Abuse of Creative Accounting: A Case Study of Satyam Computer Services Ltd.

Rashmi Goel, Abdul Aziz Ansari

Abstract


In the modern globalized and liberalized era, the firms are facing stiff competition and are under pressure to show the good financial results through financial reporting. In such an environment, they start using the creative accounting practices, especially in unsuitable situation to boost up the profit or manipulate the assets and liabilities to report to the stakeholders the image that is better than the actual image.

It is in this context, the present paper seeks to discuss the conceptual framework related to creative accounting. It also makes an attempt to analyze the case of Satyam Computer Services Ltd. (2009) to explain as to why and how the management abused creative accounting which resulted in the biggest India’s corporate fraud of around Rs. 7000 crores. Moreover, it also provides suggestions for detection and prevention of abuse of creative accounting.

It was found that the abuse of creative accounting in case of Satyam aimed at inflating the share price of the company and selling the promoters holding at inflated price. Satyam fraud resulted from audit failure and total failure of corporate governance, is clearly a case of abuse of creative accounting, in which the accounts were manipulated by creating fake invoices, recognizing revenue on these fake receipts, and falsifying the bank balances and interest on fixed deposits.

It is suggested that the abuse of creative accounting can be prevented and detected by the measures like good corporate governance, periodic rotation of auditors, due diligence by auditors, efficient whistle blower system, sound system of internal control and audit, timely examination of the cases of pledging or selling of shares by promoters and controlling shareholders, heavy penalties by regulators for non compliance to any regulation, mandatory course on ethics in accounting and auditing, and more campaigns on awareness and education of investors.

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