Abstract
This paper essentially compares the Enron scandal with the Satyam scandal which occurred early during the present year. Enron Corporation was an American energy company based in Houston, Texas. Before it went bankrupt in 2001, it was known as one of the world’s most profitable producer of electricity, natural gas, pulp and paper and Communications Company. On the other hand, Satyam Computer services were founded in 1987 and are essentially an extremely proficient and profitable company in India with its operations and alliances stretching across the globe. However, recently this year its CEO resigned after publicly declaring his involvement in an accounting fraud scandal.
This paper provides its readers with a comparison between the two afore mentioned companies in regards to the financial/accounting scandals that they were involved in. The paper takes note of the fact that both companies were initially extremely profitable in an apparent sense but consequently both companies resorted to illegal measures in order to achieve the level of profitability that they were enjoying. In Enron’s case, after filing for bankruptcy, it was later revealed that the company had involved itself in an extremely complex accounting fraud scheme where it used dishonest tactics such as ‘institutionalizing’ its financial condition. Satyam Computer Services on the other hand, the CEO manipulated the accounts of the company in such a way so as to boost the market position of the company thereby increasing the share price.
The basic purpose of the paper is to provide a strong line of discussion for the comparison of both these companies. Consequently, the paper will discuss issues concerning both companies such as business ethics and social responsibility of corporations. Both companies falsified their accounts in such a manner so as to increase the market position of their respective companies. Ethical issues such as misleading investors, withholding of information from auditing firms as well the security exchange commission of the stock market are some of the laws that both of these companies broke.
Hypothesis
Analyzing the case of Enron, we can essentially mark out the usual indicators of a corporate scam; characteristics such as sloppy board oversight, off balance sheet financing, imaginative accounting, criminal activities by top board members etc. however, all of these things essentially turned out to be consequences rather than root causes of the entire fiasco. What we can conclude from the investigation conducted on Enron’s finances is the fact that Enron failed essentially because its internal financial system was in shambles. Its managers were paid to creatively manage their finances using illegal measures. Therefore, Enron did not fail because it was falsifying its accounts it was falsifying its accounts because it was failing.
However when it comes to Satyam, we can see that basically at the crux of it, Satyam has been an extremely profitable and growing company. Satyam has been the back end support system of various large banks, manufacturers, healthcare and media companies of the world, handling their computer services as well customer service. It has made its name in the international corporate world by providing extensive services ranging from IT solutions to customer care services.
What we see, when comparing both frauds, is a difference of technique. Fundamentally both scandals are the same where accounts were falsified and investors were kept in the dark. In Satyam’s case, an interesting method used for the laundering of the money was done by issuing non-existent paychecks. Out of the 53000 employees hired by Satyam, 10,000 of them were fake and money was siphoned off through 10,000 fake paychecks. Another interesting fact is that in this case, an external accounting company was also involved which helped route the money away into a safe place. What has been concluded by the current investigation is that around 300 companies were used to siphon off $1 billion of money from Satyam. However the comparison between the two companies is significantly validated because before its liquidation Enron was considering as one of the worlds leading companies in regards to manufacturing of power, raw material etc and had been declared in the past as America’s most innovative company. Before its bankruptcy, it had declared extremely high profits although it had been later founded out that most of the profits and the esteemed financial position had been ‘window dressed’ in the sense that all of it had been done through illegal accounting means. Likewise, Satyam was also considered as the one of the best outsourcing companies in India and had won awards of innovation as well as corporate governance. Though after the CEO’s public admittance it has been found out that the company’s financial position was inflated by the means of non-existent funds. The value of the fraud in this case will be essentially significantly higher than Enron’s because Rs. 8000 crore has been admitted by the CEO himself.
Analysts in India have termed this as India’s own Enron. What we can basically see is that there has been a breach of business ethics in both cases and an almost rampant irresponsibility concerning social consequences. The Satyam scandal has had an extremely derogatory affect upon Indian international business as a whole. Investors are now extremely wary of where they are placing their money and large banking institutions such as Merrill lynch and Credit Suisse will now double check all investments in India. It is a universal fact that every company works towards achieving its goals and objectives but like everything else, the method and process to achieve those goals has to be governed by corporate and business ethics which eventually lead to social responsibility.
In both the above mentioned cases, such money laundering would not have been possible without cooperation between the top board members. During the initial investigation in regard to Enron, lawsuits were filed against a number of top board members and resultant prosecution occurred. However in Satyam’s case we see that only the CEO and two other confederates were apprehended and prosecuted. However, the fact remains that mid and top level managers had to be involved for the process to occur smoothly.
Both companies by window dressing and inflating their financial conditions were able to attract more investors. However, unlike Enron which continued to fail even due to it’s illegal measures of augmenting their financial condition, Satyam on the other hand was going along just fine. However, the CEO finding it unable to successfully launder the money to its required source decided to publicly confess his crime. After his resignation and announcement, satyam’s shares plummeted by 75% taking down the Indian stock market as well.
Conclusion
Conclusively, we can state that yes Satyam and Enron can be compared together. Both had similarities in the sense that accounts were falsified in such a way so as to show apparent profitability. In both cases, the management involved itself in breach of business as well as corporate ethics. The management also let go of it’s value and morals in regard to social responsibility that is while providing information to the public. Both companies also broke laws of providing corporate information to other companies and banking institutions which were affiliated to them.
However, in satyam’s case, investigation has revealed that an external accounting firm was involved in the laundering of the money and routing it towards different accounts. Enron, before its subsequent bankruptcy, had been failing but it was kept in floating condition by institutionalization of its accounts. However Satyam had been growing and profiting in an apparent sense. It was only after the CEO’s public announcement of his crime that investors and corporate world found out the real story.
Analyzing both companies and their subsequent scandals, we can conclude that yes the Satyam scandal was essentially at the grass root level the same as the Enron scandal. The basis of the accounting fraud that was orchestrated in both companies was of the same nature. While we can see that the entire top board of Enron was involved in the scheme, we find that on the surface of it only Satyam’s CEO and his brother were involved in the actual scheme. In Enron’s case, almost the entire board was indicted for involvement while only Satyam’s CEO and his brother, also a co-founder of the company, were indicted and arrested. However, after disclosure of their unethical acts both companies took surprisingly different directions. While Enron went completely bankrupt, Satyam Computer Services is set to be sold off till April 30th to the highest bidder.
The details of the prospective deal that have been disclosed to the public mainly include a key term which requires that the most important 100 employees of Satyam will have to be kept on the payroll for the next 12 months after the sale of the company. Also that, Satyam will not have to sell of its assets for the next 2 years. Currently, the present board of Satyam is also offering to sell 51 percent of the company in order to keep it running. The potential buyers include companies like IBM.
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