1)Identify a well known company (this may include Dell, Nike, United Airlines, e
ID: 403659 • Letter: 1
Question
1)Identify a well known company (this may include Dell, Nike, United Airlines, eBay, Southwest Airlines, or another firm) and describe its business-level (competitive) strategy. Why does this strategy fit the firm%u2019s external environment?
2)Identify one company and describe its experiences with mergers/acquisitions. Did these combinations create or destroy value? Why? For this exercise use Dell, Nike, United Airlines, eBay, Southwest Airlines, Blockbuster, Apple or another company.
3) Identify at least one company that has faced scandal in the past decade. Did this/these companies suffer from corporate governance failures, from internal control failures, or a combination of both?
Explanation / Answer
CORPORATE ACCOUNTING SCANDAL AT SATYAM
Satyam Computer Services Limited was a rising-star in the Indianoutsourced 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 globa business. It offered IT and business process outsourcing (BPO)
services spanning various sectors. Satyam was as an example of India growing success.Satyam won
numerous awards for innovation, governance, and corporate accountability. As Agrawal and Sharma (2009)
states, 2007, Ernst & Young awarded Mr. Raju with the Entrepreneur of the Year award. On April 14,
2008, Satyam won awards from MZ Consult 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 or 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.
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.
The Auditors Role and Factors Contributing to Fraud
Global auditing firm, PricewaterhouseCoopers (PwC), audited Satyam 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 Cnon-interest-bearing deposits. According to accounting professionals,
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 (Kahn, 2009).
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