Introduction Of Financial reporting
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One of India’s biggest scams of all dates has to be the Satyam Scam, which came in light in the year 2009. Here we read about the facts about the scam, how it grew so big, a bit about IFRS and its standards and specific standards or guidelines that aim at reducing the judgement in Financial Reporting.
SATYAM SCANDAL, IFRS STANDARDS AND ROLE IN SCANDAL PREVENTION
SATYAM COMPUTER SERVICES was established in the year 1987 in the city of Hyderabad. Founded by B. Ramalinga Raju, it was the 4th largest IT companies in the country. The company was listed in the BSE and the NYSE too. But due to increase in the Real Estate business, R. Raju invested in them by the firms MATYAS INFRASTRUCTURE and MATYAS PROPERTIES. The sole motive of these firms were to buy Real Estates around the city’s metro line so as the sell them in higher profits in future. There were more than 300 companies that R. Raju set up by the name of his employees. R. Raju started to create fake invoice bills of SATYAM to show huge sales, but was unable to show the profits. So he started to fake bank statements so as to cover up the scam. But the fraud was too big to cover. SATYAM was awarded the GOLDEN PEACOCK AWARD in the years 2002 and 2008. But since the recession in the Real Estate sector in 2008, MATYAS were on the verge of dissolution, when the SATYAM CEO offered to buy them to the board of directors of SATYAM (Bhasin, 2016).
The proposal was passed by the board, but was questioned by investors and motioned against too. So, taking over these two family companies was out of frame. The then CEO of the company, B. Ramalinga Raju, admitted to have made a financial reporting fraud by showcasing company’s cash and bank balances inflated by 7,000 crores. He stepped down from the post of CEO. The company’s then auditing partner PwC, which the company paid double the fees than any other firms in the market, denied of knowledge about any such frauds. SATYAM was found having insider trade worth Rs. 1200cr. Also it was found that the profits used to be hyped by 10x.
The global corporate community was shocked to know about such a huge fraud. The board members were then questioned by the authorities about the same. The company suffered a huge loss in its share prices which came declining from Rs.170 to as low as Rs.6.50 in just two days after the scandal news broke out. The company lost its clients in the world to a big extent. The GOLDEN PEACOCK AWARD that was presented to the company in September 2008 was also revoked after the news broke out. The GOI couldn’t compensate the unemployment that it would face from the dissolution of SATYAM, so it called for the bidding. The highest bidder was TECH M. and so the company had the merger under the name MAHINDRA SATYAM. The loss faced by the investors of SATYAM accounted to Rs. 14.1662cr, while LIC faced a loss of Rs. 950cr (Chaturvedi et al,2011).
INTERNATIONAL FINANCIAL REPORTING STANDARDS
International Financial Reporting Standards (IFRS) sets rules so that a company’s accounts are transparent. It helps the investors to make a better and educated judgement by letting them compare the numbers of the company. Implementation of IFRS would have been beneficial in this situation, because then there would have been no possible way of any fraudulent practices by the firm owners. The non-implementation of IFRS has shown a bit of loopholes in the scenario of the fraud. IFRS imposes the companies to maintain a total transparency relating to its accounts. The IFRS listed companies are more trustable according to the investors, since it generates a sense of trustworthiness, loyalty and credibility of the firm. If the IFRS would have been implemented, then SATYAM would have been more careful about its scam.
In fact, a lot of scams would not take place since frauds are generally caused by the loopholes in the accounting standards and norms. For example, the faulting in the SATYAM’s accounts could have been taken care of, if the audit would have been better. The fraud wouldn’t take place if the accounts would have been fully transparent and accessible to anyone. Also, if there would have been better investigation during the time when a giant number of companies were registered with no actual data, the case would have not raised this big. The interesting fact here would be that no one wondered how the share prices would be hiking rapidly. IFRS sincerely guides in ways of standards like: First time adoption of IFRS, Share-based Payments, Business Combinations, Insurance Contracts, Operating Segments, Financial Instruments, Joint Arrangements, Fair value Measurements, Regulatory Deferral accounts, Leases are some them to list. If the Indian government implemented the IFRS, then a lot of fraudulent cases would drop down to a great extent.
For example: R. Raju faulted all his business statements. He managed all the accounts himself. He made fake claims, used money for influence and also, made money out of innocent people with their no conscious. If this could have been stopped or overlooked in time then this gamble would have stopped a long time ago with no disgrace to the country. IFRS requires the management of updated statements of the transactions. It helps the investors, bankers, shareholders and other people to actually know what the company or the firm is actually capable of offering them in return for their money, support and trust. The fraud in the financial statements, cash statements, revenues and expenses are some the reasons for the SATYAM’s failure. Scams like Harshad Mehta, Vijay Mallya, B. R. Raju, Nirav Modi could have been stopped if IFRS had been implemented on time. IFRS ensures that no such frauds can be practiced (Goyal et al,2012).
IFRS ensures that there is minimal judgement in the financial reporting. Almost all the above mentioned Standards aim at reducing the judgements in the financial reporting. IFRS ensures that there are no scandals in the corporate world. It is only upon accepting it and abiding by the standards to ensure there are no scams or fraud practices by any firm. First time adoption of IFRS, Business Combinations, Fair value Measurements, Regulatory Deferral accounts, Leases can be mentioned as some of the specific guidelines that aim at reducing the judgements in the Financial Reporting. These can be counted as some of the many other standards that can be followed to reduce such big scams in the future. By abiding these guidelines it can be assured that scams and scandals can be dealt with to a great extent. For example: The accounts of SATYAM were manipulated for a long time. If the accounts were managed and out-looked by the professionals then they would seen the fault because of the consolidated financial statements of the firm.
Also, the fair valuation of the company’s transaction, revenues generated by the contracts made with the customers, the operating segments and the business combinations would have been in clear transparency. These guidelines were formed specifically keeping in mind the constant change in the corporate world, and so these guidelines are changed every time when it is felt required. The dynamic nature of the corporate world needs a constant upgrade. The Share-based Payment is also one of the IFRS standards that aim precisely over reducing the judgement in the financial reporting. The disclosure of the firm’s Financial Instruments helps in building a better goodwill of a firm in the market, which indirectly leads to the reduced amount of judgement requirement in the financial reporting. The joint agreement between two or more firms is also a great way to reduce the judgements or say divide the judgements in a financial reporting. The lease accounting is also one of the great ways to reduce calculating for hours.
It helps the borrowers to compare the lenders available in the market based on various aspects and choose what is better for them. Also, it promotes the lesser amount of frauds in the lease sector. It was also seen in the earlier days that companies would generally provide depreciation of some assets that are put up for sale in the market. IFRS looks into that and is reducing the frauds that can take place in such ways. A company should always be transparent regarding its decisions of interest in other entities. Transparency is a must in the corporate world, since it helps a company to build customer’s trust, loyalty, and other strong holds. IFRS ensures that practise of frauds and scandals are reduced and there is always a fair business. IFRSs, if implied on time, can reduce such scandals to a great extent (Bhasin et al, 2016).
Thus, it is conclusive that implementation of IFRS in the country can be useful in eradicating problem of scams and scandals to a great extent. The scam of SATYAM COMPUTER SERVICES could not have taken place if the Government of India had applied the IFRS a long time ago.
Bhasin, M.L., 2013. Corporate accounting fraud: A case study of Satyam Computers Limited. Open Journal of Accounting, 2, pp.26-38.
Bhasin, M.L., 2016. Creative accounting scam at Satyam computer limited: how the fraud story unfolded?. Open Journal of Accounting, 5(04), p.57.
Bhasin, M.L., 2016. Unethical Creative Accounting Culture at Satyam Computers Limited: A Case Study of India’s Enron. International Journal of Business and Social Research, 6(7), pp.24-48.
Chaturvedi, N. and Makkar, K., 2011. Satyam Scam: Lessons for Corporate Legislation. Available at SSRN 1878507.
Goyal, M. and Johri, D., 2012. Accounting and financial frauds!!! need for IFRS!!!. Asian Journal of Research in Banking and Finance, 2(8), pp.16-31.