Enron and Satyam Frauds: A Comparative Study Based on Corporate Governance

Author: Kanchan Yadav

LL.M, WBNUJS (2018-2019)

ISSN: 2582-3655


The purpose of the corporate governance provisions, as found in various legislations, rules, and regulations in corporate law, is to act as a watchdog over the activities of the companies. Without stringent corporate governance procedures in place, companies are likely to partake in various fraudulent activities, causing huge amounts of loss to the shareholders and to the society overall. As the two most recent cases of large-scale corporate governance failure, the 2001 Enron case in US and the 2009 Satyam scam in India can be chosen.

The primary method by which the two companies were able to conduct such shady activities for so long, was fraudulent accounting activities. The administrators cooked the books of the companies freely, as well as created various hedging agreements. On the other hand, even though there were many spheres of fraudulent activities within the internal workings of these two companies, the boards of directors and the auditing firms of the companies are liable to a great extent for these incidents, due to the extreme failures in mitigating their duties responsibly. Under such a light, it becomes essential to analyze the failings of the boards of directors and auditing firms of both Satyam and Enron in order to understand exactly how much they contributed to the debacles, and how such incidents can be avoided in the future.


The term ‘corporate governance’ means the way a company is regulated or governed, and a good corporate governance system would balance the interests of all the stakeholders in the company. The Satyam and Enron cases are often used as prominent examples of corporate governance failures. The primary reason behind that is that all the mechanisms that are usually put in place to prevent such an instance from happening, for example, the auditors, the board of directors, etc., either intentionally or unintentionally, allowed tremendous amount of fraudulent activities to occur within the companies.

The Enron debacle happened in the United States in 2001, when Enron Corporation declared bankruptcy. The energy company, formed in 1985, rose very quickly to unimaginable heights. However, most of their profits were cooked up using a technique called mark to market accounting. Once the burden got too big to maintain this tactic, the company collapsed very quickly.

 The Satyam scam came into light in India in 2009, and it is often referred to as India’s Enron. The IT Company was found by the Raju family in 1987 and was considered to be one of the most promising companies in India. However, just like Enron, Satyam’s accounts had major discrepancies, and the irregularities ranged to more than Rs. 7,000 crores.

Fudging the figures in the books related to assets, profits, revenues, and losses was something both the companies practiced. This is a grave example of poor corporate governance as it kept the shareholders in the dark about the true accounts of the company. When Enron and Satyam ultimately fell, the shareholders lost billions.

These fraudulent accounting techniques could be carried out due to the failure of the boards of directors and the auditing firms of these two companies. While the directors signed off on the shady techniques, the auditing firms overlooked the gaps in the financial reports and gave their approval to them. Thus, it can honestly be said that the Enron and Satyam scandals could be possible due to a combined effort. This article discusses the activities of the two companies in detail while looking exclusively at the failings of the directors and auditors.

Fraud in Accounting

While Enron was considered to be one of the most profitable companies in the USA, in reality, Enron used to inflate its assets and revenues to remain profitable in the eyes of the shareholders. Enron’s CEO and CFO, Jeffrey Skilling and Andrew Fastow, used a technique called mark to market for this purpose. In this method, when building an asset or making an investment, its current market value or the projected profits would be put on the books, instead of its real value. If the investment does not work out as expected, Enron would transfer the losses to one of its Special Purpose Vehicles (SPVs) to make Enron look profitable[1].

Enron had created almost 3000 partnership for the purposes of using and controlling those as SPVs, for example, Jedi, Jedi 2, Chewco, LJM1, LJM2, etc.[2] These companies were fuelled almost completely by Enron’s stock and were used to hide the loss-making assets of Enron. The SPVs were given Enron shares to mitigate the concerning losses, thus, creating a network of hedging agreements. Even though this practice was not strictly illegal, the SPVs should be independent of the concerned company to be legitimate. However, these companies were maintained by Enron personnel themselves[3]. As a result, the employees were enriched, Fastow acquiring almost $30 million[4].

In any case, this practice could not be carried on indefinitely, and Enron collapsed under the weight of its own lies. In 2001, it announced a loss of $544 million, which got the attention of SEBI. A thorough report, provided on SEBI’s request, showed a reduced net income of $500 million and increased debt $2.5 billion. This situation lost the confidence of the shareholders, and the price of Enron stock fell from $90 to 26 cents. Enron filed for bankruptcy that year itself[5]. Insider trading was also involved in this case, as the key personnel of the company unloaded huge amounts of stock just before the bankruptcy was filed.

On the other hand, Satyam’s CEO Ramalinga Raju went through a different route to make his company appear profitable. Satyam Computer Services Limited, similar to Enron, was considered to be one of the most promising companies in India before its fall. It dealt with outsourced IT services, worked with 65 countries and 690 companies. At its peak, Satyam’s share value was Rs. 526.25[6].

However, when the truth came out, it was found that the balance sheet was inflated by $1.47 billion[7]. The company’s founder, Mr. Ramalinga Raju, had overstated the company’s profits and bank reserve and underreported its liabilities. He used the revenue of the company to purchase thousands of acres of land and hoped to profit by selling them later. However, the real estate market declined, and it left a big hole in the company’s revenue that he plugged up by cooking the books.

The tampering with accounts would be done by creating fake bills and invoices by Mr. Raju on his personal computer with the use of special software. The fake invoices would increase the amount of profit as reflected in the books, and the number was in thousands of crores. He also faked the number of employees in the company, increasing it by 13,000, when no such employees existed. Crores of money were gained illegally by those fake salary accounts[8]. The assets and revenues of Satyam were inflated by adding thousands of crores in the name of human resources value and brand value.

Additionally, 356 companies were created to siphon off money from Satyam. Mr. Raju was changing the figures every year, and the gap between the actual and reported columns began to grow. The fraud came into light when Satyam wanted to buy 51% of Maytas Infrastructure, and 100% of Maytas Properties. Both these companies were owned by the family members of Mr. Raju. The Maytas acquisitions were planned to mitigate the situations, in which no money would actually change hands, but the problem with overstating figures could be resolved. This decision faced severe protest from the shareholders, and had to be reversed within a few hours[9]. Suits were filed in the US to protest these acquisitions, and that, ultimately, led to the revelation of the irregularities at Satyam.

As the above discussion shows, the techniques used for the Satyam and Enron frauds were very different. While Enron used the mark to market strategy, Satyam created fake bills and invoices. Additionally, the SPVs were used for different purposes by the two companies. Enron used them to hide their loss-making assets, but Satyam used it to siphon out cash[10]. both Enron and Satyam are cases of accounting frauds, which caused these giants to topple. However, both Enron and Satyam are, ultimately, cases of accounting frauds caused by greed, which led these corporate giants to topple.

Role of Directors and Auditors

Enron’s board of directors can be blamed to a great extent for letting the company go on with its fraudulent activities. When the LJM partnerships were created, the board exempted Fastow from abiding by Enron’s Code of Conduct, which prohibited its employees from making a profit from the business of another company with Enron. As a result, Fastow was in a position of conflict between the interests of Enron and LJM. He made millions of profit out of the LJM dealings, while Enron was on its path to bankruptcy[11].

The board also allowed the unusual partnerships between Enron and the LJM companies to be created without proper analysis of the matter. Additionally, there were very little monitoring or control mechanisms for the LJM partnerships. The directors themselves received hefty salaries and many of them had close personal relationships with Skilling and Fastow, which might have swayed their loyalties as well[12].

Enron was able to carry on with its shady accounting tactics with the approval of its auditors, the prominent accounting firm Arthur Anderson LLP. Due to the firm’s high reputation, the stakeholders did not question Enron’s financial dealings once they had the sign off from Arthur Andersen. However, the auditing firm did not act prudently and failed in its responsibility towards the shareholders. Thus, once the scenario came to light, Arthur Andersen was blamed for not reporting Enron’s various SPE dealings earlier[13].

As the firm was also providing consulting services to Enron, it has been argued that there was a conflict of interest. As much as 27% of Arthur Andersen’s total auditing fees came from Enron[14]. An auditing firm is supposed to act as a public watchdog and protect the interest of the investor, and Andersen failed in its duties massively. Once Enron’s fell, Arthur Andersen followed soon after.

Coming to Satyam, it had a vibrant board of directors, which included famous personnel like Vinod K Dham, T.R. Prasad, M. Srinivasan, etc. as independent directors. They were professors, politicians, inventors, and in general, eminent personalities. Once the misdealing came into picture, all of the independent directors resigned from their positions, arguing that they had no prior knowledge of the dealings. The fact that the independent directors received a remuneration of Rs. 13 lakhs could have compromised their interests[15]. The Maytas deal, for example, was unanimously approved by the board of directors, which was completely against the shareholders’ interests[16]. CBI investigations found several of the directors guilty of fraud, as no protests were made to the fraudulent techniques used by the company.

A significant role was also played by Satyam’s auditing firm, Price Waterhouse Coopers. It acted as an audit firm for Satyam between the years 2000-2008. However, similar to Arthur Andersen in Enron, PwC showed a complete lack of initiative in controlling or reporting the illegal activities by Satyam. The shareholders believed that Satyam’s finances were reliable based on the reputed firm PwC’s approval, and paid heavily for that. For years, PwC neglected to cross-check the accounts provided by Satyam with those of the bank balances. The firm was found guilty in the Satyam fraud case and was banned from conducting audits for two years by SEBI[17].

Thus, in both Enron and Satyam, the directors and the auditing firms failed or neglected to do their duties. Both of them are supposed to keep a check on the activities of the company so that the interests of the investors are protected. However, due to these corporate governance failures, the shareholders lost billions of dollars as an aftermath of the scandals.


When Enron and Satyam fell, thousands of employees lost their jobs and pension funds. Investors lost billions of their hard-earned money. In the case of Enron, Andrew Fastow received a jail sentence of ten years and had to pay a penalty of $23 million due to multiple counts of fraud and conspiracy. Skilling was also sentenced to twenty-four years of prison[18].

 Satyam’s Ramalinga Raju resigned after he confessed to the fraud in his letter. He compared the scenario to “riding a tiger, not knowing how to get off without being eaten”[19]. He was arrested and charged with criminal conspiracy and forgery. The Company Law Board appointed a new board of directors and CEO for the company, following which Satyam was bought by Tech Mahindra and renamed as Mahindra Satyam[20].

Due to the poor decision making of the companies’ top managerial personnel and the misplaced support in them by the directors, these scandals had a chance to happen. The various partnerships were created by Enron and Satyam for unfair dealings, even though the purposes were different. Both companies took part in fraudulent accounting activities by using different techniques, which were subsequently approved by the auditing firms.

However, the good news is that as an aftermath of these scandals, the corporate governance regulations in both India and the USA have seen much reform. Still, how effective those are to prevent future scams, only time will tell.

[1] Srinivas Shirur, Tunneling vs Agency Effect: A Case Study of Enron and Satyam, 36 Vikalpa 9–20 (2011)

[2] Matt Krantz, Trouble grew in Enron’s interlinking partnerships, USA Today, 2002

[3] Enron and the End of Corporate Governancein Global Governance and the Quest for Justice

[4] Enron’s Many Strands; Excerpts From the Report of a Special Committee Investigating Enron, The New York Times, Feb. 3, 2002, https://www.nytimes.com/2002/02/03/us/enron-s-many-strands-excerpts-report-special-committee-investigating-enron.html (last visited Sep 16, 2018)

[5] Campbell & Griffin

[6] Madan Lal Bhasin, Creative Accounting Practices at Satyam Computers Limited: A Case Study of India’s Enron, 6 International Journal of Business and Social Research 24–48 (2016)

[7] Madan Lal Bhasin, Corporate Accounting Fraud: A Case Study of Satyam Computers Limited, 02 Open Journal of Accounting 26–38 (2013)

[8] Bhasin

[9] Bhasin

[10] Shirur

[11] John Kroger, Enron, Fraud and Securities Reform: An Enron Prosecutor’s Perspective, University of Colorado Law Review  (2004), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=537542 (last visited Sep 16, 2018)

[12] Committee on Governmental Affairs United States Senate Permanent Subcommittee on Investigations, The Role of the Board of Directors in Enron’s Collapse (2002)

[13] Deepti Khadekar, Corporate Crime: A Comparison of Culture at Enron and Satyam, 3 Economics & Business Journal: Inquiries & Perspectives  (2010)

[14] [CSL STYLE ERROR: reference with no printed form.]

[15] Asish K. Bhattacharyya, Satyam: How guilty are the independent directors?, Business Standard India, Jan. 12, 2009, https://www.business-standard.com/article/economy-policy/satyam-how-guilty-are-the-independent-directors-109011201009_1.html (last visited Sep 16, 2018)

[16] Satyam board of directors’ role comes under spotlight, The Economic Times, 2008

[17] Jayashree Upadhyay, Sebi bars Price Waterhouse: What is the firm’s role in the Satyam scam?, Hindustan Times, Jan. 11, 2018, https://www.hindustantimes.com/business-news/satyam-scam-all-you-need-to-know-about-the-case-against-price-waterhouse-and-sebi-decision/story-Ot1RbPuEyn6FoYVPQDxH9M.html (last visited Sep 16, 2018)

[18] How Cooking the Books Works HowStuffWorks, https://money.howstuffworks.com/cooking-books.htm (last visited Sep 16, 2018)

[19] Talk of “India’s Enron” as Satyam Shares Plunge DealBook, https://dealbook.nytimes.com/2009/01/07/talk-of-indias-enron-as-satyam-shares-plunge/ (last visited Sep 16, 2018)

[20] Satyam scam, https://www.slideshare.net/arshkoul1/satyam-scam-11718448 (last visited Sep 16, 2018)

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