reliability of financial statements. The increasing rate of white-collar crimes demands stiff penalties, exemplary punishments, and effective enforcement of law with the right spirit.

1. INTRODUCTION
Fraud is a worldwide phenomenon that affects all continents and all sectors of the economy. Fraud encompasses a wide-range of illicit practices and illegal acts involving intentional deception or misrepresentation. According to the Association of Certified Fraud Examiners (ACFE, 2010), fraud is a deception or misrepresentation that an individual or entity makes knowing that misrepresentation could result in some unauthorized benefit to the individual or to the entity or some other party. In other words, mistakes are not fraud. Indeed, in fraud, groups of unscrupulous individuals manipulate, or influence the activities of a target business with the intention of making money, or obtaining goods through illegal or unfair means. Fraud cheats the target organization of its legitimate income and results in a loss of goods, money, and even goodwill and reputation. Fraud often employs illegal and immoral, or unfair means. It is essential that organizations build processes, procedures and controls that do not needlessly put employees in a position to commit fraud and that effectively detect fraudulent activity if it occurs. Fraud is a deliberated action done by one or more persons from the societys leadership, employees or third parts, action which involves the use of false pretence in order to obtain an illegal or unjust advantage. The auditor will be concerned with the fraudulent actions leading to a significant falsification of financial situations. The fraud involving persons from the leadership level is known under the name managerial fraud and the one involving only entitys employees is named fraud by employees association. The IFACs International Audit Standards-240 (2009) defines two types of fraud relevant for the auditor: (a) Falsifications that are caused by the misrepresentation of the assets; and (b) Falsifications that are caused by the fraudulent financial reporting, meaning the basic action that has provoked a falsification of the financial situations was done intentionally or/and unintentionally. Financial statement fraud is also known as fraudulent financial reporting, and is a type of fraud that causes a material misstatement in the financial statements. It can include deliberate falsification of accounting records; omission of transactions, balances or disclosures from the financial statements; or the misapplication of financial reporting standards. This is often carried out with the intention of presenting the financial statements with a particular bias, for example concealing liabilities in order to improve any analysis of liquidity and gearing. The research highlighted the Satyam Computers Limiteds and Ultra Mega Power Projects accounting scandal by portraying the sequence of events, the aftermath of events, the key parties involved, and major follow-up actions undertaken in India; and what lesions can be learned from Satyam scam and Ultra Mega Power Projects scam.
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1.1 MAGNITUDE OF FRAUD Organizations of all types and sizes are subject to fraud. On a number of occasions over the past few decades, major public companies have experienced financial reporting fraud, resulting in turmoil in the U.S. capital markets, a loss of shareholder value, and, in some cases, the bankruptcy of the company itself. Although it is generally accepted that the Sarbanes-Oxley Act has improved corporate governance and decreased the incidence of fraud, recent studies and surveys indicate that investors and management continue to have concerns about financial statement fraud. For example: The Association of Certified Fraud Examiners (ACFE) 2010 Report to the Nations on Occupational Fraud and Abuse found that financial statement fraud, while representing less than five percent of the cases of fraud in its report, was by far the most costly, with a median loss of $1.7 million per incident. Survey participants estimated that the typical organization loses 5% of its revenues to fraud each year. Applied to the 2011 Gross World Product, this figure translates to a potential projected annual fraud loss of more than $3.5 trillion. The median loss caused by the occupational fraud cases in our study was $140,000. More than one-fifth of these cases caused losses of at least $1 million. The frauds reported to us lasted a median of 18 months before being detected. Fraudulent Financial Reporting: 19982007, from the Committee of Sponsoring Organizations of the Treadway Commission (the 2010 COSO Fraud Report), analyzed 347 frauds investigated by the U.S. Securities and Exchange Commission (SEC) from 1998 to 2007 and found that the median dollar amount of each instance of fraud had increased three times from the level in a similar 1999 study, from a median of $4.1 million in the 1999 study to $12 million. In addition, the median size of the company involved in fraudulent financial reporting increased approximately six-fold, from $16 million to $93 million in total assets and from $13 million to $72 million in revenues. A 2009 KPMG Survey of 204 executives of U.S. companies with annual revenues of $250 million or more found that 65 percent of the respondents considered fraud to be a significant risk to their organizations in the next year, and more than one-third of those identified financial reporting fraud as one of the highest risks. Fifty-six percent of the approximately 2,100 business professionals surveyed during a Deloitte Forensic Center webcast about reducing fraud risk predicted that more financial statement fraud would be uncovered in 2010 and 2011 as compared to the previous three years. Almost half of those surveyed (46 percent) pointed to the recession as the reason for this increase. According to Annual Fraud Indicator 2012 conducted by the National Fraud Authority (U.K.), The scale of fraud losses in 2012, against all victims in the UK, is in the region of 73 billion per
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annum. In 2006, 2010 and 2011, it was 13, 30 and 38 billions, respectively. The 2012 estimate is significantly greater than the previous figures because it includes new and improved estimates in a number of areas, in particular against the private sector. Fraud harms all areas of the UK economy. The 2010 ACFE Report is based on 1,843 fraud cases examined by its members in more than 100 countries between January 2008 and December 2009. The Report identified the entity types which were victims of fraud, as shown in Table 1. It also presented data with respect to victim size, measured in terms of number of employees. For small organizations (under 100 employees), the frequency of fraud cases exceeded that of larger organizations, and the median loss was comparable to that for the largest of the four size categories reported. The Report cites the limited amount of financial and human resources available for fraud prevention in small organizations as a major driver of the results. In addition, leadership of small organizations typically has closer relationships with, and trust in, their employees, and thus, may engage in less oversight. Internal controls are the firstline of defense against fraud. When strong controls are lacking, or when controls are in place but are not actually followed, the environment for fraud is enhanced.

Table 1: Fraud Victims by Type of Organization and Entity Size

(Source: Association of Certified Fraud Examiners, 2010 Report to the Nation on Occupational Fraud and Abuse, pp. 27-29, http:/www.acfe.com/rttn/rttn-2010.pdf) Moreover, financial statement fraud was a contributing factor to the recent financial crisis and it threatened the efficiency, liquidity and safety of both debt and capital markets (Black, 2010). Furthermore, it has significantly increased uncertainty and volatility in financial markets, shaking investor confidence worldwide. FSF also reduces the creditability of financial information that investors use in investment decisions. When taking into account the loss of investor confidence, as well as, reputational damage and potential fines and criminal actions, it is clear why financial misstatements should be every managers worst fraud-related nightmare (E&Y, 2009). However, the
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terms fraudulent financial reporting and financial statement fraud are interchangeably throughout this paper. Past research has shown that corporate environment most likely to lead to an accounting scandal manifests significant growth and accounting practices that are already pushing the envelope of earnings smoothing (Crutchley et al., 2007). The primary responsibility for the prevention and detection of frauds and errors belongs to the leadership, as well as, to the management of the corporation. The accent falls on preventing frauds, and it can determine individuals to not commit fraud because of the possibility to be discovered and punished. The creation of a culture of the organization and ethical behavior is necessary in any corporation/society and it must be communicated and sustained by the persons in charge of leadership (surveillance, control, management). The active surveillance of those in charge of the leadership means a continuity of the internal control, the analysis of the financial situations safety, the efficiency and efficacy of operations, of the conformity with the legislation and regulations in use.

1.2 COMMITS FRAUDS As Reuber and Fischer (2010) states: Everyday, there are revelations of organizations behaving in discreditable ways. Observers of organizations may assume that firms will suffer a loss of reputation if they are caught engaging in actions that violate social, moral, or legal codes, such as flaunting accounting regulations, supporting fraudulent practices, damaging the environment or deploying discriminatory hiring practices. There are three groups of business people who commit financial statement frauds. They range from senior management (CEO and CFO); mid- and lowerlevel management and organizational criminals (Crumbley, 2003). CEOs and CFOs commit accounting frauds to conceal true business performance, to preserve personal status and control and to maintain personal income and wealth. Mid- and lower-level employees falsify financial statements related to their area of responsibility (subsidiary, division or other unit) to conceal poor performance and/or to earn performance-based bonuses. Organizational criminals falsify financial statements to obtain loans or to inflate a stock they plan to sell in a pump-anddump scheme. Methods of financial statement schemes range from fictitious or fabricated revenues; altering the times at which revenues are recognized; improper asset valuations and reporting; concealing liabilities and expenses; and improper financial statement disclosures (Wells, 2005). Sometimes these actions result in damage to an organizations reputation. While many changes in financial audit processes have stemmed from financial fraud or manipulations, history and related research repeatedly demonstrates that a financial audit simply
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cannot be relied upon to detect fraud at any significant level. The Association of Certified Fraud Examiners (ACFE) conducts research on fraud and provides a report on the results biennially, entitled Report to the Nation. The statistics in these reports (ACFE 2002, 2004, 2006) consistently states that about 1012 percent of all detected frauds are discovered by financial auditors (11.5 percent, 10.9 percent, and 12.0 percent, respectively). The KPMG Fraud Survey (KPMG 1994, 1998, 2003) consistently reports lower but substantively similar detection rates (5 percent, 4 percent, and 12 percent, respectively). The dismal reliability of financial audits to detect fraud can be explained very simply. They are not designed or executed to detect frauds. Statistically, one could infer that about 10 percent of all frauds are material, and because financial audit procedures are designed to detect material misstatements, then a 10 percent detection rate would be logical.

1.3 CONSEQUENCES OF FRAUDULENT FINANCIAL REPORTING Fraudulent financial reporting can have significant consequences for the organization and its stakeholders, as well as for public confidence in the capital markets. Periodic high-profile cases of fraudulent financial reporting also raise concerns about the credibility of the U.S. financial reporting process and call into question the roles of management, auditors, regulators, and analysts, among others (Telberg, 2003). Moreover, fraud impacts organizations in several areas: financial, operational and psychological. While the monetary loss owing to fraud is significant, the full impact of fraud on an organization can be staggering. In fact, the losses to reputation, goodwill, and customer relations can be devastating. When fraudulent financial reporting occurs, serious consequences ensue. The damage that results is also widespread, with a sometimes devastating ripple effect. Those affected may range from the immediate victims (the companys stockholders and creditors) to the more remote (those harmed when investor confidence in the stock market is shaken). Between these two extremes, many others may be affected: employees who suffer job loss or diminished pension fund value; depositors in financial institutions; the companys underwriters, auditors, attorneys, and insurers; and even honest competitors whose reputations suffer by association. As fraud can be perpetrated by any employee within an organization or by those from the outside, therefore, it is important to have an effective fraud management program in place to safeguard your organizations assets and reputation. Thus, prevention and earlier detection of fraudulent financial reporting must start with the entity that prepares financial reports.
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The wave of financial scandals at the turn of the 21st century elevated the awareness of fraud and the auditors responsibilities for detecting it. The frequency of financial statement fraud has not seemed to decline since the passage of the Sarbanes-Oxley Act in July 2002 (Hogan et al., 2008). For example, The 4th Biennial Global Economic Crime Survey (2007) of more than 3,000 corporate officers in 34 countries conducted by PricewaterhouseCoopers (PwC) reveals that in the postSarbanes-Oxley era, more financial statement frauds have been discovered and reported, as evidenced by a 140% increase in the discovered number of financial misrepresentations (from 10% of companies reporting financial misrepresentation in the 2003 survey to 24% in the 2005 survey). The increase in fraud discoveries may be due to an increase in the amount of fraud being committed and/or also due to more stringent controls and risk management systems being implemented, (PricewaterhouseCoopers 2005). The high incidence of fraud is a serious concern for investors as fraudulent financial reports can have a substantial negative impact on a companys existence as well as market value. For instance, the lost market capitalization of 30 high-profile financial scandals caused by fraud from 1997 to 2004 is more than $900 billion, which represents a loss of 77% of market value for these firms, while recognizing that the initial market values were likely inflated as a result of the financial statement fraud. No doubt, recent corporate accounting scandals and the resultant outcry for transparency and honesty in reporting have given rise to two disparate yet logical outcomes. First, forensic accounting skills have become crucial in untangling the complicated accounting maneuvers that have obfuscated financial statements. Second, public demand for change and subsequent regulatory action has transformed corporate governance (henceforth, CG) scenario. Therefore, more and more company officers and directors are under ethical and legal scrutiny. In fact, both these trends have the common goal of addressing the investors concerns about the transparent financial reporting system. The failure of the corporate communication structure has made the financial community realize that there is a great need for skilled professionals that can identify, expose, and prevent structural weaknesses in three key areas: poor CG, flawed internal controls, and fraudulent financial statements. Forensic accounting skills are becoming increasingly relied upon within a corporate reporting system that emphasizes its accountability and responsibility to stakeholders (Bhasin, 2008). Following the legislative and regulatory reforms of corporate America, resulting from the SarbanesOxley Act of 2002, reforms were also initiated worldwide. Largely in response to the Enron and WorldCom scandals, Congress passed the Sarbanes-Oxley Act (SOX) in July 2002. SOX, in part, sought to provide whistle-blowers greater legal protection. As
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Bowen et al. (2010) states, Notable anecdotal evidence suggests that whistle-blowers can make a difference. For example, two whistle-blowers, Cynthia Cooper and Sherron Watkins, played significant roles in exposing accounting frauds at WorldCom and Enron, respectively, and were named as the 2002 persons of the year by Time magazine. Given the current state of the economy and recent corporate scandals, fraud is still a top concern for corporate executives. In fact, the sweeping regulations of Sarbanes-Oxley, designed to help prevent and detect corporate fraud, have exposed fraudulent practices that previously may have gone undetected. Additionally, more corporate executives are paying fines and serving prison time than ever before. No industry is immune to fraudulent situations and the negative publicity that swirls around them. The implications for management are clear: every organization is vulnerable to fraud, and managers must know how to detect it, or at least, when to suspect it.

1.4 GLOBAL CASES OF CORPORATE FRAUDS AND ACCOUNTING FAILURES Financial scandals have plagued our society since before the Industrial Revolution. During the last few decades, there have been numerous financial frauds and scandals, which were milestones with historical significance. For instance, in the 1970s, the equity funding scandal was uncovered. In this context, Pearson et al., (2008) remarked, Equity funding scandal is significant because it is one of the first major financial scandals, where computers were used to assist in perpetrating a fraud. The CEO and other conspirators kept track of the phony insurance policies by assigning special codes to them. The public has witnessed a number of well-known examples of accounting scandals and bankruptcy involving large and prestigious companies in developed countries. The media has reported scandals and bankruptcies in companies, such as, Sunbeam, Kmart, Enron, Global Crossing (USA), BCCI, Maxwell, Polly Peck (UK) and HIH Insurance (Australia). Besides scandals in developed countries, which have sophisticated capital markets and regulations, similar cases can be also seen in developing countries with emerging capital markets. Asian countries have also experienced similar cases, such as, PT Bank Bali and Sinar Mas Group (Indonesia), Bangkok Bank of Commerce (Thailand), United Engineers Bhd (Malaysia), Samsung Electronics and Hyundai (Korea). The corporate collapses of recent times, culminating with massive collapses, such as, those of Enron in the U.S., HIH in Australia, and Satyam in India, have suggested that there are major systemic problems facing the way in which corporations and CG operate. The recent high-profile accounting scandals involving major companies worldwide, such as, Enron, WorldCom, Parmalat and most recently, Indias Satyam along with recent outcries over the excessive
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remuneration paid to some CEOs have raised questions about the relationship between ethical leadership, financial incentives and financial misreporting (Chen, 2010). During the recent series of corporate fraudulent financial reporting incidents in the U.S., similar corporate scandals were disclosed in several other countries. Almost all cases of foreign corporate accounting frauds were committed by entities that conducted their businesses in more than one country, and most of these entities are also listed on U.S. stock exchanges. The list of corporate financial accounting scandals in the U.S. is extensive, and each one was the result of one or more creative-accounting irregularities. Table 2 identifies a sample of U.S. companies that committed such fraud and the nature of their fraudulent financial reporting activities (Badawi, 2003). Overseas, nine major international companies, based in eight different countries have also committed financial accounting frauds. Table 3 identifies these nine international companies and the nature of the accounting irregularities they committed (Taub 2004). Table 2: A Sample of Cases of Corporate Accounting Frauds in the USA

(Source: Badawi, I. (2003) Global Corporate Accounting Frauds and Action for Reforms, Review of Business, page 9) Other frauds of significant interest include ZZZZ Best (1986), Phar-Mor (1992), Cendant (1998), Waste Management (1998), Sunbeam (2002), Parmalat (2003), along with a host of others. According to Accounting Scandals, the long list reached a critical mass in 2002 in the U.S. Perhaps no
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financial frauds had a greater impact on accounting and auditing than Enron and WorldCom. In the case of WorldCom, for example, it can be seen that in 2002 WorldCom filed the largest bankruptcy in accounting history, revealing that management fraudulently misstated earnings. Arthur Andersen, WorldComs auditor, failed to notice US$3.85 billion shifting of funds to cover up revenue shortages. The Enron case also showed a similar pattern of earnings management. Enron had aggressive earnings targets and entered into numerous complex transactions to achieve those targets. Arthur Andersen, a well-known accounting firm, let the line between consulting and auditing blur. The collapse of large companies worldwide (HIH insurance, Enron, WorldCom) have sparked lively interest in the amount of consultancy fees that external auditors receive in addition to audit fees. In the Australia environment, HIH insurance paid Andersen A$1.7 million for audit services and A$1.6 million for consultancy services for the 19992000 financial year. As a consequence, it has been argued that the role of external auditors has been subject to the influence of the board of directors of the company. As Jennings (2003) concluded, The Enron collapse showed a similar relationship between Andersen and Enron. In fact, while the Enron/Andersen relationship was extreme, its individual components provide indications of how a relationship can become so muddled that auditor independence is sacrificed. The above evidence shows that auditors were not independent and this can lead to low-quality financial reporting. In general, it can be claimed that the above accounting scandals occurred because of integrated factors, such as, lack of auditor independence, weak law enforcement, dishonest management, weak internal control, and inability of CG mechanism in monitoring management behaviors. Unfortunately, it is also true that most frauds are perpetrated by people in positions of trust in the accounting, finance, and IT functions (Carpenter et al., 2011). Consequently, there should be alternative tools to detect the possibility of financial frauds. Forensic accounting can be seen as one of such tools. As Pearson et al., (2008) states, An understanding of effective fraud and forensic accounting techniques can assist forensic accountants in identifying illegal activity and discovering and preserving evidence. Hence, it is important to understand that the role of a forensic accountant is different from that of regular auditor. It is widely known that an auditor determines compliance with auditing standards and considers the possibility of fraud. Some regulators have apparently noticed the need for forensic accounting. For example, the SarbanesOxley Act (SOX), the Statement on Auditing Standards-99 (SAS 99), and the Public Company Accounting Oversight Board (PCAOB) have not removed the pressures on CFOs to manipulate accounting statements (Gornik et al, 2005). The PCAOB recommends that an auditor should perform
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at least one walkthrough for each major class of transactions. However, SAS 99 does not require the use of forensic specialists but does recommend brainstorming, increased professional skepticism, and unpredictable audit tests. Thus, a proactive fraud approach involves a review of internal controls and the identification of the areas most subject to fraud. Table 3: A Sample of Cases of Corporate Accounting Frauds Overseas

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(Source: Badawi, I. (2003) Global Corporate Accounting Frauds and Action for Reforms, Review of Business, pp. 12-13.) The corporate scandals of the last few years came as a shock not just because of the enormity of failures, but also because of the discovery that questionable accounting practice was far more insidious and widespread than previously envisioned. A definite link between these accounting failures and poor CG, thus, is beginning to emerge. For instance, Badawi (2003) very aptly observes: Adelphia, for example, was given a very low 24% rating by Institutional Shareholder Services on its CG score. In Europe, Parmalat and Royal Ahold were ranked in the bottom quartile of companies in the index provided by Governance Metrics International. Similarly, the Corporate Library had issued early failure warnings in respect of both WorldCom and Enron. An increasing number of researchers now are finding that poor CG is a leading factor in poor performance, manipulated financial reports, and unhappy stakeholders. Corporations and regulatory bodies are currently trying to analyze and correct any existing defects in their reporting system. In addition, discussion on the relevance of forensic accounting in detecting accounting scandals has emerged in recent year. The fraud cases described above implies that these corporations have failed to supply accurate information to their investors, and to provide appropriate disclosures of any transactions that would impact their financial position and operating results. To quote Razaee (2005), The recent accounting scandals have induced a crisis of confidence in financial reporting practice and effectiveness of CG mechanisms. Accordingly, a number of efforts have been conducted to prevent the possibility of similar scandals in the forthcoming future.
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2. REVIEW OF LITERATURE
Starting in the late 1990s, a wave of corporate frauds in the United States occurred with Enrons failure perhaps being the emblematic example. Jeffords (1992) examined 910 cases of frauds submitted to the Internal Auditor during the nine-year period from 1981 to 1989 to assess the specific risk factors cited in the Treadway Commission Report. He concluded that approximately 63 percent of the 910 fraud cases are classified under the internal control risks. Calderon and Green (1994) made an analysis of 114 actual cases of corporate fraud published in the Internal Auditor during 1986 to 1990. They found that limited separation of duties, false documentation, and inadequate (or non-existent) control accounted for 60% of the fraud cases. Moreover, the study found that professional and managerial employees were involved in 45% of the cases. In addition, Smith (1995) offered a typology of individuals who embezzle. He indicated that embezzlers are opportunists type, who quickly detects the lack of weakness in internal control and seizes the opportunity to use the deficiency to his benefit. To deter embezzlement, he recommended: (a) institute strong internal control policies, which reduce the opportunity of crime, and (b) conduct an aggressive and thorough background check prior to employment. Bologna and Lindquist (1996) in their study cited the environmental factors that enhance the probability of embezzlement of funds. However, Ziegenfuss (1996) performed a study to determine the amount and type of fraud occurring in state and local governments. His study revealed that the most frequently occurring types of fraud are misappropriation of assets, theft, false representation; and false invoice. On the other hand, Haugen and Selin (1999) in their study discussed the value of internal controls, which depends largely on managements integrity. Adding to the situation of poor internal controls, the readily available computer technology also assisted in the crime, and the opportunity to commit fraud becomes a reality. Sharma and Brahma (2000) have emphasized on bankers responsibility on frauds; bank frauds could crop-up in all spheres of banks dealing. Major cause for perpetration of fraud is laxity in observance in laid-down system and procedures by supervising staff. Harris and William (2004), however, examined the reasons for loan frauds in banks and emphasized on due diligence program. They indicated that lack of an effective internal audit staff at the company, frequent turnover of management or directors, appointment of unqualified persons in key audit or finance

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posts, customers reluctance to provide requested information or financial statements and fictitious or conflicting data provided by the customers are the main reasons for loan frauds. Beirstaker, Brody, Pacini (2005) in their study proposed numerous fraud protection and detection techniques. Rezaee (2005), however, finds five interactive factors that explain several highprofile financial statement frauds. These factors are: cooks, recipes, incentives, monitoring and end results (CRIME). Moreover, Willison (2006) examined the causes that led to the breakdown of Barring Bank. The collapse resulted due to the failures in management, financial and operational controls of Baring Banks. Choo and Tan (2007) explained corporate fraud by relating the fraud-triangle to the broken trust theory and to an American Dream theory, which originates from the sociological literature, while Schrand and Zechman (2007) relate executive over-confidence to the commitment of fraud. In fact, research results by Crutchley et al., (2007) have shown that corporate environment most likely to lead to an accounting scandal manifests significant growth and accounting practices that are already pushing the envelope of earnings smoothing. Firms operating in this environment seem more likely to tip over the edge into fraud if there are fewer outsiders on the audit committee and outside directors appear overcommitted. Moreover, Bhasin (2008) examined the reasons for check frauds, the magnitude of frauds in Indian banks, and the manner, in which the expertise of internal auditors can be integrated, in order to detect and prevent frauds in banks. In addition to considering the common types of fraud signals, auditors can take several proactive steps to combat frauds. Chen (2010) in his study examined the proposition that a major cause of the leading financial accounting scandals that received much publicity around the world was unethical leadership in the companies and compares the role of unethical leaders in a variety of scenarios. Through the use of computer simulation models, it shows how a combination of CEOs narcissism, financial incentive, shareholders expectations and subordinate silence as well as CEOs dishonesty can do much to explain some of the findings highlighted in recent high-profile financial accounting scandals. According to a research study performed by Cecchini et al., (2010), the authors provided a methodology for detecting management fraud using basic financial data based on support vector machines. A large empirical data set was collected, which included quantitative financial attributes for fraudulent and non-fraudulent public companies. They concluded that Support vector machines using the financial kernel correctly labeled 80% of the fraudulent cases and

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90.6% of the non-fraudulent cases on a holdout set. The results also show that the methodology has predictive value because, using only historical data, it was able to distinguish fraudulent from non-fraudulent companies in subsequent years. An examination of prior literature reveals that the likelihood of committing fraud has typically been investigated using financial and/or governance variables. The moral, ethical, psychological and sociological aspects of fraud have also been covered by the literature. Moreover, some studies also suggested that psychological and moral components are important for gaining an understanding of what causes unethical behavior to occur that could eventually lead to fraud. A large majority of these studies were performed in developed, Western countries. However, the managers behavior in fraud commitment has been relatively unexplored so far. Accordingly, the overarching objective of this paper is to examine managers unethical behaviors in documented corporate fraud cases on the basis of press articles, which constitute an ex-post evaluation of alleged or acknowledged fraud cases. Unfortunately, no study has been conducted to examine behavioral aspects of managers in the perpetuation of corporate frauds in the context of a developing economy, like India. Hence, the present study seeks to fill this gap and contributes to the literature.

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3. ACCOUNTING SCANDALS
Accounting scandals are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. Such misdeeds typically involve complex methods for misusing funds, overstating revenues, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations or affiliates. In public companies, this type of creative accounting can amount to fraud and investigations are typically launched by government oversight agencies, such as the SEBI (Securities and Exchange Board of India), RBI (Reserve Bank of India) in India. Scandals are often only the tip of the iceberg. They represent the visible catastrophic failures. Note that much abuse can be completely legal or quasi legal. All accounting scandals are not caused by top executives. Often managers and employees are pressured or willingly alter financial statements for the personal benefit of the individuals over the company. Managerial opportunism plays a large role in these scandals. For example: Managers who would be compensated more for short term results would report inaccurate information since short term benefits outweigh the long-term ones such as pension, annuity, etc. Creative accounting means accounting practices that may follow the letter of the rules of standard accounting practices, but certainly deviate from the spirit of those rules. They are characterised by excessive complication and the use of novel ways of characterising income, assets or liabilities and the intent to influence readers towards the interpretations desired by the authors. Creative accounting is at the root of a number of accounting scandals, and many proposals for accounting reformusually centering on an updated analysis of capital and factors of production that would correctly reflect how value is added.

3.1 Worldcom WorldCom was one of the big success stories of the 1990s. It was a symbol of aggressive capitalism. Founded by Bernie Ebbers, one of the most aggressive acquirers during the US mergers and acquisitions boom of the 1990s, WorldComs asset value had soared to $180bn before the US capital market started witnessing a downtrend.

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WorldCom admitted in March 2002 that it will have to restate its financial results to account for billions of dollars in improper bookkeeping. An internal audit showed that transfers of about $3.06 billion for 2001 and $797 million for the first quarter of 2002 were not made in accordance with generally accepted accounting principles. In August 2002, an internal audit revealed an additional $3.3bn (2.2bn) of improper reported earningstaking the total to more than $7bn, double the level previously reported. Over $3.3bn money was from the companys reserves, which was misrepresented as operating income. As a result of the discovery, WorldCom said that its financial statements for 2000 will have to be reissued. The company said it may now write off $50.6bn in intangible assets. Former chief financial officer Scott Sullivan and ex-controller David Myers were arrested, and face seven counts of securities fraud and filing false statements with the SEC (US Securities and Exchange Commission). The company filed for Chapter 11 bankruptcy protection on 22 July 2002, a process that protects it from its creditors while it tries to restructure. It became the largest bankruptcy in US history, listing $107bn in total assets and $41bn in debts. In May 2003, WorldCom agreed to pay a record amount to the US financial watchdog. MCI (formerly WorldCom), while neither admitting nor denying any wrongdoing, came to a settlement over its massive accountancy scandal. It will pay $500m to SEC, the highest fine ever imposed by the regulator. The original figure of $1.5bn was scaled down as MCI declared itself bankrupt and so received favourable treatment. The settlement sorts out the civil lawsuits that have been filed. But the criminal cases relating primarily to the actions of former employees at the company are still pending.

Summary Scandal discovered: March 2002 Charges: Overstated cash flow by booking $3.8 billion in operating expenses as capital expenses. Company founder Bernard Ebbers received $400 million in off-the-books loans. The company found another $3.3 billion in improperly booked funds, taking the total misstatement to $7.2 billion, and it may have to take a goodwill charge of $50 billion.

Outcome: Former CFO Scott Sullivan and ex-controller David Myers have been arrested and criminally charged, while rumours of Bernie Ebbers impending indictment persist. On 9 March

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2005, four foreign banks agreed to pay $428.4 mn for settling the class action law suit by investors accusing them of hiding risks at WorldCom before its collapse.

3.2 Enron In just 15 years, Enron grew from to be Americas seventh largest company, employing 21,000 staff in more than 40 countries. It started out as a pipeline company, and transformed into an energy trader, buying and selling power. Among other businesses, Enron was engaged in the purchase & sale of natural gas, construction & ownership of pipelines and power facilities, provision of telecommunications services, and trading in contracts to buy & sell various commodities. It expanded into many diverse industries for which it had no unifying strategies and no expertise. Fortune magazine named it the most innovative company in America six years in a row, not spotting that much of the innovation was sleight-of-hand accounting that amounted to fraud. Enron lied about its profits and used off-the-books partnerships to conceal $1 billion in debt and to inflate profits. Some tactics used by Enron Earnings manipulation: From at least 1998 through late 2001, Enrons executives and senior managers engaged in wide-ranging schemes to deceive the investing public about the true nature and profitability of Enrons businesses by manipulating Enrons publicly reported financial results and making false and misleading public representations. The schemes objectives were: To produce that reported earnings steadily grew by 15%-20% p.a. To meet or exceed, without fail, the expectations of investment analysts about Enrons EPS. To persuade the investing public that Enrons future profitability would continue to grow. To achieve these objectives, quarterly earnings targets were imposed on each of the companys business units based on EPS goals and not true forecasts. When the budget targets could not be met, through results from business operations, they were achieved through the use of fraudulent devices. The primary purpose was to increase the share price which increased from US$30 per share in 1998 to US$80 in 2001 even after a stock split.

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The rising stock prices enriched Enrons senior managers in the form of salary, bonuses, grants of artificially appreciating stock options, restricted stock, and phantom stock, and prestige within their professions and communities.

Other methods used were: Manipulating reserve accounts to maintain the appearance of continual earnings growth and to mask volatility in earnings by concealing earnings during highly profitable periods and releasing them for use during less profitable periods Concealing losses in individual business segments through fraudulent manipulation of "segment reporting," and deceptive use of reserved earnings to cover losses in one segment with earnings in another; Manufacturing earnings through fraudulent inflation of asset values and avoiding losses through the use of fraudulent devices designed to "hedge," or lock-in, inflated asset values Structuring of financial transactions using improper accounting techniques in order to achieve earnings objectives During 2000, Enrons wholesale energy trading business, primarily its En ron North America business, generated larger profits mostly due to rapidly rising energy prices in the western United States, especially in California. This growth was more than the smooth, predictable annual earnings growth of 15% to 20%. Beginning in the first quarter of 2000 and continuing throughout 2000 and 2001, Enron improperly reserved hundreds of millions of dollars of earnings, and used large amounts of those reserves to cover-up losses in ENA's "merchant" asset portfolio and from other business units such as EES. This misuse of reserves was discussed and approved among Enron's and ENA's senior commercial and accounting managers. Concealment of uncollectible receivables owed to Enron Energy Services by California utilities Enron also used reserves to conceal huge receivables (valued in the hundreds of millions of dollars), accumulated during the California energy crisis, that California public utilities owed to Enron and that Enron believed it would not collect. The California utilities were refusing to pay these monies, and they likely were headed for bankruptcy. Enron concluded that it should book a large reserve for these uncollectible receivables.

Concealment of EES failures by manipulating reporting In the first quarter of 2001, new EES managers discovered and quantified hundreds of millions of dollars in inflated valuations of EES contracts that would have to be recorded as losses. This would
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wipe out EES's modest reported profits and reveal it was a badly mismanaged business that was losing large amounts of money. Enron's senior management decided to conceal these EES losses from investors by offsetting them with Enron Wholesale trading profits earned in that quarter, as well as profits improperly reserved in prior periods. This was accomplished through a "reorganization" of Enron's business segments that was made effective for the first quarter of 2001, enabling Enron to avoid reporting the losses in the EES segment. This was explained deceptively to Enron's auditors and investors as meant to improve "efficiency. This maneuver helped to conceal the hundreds of millions of dollars in reserves booked within ENA for the uncollectible California receivables owed to EES. Fraudulent valuation of "merchant" assets Enron's ENA business unit managed a large "merchant" asset portfolio, which consisted primarily of ownership stakes in a group of energy and related companies that Enron recorded on its quarterly financial statements at what it alleged to be "fair value." Senior Enron and ENA commercial and accounting managers fraudulently generated earnings needed to meet budget targets by artificially increasing the book value of certain of these assets, many of which were volatile or poorly performing. Likewise, to avoid recording losses on these assets, Enron's management fraudulently locked-in these assets' value in improper "hedging" structures. ENA's largest merchant asset was an oil and gas exploration company known as Mariner Energy (Mariner), which Enron was required to book at "fair value" every quarter. During the fourth quarter of 2000, there was a shortfall of approximately $200 million in Enron's quarterly earnings objectives. Senior Enron and ENA managers decided to increase artificially the value of the Mariner asset by approximately $100 million in order to close half of this gap. In the third quarter of 2000, other ENA "merchant" assets were similarly manipulated in value before being inserted into an elaborate hedging mechanism known as the "Raptors." Enron and ENA managers instructed ENA managers that Enron had constructed a device that would allow ENA to lock in approximately $400 million in book value of its assets, thereby protecting them from later write-downs, Other manipulative devices used in Enron wholesale Enron employed other devices fraudulently to manipulate the financial results of Enron Wholesale and its predecessor ECT. For example, ECT entered into a large contract in 1997 to supply energy to the Tennessee Valley Authority (TVA) that resulted in an immediate "mark-to-market" earnings gain to Enron of approximately $50 million dollars. But in mid-1998, when energy prices in the region in
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which the TVA was located sharply increased, Enron's unhedged position in the TVA contract fell to a loss in the hundreds of millions of dollars, which would have eliminated ECT's earnings at the end of the then-current reporting period. To avoid this Enrons managers removed the TVA contract from Enron's "mark-to-market" accounting books by instead applying accrual accounting to the contract. Enron then did not disclose the loss. Senior Enron and ECT managers devised a plan to avoid later disclosure of most of the loss from TVA by investing hundreds of millions of dollars in the purchase of power-plant turbines and the construction of "peaker" power plants that Enron otherwise would not have purchased. This mechanism ultimately resulted, in a later reporting period, in a recorded loss to Enron from the TVA contract that was hundreds of millions of dollars less than the actual loss incurred in 1998. Enron did not reveal this. During 1999, Enron attempted unsuccessfully to shed itself of this costly investment in turbines and "peaker" plants. Unable to sell the assets at a profit to satisfy budget targets, Enron devised and executed a scheme to manufacture current earnings by agreeing to entering into back-to-back trades with Merrill Lynch & Co., Inc. which to sell and then repurchase energy generated by Enron's "peaker" plants. These trades with Merrill Lynch, which virtually mirrored each other, ensured that ENA satisfied budget targets for the fourth quarter of 1999. Apart from this many of Enrons senior managers were charged with insider trading and indicted. Enron was also accused of creating phantom shortages in Californias unregulated electricity market to fleece ratepayers of an estimated $30 billion during the 2001 energy crisis.

Outcome:

Enron filed for Chapter 11 bankruptcy, allowing it to reorganise while protected from creditors.

Enron has sought to salvage its business by spinning off various assets. Enron's core business, the energy trading arm, has been tied up in a complex deal with UBS Warburg. The bank has not paid for the trading unit, but will share some of the profits with Enron.

Centrica, part of the former British Gas, has bought Enron's European retail arm for 96.4m. Dynegy, a smaller rival, has won a key pipeline in the US after merger talks fell through. The pipeline was then resold to Warren Buffet.
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Summary When scandal was discovered: October 2001 Charges: Boosted profits and hid debts totaling over $1 billion by improperly using off-the-books partnerships; manipulated the Texas power market; bribed foreign governments to win contracts abroad; manipulated California energy market

Latest developments: Ex-Enron executive Michael Kopper pled guilty to two felony charges; acting CEO Stephen Cooper said Enron may face $100 billion in claims and liabilities; company filed Chapter 11; its auditor Andersen was convicted of obstruction of justice for destroying Enron documents.

ARTHUR ANDERSEN Energy giant Enron went from being America's seventh biggest company to being biggest bankruptcy in US corporate history. Enron's success had been based on artificially inflated profits and on accounting practices that had kept hundreds of millions of dollars in debt off its books. Andersens role Arthur Andersen's job was to check Enron's accounts and to make sure they were an accurate reflection of the state of the business. The auditor would have been expected to spot large scale fraud or deception. The company also carried out consultancy work for Enron, leading to accusations of a conflict of interest. When the energy giant's business began to unravel, staff at Arthur Andersen destroyed thousands of Enron-related documents and e-mails. This happened both before and after US stock market regulators had asked for more information about the energy giant's accounts.

Charges: Arthur Anderson was in trouble with the SEC in June 2001 over action related to its audit work for Waste Management Corporation, paying a record $7 million fine. Again in July the SEC filed an amended complaint against five officers of Sunbeam Corporation and the lead Andersen partner who worked on the Sunbeam audit, contending that Sunbeam's financial statements were materially false or misleading. Thus Anderson was familiar with SEC enforcement proceedings and anxious to avoid any further sanction or censure.

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Andersen audited the publicly-filed financial statements of Enron, a sophisticated trading and investment conglomerate with a global energy trading business. Enron employed accounting practices that were highly aggressive, stretching Generally Accepted Accounting Principles (GAAP) to their outermost limits. Although the firm knew of Enron's accounting practices, Andersen bent over backward to accommodate Enron, its largest domestic client, whom the firm billed approximately $58 million in 2000. Andersons management uncovered serious accounting problems in Enron in late 2001 that caused it to anticipate imminent SEC action and civil litigation. First, in September 2001, Andersen personnel discovered that its Enron engagement team had approved the use of an improper accounting technique for four Raptors, a group of special purpose entities (SPEs) that Enron used to engage in "off balance sheet" activities. To conceal the losses due to Raptors had experienced sharp losses, they allowed Enron to aggregate the four entities even though petitioner's own accounting experts deemed that it as a violation of GAAP. Second, it was also found that Enron and petitioner had made a separate $1.2 billion accounting error in Enron's favor which would require that Enron reduce its outstanding shareholder equity by $1.2 billion in its quarterly SEC filing, After Jeffrey Skilling, Enron's CEO, resigned unexpectedly it caused widespread speculation about financial problems at Enron and after a Wall Street Journal article suggested improprieties at Enron, the SEC opened an informal investigation of the company. The firm began to prepare for legal action (including SEC document requests) relating to Enron. By September 28, 2001, in-house attorney Nancy Temple held near-daily meetings or conference calls with an Enron crisis-response group composed of high-level Andersen partners. It was understood by the firm that investigation was "highly probable and there was a "reasonable possibility [that this] will force a restatement"; It was then decided to use the firm's widely ignored document policy to purge harmful material from its files. In broad outline, petitioner's document policy required that only information necessary to support the firm's final audit opinion be maintained in the audit "workpapers." All other information (including draft documents and handwritten notes) was to be permanently destroyed upon conclusion of an audit. Andersen personnel (including many members of the Enron engagement team) were urged to comply with the document policy. It was explained that "if it's destroyed in the course of the normal policy and litigation is filed the next day, that's great... we've followed our own policy, and whatever there was that might have been of interest to somebody is gone and irretrievable." When this was not complied with, Temple requested them to comply with the policy even though it actually provided
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that "in cases of threatened litigation, no related information will be destroyed" and identified "regulatory agency investigations (e.g., by the SEC)" as situations where "material in our files cannot be altered or deleted." After Ken Lay, Enron's CEO, mentioned that Enron was reducing "shareholder equity" by approximately $1.2 billion, the SEC notified Enron by letter of its existing investigation and requested various accounting information and documents. Temple again ordered compliance with the firm's document policy which led the Professional Standards Group accountants to delete hundreds of Enron-related e-mails. Duncan and the other Enron engagement partners also decided that compliance with the previously ignored document policy was imperative inspite of knowing that the SEC had already requested documents from Enron, and he acted out of concern that "extraneous material" in petitioner's files could be used against it in civil lawsuits and the SEC investigation. The firm's Enron auditors were instructed to make compliance with the document policy a priority despite the mounting time pressure they faced in dealing with Enron's accounting problems. As a result, the Enron engagement team made an unprecedented effort to destroy non-workpaper documents. Documents were shredded on-site and also were shipped to petitioner's main office for bulk shredding. There was an extraordinary spike in physical document destruction that coincided with petitioner's discovery of the SEC inquiry. In addition to the destruction of hard copies of documents, tens of thousands of e-mails and other electronic documents were deleted, representing at least a three-fold increase over usual activity.

The shredding continued notwithstanding the following:

Firm's discovery of two additional major accounting problems-one involving suspected fraud by Enron relating to an entity named "Chewco" and the other a large accounting error by Anderson itself;

Decision by Enron's Board of Directors to form a special committee to investigate Enron's accounting;

Efforts of Andersen partners to help Enron's Board formulate strategy for dealing with the SEC and restating its finances;

Filing of numerous shareholder lawsuits; And petitioner's receipt of a subpoena for Enron documents from a private plaintiff. Only after the SEC served a subpoena for its Enron documents, and Enron announced its intent to file a restatement did Duncan's assistant send an e-mail to "Stop the Shredding".
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Trial: Andersen went on trial in Houston, Texas, after allegations that employees had illegally destroyed thousands of documents and computer records relating to its scandal-hit client. The firm's lawyers had argued that the shredding of documents had been routine housekeeping, but the jury decided it was an attempt to thwart federal regulators investigating Enron. The prosecution's star witness was former Andersen partner David Duncan, who was in charge of the Enron audit team. He admitted obstructing justice in April and told jurors that he had signed an agreement with Andersen to present a united front, claiming that neither had done anything wrong. He had reneged on the agreement after much "soul searching". The trial heard how one Andersen executive said on a training video that if documents were shredded and then the investigators arrived, that would be good.The accountancy firm was found guilty of obstructing justice by shredding documents relating to the failed energy giant Enron. The firm was sentenced to five years of probation, fined $500,000, and ordered to pay a special assessment of $400. Andersen lost much of its business, and two-thirds of its once 28,000 strong US workforce. Following the conviction, multi-million dollar lawsuits brought by Enron investors and shareholders demanding compensation are likely to follow, and could bankrupt the firm. Summary Scandal discovered: November 2001 Charges: Shredding documents related to audit client Enron after the SEC launched an inquiry into Enron. Latest Developments: Andersen was convicted of obstruction of justice in June 2002 and to cease auditing public firms by Aug. 31. Most of the international arms of Andersen Worldwide have split from the US side of the business and were taken up by rivals.

3.3 XEROX In 2002, Xerox Corp announced that it will restate its revenues by as much as $2 billion over a five year period from 1997 to 2001 because of an accounting error.

An audit showed that Xerox improperly posted revenues before they were actually made. The company described the accounting problems uncovered by an audit as a "timing and allocation issue," saying the revenues that were posted early would be shown to have actually been collected later. An
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audit found that Xerox improperly booked far more revenue over a five- year period than the Securities and Exchange Commission estimated in an April settlement with the company over its accounting procedures. The SEC had estimated in April the overstatement was $3 billion for the four years from 1997 through 2000. The mispostings of revenue could total up to $6 billion. The company disputed that and said the restatement for that period will be "no more than $2 billion" which is about 2% of revenue for that period. Subsequently, the company announced that the extent of overstatement of revenues for a fiveyear period was even greater, at more than $6.4 billion. Once again the auditors at Xerox, as usual one of the international "Big Five", had apparently not noticed the discrepancies for all these years. Summary Scandal discovered: June 2000 Charges: Falsifying financial results for five years, boosting income by $6.4 billion Outcome: Xerox agreed to pay a $10 million and to restate its financials dating back to 1997.

PARMALAT Investors become concerned about the group's accounts in March 2003 when the company failed to place bonds worth up to EUR500m with investors. In December 2003 the company missed a bond payment it was disclosed that Bonlat, a Parmalat subsidiary in the Cayman Islands, did not have accounts worth almost EUR4bn at Bank of America. A scanning machine had been used to forge BoA documents, which were then sent to auditors who certified the accounts. Cayman seems to provide a key link in the network of missing funds. Italian investigators reportedly believe EUR250m, raised in a EUR500m bond issue in Brazil in 2001, ended up in Malta via a Cayman Islands unit of Spain's Santander Central Hispano. The total sum of bogus operations uncovered at the firm as of 30 June 2003 amount to $10bn, including $1.4bn in obligations by other companies in which Parmalat invested. An Italian newspaper claims that Parmalat had not bought their obligations at all, but had merely copied their names from the internet. The Italian government, which had initially promised to bail out Parmalat, but later put some distance between itself and the fallout by enacting emergency bankruptcy legislation. The decree allows a company with at least 1,000 employees and debts of more than EUR1bn to apply for immediate but temporary protection from creditors. This allows the bankrupt firm to continue trading without government aid.
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Auditors Deloitte, acted as Parmalat's group auditor from 1999, while Grant Thornton, which had been the group auditor, carried on as auditor at many of the company's subsidiaries. The sub-Big Four accounting firm, which audited up to 49% of Parmalat's assets, disassociated itself from its Italian operations claiming that "Grant Thornton (Italy) has been unable to provide sufficient assurances or access to the appropriate information and people in an acceptable timeframe." Deloitte denied acting negligently or being complicit in this massive fraud. Its relationship with Grant Thornton came under strain when ,in October, Deloitte declined to authenticate the value of Bonlat's mutual fund in Cayman and also refused to approve a gain on a derivatives contract held by the fund. From 1999 to 2001, it qualified the accounts of Parmalat Soparfi SA, a Luxembourg subsidiary, on the book value of a participation in Parmalat Paraguay. There was also a qualification on the book value in Parmalat Food Industries South Africa Ltd. Deloitte treated Parmalat with suspicion, learning from The Enron case which led to collapse of its auditor Anderson too. Deloitte excluded these assets from its valuation of the subsidiary. However, Deloitte failed to do checks on those big bank accounts supposedly held by Bonlat at BoA. In spite of the qualified accounts, Parmalat Soparfi SA was able to raise EUR246.4m in an equitylinked bond issue with Morgan Stanley acting as manager. The banks which helped Parmalat to raise money were JP Morgan Chase, UniCredito Italiano, Merrill Lynch, Morgan Stanley, Barclays Capital, Deutsche Bank, Citigroup, Santander Central Hispano, Bank of America and UBS. Citigroup and Bank of America held exposures of up to $1bn in Parmalat. Together, the banks sold about EUR8bn in Parmalat bonds between 1997 and 2002. Outcome The Italian financial police, the Manhattan District Attorney and the SEC have launched a probe of a different nature, looking into how the dairy group perpetrated one of the biggest financial scams ever, and whether any of the banks involved knowingly played a role in it. The banks could find themselves in trouble with SEC simply for having acted negligently by selling Parmalat bonds. Italy's market regulator, Consob, has asked a Parma court to annul Parmalat's 2002 accounts, which showed net profits of EUR252m, due to the company's failure to comply with accounting standards. According to latest estimates, Parmalat lost EUR1.4bn between 2000 and 2003. A company that had claimed to have cash balances of EUR4.2bn now appears to be missing assets worth at least EUR8bn. In December 2003, a fraud investigation was launched, Parmalat went into administration
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and, at the end of December, Tonna, former chairman and chief executive Calisto Tanzi and other senior executives were arrested by Italian police. Tanzi has also admitted to diverting some EUR500m from the publicly quoted company into family owned firms. The rating agencies, auditors and banks involved all claim they were misled or the victims of lies or fraud. Developments: Italian prosecutors have stated that the black hole at Parmalat could be bottomless, as the Tanzi family's other financial interests like a football club Parma, tourism business Parmatour and others. Key dates

9 December 2003: Parmalat misses EUR150m bond payment 15 December: Tanzi resigns as chairman and CEO 19 December: Bank of America claims a document showing EUR3.9bn on deposit in Cayman Islands is a forgery

20 December: Fraud investigation launched 24 December: Parmalat goes into administration 27 December: Tanzi arrested 30 December: Tanzi admits EUR8bn hole in accounts. Claims managers acted of own accord 31 December: Tonna, Del Soldato and others arrested 8 January 2004: Grant Thornton International expels Italian partner firm; Italian officials investigate Deloitte

Summary Scandal discovered: December 2003 Charges: Financial fraud to the extent of EUR10bn Latest developments: Investigation launched by The Italian financial police, the Manhattan District Attorney and SEC. http://www.indiainfoline.com/Markets/News/Some-of-the-biggest-accounting-scandals/5504117311

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4. OBJECTIVES OF STUDY
The main objectives of this study was to: (1) identify the prominent American and foreign companies involved in fraudulent financial reporting practices and the nature of accounting irregularities they committed; (2) highlight the Satyam Computers Limiteds and Ultra Mega Power Projects accounting scandal by portraying the sequence of events, the aftermath of events, the key parties involved, and major follow-up actions undertaken in India; and (3) what lesions can be learned from Satyam scam and Ultra Mega Power Projects scam?

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5. RESEARCH METHODOLOGY
Research is defined as a scientific & systematic search for pertinent information on a specific topic. Research is an art of scientific investigation. Research is a systemized effort to gain new knowledge. It is a careful inquiry especially through search for new facts in any branch of knowledge. The search for knowledge through objective and systematic method of finding solution to a problem is a research. Financial reporting practice can be developed by reference to a particular setting in which it is embedded. Therefore, qualitative research could be seen useful to explore and describe fraudulent financial reporting practice. Here, two issues are crucial. First, to understand why and how a specific company is committed to fraudulent financial reporting practice an appropriate interpretive research approach is needed. Second, case study conducted as part of this study, looked specifically at the fraud case in India, involving Satyam Computer Services (Satyam) and Ultra Mega Power Projects. Sources of data: The sources of data means from where we have to get data. There are mainly two sources of data. These are: Primary data: The Primary data are those which are collected a fresh and for the first time and thus happens to be original in character. Secondary data: The secondary data are those data which have already been collected by someone else and which have already been passed through statistics process. We get published data as maintained by finance departments of a concern or other publications like Annual report, Magazines etc. In my research only secondary type of data was collected. Data sources: Secondary sources of data: Annual reports of the company Internet Finance books

This also included going through researches prepared by other students.

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6. ANALYSIS 4.1 SATYAM COMPUTERS LIMITED

Ironically, Satyam means truth in the ancient Indian language Sanskrit (Basilico et al., 2012). Satyam won the Golden Peacock Award for the best governed company in 2007 and in 2009. From being Indias IT crown jewel and the countrys fourth largest company with highprofile customers, the outsourcing firm Satyam Computers has become embroiled in the nations biggest corporate scam in living memory (Ahmad, et al., 2010). Mr. Ramalinga Raju (Chairman and Founder of Satyam; henceforth called Raju), who has been arrested and has confessed to a $1.47 billion (or Rs. 7,800 crore) fraud, admitted that he had made up profits for years. According to reports, Raju and his brother, B. Rama Raju, who was the Managing Director, hid the deception from the companys board, senior managers, and auditors. The case of Satyams accounting fraud has been dubbed as Indias Enron. In order to evaluate and understand the severity of Satyams fraud, it is important to understand factors that contributed to the unethical decisions made by the companys executives. First, it is necessary to detail the rise of Satyam as a competitor within the global IT services marketplace. Second, it is helpful to evaluate the driving-forces behind Satyams decisions: Ramalinga Raju. Finally, attempt to learn some lessons from Satyam fraud for the future.

EMERGENCE OF SATYAM COMPUTER SERVICES Satyam Computer Services Limited was a rising-star in the Indian outsourced IT-services industry. The company was formed in 1987 in Hyderabad (India) by Mr. Ramalinga Raju. The firm began with 20 employees and grew rapidly as a global business. It offered IT and business process outsourcing (BPO) services spanning various sectors. Satyam was as an example of Indias growing success. Satyam won numerous awards for innovation, governance, and corporate accountability. As Agrawal and Sharma (2009) states, In 2007, Ernst & Young awarded Mr. Raju with the Entrepreneur of the Year award. On April 14, 2008, Satyam won awards from MZ Consults for being a leader in India in CG and accountability. In September 2008, the World Council for Corporate Governance awarded Satyam with the Global Peacock Award for global excellence in corporate accountability. Unfortunately, less than five months after winning the Global Peacock Award, Satyam became the centerpiece of a massive accounting fraud. By 2003, Satyams IT services businesses included 13,120 technical associates servicing over 300 customers worldwide. At that time, the world-wide IT services market was estimated at nearly $400 billion, with an estimated annual compound growth rate of 6.4%. The markets major drivers at that
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point in time were the increased importance of IT services to businesses worldwide; the impact of the Internet on eBusiness; the emergence of a highquality IT services industry in India and their methodologies; and, the growing need of IT services providers who could provide a range of services. (Caraballo, 2010) To effectively compete, both against domestic and global competitors, the company embarked on a variety of multipronged business growth strategies. From 2003-2008, in nearly all financial metrics of interest to investors, the company grew measurably. Satyam generated USD $467 million in total sales. By March 2008, the company had grown to USD $2.1 billion. The company demonstrated an annual compound growth rate of 35% over that period. Operating profits averaged 21%. Earnings per share similarly grew, from $0.12 to $0.62, at a compound annual growth rate of 40%. Over the same period (20032009), the company was trading at an average trailing EBITDA multiple of 15.36. Finally, beginning in January 2003, at a share price of 138.08 INR, Satyams stock would peak at 526.25 INRa 300% improvement in share price after nearly five years (www.capitaliq.com). Satyam clearly generated significant corporate growth and shareholder value. The company was a leading star and a recognizable namein a global IT marketplace. The external environment in which Satyam operated was indeed beneficial to the companys growth. But, the numbers did not represent the full picture. Exhibit 1 lists some of the critical events for Satyam between 1987 and 2009. The case of Satyam accounting fraud has been dubbed as Indias Enron.

Exhibit 1: Satyam Timeline June 24, 1987: Satyam Computers is launched in Hyderabad 1991: Debuts in Bombay Stock Exchange with an IPO over-subscribed 17 times. 2001: Gets listed on NYSE: Revenue crosses $1 billion. 2008: Revenue crosses $2 billion. December 16, 2008: Satyam Computers announces buying of a 100 per cent stake in two companies owned by the Chairman Ramalinga Rajus sonsMaytas Properties and Maytas Infra. The proposed $1.6 billion deal is aborted seven-hours later due to a revolt by investors, who oppose the takeover. But Satyam shares plunge 55% in trading on the New York Stock Exchange. December 23: The World Bank bars Satyam from doing business with the banks direct contracts for a period of 8 years in one of the most severe penalties by a client against an Indian outsourcing company. In a statement, the bank says: Satyam was declared ineligible for contracts for providing
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improper benefits to Bank staff and for failing to maintain documentation to support fees charged for its subcontractors. On the day the stock drops a further 13.6%, it is lowest in more than four-and-ahalf years. December 25: Satyam demands an apology and a full explanation from the World Bank for the statements, which damaged investor confidence, according to the outsourcer. Interestingly, Satyam does not question the company being barred from contracts, or ask for the revocation of the bar, but instead objects to statements made by bank representatives. It also does not address the charges under which the World Bank said it was making Satyam ineligible for future contracts. December 26: Mangalam Srinivasan, an independent director at Satyam, resigns following the World Banks critical statements. December 28: Three more directors quit. Satyam postpones a board meeting, where it is expected to announce a management shakeup, from December 29 to January 10. The move aims to give the group more time to mull options beyond just a possible share buyback. Satyam also appoints Merrill Lynch to review strategic options to enhance shareholder value. January 2, 2009: Promoters stake falls from 8.64% to 5.13% as institutions with whom the stake was pledged, dump the shares. January 6, 2009: Promoters stake falls to 3.6%. January 7, 2009: Ramalinga Raju resigns, admitting that the company inflated its financial results. He says the companys cash and bank shown in balance sheet have been inflated and fudged to the tune of INR 50,400 million. Other Indian outsourcers rush to assure credibility to clients and investors. The Indian IT industry body, National Association of Software and ServiceCompanies, jumps to defend the reputation of the Indian IT industry as a whole. January 8: Satyam attempts to placate customers and investors that it can keep the company afloat, after its former CEO admitted to Indias biggest-ever financial scam. But law firms Izard Nobel and Vianale & Vianale file class-action suits on behalf of US shareholders, in the first legal actions taken against the management of Satyam in the wake of the fraud. January 11: The Indian government steps into the Satyam outsourcing scandal and installs three people to a new board in a bid to salvage the firm. The board is comprised of Deepak S Parekh, the Executive Chairman of home-loan lender, Housing Development Finance Corporation (HDFC), C. Achuthan, Director at the countrys National Stock Exchange, and former member of the Securities and Exchange Board of India, and Kiran Karnik, Former President of NASSCOM.

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January 12: The new board at Satyam holds a press conference, where it discloses that it is looking at ways to raise funds for the company and keep it afloat during the crisis. One such method to raise cash could be to ask many of its Triple A-rated clients to make advance payments for services.

MR. RAMALINGA RAJU AND THE SATYAM SCANDAL On January 7, 2009, Mr. Raju disclosed in a letter, as shown in Exhibit 2, to Satyam Computers Limited Board of Directors that he had been manipulating the companys accounting numbers for years. Mr. Raju claimed that he overstated assets on Satyams balance sheet by $1.47 billion. Nearly $1.04 billion in bank loans and cash that the company claimed to own was non-existent. Satyam also underreported liabilities on its balance sheet. Satyam overstated income nearly every quarter over the course of several years in order to meet analyst expectations. For example, the results announced on October 17, 2009 overstated quarterly revenues by 75 percent and profits by 97 percent. Mr. Raju and the companys global head of internal audit used a number of different techniques to perpetrate the fraud. As Ramachandran (2009) pointed out, Using his personal computer, Mr. Raju created numerous bank statements to advance the fraud. Mr. Raju falsified the bank accounts to inflate the balance sheet with balances that did not exist. He inflated the income statement by claiming interest income from the fake bank accounts. Mr. Raju also revealed that he created 6,000 fake salary accounts over the past few years and appropriated the money after the company deposited it. The companys global head of internal audit created fake customer identities and generated fake invoices against their names to inflate revenue. The global head of internal audit also forged board resolutions and illegally obtained loans for the company. It also appeared that the cash that the company raised through American Depository Receipts in the United States never made it to the balance sheets (www.outlookindia.com).

Exhibit 2: Satyams Founder, Chairman and CEO, Mr. Rajus Letter to his Board of Directors To The Board of Directors, Satyam Computer Services Ltd. From: B. Ramalinga Raju Chairman, Satyam Computer Services Ltd. January 7, 2009 Dear Board Members,
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It is with deep regret, and tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice: 1. The Balance Sheet carries as of September 30, 2008: (a) Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5,361 crore reflected in the books); (b) An accrued interest of Rs. 376 crore which is non-existent; (c) An understated liability of Rs. 1,230 crore on account of funds arranged by me; and (d) An over stated debtors position of Rs. 490 crore (as against Rs. 2,651 reflected in the books). 2. For the September quarter (Q2), we reported a revenue of Rs.2,700 crore and an operating margin of Rs. 649 crore (24% of revenues) as against the actual revenues of Rs. 2,112 crore and an actual operating margin of Rs. 61 Crore (3% of revenues). This has resulted in artificial cash and bank balances going up by Rs. 588 crore in Q2 alone. The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). 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 (annualized revenue run rate of Rs. 11,276 crore in the September quarter, 2008 and official reserves of Rs. 8,392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations thereby significantly increasing the costs. Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyams problem was solved, it was hoped that Maytas payments can be delayed. But that was not to be. What followed in the last several days is common knowledge. I would like the Board to know: 1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight yearsexcepting for a small proportion declared and sold for philanthropic purposes. 2. That in the last two years a net amount of Rs. 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares
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and raising funds from known sources by giving all kinds of assurances (Statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged share by the lenders on account of margin triggers. 3. That neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefitted in financial terms on account of the inflated results. 4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T.R. Anand, Keshab Panda, Virender Agarwal, A.S. Murthy, Hari T, SV Krishnan, Vijay Prasad, Manish Mehta, Murali V, Sriram Papani, Kiran Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or Managing Directors immediate or extended family members has any idea about these issues. Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps: 1. A Task Force has been formed in the last few days to address the situation arising out of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam: Subu D, T.R. Anand, Keshab Panda and Virender Agarwal, representing business functions, and A.S. Murthy, Hari T and Murali V representing support functions. I suggest that Ram Mynampati be made the Chairman of this Task Force to immediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board. 2. Merrill Lynch can be entrusted with the task of quickly exploring some Merger opportunities. 3. You may have a restatement of accounts prepared by the auditors in light of the facts that I have placed before you. I have promoted and have been associated with Satyam for well over twenty years now. I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent leadership and competency base at all levels. I sincerely apologize to all Satyamites and stakeholders, who have made Satyam a special organization, for the current situation. I am confident they will stand by the company in this hour of crisis. In light of the above, I fervently appeal to the board to hold together to take some important steps. Mr. T.R. Prasad is well placed to mobilize support from the government at this crucial time. With the hope that members of the Task Force and the financial
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advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well. Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible. I am now prepared to subject myself to the laws of the land and face consequences thereof. Signature (B. Ramalinga Raju) (Source: Bombay Security Exchange ,and Security and Exchange Board of India, available at www.sebi.gov.in)

Greed for money, power, competition, success and prestige compelled Mr. Raju to ride the tiger, which led to violation of all duties imposed on them as fiduciariesthe duty of care, the duty of negligence, the duty of loyalty, the duty of disclosure towards the stakeholders. According to Damodaran (2012), The Satyam scandal is a classic case of negligence of fiduciary duties, total collapse of ethical standards, and a lack of corporate social responsibility. It is human greed and desire that led to fraud. This type of behavior can be traced to: greed overshadowing the responsibility to meet fiduciary duties; fierce competition and the need to impress stakeholders especially investors, analysts, shareholders, and the stock market; low ethical and moral standards by top management; and, greater emphasis on shortterm performance. According to CBI, the Indian crime investigation agency, the fraud activity dates back from April 1999, when the company embarked on a road to doubledigit annual growth. As of December 2008, Satyam had a total market capitalization of $3.2 billion dollars. Satyam planned to acquire a 51% stake in Maytas Infrastructure Limited, a leading infrastructure development, construction and project management company, for $300 million. Here, the Rajuss had a 37% stake. The total turnover was $350 million and a net profit of $20 million. Rajus also had a 35% share in Maytas Properties, another real-estate investment firm. Satyam revenues exceeded $1 billion in 2006. In April, 2008 Satyam became the first Indian company to publish IFRS audited financials. On December 16, 2008, the Satyam board, including its five independent directors had approved the founders proposal to buy the stake in Maytas Infrastructure and all of Maytas Properties, which were owned by family members of Satyams Chairman, Ramalinga Raju, as fully
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owned subsidiary for $1.6 billion. Without shareholder approval, the directors went ahead with the managements decision. The decision of acquisition was, however, reversed twelve hours after investors sold Satyams stock and threatened action against the management. This was followed by the law-suits filed in the U.S. contesting Maytas deal. The World Bank banned Satyam from conducting business for 8 years due to inappropriate payments to staff and inability to provide information sought on invoices (www.slideshare.net). Four independent directors quit the Satyam board and SEBI ordered promoters to disclose pledged shares to stock exchange. According to Investors Protection and Redressal Forum, Investment bank DSP Merrill Lynch, which was appointed by Satyam to look for a partner or buyer for the company, ultimately blew the whistle and terminated its engagement with the company soon after it found financial irregularities (Blakely, 2009). In the context of whistle-blowing, Bowen et al., (2010) concludes that Our results suggest whistle-blowing is far from a trivial nuisance for targeted firms, and on average, appears to be a useful mechanism for uncovering agency issues. On 7 January 2009, Saytams Chairman, Ramalinga Raju, resigned after notifying board members and the Securities and Exchange Board of India (SEBI) that Satyams accounts had been falsified. Raju confessedthat Satyams balance sheet of September 30, 2008, contained the following irregularies (see Table-4): He faked figures to the extent of Rs. 5,040 crore of non-existent cash and bank balances as against Rs. 5,361 crore in the books, accrued interest of Rs. 376 crore (non-existent), understated liability of Rs. 1,230 crore on account of funds raised by Raju, and an overstated debtors position of Rs. 490 crore. He accepted that Satyam had reported revenue of Rs. 2,700 crore and an operating margin of Rs. 649 crore, while the actual revenue was Rs. 2,112 crore and the margin was Rs. 61 crore. In other words, Raju: (a) inflated figures for cash and bank balances of US$1.04 billion vs. US$1.1 billion reflected in the books; (b) an accrued interest of US$77.46 million which was nonexistent; (c) an understated liability of US$253.38 million on account of funds was arranged by himself; and (d) an overstated debtors' position of US$100.94 million vs. US$546.11 million in the books. Raju claimed in the same letter that neither he nor the managing director had benefited financially from the inflated revenues, and none of the board members had any knowledge of the situation in which the company was placed. The fraud took place to divert company funds into real-estate investment, keep high earnings per share, raise executive compensation, and make huge profits by selling stake at inflated price. In this context, Kirpalani (2009) stated, The gap in the balance sheet had arisen purely on account of inflated profits over a period that lasted several years starting in April 1999. What accounted as a marginal gap between actual operating profit and the one reflected in
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the books of accounts continued to grow over the years. This gap reached unmanageable proportions as company operations grew significantly, Ragu explained in his letter to the board and shareholders. He went on to explain, Every attempt to eliminate the gap failed, and the aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. But the investors thought it was a brazen attempt to siphon cash out of Satyam, in which the Raju family held a small stake, into firms the family held tightly (DMonte, 2008). Table 4 depicts some parts of the Satyams fabricated Balance Sheet and Income Statement and shows the difference between actual and reported finances. Table 4: Fabricated Balance Sheet and Income Statement of Satyam: As of September 30, 2008

Fortunately, the Satyam deal with Matyas was salvageable. It could have been saved only if the deal had been allowed to go through, as Satyam would have been able to use Maytasassets to shore up its own books. Raju, who showed artificial cash on his books, had planned to use this nonexistent cash to acquire the two Maytas companies (Besson, 2009). As part of their tunneling strategy, the Satyam promoters had substantially reduced their holdings in company from 25.6% in March 2001 to 8.74% in March 2008. Furthermore, as the promoters held a very small percentage of equity (mere 2.18%) on December 2008, as shown in Table 5, the concern was that poor performance would result in a takeover bid, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten. The aborted Maytas acquisition deal was the final, desperate effort to cover up the accounting fraud by bringing some real assets into the business. When that failed, Raju confessed the fraud. Given the stake the Rajus held in Matyas, pursuing the deal would not have been terribly difficult from the perspective of the Raju family. As pointed out by Shirur (2011), Unlike Enron, which sank due to agency problem, Satyam was brought to its knee due to tunneling. The company with a huge cash pile, with promoters still controlling it with a small per cent of shares (less than 3%), and trying to absorb a
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real-estate company in which they have a majority stake is a deadly combination pointing prima facie to tunneling. The reason why Ramalinga Raju claims that he did it was because every year he was fudging revenue figures and since expenditure figures could not be fudged so easily, the gap between actual profit and book profit got widened every year. In order to close this gap, he had to buy Maytas Infrastructure and Maytas Properties. In this way, fictitious profits could be absorbed through a self-dealing process. The auditors, bankers, and SEBI, the market watchdog, were all blamed for their role in the accounting fraud.

Table 5: Promoters Shareholding Pattern in Satyam from 2001 to 2008

THE AUDITORS ROLE AND FACTORS CONTRIBUTING TO FRAUD Global auditing firm, PricewaterhouseCoopers (PwC), audited Satyams books from June 2000 until the discovery of the fraud in 2009. Several commentators criticized PwC harshly for failing to detect the fraud (Winkler, 2010). Indeed, PwC signed Satyams financial statements and was responsible for the numbers under the Indian law. One particularly troubling item concerned the $1.04 billion that Satyam claimed to have on its balance sheet in non-interest-bearing deposits. According to accounting professionals, any reasonable company would have either invested the money into an interest-bearing account, or returned the excess cash to the shareholders. The large amount of cash thus should have been a red-flag for the auditors that further verification and testing was necessary. Furthermore, it appears that the auditors did not independently verify with the banks in which Satyam claimed to have deposits (Blakely, 2009). Additionally, the Satyam fraud went on for a number of years and involved both the manipulation of balance sheets and income statements. Whenever Satyam needed more income to meet analyst estimates, it simply created fictitious sources and it did so numerous times, without the auditors ever discovering the fraud. Suspiciously, Satyam also paid PwC twice what other firms would charge for the audit, which raises questions about whether PwC was complicit in the fraud. Furthermore, PwC audited the company for nearly 9 years and did not uncover the fraud, whereas Merrill Lynch discovered the fraud as part of its due diligence in merely 10 days (Thaindian News, 2009). Missing these red-flags implied either that the auditors were grossly inept or in collusion with the company
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in committing the fraud. PWC initially asserted that it performed all of the company's audits in accordance with applicable auditing standards. Numerous factored contributed to the Satyam fraud. The independent board members of Satyam, the institutional investor community, the SEBI, retail investors, and the external auditornone of them, including professional investors with detailed information and models available to them, detected the malfeasance. The following is a list of factors that contributed to the fraud: greed, ambitious corporate growth, deceptive reporting practiceslack of transparency, excessive interest in maintaining stock prices, executive incentives, stock market expectations, nature of accounting rules, ESOPs issued to those who prepared fake bills, high risk deals that went sour, audit failures (internal and external), aggressiveness of investment and commercial banks, rating agencies and investors, weak independent directors and audit committee, and whistle-blower policy not being effective.

AFTERMATH OF SATYAM SCANDAL Immediately following the news of the fraud, Merrill Lynch terminated its engagement with Satyam, Credit Suisse suspended its coverage of Satyam, and PricewaterhouseCoopers (PwC) came under intense scrutiny and its license to operate was revoked. Coveted awards won by Satyam and its executive management were stripped from the company (Agarwal and Sharma, 2009). Satyams shares fell to 11.50 rupees on January 10, 2009, their lowest level since March 1998, compared to a high of 544 rupees in 2008. In the New York Stock Exchange, Satyam shares peaked in 2008 at US$ 29.10; by March 2009 they were trading around US $1.80. Thus, investors lost $2.82 billion in Satyam (BBC News, 2009). Unfortunately, Satyam significantly inflated its earnings and assets for years and rolling down Indian stock markets and throwing the industry into turmoil (Timmons and Wassener, 2009). Criminal charges were brought against Mr. Raju, including: criminal conspiracy, breach of trust, and forgery. After the Satyam fiasco and the role played by PwC, investors became wary of those companies who are clients of PwC (Blakely), which resulted in fall in share prices of around 100 companies varying between 515%. The news of the scandal (quickly compared with the collapse of Enron) sent jitters through the Indian stock market, and the benchmark Sensex index fell more than 5%. Shares in Satyam fell more than 70%. The chart titled as Fall from grace, shown in Exhibit 3 depicts the Satyams stock decline between December 2008 and January 2009:

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Exhibit 3: Stock Charting of Satyam from December 2008 to January 2009

Immediately after Rajus revelation about the accounting fraud, new board members were appointed and they started working towards a solution that would prevent the total collapse of the firm. Indian officials acted quickly to try to save Satyam from the same fate that met Enron and WorldCom, when they experienced large accounting scandals. The Indian government immediately started an investigation, while at the same time limiting its direct participation, with Satyam because it did not want to appear like it was responsible for the fraud, or attempting to cover up the fraud. The government appointed a new board of directors for Satyam to try to save the company. The Boards goal was to sell the company within 100 days. To devise a plan of sale, the board met with bankers, accountants, lawyers, and government officials immediately. It worked diligently to bring stability and confidence back to the company to ensure the sale of the company within the 100-day time frame. To accomplish the sale, the board hired Goldman Sachs and Avendus Capital and charged them with selling the company in the shortest time possible. By mid-March, several major players in the IT field had gained enough confidence in Satyams operations to participate in an auction process for Satyam. The Securities and Exchange Board of India (SEBI) appointed a retired Supreme Court Justice, Justice Bharucha, to oversee the process and instill confidence in the transaction. Several companies bid on Satyam on April 13, 2009. The winning bidder, Tech Mahindra, bought Satyam for $1.13 per shareless than a third of its stock market value before Mr. Raju revealed the fraudand salvaged its operations (Dagar, 2009).

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Both Tech Mahindra and the SEBI are now fully aware of the full extent of the fraud and India will not pursue further investigations. The stock has again stabilized from its fall on November 26, 2009 and, as part of Tech Mahindra, Saytam is once again on its way toward a bright future.

INVESTIGATION: CRIMINAL, CIVIL CHARGES AND VICTIMS The investigation that followed the revelation of the fraud has led to charges against several different groups of people involved with Satyam. Indian authorities arrested Mr. Raju, Mr. Rajus brother, B. Ramu Raju, its former managing director, Srinivas Vdlamani, the companys head of internal audit, and its CFO on criminal charges of fraud. Indian authorities also arrested and charged several of the companys auditors (PwC) with fraud. The Institute of Chartered Accountants of India (ICAI) ruled that the CFO and the auditor were guilty of professional misconduct. The CBI is also in the course of investigating the CEOs overseas assets. There were also several civil charges filed in the U.S. against Satyam by the holders of its ADRs. The investigation also implicated several Indian politicians. Both civil and criminal litigation cases continue in India and civil litigation continues in the United States. Some of the main victims, according to Manoharan (2011), were: Employees of Satyam spent anxious moments and sleep-less nights as they faced nonpayment of salaries, project cancellations, layoffs and equally-bleak prospects of outside employment opportunities. They were stranded in many ways: morally, financially, legally, and socially. Clients of Satyam expressed loss of trust and reviewed their contracts, preferring to go with other competitors. Several global clients, like Cisco, Telstra and World Bank cancelled their contracts with the Satyam. Customers were shocked and worried about the project continuity, confidentiality and cost overrun. Shareholders lost their valuable investments and there was doubt about revival of India, as a preferred investment destination. The VC and MD of Mahindra, in a statement, said that the development had resulted in incalculable and unjustifiable damage to Brand India and Brand-IT, in particular. Bankers were concerned about recovery of financial and non-financial exposure and recalled facilities. Indian Government was worried about its image of the nation and IT-sector affecting faith to invest, or to do business in the county. In the aftermath of Satyam, Indias markets recovered and Satyam now lives on. Indias stock market is currently trading near record highs, as it appears that a global economic recovery is taking place.
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Civil litigation and criminal charges continue against Satyam. Tech Mahindra purchased 51% of Satyam on April 16, 2009, successfully saving the firm from a complete collapse. As Winkler states (2010), With the right changes, India can minimize the rate and sizeof accounting fraud in the Indian capital markets.

CORPORATE GOVERNANCE ISSUES AT SATYAM On a quarterly basis, Satyam earnings grew. Mr. Raju admitted that the fraud which he committed amounted to nearly $276 million. In the process, Satyam grossly violated all rules of corporate governance (Chakrabarti, 2008). The Satyam scam had been the example for following poor CG practices. It had failed to show good relation with the shareholders and employees. As Kahn (2009) stated, CG issue at Satyam arose because of non-fulfillment of obligation of the company towards the various stakeholders. Of specific interest are the following: distinguishing the roles of board and management; separation of the roles of the CEO and chairman; appointment to the board; directors and executive compensation; protection of shareholders rights and their executives. In fact, shareholders never had the opportunity to give their consent prior to the announcement of the Matyas deal and falsified documents with grossly inflated financial reports were delivered to them. Ultimately, shareholders were at a loss and felt cheated. Surely, questions about managements credibility were raised, in addition to the nonpayment of advance taxes to the government. Together, these issues raise questions about Satyams financial health.

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4.2 ULTRA MEGA POWER PROJECTS

The concept of UMPPs was conceived by MOP in 2005 in the backdrop of growing demand for power. To address the deficit, a need was felt for development of large capacities in power sector in India and to bring in potential private investors for developing such projects at a stage having major clearances, fuel tie-up and sale of power agreements in place. The UMPPs would meet the power needs of a number of states/distribution companies located in the states and were to be developed on a Build, Own and Operate (BOO) basis through creation of "Shell" companies. Each UMPP was projected to have a capacity of around 4,000 MW with cost ranging between `16,000 - 20,000 crore per project. Audit was conducted to obtain a reasonable assurance on the competitiveness of the Standard Bidding Documents, bidding process and to assess whether selection of the Project Developers/consultants was done with objectivity and in a transparent manner and whether land was acquired and captive coal blocks were allocated to the Developers as per their optimum requirement. Audit commenced (January 2009) with Entry Conference with PFC and was completed in September 2009. The significant issues noticed during the audit were flagged to PFC and MOP in June 2010 and August 2010 respectively. An Empowered Group of Ministers (EGOM)4 was constituted to take all major decisions concerning UMPPs including coal linkage. Since a very important role was played by MOP in this, audit was again conducted in AugustSeptember 2011 to assess the action taken by the Management/MOP (including EGOM) on the issues flagged to them. The draft report was issued to MOP in October-November 2011 and their response was received in December 2011/January 2012. The Exit conference with the Ministry and Management of PFC was held in February 2012. After incorporating the views of the Ministry, the draft Audit report was again issued to MOP in March 2012. This was followed by another Exit conference in March 2012. Energy is one of the most critical components of infrastructure that determines the economic development of a country. The growth rate of demand for power is generally higher than the GDP growth rate. Studies point that in order to have 8 per cent GDP growth per annum, power supply needs to grow around 12 per cent annually. The XI Five Year Plan emphasized the need for removing infrastructure bottlenecks for sustained growth. It, therefore, proposed an investment of around ` twenty one lakh crore (US $500 billion) in infrastructure sectors through a mix of public and private sectors to reduce deficits in identified infrastructure sectors. Public-private partnership (PPP) model was introduced to augment resource availability as well as to improve the efficiency of infrastructure service delivery. During the X Five Year Plan, the capacity
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addition achieved by the power generation sector was 21,080 MW as against the target of 41,110 MW. The cumulative installed capacity at the end of X Plan was 1,32,329 MW including 86,015 MW of Thermal. The XI Plan initially envisaged a power generation capacity addition of 78,700 MW, of which 59,655 MW was to be added in Thermal. At the time of the Mid Term Appraisal of the XI Plan, the total target was revised to 62,374 MW with target for Thermal getting reduced to 50,757 MW. Against this the capacity addition achieved at the end of XI Plan was 54,964 MW1 which included capacity addition of 48,540 MW in the Thermal Sector. The Ministry of Power (MOP), Government of India is primarily responsible for the development of electrical energy in the country. It is concerned with perspective planning, policy formulation, processing of projects for investment decision and enactment of legislation in regard to power generation, transmission and distribution. Electricity is a concurrent subject under the Constitution of India. Development of Ultra Mega Power Projects To augment the generation capacity, the Government of India (GoI) decided (November 2005) to develop Ultra Mega Power Projects (UMPPs) using Super Critical Technology2. The UMPPs would meet the power needs of a number of states/distribution companies located in the states and were to be developed on Build, Own and Operate (BOO) basis through creation of "Shell" companies. Each UMPP was projected to have a capacity of around 4,000 MW with cost of ` 16,000- 20,000 crore per project. The identification of the Project Developer was to be done on the basis of tariff based competitive bidding as per "Guidelines for determination of tariff by bidding process for procurement of power by distribution licensees" issued by Ministry of Power (MOP) in January 2005. The MOP has a crucial role in the development of UMPPs. Some of the key areas requiring MOPs intervention include coordination with Central Ministries/Agencies for ensuring coal block allotment/coal linkage, environment/ forest clearances, water linkage etc. MOP designated (November 2005) Power Finance Corporation Limited (PFC) as the nodal agency for the purpose of development of UMPPs. An Empowered Group of Ministers (EGOM) was constituted on 14 June 2007 for facilitating expeditious decisions on all major issues concerning UMPPs. While the 1st meeting of EGOM took place on 20 June 2007, the latest (14th) meeting was held on 28 April 2012.

Concept of Special Purpose Vehicles

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MOP prescribed the Special Purpose Vehicles (SPVs) route for the UMPPs. SPV is a legal entity (usually a limited company or a limited partnership) created to fulfill narrow, specific or temporary objectives and are typically used by companies to isolate them from financial risk. As per the methodology followed, SPVs acted as the 'Authorised Representative' for carrying out the bidding process on behalf of the procurers3 and facilitated preliminary activities like site identification with Central Electricity Authority (CEA), land acquisition, coal block allocation (in the case of pithead stations) obtaining various clearances relating to environment, forest etc. After the bidder was identified, the SPV was transferred to the successful bidder on execution of the Share Purchase Agreement and payment of the acquisition price to PFC. The SPVs, being separate companies, were managed by a Board of Directors (BoDs). The Chairmen of the BoDs were nominated by PFC from its own Functional Directors. The day to day affairs of each SPV were looked after by its Chairman and Chief Executive, who was also represented in the BoDs.

Status of UMPPs Initially, nine UMPPs were identified to be taken up and later on seven more projects were added to the list of UMPPs. Out of the 16 UMPPs so far identified (March 2012), PFC floated 12 shell companies (SPVs) as its wholly owned subsidiaries, each with a paid-up share capital of `5 lakh during 2005-06 to 2011-12 for development of UMPPs at six pithead sites and six coastal sites. The six pithead sites are Sasan in Madhya Pradesh, Tilaiya in Jharkhand, Surguja in Chhattisgarh and Sundergarh, Sakhigopal & Ghogarpalli in Odisha. The six coastal sites are Mundra in Gujarat, Krishnapatnam in Andhra Pradesh, Tadri in Karnataka, Munge in Maharashtra, Cheyyur in Tamil Nadu, and Tatiya in Andhra Pradesh. The SPVs invited bids from prospective bidders for six UMPPs during March 2006 to March 2012. Bidding process had been completed and contracts were awarded in respect of four UMPPs viz. Sasan, Mundra, Krishnapatnam and Tilaiya while the remaining eight are yet to be awarded (March 2012). Details of the four UMPPs awarded so far are tabulated below:

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AUDIT APPROACH Audit Scope, Objectives and Methodology The Performance Audit was commenced with the entry conference with management of PFC in January 2009. The records of PFC were initially examined between January 2009 and September 2009 to assess comprehensiveness of the bidding guidelines4 and bidding documents, effectiveness
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and transparency of the bidding process, clarity in defining the role of consultants, etc. Important issues noticed during the audit were flagged to the Management and MOP in June 2010 and August 2010 respectively. Since EGOM was constituted to take all major decisions concerning UMPPs including their coal linkages and a very important role was being played by MOP in this, as a sequel, audit was again conducted in MOP/PFC during August September 2011, wherein action taken by the Management/MOP (including EGOM) on the issues pertaining to the so far awarded four UMPPs communicated to MOP in August 2010 and other related issues were examined with following objectives: Standard Bidding documents were comprehensive without any ambiguity; Selection of Consultants for Bid Process was made through a transparent system; Bid Process management was carried out efficiently and in transparent manner; Land and coal linkages provided to the UMPPs were justified. The draft report was issued to MOP in October-November 2011 and the response of the Ministry was received in December 2011/ January 2012. The Exit conference with MOP and management of PFC was held in February 2012. After incorporating the views of the Ministry, the draft audit report was again issued to MOP in March, 2012 which was followed by another Exit conference with MOP in March 2012. MOP brought officials of Reliance Power Limited (RPL), the Developer for Sasan UMPP, who made presentations during the Exit conferences. MOP, however, in the exit conference stated (March 2012) that it could not endorse the facts and figures of RPL as they were commercial in nature. MOPs reply to the draft Audit Report received in March 2012 has also been considered while finalising this report.

Audit Criteria Audit criteria adopted for the Performance Audit included: GoI Guidelines for Tariff based Competitive Bidding. Standard Bidding Documents developed and used for awarding UMPPs. Reports of Consultant and Bid Evaluation Committees at both RFQ and RFP stage. Memorandum and Articles of Association of PFC and SPVs. Agenda/Minutes of meetings of Board of Directors of PFC/SPVs. Documents related to various linkages provided to UMPPs. Agenda/Minutes of meetings of EGOM.

Bid Process Management Bidding Process

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Promotion of competition is one of the key objectives of the Electricity Act, 2003. As such, identification of the Project Developers for UMPPs was to be done on tariff based bidding. The bidding process for UMPPs involved two stages. In the first stage called Request for Qualification(RFQ), the bidders were required to present their technical and financial capability in the prescribed formats. The bidders satisfying the minimum technical and financial criteria were eligible to participate in the second stage. In the second stage called Request for proposal(RFP), the bidders were required to quote the tariff for 25 years from the Scheduled Commercial Operation Date and the bidder who quoted the lowest levelised tariff was declared as the successful bidder. The bids were jointly evaluated by professional consultants (M/s. Ernst & Young) and an Evaluation Committee having PFC executives and representative of Central Electricity Authority (CEA) as members. The evaluation was overseen by an Apex Level Committee having members of the level of Chairman and Managing Director of PFC, Chairperson CEA, Principal Secretary (Energy) of power procuring States and other experts from the industry. The evaluation reports were accepted by the Board of Directors of the respective SPVs/the High Level Committee. The SPVs invited competitive bids for six UMPPs during the period from March 2006 till March 2012 and bidding process has been completed and contracts awarded in respect of four UMPPs viz. Sasan, Mundra, Krishnapatnam and Tilaiya. Bid (RFQ) for Chhattisgarh Surguja UMPP was invited on 15 March 2010 but last date for submission of bids has been extended from time to time upto 04 June 2012. In respect of the UMPP at Sundergarh, RFQ bids were opened on 1 August 2011 and bid evaluation was in progress (March 2012). The tariffs quoted by the bidders in the four awarded UMPPs are tabulated in Annexure 1.

Appointment of bid process management Consultant Competitive bids were invited for appointment of Consultants to assist PFC in conducting the bid process for five UMPPs. The scope of Consultants involved participation in preparation and issue of Bidding Documents (RFQ & RFP), participation in pre-bid and post-bid conferences, evaluation of Bid documents and assisting in finalizing the agreement with successful bidders. Audit found that the lowest bids of M/s. ICRA of ` 54.50 lakh and ` 44.50 lakh for Sasan and Mundra UMPPs respectively were not considered though the bidder was declared technically qualified. The work was awarded to

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M/s. Ernst & Young (M/s E & Y) at higher rates of ` 1.28 crore each on the ground that they were managing bid process of Anpara power project in Bangladesh. Further, ICRA had quoted ` 54.50 lakh for Krishnapatnam UMPP. However, the consultancy job for this UMPP was awarded to M/s. E&Y at ` 60 lakh as against ` 1.28 crore first quoted by them. For Tilaiya UMPP the job was awarded to M/s. E&Y at ` 60 lakh without inviting any bid. Thus, principle of equity in public procurement laid down in Rule 160 of General Financial Rules was not followed in the appointment which also resulted in extra expenditure of `1.68 crore. Ministry replied (December 2011 and March 2012) that there was large variation in the technical rating and prices quoted. UMPPs being a prestigious assignment, it was found prudent to have presentations from the top three bidders (ICRA, E&Y and CRISIL). Since M/s E & Y had advised on bid process management of power projects, the High Level Committee6 found them most suitable for the assignment. The reply is not acceptable since M/s. ICRA was technically qualified by bid evaluation committee but its offer was not considered even though their price was the lowest. Audit further noticed that PFC had to subsequently debar M/s. E & Y for a period of three years from future assignments from July 2011 due to deficiencies in Bid evaluation. The Ministry has also issued a show cause notice to them for their omission and commission in the evaluation of bid documents of Sasan & Mundra UMPPs.

Bid Documentation The bid documents for the UMPPs (RFQ and RFP) were prepared by the Consultant (M/s. E&Y) based on the Standard Bidding Documents (SBDs) developed and notified (March 2006) by the MOP. It was noticed in Audit that EGOM in its meeting held on 06/07 September 2007 directed that the SBDs being utilized for UMPPs may be got vetted from a Solicitor/law consultancy firm having sufficient experience in dealing with international power sector contracts. Accordingly, two legal firms were engaged for this work but on getting their divergent view on the SBDs, EGOM in its meeting held on 15 January 2010 directed that the comments of the Planning Commission, Department of Legal Affairs and Department of Economic Affairs should be obtained on SBDs. Bids for infrastructure projects of such huge magnitude had, thus, been called for on the basis of bid documents which were not vetted by the Department of Legal Affairs.

Softening of conditions in the Standard Bidding Documents (SBDs)

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The following significant amendments were carried out in the SBDs by MOP from time to time based on feedback of the bidders and recommendations of PFC. (i) Change in equity holding requirement of Parent/Affiliate As per the bid criteria, a bidding company could take 100 per cent benefit of the technical and financial capability of a Parent or its Affiliates for the purpose of qualification. As per the initial bid document issued in March 2006, the equity holding requirement of such Parent/Affiliate in the bidding company was 51 per cent but after pre-bid conference with bidders, the equity holding requirement was scaled down from 51 per cent to 26 per cent in May 2006. This amended criteria was made effective in the bidding documents of all four UMPPs awarded so far. The change which was made on the request of bidders and advice of the Consultant M/s. E & Y violated the basic principles of ownership and control given in Accounting Standards Interpretation (ASI) 24 issued by the Institute of Chartered Accountants of India. ASI 24 defines control as 'the ownership, directly or indirectly through subsidiary(ies), of more than one-half of the voting power of an enterprise or control of the composition of the Board of Directors in the case of a company so as to obtain economic benefits from its activities'. Model RFQ document of Government of India for PPP Projects has also prescribed more than 50 percent share holding as the criteria. The recommendation for making the amendments was sent by PFC (May 2006). Audit examined the files of MOP relating to approval of the above proposal and found that initially MOP had reservations8 about the dilution and stated that management control should be included as a condition in addition to 26 per cent equity holding. This view was, however, changed later citing discussions held with the consultant M/s. E & Y who explained that it would be difficult to describe 'effective management control' and assured that 26 per cent shareholding meant control. At the time of bid submission by RPL for Sasan, Mundra and Krishnapatnam UMPPs, Reliance Energy Limited9 (REL) had an equity holding of only 26 per cent in RPL. RPL did not have any technical or financial capability of its own and had used that of REL. Ministry stated (March 2012) that the bidders were required to submit an undertaking supported by Board Resolution for equity commitment in the project to enable the bidding company to draw upon the experience of the Parent/Affiliate. The Ministry further added that in all the UMPPs, the same criteria were followed for all the bidders without having any specific Developer in mind and that in no case, the bidder defaulted for want of financial and technical support of the parent/affiliate. The reply does not take into account the fact that shareholding of 26 per cent would only enable an entity to block any special resolutions requiring three-fourth majority whereas the power to pass
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ordinary resolutions by way of 51 per cent shareholding is needed to draw upon the experience of the Parent/Affiliate to execute a large project. (ii) Reduction of normative availability and penalty In the original version of SBDs (March 2006), the normative availability10 for UMPPs was prescribed at 80 per cent. Based on the suggestions of CERC and the concern of the procuring States like Gujarat about the incentive above 80 per cent availability being too liberal, the normative availability was raised to 85 per cent in the revised Standard bidding documents issued in August 2006. The normative availability was however, reduced from 85 per cent stipulated in the RFP issued in August 2006 to 80 per cent in September 2006 to bring down the risk of Developers. The penalty is used as a deterrent to avoid any slippages in envisaged terms and conditions by the Project Developers. However, the base for levy of penalty was also reduced from 80 per cent to 75 per cent before receiving financial bids. These two amendments were made effective in the bidding documents of all four UMPPs awarded so far. Audit observed that since the UMPPs were meant to have higher operational efficiency, reduction of both normative availability from 85 per cent to 80 per cent and penalty base from 80 per cent to 75 per cent were not in the interest of operational efficiency of UMPPs. Ministry replied (March 2012) that as per the SBDs, the normative availability shall be aligned to the level specified in the tariff regulations of CERC prevailing at the time of bid process (which was 80 per cent). The Ministry also added that there is a need to instill confidence in the power Project Developers since they have a higher risk perception and that high performance parameters would generally lead to high cost and result in higher tariff. The reply is not acceptable since as per amendment to the Guidelines for Determination of Tariff by Bidding Process for Procurement of Power by Distribution Licensees notified in August 2006, the normative availability shall be higher by a maximum of 5 per cent of the level specified in the tariff regulations of the Central Electricity Regulatory Commission (CERC) prevailing at the time of the bid process. In view of this, the reduction of normative availability in September 2006 was not in accordance with the Guidelines. Moreover, while revising the normative availability to 85 per cent in January 2009, CERC observed that the average availability of NTPC thermal power stations for the period 2004-05 to 2007-08 having 200 MW sets and above was in the range of around 86 to 97 per cent except Farakka thermal power station due to problem in coal supply. Therefore, reduction of

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normative availability from 85 per cent to 80 per cent and reduction of base for levy of penalty for UMPPs which are based on superior technology was not justified. (iii) Dilution of equity lock-in requirements for the sponsoring entity Equity lock-in requirement for the selected bidder in the SPV, was reduced (September 2007) from 12 years from COD to 5 years from COD for Krishnapatnam and Tilaiya UMPPs after the award of Sasan and Mundra UMPPs. Further, the Developers were permitted to cede managerial control (i.e. equity holding can be reduced from 51 per cent to 26 per cent) in all the four UMPPs after two years of commercial operation, though the quoted tariff was valid for 25 years. A comparison of initial and revised equity lock in requirements for UMPPs is tabulated below:

Ministry stated (January & March 2012) that equity lock-in has been ensured in the pre-COD phase of the project when the investment is to be made in the project in the form of equity and debt and that the project risk is comparatively less once the project is commissioned. Ministry further stated (March 2012) that equity lock-in provisions were changed after approval of Empowered Group of Ministers (EGOM). UMPPs are mega projects using super critical technology and their economic, efficient and effective operations is very important throughout the 25 years of their operation by the Developers to ensure supply of energy to consumers at agreed rates. Thus, allowing the Developers to cede management control after 5 years of the COD may not be advisable since adequate backing of the sponsoring entity would be lacking for SPVs during the major part of the operational period which may adversely affect the operational performance of UMPPs resulting in non-availability of power to consumers at agreed rates. Moreover, this does not provide safeguard against the Developer using substandard capital equipment which may breakdown frequently during the operational period after control is ceded. In brief, some of the key conditions of the Standard Bidding Documents were diluted citing the need for increasing competition or providing comfort to the Developers. However, these measures have decreased the maintenance safeguards for the projects.
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Ministry of Power informed in the Exit Conference held on 21 February 2012 that the Audit concerns would be considered in the revised Standard bidding documents which were under finalisation in the Ministry. Lower networth requirement for bidders As per Ministry of Finance guidelines, for PPP projects costing ` 1000 crore or more the requirement of net worth of the bidders should not be less than 15 per cent. However, in the case of UMPPs, the minimum net worth for bidders was ` 1000 crore or equivalent USD which was around 5 per cent of Project Cost of around ` 20000 crore. Ministry stated (December 2011 and March 2012) that the qualification requirements enabled wide competition among the bidders and had a reflection in lower tariff. Audit is of the opinion that fixing low net worth criteria involves unwarranted risk for the UMPPs. To conclude, inappropriate dilution of SBD conditions of equity holding, normative availability/penalty, equity lock in period and low networth for bidders etc. warrant a stringent and close monitoring not only on the completion/ commissioning of the Projects but also on the efficient operation of UMPPs by the Project Developers. Financial benefit to Project Developer Financial benefit to Developer in permitting usage of surplus coal (i) Allocation of coal blocks for Sasan Project Sasan Power Limited (an SPV created for development of Sasan UMPP) was initially allocated (September 2006) two coal blocks - Moher (Geological reserves of 402 million tonne) and MoherAmlohri Extension (Geological reserves of 198 million tonne) to meet its coal requirement. In the Request for Proposal document for the Sasan UMPP, the bidders were informed that coal blocks with reserves of about 700- 800 million tonne will be allocated and the project would require the development of a coal mine with production of 18-20 million tonne per annum. The allocation was made based on Geological reserves and as the production from the above two blocks was considered insufficient by MOP, Secretary (Power) requested (9th October 2006) Ministry of Coal (MOC) to allocate another block to Sasan UMPP. Accordingly, MOC allocated (26 October 2006) Chhatrasal coal block after de-allocating the same from NTPC Limited prior to opening of financial bids (7 December 2006) for Sasan UMPP. The total Geological reserves of the three coal blocks were estimated at 700- 800 million tonne. At the time of allocation of coal blocks, data regarding actual availability of coal for the project was not available in the absence of mining plan. The Sasan UMPP
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was awarded to the bidder (i.e. RPL) who quoted the lowest levelised tariff and the contract agreements15 were signed on 7 August 2007 for transfer of Sasan Power Limited (the SPV) to RPL. (ii) Existence of surplus coal in the coal blocks The Chief Minister of Madhya Pradesh wrote to the Prime Minister on 2 November 2007 stating that it made economic sense to use the excess coal in the captive blocks of Sasan UMPP for power generation by the power plant being set up by RPL at Chitrangi tehsil in the vicinity of these mines. It is, however, noticed that the mining plan of Moher & Moher-Amlohri Extension and Chhatrasal coal blocks were submitted by RPL in March 2008(revised in September 2008) and July/August 2008 respectively. The Chief Ministers above letter sent (November 2007) three months after the contract was awarded (August 2007) to RPL referred to excess availability of coal even though the mining plans of these three coal blocks were not available on that date. Prime Minister's Office sought comments on the proposal from Ministry of Coal (MOC) which in turn, sought the comments of MOP. (iii) Issues before the EGOM The request made by the Chief Minister, Madhya Pradesh was referred to the EGOM on UMPPs16. In the agenda note dated 23 May 2008 for the EGOM meeting held on 28 May 2008, MOP stated that the request of the Chief Minister of Madhya Pradesh was examined by MOP with CEA and the latter pointed out that: (i) The total Geological reserves of the three blocks are estimated at about 630- 700 million tonne and the extractable reserves are generally around 70% of GR, however, actual quantity available would be known only after the mining plans are prepared. (ii) Considering the average gross calorific value of 4000 K Cal/kg for coal, the requirement of coal for the Sasan UMPP at 90% plant load factor (PLF) for 25 years works out to be 18 million tonne per annum. According to CEA's assessment, the extractable coal reserves from Moher, Moher-Amlohri Extension and Chattrasal blocks may be just sufficient for the Sasan UMPP taking into account the consumption of Sasan UMPP. As such it may not be feasible to meet the coal requirement for an additional 4000 MW power project (Chitrangi project) from these three coal blocks. (iii) If surplus coal is available, it would be used by the Sasan UMPP itself during its extended span beyond 25 years. MOP added that decision regarding disposal of surplus coal, if any, can be taken only on the basis of the prevailing policy/instruction of the government.

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In the Agenda Note dated 23 May 2008 for the EGOM, MOP inter-alia proposed to communicate the following to MOC: Coal Ministrys allocation letters clearly state that the coal produced from these mines would be exclusively used in the Sasan UMPP. Since mining activity at the site has not commenced as yet, therefore, at the present there is no basis to conclude that surplus coal will be available from these blocks. If surplus coal is available, it would be used by the Sasan project itself during its extended span beyond 25 years. Furthermore, decision regarding disposal of surplus coal if any, can be taken only on the basis of the prevailing policy/ instruction of the government at the relevant point of time as already stipulated in the allocation letter of the Coal Ministry. The EGOM deliberated (28 May 2008) on the issue and recorded, "While there was clear consensus that coal from any coal mine allocated for development of a tariff based UMPP should be utilised for generation of power, it was generally agreed that in the first instance, any Developer should implement the UMPP project for which coal mines had been allocated. Thereafter it should be ascertained whether surplus coal was available from the allotted mines. It would also be appropriate to sell any additional power generated through a tariff bidding route. EGOM directed that information about structure in respect of ownership, mode of sale of power and tariff of Chitrangi project be obtained from the State Government of Madhya Pradesh. (iv) RPL's initial expression of inability to increase production from the mines RPL submitted a mining plan to MOC in March 2008 for Moher & Moher-Amlohri Extension mines for a targeted production level of 12 million tonne per annum. At the time of presentation of mining plan for 12 million tonne, RPL was asked17 to examine the possibility of enhancement of production beyond 12 million tonne so that the projected total requirement of 16 million tonne to the downstream Sasan UMPP could be entirely met from Moher & Moher-Amlohri Extension Blocks. However, RPL conveyed that the blocks cannot sustain 16 million tonne production and that they have been allotted another block in the region namely Chhatrasal to meet the balance requirement of coal. This mining plan was approved by the MOC on 4 June 2008. (v) RPL's letter dated 06 August 2008 seeking permission for using 'incremental' coal In a surprising turnaround of the position taken by RPL in March 2008 before the Standing Committee, RPL sent letter dated 6 August 2008 to the Minister of Power stating that they have performed detailed studies on the allotted coal blocks and proposed to develop them using latest world class technologies resulting in increased recovery factor and higher annual production. RPL
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requested that the 'incremental' coal produced can be used for other power projects of the group, supplying power through tariff based competitive bidding with certain undertakings. RPL, thus, established that there would be surplus coal in deviation with its earlier stand. RPL's letter dated 6 August 2008 was also received in the MOC on 7 August 2008. Agenda Note for the EGOM meeting held on 14 August 2008 inter-alia had an item titled Use of surplus coal, if any, from the mines allocated to the UMPPs. This agenda note did not make any reference to the RPL letter of 6 August 2008 and its changed stance. The request of RPL was taken up for consideration by EGOM and agreed to by EGOM. (vi) EGOM recommendation EGOM noted in the meeting held on 14 August 2008 that in terms of allotment letter of MOC dated 26 October 2006, RPL was permitted to utilize the surplus coal with the previous approval of the Central Government. Accordingly, EGOM recommended to MOC to allow RPL the use of the surplus coal from blocks allotted to Sasan UMPP by other projects of RPL subject to the following undertakings: Incremental coal quantity would be determined based on the Mine Plan ap proved by Ministry of Coal, GoI. The 3960 MW Sasan UMPP will always have the first right and overriding priority over all coal produced from the allotted blocks and the allottee shall always ensure that the generation from the UMPP for the entire contracted period will not be allowed to be affected by utilization of incremental coal by other projects of the Group. Any loss in generation in the awarded UMPP at Sasan shall only be on account of genuine reasons such as maintenance, repairs etc. End use of coal from these blocks would be restricted to power generation. The power generated by utilizing incremental coal from these captive coal blocks would be sold through tariff based competitive bidding. The above undertakings were similar to those proposed by RPL in their letter dated 6 August 2008. On 18 November 2008, MOC conveyed in-principle approval to the above recommendation of EGOM to the Ministry of Power with endorsement to the Developer. (vii) Mining Plans and Approvals In March 2009, the Standing Committee of MOC took up the Mining Plan of Chhatrasal Block (Production 5 million tonne per annum) for approval. The minutes of the Standing Committee revealed the following:

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-------- EGOM decision of meeting the entire requirement of the Sasan UMPP as also utilisation of surplus coal thus stands fulfilled with the allotment of Moher & Moher- Amlori block itself. The need for the allocation of an additional block thus prima facie had no justification except that the three blocks were mentioned in the bid documents and that the EGOM decision also refers to these three blocks for the Sasan UMPP. ------ there is no justification for allocation of Chhatrasal coal block for supplying coal to the Sasan UMPP. The Committee was therefore, initially inclined to return this Mining Plan as it was originally meant primarily for supplying coal to Sasan UMPP. However, taking a larger view in the context of the overall need for stepping up coal production and in the light of extant EGOM decision and also since this block does stand allocated for the UMPP, it was felt that the committee should go ahead and consider the mining plan as per the mining feasibility and as provided under the purview of Standing Committee. Thus, even the Standing Committee headed by the Secretary (Coal) was aware of the fact that Chhatrasal Coal Block was not really required by the Sasan UMPP but had to relent as this block was part of the bid documents and EGOM had already recommended usage of surplus coal by the Developer in their other Projects. A gazette notification granting permission to the Developer to utilize up to a maximum of 9 million tonne per annum of coal from the Sasan coal blocks in the Chitrangi Project of the Developer was issued on 17 February 2010. A chronology of the events leading to grant of permission for use of surplus coal from captive mines of Sasan UMPP for Chitrangi Project is also given in Annexure 4. (viii) Audit Observations (a) Allocation of surplus coal The observations of audit on the sequence of events mentioned above and the decisions emanating from each are the following: (i) It is not clear how MOP on 9 October 2006 came to the conclusion that the two initially allocated blocks for the Sasan UMPP would be inadequate. (ii) The basis on which MOC was prevailed upon in October 2006 itself to allot an additional block (Chhatrasal) of coal to Sasan UMPP by de-allocating it from the Public Sector NTPC is not clear. (iii) Till March 2009, MOC was taking the stand that coal from two blocks (Moher and MoherAmlohri Extension) was sufficient for the Sasan UMPP and that there is no justification for allocating a third block (Chhatrasal) to the Developer. (iv) In March 2008, RPL maintained that there was no possibility to enhance production beyond 12 million tonne from the two blocks of Moher and Moher-Amlohri Extension.
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(v) However, on 6 August 2008, RPL intimated of their intention to use latest world class technology leading to increased recovery factor and higher annual production leading to the mined coal from these three blocks becoming surplus to the requirement of Sasan UMPP. (vi) This indeed was the position which the Chief Minister of Madhya Pradesh was aware of when he wrote to the Prime Minister in November 2007 itself seeking diversion of the surplus coal to Chitrangi. (vii) This revelation by RPL, provided to the EGOM in its meeting on 14 August 2008, led to their deciding that indeed surplus coal would be available and this could be diverted to Chitrangi. (b) Vitiation of the Bidding Process The permission to use surplus coal in other projects of the Developer vitiated the sanctity of the bidding process since it amounts to post bid concessions to the Developer having significant financial implication as explained below: _ The EGOM in its meeting held on 28 May 2008 had sought information about structure in respect of ownership, mode of sale of power and tariff of Chitrangi Project. However, without getting this information from Madhya Pradesh Government, EGOM recommended (14 August 2008) granting of permission for usage of incremental coal. _ EGOM in its meeting held on 14 August 2008 had recommended that power generated by utilizing incremental coal from captive coal blocks of Sasan UMPP would be sold through tariff based competitive bidding. But RPL was granted permission by MOC (February 2010) to use the surplus coal in Chitrangi Project the tariff of which was already accepted in May 2008 at ` 2.45 per unit i.e. prior to the EGOM decision (August 2008) on usage of surplus coal for Chitrangi Project. For this purpose RPL had bid along with other bidders citing independent fuel arrangement (from Mahanadi Coalfields Limited/112.22 million tonne of coal reserves in the Rampia and dip-side of Rampia non-coking coal blocks in the state of Odisha). Ministry of Power in its reply (December 2011 and March 2012) stated that since every qualified bidder had information about the clauses of the coal block allocation letter prior to submission of financial bid, there was no vitiation of commercial condition. The contention of the Ministry is not tenable in view of the following: _ The clauses of the coal allocation letter do not explicitly state that Central Government would indeed grant permission to the Developer to use the surplus coal in their other projects. This fact was not disclosed upfront in the allocation letters and in the absence of clarity on this issue, it was left to
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the bidders to interpret the implication of the clauses of allocation letter. The relevant clauses in the allocation letter are reproduced below: The coal produced from these mines would be exclusively used in the Sasan UMPP- Clause (i). The modalities of disposal of surplus coal/middlings/rejects, if any, would be as per the prevailing policy/instructions of the Government at the relevant point in time and could also include handing over such surplus coal/middlings/rejects to the local CIL subsidiary or to any person designated by it at a transfer price to be determined by the Government.- Clause (vi). No coal shall be sold, delivered or disposed of except for the stated captive mining purposes except with the previous approval of the Central Government.'- Clause (xii). A normal understanding of reading these three clauses would imply the meaning that they are restrictive and designed to ensure non-diversion of coal. _ This seems to have been the conclusion that even NTPC came to as they did not factor into their bid the possibility of using the surplus coal from the captive mines of Sasan UMPP. _ M/s. Tata Power Company Limited, which was also a bidder for the Sasan UMPP has also contested the post-bid permission of surplus coal diversion facility to RPL as that was not their understanding either, from a reading of the pre-bid conditions. A special leave petition filed (May 2009) by Tata Power Limited against permission to RPL to use surplus coal from captive coal mines of Sasan UMPP is pending in the Hon'ble Supreme Court of India. _ The Inter Ministerial Group (IMG), while deliberating on the safeguards issue against misuse of coal mine, noted in September 2007 that the allocation of coal mine had an explicit condition that its coal should be used solely for the purpose of the Sasan UMPP or else the lease was liable to be cancelled. This IMG was constituted in August 2007 by the MOP on the recommendation of EGOM to review the Standard Bidding Documents for UMPPs. _ Since fuel cost is an important aspect of commercial consideration in arriving at the tariff, any relaxation of condition subsequent to bidding would vitiate the bidding process. As explicit mention of usage of surplus coal in other projects was not unambiguously transparent in the coal block allocation letters, the bidders who lost out did not have equal opportunity to bid under the relaxed condition. To sum up, the conclusion that can be drawn is: (i) The advice of MOP in October 2006 that Sasan UMPP would require an additional coal block was based on insufficient data as mining plan of Moher and Moher-Amlohri Extension was not available.

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(ii) The condition purportedly permitting diversion of surplus coal was not explicitly stated in the bid document. (iii) The EGOM evidently was not provided accurate information about adequacy or otherwise of coal availability in the two blocks initially allocated to Sasan UMPP leading to their decision permitting usage of surplus coal. (iv) Permission to utilize surplus coal for projects with tariff based competitive bidding has been violated since tariff for Chitrangi Project, for which such permission was granted, was already fixed before the permission was granted. Government need to generate confidence among bidders of future UMPPs of its equity and fairness. Audit would recommend that to ensure fair play, a level playground and transparency of the bidding process for future Developers to derive comfort in Government action, the allocation of the third coal block (Chhatrasal) be appropriately reviewed. Since the Developer had committed that he would be able to source 20 million tone from the two blocks (Moher and Moher-Amlohri Extension) there would be adequate coal to feed the Sasan UMPP.

Financial Impact Audit has attempted to quantify the post-bid concession extended to RPL in Sasan UMPP on an estimated basis and these figures are only indicative in nature. The Sasan UMPP was awarded three coal blocks namely Moher, Moher-Amlohri Extension and Chhatrasal. As per the mining plan submitted by RPL, Moher and Moher-Amlohri Extension would produce 20 million tonne of coal per annum while Chhatrasal would produce 5 million tonne of coal per annum against a requirement of 16 million tonne of coal per annum for Sasan UMPP. As a result, surplus coal amounting to 9 million tonne per annum would be available to RPL for utilizing in its other power project, i.e. Chitrangi. The surplus coal would create additional electricity generation capacity18 of 461 MW in the 1st year, 2075 MW every year from 2nd to 16th year and 1383 MW, 1153 MW, 1153 MW and 922 MW in the 17th, 18th, 19th and 20th year respectively as per RPLs own stated plan to MOC. Audit noted that the tariff for Sasan is based on coal being sourced from a captive mine while the tariff of Chitrangi is based on independent fuel arrangements i.e. coal being sourced from Coal India Limited or its subsidiaries, e-auction or imports etc. However, if the coal from the Sasan UMPP coal blocks is used for Chitrangi project, the tariff originally quoted by RPL for the Chitrangi project would no longer be based on assumptions of the costlier coal1. The tariffs quoted by RPL for different projects are given below:
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Comparing the higher tariffs for Chitrangi project to the tariff of the Sasan UMPP, it is seen that the benefit of using surplus coal would not pass on to the consumers in the next 20 years as the tariff for Chitrangi Project had already been fixed as per the bid of RPL. There would, thus, be unintended benefit accruing to RPL based on their projected capacity. The overall financial benefit to RPL due to impact of the difference in tariff comes to ` 29,033 crore with a net present value of ` 11,852 crore. The detailed calculations are made in Annexure 5A and Annexure 5B. Ministry replied (March 2012) that costs and tariff for two projects cannot be compared. Similar views were expressed by RPL citing variations in project structure such as point of delivery of electricity, comfort of clearances for Sasan UMPPs and the lack of it for Chitrangi project etc. Audit is of the opinion that the comparison between Sasan and Chitrangi projects is not out of place since both the projects (Sasan and Chitrangi) are

To conclude, the post-bid concessions extended to RPL in Sasan UMPP resulted in financial benefit to RPL to the tune of ` 29,033 crore with a net present value of ` 11,852 crore.

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LESSONS LEARNED
SATYAM SCAM The 2009 Satyam scandal in India highlighted the nefarious potential of an improperly governed corporate leader. As the fallout continues, and the effects were felt throughout the global economy, the prevailing hope is that some good can come from the scandal in terms of lessons learned (Behan, 2009). Here are some lessons learned from the Satyam Scandal: Investigate All Inaccuracies: The fraud scheme at Satyam started very small, eventually growing into $276 million white-elephant in the room. Indeed, a lot of fraud schemes initially start out small, with the perpetrator thinking that small changes here and there would not make a big difference, and is less likely to be detected. This sends a message to a lot of companies: if your accounts are not balancing, or if something seems inaccurate (even just a tiny bit), it is worth investigating. Dividing responsibilities across a team of people makes it easier to detect irregularities or misappropriated funds. Ruined reputations: Fraud does not just look bad on a company; it looks bad on the whole industry and a country. Indias biggest corporate scandal in memory threatens future foreign investment flows into Asias third-largest economy and casts a cloud over growth in its once-booming outsourcing sector. The news sent Indian equity markets into a tail-spin, with Bombays main benchmark index tumbling 7.3% and the Indian rupee fell (IMF, 2010). Now, because of the Satyam scandal, Indian rivals will come under greater scrutiny by the regulators, investors and customers. Corporate Governance needs to be stronger: The Satyam case is just another example supporting the need for stronger CG. All public-companies must be careful when selecting executives and toplevel managers. These are the people who set the tone for the company: if there is corruption at the top, it is bound to trickle-down. Also, separate the role of CEO and Chairman of the Board. Splitting up the roles, thus, helps avoid situations like the one at Satyam. The Satyam Computer Services scandal brought to light the importance of ethics and its relevance to corporate culture. The fraud committed by the founders of Satyam is a testament to the fact that the science of conduct is swayed in large by human greed, ambition, and hunger for power, money, fame and glory. Scandals from Enron to the recent financial crisis have time and time again proven that there is a need for good conduct based on strong ethics. Not surprising, such frauds can happen, at any time, all over the world. Satyam fraud spurred the government of India to tighten CG norms to

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prevent recurrence of similar frauds in the near future. The government took prompt actions to protect the interest of the investors and safeguard the credibility of India and the nations image across the world.

ULTRA MEGA POWER PROJECT Taking a larger perspective and as the Government is left with the fait accompli of continuing with the bidders since the respective SPVs have already been transferred to the bidders and financial closure has been achieved in two UMPPs, there is a need to closely monitor the physical progress of the projects so as to avoid any slippage in capacity addition programme. The bid evaluation process may be streamlined to ensure strict compliance of the qualifying criteria and adequate due diligence done in the selection of appropriate bidder. To ensure fair play, a level playground and transparency of the bidding process for future Developers to derive comfort in Government action, the allocation of the third coal block (Chhatrasal) be appropriately reviewed. Since the Developer had committed that he would be able to source 20 million tone from the two blocks there would be adequate coal to feed the Sasan UMPP.

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CONCLUSION
Fraud is a deception. Whatever industry the fraud is situated in, or whatever kind of fraud you visualize, deception is always the core of fraud. Fraud is a million dollar business and it is increasing every year. Applied to the 2011 Gross World Product, as per ACFE Survey, this figure translates to a potential projected annual fraud loss of more than $3.5 trillion. Both internal and external fraud present a substantial cost to our economy worldwide. It is widely accepted that corporate entities of all sizes across the world are susceptible to accounting scandals and frauds. From Enron and WorldCom in 2001 to Madoff and Satyam in 2009, accounting fraud has been a dominate news item in the past decade. Despite intense efforts to stamp out corruption, misappropriation of assets, and fraudulent financial reporting, it appears that fraud in its various forms is a problem that is increasing, both in frequency and severity. Financial statement fraud was a contributing factor to the recent financial crisis and threatens the efficiency, liquidity, and safety of both debt and capital markets (Black, 2010). Furthermore, frauds and scandals have significantly increased uncertainty and volatility in the financial markets, thereby shaking investor confidence worldwide. It also reduced the creditability of financial information that investors use in investment decisions (Rezaee and Kedia, 2012). However, there has been ample evidence that rising number of frauds have undermined the integrity of financial reports, contributed to substantial economic losses, and eroded investors confidence in the usefulness and reliability of financial statements. Given the current state of the economy and recent corporate scandals, fraud is still a top concern for corporate executives. Hence, major financial reporting frauds need to be studied for lessons learned and strategies to be followed so as to avoid (or reduce) the incidence of such frauds in the coming future. Recent corporate frauds and the outcry for transparency and honesty in reporting have given rise to two outcomes. First, forensic accounting skills have become very crucial in untangling the complicated accounting maneuvers that have obfuscated financial statements. Second, public demand for change and subsequent regulatory action has transformed CG scenario across the globe. In fact, both these trends have the common goal of addressing the investors concerns about the transparent financial reporting system. The failure of the corporate communication structure, therefore, has made the financial community realize that there is a great need forskilled professionals that can identify, expose, and prevent structural weaknesses in three key areas: poor corporate governance, flawed internal controls, and fraudulent financial statements.

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Undoubtedly, forensic accounting skills are becoming increasingly relied upon within a corporate reporting system that emphasizes its accountability and responsibility to stakeholders (Bhasin, 2008). In addition, the CG framework needs to be first of all strengthened and then implemented in letter as well as in right spirit. The increasing rate of white-collar crimes, without doubt, demands stiff penalties and punishments. Perhaps, no financial fraud had a greater impact on accounting and auditing profession than Enron, WorldCom, and recently, Indias Enron: Satyam. Unlike Enron, which sank due to agency problem, Satyam was brought to its knee due to tunneling. All these frauds have led to the passage of the Sarbanes-Oxley Act in July 2002, and a new federal agency and financial standard-setting body, the Public Companies Accounting Oversight Board (PCAOB). It also was the impetus for the American Institute of Certified Public Accountants (AICPA) adoption of SAS No. 99, Consideration of Fraud in a Financial Statement Audit. But it may be that the greatest impact of Enron and WorldCom was in the significant increased focus and awareness related to fraud. It establishes external auditors responsibility to plan and perform audits to provide a reasonable assurance that the audited financial statements are free of material frauds. As part of this research study, one of the key objective was to examine and analyze in-depth the Satyam Computers Limiteds accounting scandal by portraying the sequence of events, the aftermath of events, the key parties involved, major reforms undertaken in India, and learn some lessons from it. Unlike Enron, which sank due to agency problem, Satyam was brought to its knee due to tunneling. The Satyam scandal highlights the importance of securities laws and CG in emerging markets. There is a broad consensus that emerging market countries must strive to create a regulatory environment in their securities markets that fosters effective CG. India has managed its transition into a global economy well, and although it suffers from CG issues, it is not alone as both developed countries and emerging countries experience accounting and CG scandals. The Satyam scandal brought to light, once again, the importance of ethics and its relevance to corporate culture. The fraud committed by the founders of Satyam is a testament to the fact that the science of conduct is swayed in large by human greed, ambition, and hunger for power, money, fame and glory. All kind of scandals/frauds have proven that there is a need for good conduct based on strong ethics. The Indian government, in Satyam case, took very quick actions to protect the interest of the investors, safeguard the credibility of India, and the n ations image across the world. Moreover, Satyam fraud has forced the government to rewrite CG rules and tightened the norms for auditors and accountants. The Indian affiliate of PwC routinely failed to follow the most
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basic audit procedures. The SEC and the PCAOB fined the affiliate, PwC India, $7.5 million in what was described as the largest American penalty ever against a foreign accounting firm. (Norris, 2011) According to President, ICAI (January 25, 2011), The Satyam scam was not an accounting or auditing failure, but one of CG. This apex body had found the two PWC auditors prima-facie guilty of professional misconduct. The CBI, which investigated the Satyam fraud case, also charged the two auditors with complicity in the commission of the fraud by consciously overlooking the accounting irregularities. The culture at Satyam, especially dominated by the board, symbolized an unethical culture. On one hand, his rise to stardom in the corporate world, coupled with immense pressure to impress investors, made Mr. Raju a compelled leader to deliver outstanding results. On the contrary, Mr. Raju had to suppress his own morals and values in favor of the greater good of the company. The board connived with his actions and stood as a blind spectator; the lure of big compensation to members further encouraged such behavior. But, in the end, truth is sought and those violating the legal, ethical, and societal norms are taken to task as per process of law. The public confession of fraud by Mr. Ramalinga Raju speaks of integrity still left in him as an individual. His acceptance of guilt and blame for the whole fiasco shows a bright spot of an otherwise tampered character. After quitting as Satyams Chairman, Raju said, I am now prepared to subject myself to the laws of land and face consequences thereof. Mr. Raju had many ethical dilemmas to face, but his persistent immoral reasoning brought his own demise. The fraud finally had to end and the implications were having far reaching consequences. Thus, Satyam scam was not an accounting or auditing failure, but one of CG. Undoubtedly, the government of India took prompt actions to protect the interest of the investors and safeguard the credibility of India and the nations image across the world. In addition, the CG framework needs to be strengthened, implemented both in letter as well as in right spirit, and enforced vigorously to curb hitecollar crimes. It is universally accepted that lasting solutions can be found by transforming human consciousness through an inner discipline and higher moral reasoning. An integrated, valuebased vision of leadership and effective governance will go a long-way in creating good CG. A transformed organizational culture, which pays highest attention to ethical conduct and moral values, will strengthen sustainable roots of the company. Transparency and effective auditing and regulatory checks, through internal and external auditors and monitoring agencies, will also help to establish long-lasting credibility for a company. Companies must take a step-back when presented with challenging decisions and individuals must listen to the little voice in their head in complying with
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the law and to their heart in dealing with people. Transparency in financial reporting, as a moral duty and ethical code of conduct, are also very important for companies to adhere to in order to uphold ethical standards. With a view to augment power generation capacity in the country, Ministry of Power identified development of 16 Ultra Mega Power Projects (UMPPs) during XI and XII Plan, each with a capacity of around 4000 MW. Power Finance Corporation Limited (PFC) was the nodal agency for development of UMPPs and Special Purpose Vehicles (SPVs) of the nature of Shell Companies were formed by PFC. So far, contracts for four UMPPs viz. Sasan, Mundra, Krishnapatnam and Tilaiya have been awarded to the Project Developers by these SPVs. Audit observed that the process of identifying the Project Developers suffered from inadequacies as the minimum qualification criteria for prequalification of bidders like networth was on the lower side considering the size of the projects and some of the key conditions of the Standard Bidding Documents were diluted citing the need for increasing competition or providing comfort to the Developers. The bid evaluation process was completed and Letter of Intent issued to Reliance Power Limited (RPL) in case of Sasan, Krishnapatnam and Tilaiya UMPPs without verifying admissibility of experience claimed by them. Bid Process Management Consultants M/s. E&Y as well as the various Evaluation Committees failed to perform their functions effectively. Subsequent to award of the Sasan Project to RPL, Empowered Group of Ministers (EGOM) on UMPPs recommended and Ministry of Coal granted permission to RPL to utilize the surplus coal from three (Moher, Moher Amlohri and Chhatrasal) captive mines of Sasan UMPP for their other project i.e. Chitrangi in Madhya Pradesh. A reading of all the clauses in the allocation letters together conveyed that these clauses were inserted in the coal allocation letter as a safeguard measure to prevent the misuse of coal by the Developer. The permission to use surplus coal in other projects of the bidder after award of the contract based on acceptance of the lowest tariff, vitiated the sanctity of the bidding process which would result in post bid concessions to the Developer having significant financial implication. Permission for use of excess coal by RPL from the three coal blocks allocated to Sasan UMPP after its award not only vitiated the bidding process but also resulted in undue benefit to RPL. To ensure fair play, a level playground and transparency of the bidding process for future Developers to derive comfort in Government action, the allocation of the third coal block (Chhatrasal) be

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appropriately reviewed. Since the Developer had committed that he would be able to source 20 million tonne from the two blocks there would be adequate coal to feed the Sasan UMPP. Audit has estimated the financial benefit that will accrue to the Project Developer on the basis of comparison of tariff of Sasan Project (` 1.196 per unit) with that of Chitrangi Project (` 2.450 for Madhya Pradesh and ` 3.702 for Uttar Pradesh). The overall financial benefit to RPL due to impact of the difference in tariff works out to `29,033 crores with a net present value of ` 11,852 crore.

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