Enhancing Financial Transparency and Accountability: A Case Study of Satyam Computers and Enron Corporations”
INTRODUCTION
In today’s rapidly evolving landscape financial transparency and accountability have emerged as fundamental pillars that ensure stability, growth and credibility of organizations across sectors. The significance of these principles cannot be ignored, as they form the bedrock upon which public trust, investor confidence and the structure of effective governance are built.
In the evolving practices of the company, adherence to corporate governance is a must and transparency in financial accounting and reporting ensures it as they are interrelated to each other. The importance of transparency and accountability has been widely discussed in the Indian Legal framework. Accountability implies taking responsibility for financial actions, decisions and outcomes. Effective financial accountability ensures compliance with regulations and strengthens the organization. The importance of transparency in financial auditing as well as accountability cannot be ignored and academicians and market regulators have always vouched for it. Stakeholders in the modern corporate environment, including shareholders, regulators, customers, and the general public, demand levels of openness and transparency regarding financial operations that were never before seen. Greater financial transparency ensures that crucial financial information is accessible, clear, and supplied as soon as feasible.
As a result, stakeholders are better able to make informed decisions, trust is improved, and information asymmetry is decreased. Chapter 10 of the New Companies Act, 2013 thoroughly discusses the role of auditors in ensuring transparency in financial auditing and ensures it is a critical mechanism in corporate governance practices. Accountability involves providing answers by way of publishing annual reports or by presenting information in the board meeting. The reason is that numerous rules and regulations have been introduced in the aftermath of some leading corporate scandals that shook the economy of India and affected the rights of shareholders to a greater extent, so its requirement was necessary to ensure timely and authentic reports related to financial information, creating standards to which companies must adhere.
1.THE ROLE OF COMPANIES ACT IN ENSURING TRANSPARENCY IN FINANCIAL AUDITING AND REPORTING
Corporate Governance is an area that has gained immense importance over the past few years. Though there was an existence of term “Corporate Governance” it was not widely recognised and emphasised so much, especially if we talk about India. But after the infamous Satyam Scandal, often regarded as one of the biggest accounting frauds. 1The role of transparency in financial auditing and reporting became utmost importance and if we talk about auditing, it is often referred as a formal examination & verification of financial accounts and records of an organization. Board’s one of the key functions to ensure transparency and effective communication in the organization[1].
The Companies Act, 2013 is the principal legislation that governs the incorporation and management of companies in India. S.136[2] says that that is the right of the members to have access to a copy of financial statements, which includes consolidated financial statements, auditor’s report and every other document required by law to be annexed or attached to the financial statements, which are to be presented before a company in its general meeting and sub-section (3)[3] also talks about the penalty of 25,000 to the company and 5,000 to every officer who is in default.
Also, s.138[4] talks about the “appointment of an internal auditor to conduct the functions of internal audit and activities of the company”.
In addition to that chapter 10 of the Companies Act, 2013 deals with the appointment of the auditor, his functions, remunerations and powers specifically.
Therefore, one potential role for financial reporting is to provide outside directors and shareholders with pertinent and reliable information to enable their mutual management supervision and, in the case of shareholders, their oversight of directors[5]. Additionally, one would expect to see a similar difference in the governance structures tied to financial reporting as it strives to decrease information asymmetries.
CORPORATE SCANDALS
Scam is a worldwide phenomenon that affects one way or another all types of organizations. There have been many scams such as the Mundhra scam, Nirav Modi and PNB scam. Over the past few decades, major public companies have been subject to financial reporting fraud, resulting in turmoil within the organization as well as in the capital markets. When we talk about corporate scandals two names that are etched in everyone’s memories are Satyam Computers and Enron Corporation Scandal.
Satyam Computers Services Limited
[6]Satyam Computers Services Limited was founded by Ramalingam Raju in 1984 in Hyderabad. The firm started with 20 employees and rapidly made it a global business. It offered IT and business process outsourcing services spanning various sectors, from 2003-2008, in all metrics Satyam Computers registered exponential growth. The company showed an annual compound growth rate of over 35% in that period.
On 7th January 2009, Mr. Raju in a letter disclosed to Satyam Computers Limited’s board of directors that he had been manipulating the company’s accounting numbers for years. Mr Raju also claimed that he overstated the company’s assets on Satyam Computer’s balance sheet by
$1.47 billion and nearly $1.04 billion in bank loans and cash that the company claimed to own was also false.
He also resigned on 7th January 2009, after notifying board members and SEBI that Satyam’s account had been falsified. Immediately, after this Merrill Lynch terminated its contract with Satyam Computers and also Credit Suisse suspended its coverage of Satyam Price Waterhouse Coopers (PWC) came under scrutiny and its license was revoked. The shares of Satyam Computers’ fell to an all-time low at 11.50 rupees on Jan 10, 2009, the lowest since 1998 and resulting in investors losing $2.82 billion.
Enron Corporation
[7]Enron was founded in 1984 by Kenneth Layin through the merger of 2 natural gas transmission companies, Houston Natural Gas Corporation and Inter-North, Inco, the merged company, HNG Inter North, was renamed Enron in 1986. After the U.S. Congress adopted a series of laws to regulate the sale of natural gas in the early 1990s, which resulted in the company losing its executive right to operate its pipelines, with the help of Jeffrey Skilling, Enron changed its operations into a trader of Eugery derivate contracts, acting as an intermediary between natural- gas producers and their customers.
Soon, Enron started dominating the natural gas contracts market and made huge profits. As Enron started facing increased competition company’s profits started shrinking and under shareholder pressure, company executives began to create false accounting statements, including a technique market-to-market accounting, basically, this technique helped the company create unrealistic profits for the company. By the end of 2000 had losses of $591 million and $690 debt and Dynegy a company that was planning to merge with Enron backed out from the deal. By the end of 2001, Enron filed for bankruptcy. The company paid to its creditors more than $21.8 billion from 2004 to 2012.
LESSONS LEARNED FROM THESE SCANDALS AND THEIR IMPLICATIONS IN THE CORPORATE GOVERNANCE PRACTICES
In the aftermath of the biggest scandals such as Enron Corporations, Tyco International plc, and World Com, the U.S. Congress on 30th July 2002 passed the Sarbanes- Oxley Act of 2002 to protect investors from fraudulent financial reporting by corporations[8].
On the same line, in India N.R. Narayana Murthy Committee constituted by SEBI(Securities and Exchange Board of India) to check clause 49 of SEBI in order to robust the corporate governance codes not only in form but in practice also[9]. This was the case before the Satyam Scandal in India and after the Satyam Scandal some major changes were brought in such as
Confederation of Indian Industry (CII) played a major role in bringing reforms in Corporate Governance.
The National Association of Software and Services Companies(NASSCOM) constituted a Corporate Governance, chaired by N.R. Narayana Murthy, the committee’s main objective was on the whistleblower policy and the audit committee.
SEBI also proposed some major reforms such as the appointment of a Chief Financial Officer(CFO), rotation of audit partners every five years, voluntary adoption of International Financial Reporting Standards(IFRS), interim disclosure of balance sheets twice in a year and mandated requirements as to submission of financial reports.
The Ministry of Corporate Affairs(MCA) in late 2009 released a set of guidelines for corporate governance such as Independence of the board, regulations related to the audit committee and mechanisms to encourage whistle-blowing.
The above-mentioned were some of the major reforms that were brought in the corporate governance practices in the aftermath of the Satyam and Enron scandals.
CONCLUSION
The importance of transparency cannot be ignored and the case of Satyam Computers and Enron Corporations provides evidence to it. Both companies serve as cautionary tales, illustrating the consequences that can result from unethical financial practices and a lack of transparency. The fallout from the Satyam scandal not only led to significant financial losses for investors but also severely damaged the reputation of the entire Indian IT industry.
Sec. 136 of the Companies Act, 2013 provides a vigilant mechanism to deal with such discrepancies and it contains punishment for the same. To enhance financial transparency and accountability and accountability in the corporate world, it is important for companies to implement strict governance and compliance measures, adopt transparent financial reporting practices, establish a culture of ethical conduct and contribute to the long-term sustainability of the global financial system.
[1] Amarchand Mangaldas & Suresh A. Shroff & Co, Corporate Governance,13,(Wolters Kluwer Business 2009).
[2] Companies act, 2013 § 136, No. 13, Acts of Parliament,2013(INDIA).
[3] Ibid.
[4] Companies act, 2013 § 138, No. 13, Acts of Parliament,2013(INDIA).
[5] Christopher S. Armstrong, Wayne R. Guay and Ors, The role of Financial Reporting and Corporate Governance, Federal Reserve Bank of New York, FRNBY ECONOMIC POLICY REVIEW,(August,2016).
[6] Madan Lal Bhasin, Corporate Accounting Fraud: A case study of Satyam Computer Limited,( 20 October, 2015).
[7] Nigel Kendall, Enron a case study in Corporate Governance, Tangley International Ltd.(2015).
[8] Ibid.
[9] J.P. Singh, Naveen Srivastava and Ors, Satyam Fiasco: Corporate Governance Failure and Lessons Thereform, (January, 2010).
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