WorldCom and Satyam: Accounting Scams in the US and India

            
 
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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.



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Case Details:

Price:

Case Code : FINC077 For delivery in electronic format: Rs. 300;
For delivery through courier (within India): Rs. 300 + Rs. 25 for Shipping & Handling Charges

Themes

Finance
Case Length : 24 Pages
Period : 2002-2009
Pub. Date : 2012
Teaching Note : Not Available
Organization : WorldCom, Satyam, Teach Mahindra, Mahindra Satyam
Industry : IT, IT Services, Telecommunication
Countries : US,India

Abstract:

US-based telecommunications major WorldCom Group (WorldCom) and India's the then fourth largest Information Technology company Satyam Computers Services Limited (Satyam) had reported accounting irregularities that were touted to be the biggest accounting frauds in their respective countries. In June 2002, WorldCom had announced that it had resorted to fraudulent accounting practices for five quarters (four quarters of 2001 and the first quarter of 2002) and had misrepresented its financial statements by a staggering US$ 3.8 billion. Similarly, B Ramalinga Raju (Raju), Founder and Chairman of Satyam, revealed that the company had been inflating the revenue and profit figures for several years. He confessed to an accounting fraud that amounted to Rs.70 billion or US$ 1.4 billion.

Finance | Case Study in Management, Operations, Strategies, Finance, Case Studies

With the sudden revelation of accounting irregularities, a series of events followed at both WorldCom and Satyam. A severe cash crunch at WorldCom forced it to lay off 17,000 workers, which constituted 20 percent of its global workforce. Eventually, the financial crisis forced WorldCom to file for reorganization under Chapter 11 of the Bankruptcy Code in July 2002. Subsequently, the company wrote down around US$ 82 billion (over 75 percent) of its reported assets. At this stage, the Board of Directors at WorldCom established a special investigation committee with the stated responsibility of conducting a full and independent investigation into the accounting irregularities that took place at WorldCom. The startling revelation by Raju in the Satyam case only served to deepen concerns about poor corporate governance practices in other companies in India as well. At this juncture, the Government of India intervened and constituted a new board for the company. The board immediately reassured Satyam’s employees and clients, raised money for working capital, and appointed new auditors to restate the accounts.

WorldCom terminated the services of some of its top executives including Scott Sullivan (Sullivan), the Chief Financial Officer, and David Myers (Myers), the Senior Vice President and Controller. The company's auditors held Sullivan responsible for the accounting mess and Sullivan was soon arrested on charges of fraud and misrepresentation. Similar events took place at Satyam after Raju's confession of accounting irregularities. On January 12, 2009, Raju was arrested on charges of cheating, breach of trust, criminal conspiracy, falsification of records and forgery, and the board of Satyam was dissolved. On January 24, 2009, two auditors from PricewaterhouseCoopers were also arrested. SEBI subsequently charged Raju and his brother with fabricating bank accounts, diverting Satyam money to fund real estate business, and siphoning off money to finance activities of sister concerns and companies run by Raju’s family and relatives.

In April 2003, WorldCom changed its name to MCI and moved its corporate headquarters from Mississippi to Virginia. The company emerged from Chapter 11 bankruptcy in 2004. Subsequently, the company intended to pay various claims and settlements. Satyam, on its part, was acquired by Tech Mahindra on April 13, 2009. The merged entity was called Mahindra Satyam with C P Gurnani as its new CEO. Mahindra Satyam was confident that it would turn around the company by 2014.

Issues:

  • Examine and analyze the accounting scandals at WorldCom and Satyam and the circumstances that led to the continuation of fraudulent accounting practices.
  • Critically analyze the adverse business conditions that often cause companies resort to unethical practices.
  • Understand the need for sufficient internal control measures and transparency in the financial statements of a company.
  • Discuss the role and responsibility of the senior executives, the board of directors, and the external auditors; and the nature and extent of the failure to avert the situation.
  • Examine the roles and responsibilities of a company’s board and independent directors.
  • Contents:

      Page No.
    Largest Corporate Scams: Worldcom 2002 and Satyam 2009 1
    About Worldcom 2
    About Satyam 4
    Corporate Culture 5
    Genesis of the Frauds 5
    Accrual Releases 7
    Expense Capitalization 7
    The Maytas Fiasco 8
    Internal Audit 12
    Outside Auditors 13
    The Board of Directors 14
    The Aftermath 17
    Exhibits 19

    Keywords:

    WorldCom Group, Satyam Computers Services Limited, MCI, Mahindra Satyam, Maytas Infra, Maytas Properties, SEBI, Arthur Andersen, Security and Exchange Commission, PricewaterhouseCoopers, telecommunication industry, information technology, accounting scandal, Chapter 11 of the US Bankruptcy Code, financial statements, corporate governance, corporate code of conduct, internal audit, whistleblower policy, fraudulent/unethical practices, merger, takeover, economic recession, General Accepted Accounting Principles, global financial crisis, forensic accounting, external auditors, board of directors

    Largest Corporate Scams: Worldcom 2002 and Satyam 2009 - Next Page>>


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