Managers and employees have a responsibility in creating wealth for shareholders
according to the stewardship theory of corporate governance. The yes theory identifies various
participants. Have a role in developing a company (Paine et al. 2005). The shareholder's shares
and the management of the company act as stewards to this wealth and they bear the
responsibility of increasing the wealth of that shareholders while also protecting it from
circumstances that may lead to its loss. Fraud is an action that is contrary to this action and
responsibility since it provides a foundation for shareholder wealth to get lost. Fraud is a major
problem within many organizations and generally inhibits the possible success of these
companies and their operations in the long run. Employees take part in fraud based on different
factors and motivations that lead them in that direction no matter the circumstances that they
stand to face. Commonly, individuals who engage in fraud stand to lose their jobs or even get
charged in a court of law (Soltani 2014). One may act fraudulently on account of their influence
or external factors such as having an organization where fraud is part of the culture. In such an
environment, it is hard for employees even at higher levels to go against the tide and act in a
manner that is completely against the norm in the organization. In the case of Satyam
Computers, the occurrence of fraud was influenced by the lack of appropriate corporate
governance measures to curb it (Tunji 2013). The company, after the acquisition, instituted
measures to prevent fraud and these worked well to reduce its force in the organization.
Reasons for Fraud
The agency theory defines corporate governance as the act of taking actions in place of
the shareholders (Tunji 2013). All employees in an organization play an agency role in terms of
decision making. A manager is certainly supposed to institute highly efficient measures to
safeguard the wealth of shareholders. One of the reasons why fraud occurs is the existence of an
CASE STUDY 3
opportunity to commit fraud. Without an opportunity to commit fraud it is certain that the
circumstances under which route would occur as a highly minimize and its occurrence would be
minimized as well (Certo, Cornelly & Tihanyi). The major reason as to why fraud occurred is the
existence of a culture that brought about an opportunity to commit fraud. Ramalinga Raju only
Recognize the existence of fraud in the company when tending his resignation yet considering
the amount of fraud, it had been occurring over a long period. The irony of the company
receiving an award despite huge losses that it was making as a result of poor governance points
out to management that had little severity towards fraud acts (Paine et al. 2005). One of the
limitations of the agency theory is that it gives rise to an opportunity for seeking self-interest
without limitation on guile. This was a major factor that led to fraud at the company since the
directors had a lot of authority to govern the company’s operations.
Rationalization of Fraud
Satyam had a long-standing period where Fraud occurred in the institution and this shows
it had risen to become part of organizational culture (Paine et al. 2005). An individual having the
pressure to commit fraud, they may as well commit it because it does not appear to be wrong
(Soltani 2014). According to the operant conditioning theory of learning, individuals who do not
receive negative reinforcement for their actions will not avoid their negative actions. On the
other hand, negative reinforcement offers learning whereby if one applies negative reinforcement
on behavior, then the person will not carry it out anymore due to fear of negative reinforcement.
On the very top level, the company received the Golden Peacock award for having excellent
corporate governance structures. This went against the complete true situation of the
organization and promoted the wrong deeds that the company was engaging in. It suffices to say,
the directors rarely punished lower-level employees and managers for the fraud that continued to
CASE STUDY 4
occur (De La Rama 2005). This created a culture of fraud whereby people feel left out if at all
they are not engaging in fraud where other people are benefiting from. Going back to the operant
conditioning theory, if individuals feel that they are gaining desirable pleasure from their actions,
then they will continue engaging in such acts and this is referred to as positive reinforcement
(Certo, Cornelly & Tihanyi). The employees at Satyam felt there was no implication on them if
they engaged in fraud and rather they needed to enjoy the benefits of fraud and this led them to
engage in the act more frequently.
Directors’ Characteristics
As aforementioned, directors act as stewards to an organization and they play the
capacity of a shareholder in ensuring the success of an enterprise. The role of preventing fraud
lies squarely with them and they must do all that is within their power to prevent fraud from
occurring (De La Rama 2005). This goes a long way in ensuring that cases of fraud are
significantly minimized. One of the characteristics they must bear is that of complete support for
ethics. Managers and directors must show great commitment towards developing government
systems that support appropriate business processes. This goes a long way in ensuring that the
business functions in the most suitable means. Acting in such a manner will relay the possible
actions they may take if they realize the existence of fraud. Such talk limits the possibility of
employees assuming that nothing will happen if they engage in fraud. Managers also ought to
have zero tolerance towards cases of fraud (Soltani 2014). They should fast track the provision of
negative reinforcement upon individuals that engage in fraud. This may occur through taking
actions such as firing those who engage in fraud and they can also take other actions such as
charging them in the court of law. This reduces the possibility of employees engaging in fraud
CASE STUDY 5
and increases security for organizational resources and therefore maintains the possible success
of the business in the long run.
Lessons from the Audit Committee
The audit committee has a central responsibility in ensuring that fraud does not occur in a
public company. The existence of failures in various levels of protection against fraud propagates
the possibility of fraud occurring and this greatly leads to fraud. In the case of Satyam, there was
a failure in all audit procedures beginning from the internal audit team led by the CFO, PWC as
an external auditor, and the Committee bringing the two together. The fact that the two bodies
agreed on the results of the audit proves that they were both not bothered by the circumstances
occurring in the company (De La Rama 2005). As seen in the case, PWC received almost double
the rate Satyam’s peers paid in yearly audit fees and this proves the existence of loopholes in the
company’s management. The audit committee ought to possess the highest levels of scrutiny to
prevent fraud from occurring. For instance, there was no justification for the company's debt at
INR2.36 Billion while it had cash deposits amounting to INR44.62 Billion. This implies that the
audit committee was actually and actively implicated in the fraud scheme and contributed a lot to
the loss of money the company experienced over time.
Compliance Mechanisms
The law provides for various systems to enhance compliance by institutions against
fraud. It is appropriate that Satyam established stiffer measures of control to prevent fraud and
the very basic level of measures is punishing those who engage in fraud. The institution ought to
establish frequent audits on the finances of the firm established on corporate policies it
establishes (Certo, Cornelly & Tihanyi). This will significantly reduce the possibility of cases of
fraud becoming imminently prevalent and actively reduce their occurrence. Satyam’s
CASE STUDY 6
management should be willing to allow the services of external experts to assess the possibility
of fraud at the organization frequently and develop ways to deal with the measures in a severe
manner that will prevent similar cases in the future. The management ought to set the right tone
at the top especially in fighting against a culture of fraud. Management has a great influence on
the actions of employees at the lower levels and they can significantly influence positive actions
by the management in a manner that promotes better performance by management which will
lead to the success of the management at the top. The management must as well develop and
implement an ethics program that will support appropriate business processes to limit fraud.
Conclusion
In summation, management Play a crucial role in preventing fraud from occurring in the
organization and the lack of action against fraud by top managers promotes its occurrence. In the
case of Satyam, the lack of proper fraud prevention measures actively promoted its occurrence
and led to the fall down of the company’s share index after the revelation by its top manager.
The management should develop an ethics program that will aid in stemming from corruption
and this goes a long way in promoting an ethical environment of business.
References
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Certo, S.T., Connelly, B.L., and Tihanyi, L. (2008). “Managers and Their Not-So Rational
De La Rama, M. (2012). “Corporate Governance and Corruption: Ethical Dilemmas of Asian
December, pp. 122-133.
Decisions,” Business Horizons, 51, pp. 113-119.
Does Your Company’s Conduct Meet World-Class Standards?” Harvard Business Review,
Paine, Lynn, Rohit Deshpandé, Joshua D. Margolis, and Kim Eric Bettcher (2005). “Up to Code:
CASE STUDY 7
Profile American and European Corporate Scandals,” Journal of Business Ethics, 120: 251-274.
Soltani, Bahram (2014). “The Anatomy of Corporate Fraud: A Comparative Analysis of High
Tunji, S. T. (2013). Effective internal controls system as an antidote for distress in the banking
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