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Why Satyam Fraud Requires Forensic Audit?

In what became India’s biggest corporate scandal till date, Mr. Ramalinga Raju, founder and chairman of Satyam Computers Ltd., one of India’s four premier IT companies, admitted of a fraud through a letter addressed to the board of the company in January 2009.

The Fraud

• There was Rs. 5040 crores worth inflated cash and bank balance
• Non-existent accrued interest of Rs. 376 crores
• Understated liability of Rs. 1230 crores
• Overstated debtor position of Rs. 490 crores
• Overstated Revenues & operating profit by Rs. 588 crores

Added together, it was a discrepancy of Rs. 7724 crores in the accounts for a company having annual revenues of Rs. 10,000 odd Crores.

Satyam’s share price crashed 77% to Rs. 40.25 on the news and the great story for a seemingly successful Indian IT company ended. Fingers were pointed, concerns were raised, complaints were filed and dreams were shattered.

The government was quick to act, appointing a new board for Satyam which helped carry out bidding process for the IT giant and saved the company from extinction.

The Satyam fracas is one more fraud in the long history of misappropriation of resources given in trust to individuals and institutions. What this entire episode brings to the fore, is the following:

• Any control system is only as good as the people administering it
• Audits are not a replacement for responsible management
• Laws and regulations cannot deter persons who wish to defeat them – at least temporarily.

In this context, the relevance of forensic accounting and forensic accounts has grown enormously in recent years. In the interest of organisations and numerous investors who have direct stake in the financial well-being of the organisations, more and more forensic accountants should be involved to ward off financial disasters.

The integration of accounting, auditing and investigative skills yields the speciality known as Forensic Accounting. There is a growing need among analysts, law enforcement professionals, small business owners, and department managers to better understand basic forensic accounting principles, how different types of frauds occur and how to investigate a fraud that is detected in a way that maximizes the chances of successful prosecution of the perpetrator.

Check Mahindra Satyam stock price here as Mahindra has taken over the Satyam company.

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