FINANCIAL

ACCOUNTING
ASSIGNMENT

CONTENTS
1. Parmalat (Italy) 2003................................................................................3
2. Bank of Credit and Commerce International (BCCI).............................................4
3. Tyco international...................................................................................5
4. Krich Media, Germany.............................................................................6
5. WorldCom...........................................................................................8
6. Enron.................................................................................................9
7. Vivendi, France (2002).............................................................................10
8. Maxwell communications corporations and mirror group newspaper, UK (1991).............11
9. The Kabul Bank Scam, Afghanistan (2012)......................................................12
10. Satyam scam, India (2008).......................................................................13
Types and Forms Of Business Organisation........................................................15
Types of businesses.................................................................................................. 15
Forms of Business Organisation.................................................................................. 15
Sources................................................................................................19

1. Parmalat (Italy) 2003

Parmalat was formed in 1961 by Calisto Tanzi, from a small family business. By the 1990s, it has
grown into a large company. Its main line of operations were milk and dairy products. By the end of
1990s the company went international in the form of multinational. Parmalat engaged into heavy
acquisitions in the food industry in the US. As a consequence, Parmalat became an important food
and beverage conglomerates in the world with international listings in six stock exchanges excluding
Milan Stock Exchange.
Frauds
In the 1980s only Parmalat already started having financial difficulties. In 1987, Tanzi worked a
reverse merger, under which it sold itself to a dormant holding already listed on the Milan Stock
Exchange. The combined firm raised about 150million. By 1993, Parmalat started faking

transactions to inflate its financial statements. From 1990 to 2002 the company continuously forged
documents in order to deceive banks and regulatory authorities.
Modus Operandi of the Fraud
Double Billing
The fraud was mainly a system of double billing to Italian supermarkets and customers. By so doing,
the accounts receivable were significantly inflated and it showed a much larger amount than what
they actually were.
2.
Off-Shore Companies to conceal losses
Parmalat used to transfer all the losses of the loss making acquisitions that it used to make to the over
200 off-shore companies located in tax havens. This was cleverly done through accounting
manipulations and actually showing them as assets.
3.
Bonds for Fraudulent Transactions
From 1990 to 2003, Parmalat issued bonds to Bank of America, Citicorps and J.P. Morgan to raise
money. It also borrowed heavily from global banks. As justification to loans it used to inflate
revenues through fictitious sale to retailers. Later on these debts were transferred to shell companies
located in off-shore tax havens.
4.
Bogus company
When the fraud was intensifying, Tanzi and two auditors cooked up the accounts by saying a bogus
milk producer in Singapore that supposedly supplied 300,000tons of non-existent milk powder to a
Cuban importer that held the fake Bank of America account
1.

Exposure
In early 2003, Parmalat tried and failed to sell bonds worth 500 million. The CFO Fausto Tonna
resigned and replaced by Alverto Ferrari. The latter was barred from viewing some of the companiys
account, he resigned and the problems became public in November 2003. In December 2003,
Parmalat confirmed that an account it claimed to have at Bank of America with 3.95million was
inexistent, after which other fraud were discovered.
Aftermath
Tanzi retired as chairman and CEO. The company was liquidated with debts of nearly 14 billion
making it one of the biggest fraud in European history. Tanzi was sentenced to 18 years in jail in
2010.

2. Bank of Credit and Commerce International (BCCI)

Bank of Credit and Commerce International (BCCI) was a major international bank founded in 1972
by Agha Hassan Abedi, a Pakistani financier. The BCCI was incorporated in Luxembourg with head
offices in Karachi and London. The quadrupling of oil prices in 1973-1974 led to huge deposits by
Arab oil producers. Within a decade, BCCI touched its peak. It operated in 78 countries, had over 400
branches and had assets in excess of US $20 billion, making it the 7th largest private bank in the
world by assets then.
Although BCCIs published results showed ever-rising profits, by the late 1970s the bank was
suffering an alarming level of bad debts due to reckless lending. As the losses mounted Abedi
resorted to different ways such as proprietary trading, but the results were further huge losses. Inquiry
report in June 1991 for BCCI by Price Waterhouse at the behest of Bank of England code named

Sandstorm Report revealed that BCCI was involved in massive money laundering, other financial
crimes and illegally gained controlling interest in a major American bank. The report indicated
massive manipulation of non-performing loans, fictitious transactions and charges, unrecorded
deposit liabilities, fictitious profits and concealment of losses. Therefore in 1991, customs and bank
regulators in seven countries seized the banks branches in the UK, US, France, Spain, Switzerland,
Luxembourg and the Cayman Islands.
The BCCI scandal was the biggest bank fraud in history. Its closure left 150,000 depositors
scrambling to recover lost money, eventually recovering 75 percent of their claims, leaving a final
loss of around $2 billion. Abedi was indicted in the US but he died in 1995 before facing the trial.
The primary reasons that could be attributed to the banks losses were
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)

Lax Corporate Governance

Manipulation by bank officers with their own personal agendas
General fraud
Failure of fundamental risk management structures
Untenable loans and acquisition strategies
Poor treasury and record-keeping practices
Complex structure of BCCI leading to numerous regulatory violations and legal liabilities.
Flaws in Corporate Governance

(1)

Poor Risk Management: The flaw in BCCIs operations was that it made large loans to
companies and individuals without properly securing them. These were not properly documented or
monitored. It covered up this problem by taking in new deposits which were not recorded properly.
The bank created a matrix of false accounts that hid the losses for years.
(2)
Non-existent of Board of Directors: The bank was managed by its founder Abedi and the CEO
Naqvi. 248 managers at different locations reported directly to them. Certain senior bank executives
manipulated gaps in the banks risk management structure and indulged in money laundering as well
as escaped regulations.
(3)
Lack of Regulatory Supervision: BCCIs two holding companies were based in Luxembourg and
the Cayman Islands two jurisdictions where banking regulation was very weak. It was also not
regulated by a country that had a central bank.
(4)
Ineffective Audit System: In 1990, a Price Waterhouse audit of BCCI revealed an unaccountable
loss of hundreds of millions of dollars and it also confirmed that BCCI secretly (and illegally) owned
First American.

3. Tyco international
The Tyco scandal was famous in the early 2000s wherein its former CEO L. Dennis Kozlowski and
former CFO Mark H. Swartz were charged with misappropriating more than $170 million from the

company. They were also accused of stealing more than $430 million through fraudulent sales of
Tyco stock. They were charged with more than thirty counts of misconduct, including grand larceny,
enterprise corruption and falsifying business records.
Tycos share price declined nearly 80% in a six-week period from its peak of nearly $63 to $12 by the
middle of 2002 representing a loss of $80 billion in market value. Tyco however survived the scandal
in which its new management team reorganized the company and recovered some of the funds. It
implemented safeguards to ensure greater objectivity on the part of the board of directors. The
Company restated its 2002 financial results by $382.2 million.
Rise of Tyco
Tyco International was originally established as Tyco Laboratories in 1960 as an investment and
holding company in Bermuda. In 1992, with its new CEO Kozlowski, the company had an aggressive
program of acquisitions where an estimated $62 billion was spent to purchase more than 1000
companies. In 1993 its name was changed to Tyco International Ltd. to reflect Tycos global
presence. By 2001 Tyco was one of Americas largest conglomerates with revenues of $38 billion and
240,000 employees worldwide.
Causes of the Downfall
(1)

Aggressive Acquisitions: Due to these, Tyco became highly levered. At the end of 2001, debts of
Tyco stood at a record level of $27 billion.

(2)

Faulty Valuation Techniques: As per the investigations of the SEC, one of Tycos valuation
techniques was spring loading under which the pre-acquisition earnings of target companies were
understated to show boost in earnings after the purchases.

(3)

Misuse of Corporate Funds: Kozlowski enjoyed an extravagant lifestyle and used over $75
million of Tyco funds. Tyco forgave a $19 million, no-interest loan to Kozlowski in 1998 and paid the
CEOs income taxes on the loan.
Flaws in Corporate Governance

(1)

Conflicted Board of Directors: Out of 11 independent directors on paper, at least 3 were subject
to conflict of interest. The majority supported the aggressive acquisitions. The board members who
were aware of the unethical deals did not bring the issues to the other members.

(2)

Weak Internal Control: The internal control of the company was too weak to detect the frauds
and failed in its duty of oversight over the executives.

(3)

Dominating Dishonest CEO: Kozlowski handpicked a few trusted people and placed them in key
positions. They all engaged in enterprise of corruption and collusion.

(4)

Fabulous Compensation of the CEO: Tycos share increased 13-fold between July 1992 and late
2001, but the compensation of Kozlowski grew 4 times more than that amount. During the latter part

of his tenure, his compensation was supplemented with the loans from Tyco which, with the support
of the board, was forgiven.
Audit Failure
The external auditor of Tyco, Pricewaterhouse Coopers (PwC) failed to detect the financial
manipulation and abuse of corporate funds for a fairly long period. The auditor even certified the
financial statements after becoming aware of the accounting problems. The conflicted interest arising
out of non-auditing fees earned by the firm could have been the reason for the failure of the audit.

4. Krich Media, Germany

Krich Media is one of Germany`s two biggest commercial broadcasters founded by Leo Krich. The
group collapsed in 2002 largely due to the debts associated with purchase of sports rights for its
television channels and the launch of pay TV services.
Causes of fall of Krich Media:
1) Ill-conceived Media: Krich was hurt by big losses at pay-TV broadcaster Premiere, wherein more
than $3 billion was invested by the group. The pay channel attracted only 2.4 million subscribers.
2) Heavy debts: Krich amassed heavy debts in the 1990s, buying up sporting and film rights to pipe
exclusive content to its television channels. Krich Media crumbled in 2002 under some $9.3 billion
debt.
3) Financial pressures: Exercise of put option by Axel requiring Krich to buy Axel`s shares, trading
rights payable to soccer club, losses of pay channel, and interest payments on $9.3 billion debts were
mounting a financial pressures on Krich Media.
4) Deutsche Bank`s public exposition: Krich Media group`s bankruptcy was accelerated by the
deutsche Bank`s then chairman Rolf Breuer public exposition of the problems being faced by Krich
Media.
Aftermath
1) The holding company for the group Taurus Holding and its three major subsidiaries, Krich media,
Krich Pay TV and Krich Beteiligung declared insolvent.
2) German Police in October 2003 arrested Herbert Schroder , former chief financial Officer of Krich
Media, on suspicion of fraud linked to the company`s insolvency.
Flaws in corporate governance:
1) Inadequate financial disclosures: The financial disclosures made by Krich Media were inadequate
and vague.

2) Failure of keeping leverage within manageable limits: The broad of directors of Krich Media and
the bankers permitted the leverage to grow to an un-manageable level.
3) Failure of strategic policies: The board of directors of Krich Media failed miserably in formulating
strategic policies of acquisitions in the interest of the company. The top management failed in
perceiving realistic supply and demand projections for pay-channel in Germany.

5. WorldCom
Ascension: WorldCom started in 1983 as a telecom service provider for long distance discount
services (LDDS). Since its beginning it was generating profit. Bernie Ebbers became its first
CEO in 1985. It came into light in 1989 when it took over Advantage Corporation Inc. which
was a long distance telecom service company. It continued to take over big companies including
giants such MCI, UUNet, CompuServe all over the world which led to the increase in revenue
from 154 million dollars in 1990 to 39.2 billion dollars in 2001 making it one of the leading
company in internet infrastructure.
Reason of the failure of WorldCom:
1) Inorganic growth and poor customer service: WorldCom acquired MCI in 1997 with the cost
of 37 billion dollars which led to the increase to customer prices. This increased customer prices
along with complaints of poor phone and customer service, contributed to an eventual decline in
WorldCom stock prices
2) Failed Merger: WorldCom tried to acquire the Sprint Corporation in 1999 which was another
telecommunication giant which would have made WorldCom the largest telecommunication
corporation in America giving it the monopoly share of the telecommunications market. But the
United States Department of Justice called this possible merger illegal which led to sinking of
WorldCom's share.
3) Oversupply: In 1990's, WorldCom rushed to build fiber optic networks and other
infrastructure based on the optimistic projections of Internet growth. This was one of the
fundamental economic problems that WorldCom was facing. With the economy entering
recession and gradual fall of dot-com bubble, WorldCom faced reduction in demand. This led to
the fall of expected revenue while the debt taken due to finance mergers and infrastructure
investment remained.
4) Accounting Fraud: WorldCom under the leadership of Ebbers and other key executives of
accounting department used fraudulent accounting methods to hide its reduction in earning by
projecting false profits and financial growth. These fraudulent accounting ways were:
a) Inflating revenues with fraudulent accounting entries from corporate unallocated revenue
accounts
b) Underreporting the line cost by considering expenditures as capital assets rather than expenses
on the balance sheet. By doing this, WorldCom increased both its net income and its assets. Thus
WorldCom had over-reported its earnings by 11billion dollars
5) Imperfections in Corporate Governance: WorldCom had board of directors consisting of 11
directors out of which 8 were independent which was the reason for improper co-ordination
among them. Taking over of another company by WorldCom was mostly opportunistic lacking
long-term strategic plan. Thus, the Audit committee of company consisting majority of
independent directors failed to do its function of reviewing the company's financial statements
and monitoring internal accounting control activities. However, this committee acted on the
warning of whistleblower Copper but by then it was too late to save company from bankruptcy.
Aftermath
1) WorldCom filed for chapter 11 bankruptcy protection on July 21, 2002. It finally emerged
from Chapter 11 bankruptcy in 2004 with about 5.7 billion dollars in debt.

2) WorldCom changed its name to MCI on April 14, 2003. Under the bankruptcy reorganization
agreement, the company paid 750 million dollars to Securities and Exchange Commission in
cash.
3) Bernard Ebbers, the CEO of the company was found guilty and convicted of all the charges
related to 11 billion dollars accounting scandal in March 2005. Other former WorldCom officials
including Chief financial officer Scott Sullivan were charged with criminal penalties relating to
company's financial misstatements.
4) WorldCom stock price had fallen from 64.5 dollar a share in mid 1999 to less than 2 dollar a
share. WorldCom employees who hold the company's stock in their retirement plans also
suffered huge losses.

6. Enron
Ascension
Kenneth Lay merged the natural gas pipeline companies of Houston Natural Gas and Inter north
to form Enron in 1985. Early in the 1990's, deregulation of sale of natural gas in the USA made
way for Enron to sell energy at higher prices, thus increasing its revenue substantially. By 1992,
Enron became the largest seller of natural gas in North America. To further grow, Enron followed
diversification strategy and so entered into various fields such as gas pipelines, pulp and paper
plants, electricity plants, water plants and broadband services across the globe. On December 31,
2000, Enron's stock price was 83.13 dollars and its market capitalization exceeded 60 billion
dollars, which is 70 times of the earnings. Thus Enron was rated the most innovative large
company in America in Fortune's Most admired companies survey.
Reasons of Downfall:
A combination of the following issues led to the downfall of Enron:
1) Faulty Revenue Recognition Model: Enron adopted the 'Merchant Model' of revenue reporting
in respect of providing services in wholesale trading and risk management. The entire sales value
was reported as revenue and products costs as the cost of goods sold in this model. This model is
much more aggressive in the accounting interpretation than the 'agent model' where only trading
and brokerage are considered as revenue, not the full value of the transaction.
2) Mark-to-market Accounting: Enron adopted this accounting to account for complex long-term
contracts. This accounting requires that once a long-term contract was signed, income as was
calculated as the present value of net future cash flows. Due to large discrepancies of attempting
to match profits and cash, investors were given false and misleading reports. However in future
years the profits could not be included, so new and additional incomes were included from more
projects to develop additional growth to appease investors.
3) Special Purpose Entities: Enron created special purpose entities like limited partnerships or
companies to fulfill a specific purpose of providing fund or managing risks associated with
specific assets.
4) Whistle Blower Policy: Sherron Watkins, one of the employees of Enron raised concern about
the accounting methods followed in the company in 1996 but no notice was taken of her concern

and she was shifted to another department. Finally in 2001, when she raised the matter of
extensive frauds at special purpose entities again loudly, then the scandal came to the surface.
5) Audit Committee: Enron's audit committee did not have the technical knowledge to properly
question the auditors on accounting issues related to company's special purpose entities. The
audit committee failed to review the related party transactions with the SPE's.
6) Stakeholders: stakeholders of the company including creditors, credit rating agencies and
regulators (majorly securities and exchange commission) remained silent spectators until the
scam became too evident. They failed to question the wrong accounting policies and faulty
business model adopted by Enron.
Aftermath
1) It led to the bankruptcy of the Enron Corporation. Enron's 63.4 billion dollars in assets, as a
consequence to this shareholder lost nearly 11 billion dollars when its stock price fell from 90
dollars per share in mid 2000 to less than 1 dollar per share in Nov 2001.
2) Many executives of Enron including its chairman Mr. Kenneth Lay, President Mr. Jeffrey
Skilling and CFO Mr. Andrew Fastow were indicted for a variety of charges and later sent to
prison.
3) Enron's auditor, Arthur Andersen was found guilty and ultimately the audit firm was closed
down.
4) Employees and shareholders received limited returns in lawsuits, despite losing billions in
pensions and stock prices.
5) New regulations and legislation were enacted in the USA to increase the accuracy of financial
reporting for public companies and to expand the accountability of auditing firms to remain
independent and unbiased of their clients.

7. Vivendi, France (2002)

Introduction: Vivendi SA is a French multinational mass media and telecommunication company
headquartered in Paris, France. It reported losses of Euro 23.3 billion for the financial year 20012002 which was the biggest corporate loss reported in French corporate history.
Causes of downfall
1) Heavy debts: Vivendi had grown entirely through acquisitions. Messier spent Euro 600 bilion in
2000-01 for that. Due to numerous acquisitions, there was a huge accumulation of debts.Vivendi offloaded some strakes in the market including 15% sale of strake to Deutsche Bank.
2) Misleading information: Messier tried to cover up the fact of huge losses and debts by issuing
press releases portraying cash flows as `excellent`, operating earnings(EBITDA) better than the

projections and ahead of the targets. The press releases of the first, second and third quarter of 2002
presented a materially misleading picture of the financial condition of Vivendi.
3) Aggressive accounting: During 2001-02, Vivendi engaged in a variety of improper accounting
practices to present a false impression of company`s operating profits. In 2002, a minority
shareholders` association filed a suit against Vivendi accusing it of concealing financial information
and presenting fraudulent information.
Governance flaws:
1) Lack of proper leadership: Lack of proper leadership was avident in Vivendi with Messier on a
spree of expansion through acquisition.
2) Ineffective board of directors: The board was largely ineffective composed of `CEO friendly`
directors and dominated by Messier.
3) High severance compensation: Messier, the CEO of the company who plunged the company near
to bankruptcy was paid severance package of US$20million.
Aftermath:
1) The CEO was forced to resign and was subsequently replaced by Jean-Rene Fourtou.
2) Messier was found guilty of embezzlement in 2011.
3) The company paid over US$20 million to Messier as part of his severance package.

8. Maxwell communications corporations and mirror group newspaper, UK

(1991)
Maxwell Communications Corporation was a leading British media company listed on the London
Stock Exchange. Established in 1964 as the British Printing Corporation. In July 1981 Robert
Maxwell acquired a stake of 29%. In 1982 he took full control over the company and renamed it to
British Printing & Communication in October 1987. The company further acquired Macmillan
Publishers (Us publishers), Science Research Associates and the Official Airlines Guide. By the end
of 1980s, the Maxwell Empire, comprising of more than 400 companies was mainly organized in
three classifications. The two publicly listed companies were The Mirror Group which published
Daily record, the Sunday mail, Racing Times and Mirror newspapers; Maxwell Communication
which concern macmillan books, the official airlines guide, P.F. Collier encyclopedias. Robert
Maxwell Group was 100% privately owned whose operations reached Israel, Hungary and Kenya.
Debacle of Maxwell
In 1991, the chairman, Robert Maxwell, 68 was found drowned floating beside his yacht near Canary
Islands. Within weeks the global empire of publishing and business started to collapse. Financial

investigation revealed Maxwell group owed 2.8 billion to its bankers. Other banks started calling in
for massive loans. The most famous UK pension scandal of 530 million was revealed affecting
more than 16000 employees.
Reasons of the Debacle
1.
Acquisitions through heavy debts
Maxwell used to borrow both on personal and companys accounts. Consequently Maxwell was
facing financial troubles as he had heavy borrowings. The company borrowed $3Billion in 1988.
Their objective was to acquire publishers from US, Israel, and Hungary. It was later discovered that
Maxwell had pledged the same companys assets a collateral for various loans.
2.
Financial Difficulties and Diversion of Funds
The group comprised more than 400 companies by the end of 1980s. It had no other choices other
than shifting funds across the private companies, misappropriating pensioners fund in order to hide
its financial frauds and liquidity problems. Months before Maxwells death, there was trouble in
meeting the repayment schedule due to declining cash flows and huge debt payments. In 1991, in
acute need for money, Maxwell sold Pergamond and floated Mirror Group Newspapers as a public
company.
3.
Uncertainties following the death of Robert Maxwell
Following the death of Robert Maxwell, the stock of Maxwell Communication fell to $2.18 on
5November 1991 from a high of $4.28 in April 1991 further dropped to $0.68. Creditors were highly
affected. Maxwell sudden death triggered uncertainty among creditors and eventually the Maxwell
Empire collapsed.
Aftermath
Maxwell siphoned hundreds of millions of pounds from his companies pension funds to show a
greater value of the shares of his group and to save his company from bankruptcy.
Pensioners received only about 50% of their company pension entitlement.
The sons, Kevin and Ian were declared bankrupted with debts of 400.Auditors were Cooper and
Lybrand and admitted 59 errors of judgment.

9. The Kabul Bank Scam, Afghanistan (2012)

Relative to the size of Afghanistan's economy, the Kabul Bank crisis that came into light in
November 2012 was the biggest banking scandal the world had ever seen, equivalent to around 5% of
national income. At the time of the scam, Kabul Bank was a central institution in the lives of millions
of Afghans, for many it was their first experience with formal banking.
The modus operandi of the scam
Senior management directed Employees to open and administer overdraft and loan accounts for
proxy borrowers supported by fake records and unreliable Know Your Customer forms that were
processed without meeting the clients. Inconsistent information and lack of supporting evidence was
a common feature in the loan files. The actual beneficiaries of the loan accounts were concealed by
passing false entries giving the impression that funds were being transferred overseas by customers to
suppliers supported by fake SWIFT messages and invoices from fake suppliers created by the Credit
Department. Ultimately the funds were deposited in accounts controlled by the true beneficiaries. The
Shaheen Exchange - in which the now ex-Chairman of Kabul Bank had a 49 percent stake - opened

an account at Kabul Bank the month after the Bank was granted a banking license and had
approximately 160 proxy loans assigned to it at the time of conservatorship. The exchange was used
to launder disbursements; conceal beneficiaries; use depositors funds for illegitimate and risky
business investments; satisfy loan repayment schedules; and to enable the Shaheen to operate as a
Hawala.
In addition to initiating and administering fraudulent loans, Kabul Bank management disbursed Bank
funds as operating expenses for the benefit of outside businesses they controlled, or created fictitious
assets to conceal illicit withdrawals. Misuse of accounts also included payment of advance salaries
and travel expenses, the claims of which had no supporting documents. Salaries were also paid to
unqualified employees, employees engaged in fraudulent activities, or those who simply did not work
for the Bank. For example, the brother of the ex-Chief Executive Officer was being paid a yearly
salary of $96,092 and was granted four-years paid leave, but never worked at the Bank. Several
transactions were created to appear as though expenses were being incurred for capital expenses. A
purported payment to a technology company for $739,000 in August 2009 was paid via the Shaheen
Exchange and transferred to the ex-Chief Executive Officer on the same day.
Causes and Aftermath of the scam
After the scam came into light, as per Afghan law, a conservator was appointed to enquire into the
matter, and it was discovered that over 92 percent of the Banks loan-book, or $861 million, was
granted to 19 related individuals and businesses ultimately reaching 12 individuals, with the
remaining $74 million being extended to legitimate customers. New Kabul Bank to allow good assets
to move from Kabul Bank to a clean bank, while the bad assets remain with Kabul Bank receivership.
High political involvement combined with the weak regulatory and supervisory requirements, and
inadequate reporting and auditing laws led to the Kabul Bank Crisis. Despite efforts on the part of the
government, the investigation and fight against corruption continues in Afghanistan.

10. Satyam scam, India (2008)

Satyam Computers, founded in 1987 by Ramalinga Raju, was the fourth largest IT company in India
in 2009 when the founder confessed to one of the biggest fraud in Indias corporate history. On
January 7, 2009, he announced that he had been falsifying accounts for years, the scale of the fraud is
estimated to be 7000 crore. Raju was compelled to admit to the fraud after a failed attempt to have
Satyam invest $1.6 billion in Maytas Infrastructure and Maytas properties- two firms promoted and
controlled by his family members. The deal, which was initially cleared by the board of directors,
was aborted after institutional investors questioned the use of a software companys money to buy
two infrastructure companies. The aim was to fill the fictitious assets with real ones, with the failure
of the attempt Raju had no other option but to admit to the scam.
Magnitude of the Scam
As per the confession Satyams Balance sheet included Rs 7136 crore in non existent cash and bank
balances, accrued interest and misstatements. The company had also inflated its 2008 second quarter
revenues by Rs 588 crore to Rs 2700 crore and actual operating margines were less than a tenth of the

stated Rs 649 crore.

The modus operandi of the scam
The then senior management allowed certain employees to have super user login password to
access the billing systems and were directed to create fake invoices for no existing customers. A total
of 6603 fake invoices were created in the five year period which boosted the companys profits
fraudulently. The fake revenues were then showed as cash receipts by falsifying bank statements to
show higher deposits than what actually existed. Moreover, falsified interest on fixed deposits was
shown to complete the fraud cycle.
Aftermath
The confession of Raju emanated shock waves in the stock market and the share of the company
nosedived from a high of Rs 178.95 on January 6, 2009 it fell below Rs 40, wiping out Rs 9376 crore
of investors wealth in just one day. An all time low of Rs 23.75 was reached on January 9, 2009,
compared to the highest of Rs 534.9 on May 29, 2008. After the satyam scam, the Government
realized the loopholes in the corporate governance policies and introduced major changes regarding
the provisons governing independent auditors and directors on companies.
Causes of the scam
Despite having a majority of independent directors, the Board of directors of Satyam falied their
prime duty of oversight and failed to notice the scam cooking up in the company. The audit
committee failed to carry out their responsibilities, despite an email from a whistle blower they did
not take up the matter until the scam was already exposed. Diligence on the part of external auditors
could have avoided the scam, they relied completely on the information provided by the management
and did not conduct any physical checks. If they would have contacted the banks to verify the
balances in the accounts of Satyam the mismatch would have been evident.

Types and Forms Of Business Organisation

Types of businesses
Trading Organisation
A trading organization is one that is involved as an intermediary between the customer and the
supplier. The trading organisation neither produces nor stores. For example: Stock brokers: Indiabulls
Securities.
Manufacturing organization
A manufacturing organization is one that is actively involved in procuring raw material, convert them
into finished goods as per customer requirements and later on dispatch them to distributors for sale.
For example: FMCG: Hindustan Unilever.
Service Organisation
A service organization is one that provides an intangible service to customers. These services are
usually specialized in nature and require a high level of professionalism. For example: Banking
service: Axis Bank.
Sole Proprietorship
Sole proprietorship is a model in which an individual starts a business venture on his own. He
procures the initial capital from his past savings, borrowing from close relatives and friends or may
start with a personal bank loan. Under this mode, the entrepreneur decides his revenue model and the
way he wants the business to operate. Often, he is expected to work beyond expected hours. The
main advantage is that all the profit earned are sole his and the disadvantage is unlimited liability.

Forms of Business Organisation

Partnership
When a group of individuals pool up their resources either financial or non-financial to carry out a
business venture together based on agreed terms stipulated on a partnership deed is known as
partnership. Often these individuals are professionals as they are not allowed to form companies.
There is the concept of dormant and active partners. The main advantage of partnership is that the
initial capital is pooled up more easily as compared to sole proprietorship. The disadvantage is that
partners under the partnership still have unlimited liability.
Limited Liability Partnership
While traditionally only three forms of organizing business activities existed (Sole proprietorship,
Partnership, Corporate form); Limited liability partnership (LLP) was introduced in India through the
Limited liability Act, 2008. While it inherits the flexibility of partnerships it has the added benefit of
Limited Liability of a corporate form. The internal management is flexible as per mutual agreements
between the partners similar to a firm. Moreover, the limited liability clause implies that the liability

of the partners is limited to the extent of their agreed contribution to the partnership and partners
would not be responsibilities of the liabilities of the LLP.
1.
2.
3.
4.
5.
6.

Characteristics of an LLP
An LLP is a body corporate and has a legal entity and is separate from its partners. An LLP also
has the feature of perpetual succession, meaning the existence of the LLP is not dependent on the
partners.
The provisions of the Indian Partnership act, 1932 are not applicable to an LLP, and every
Limited Liability partnership must use the words Limited Liability partnership or LLP as the last
words of its name.
Every LLP must have at least 2 designated partners being individuals and at least one of them
should be a Resident of India. The rights and duties of the partners of an LLP is governed by the
agreement between the partners and the LLP subject to the provisions of the LLP Act.
Every partner of an LLP is an agent of the LLP, but not an agent of the other partners.
A firm or a company can convert into an LLP as per the provisions of the act. After the certificate
of registration is issued as per the act, all assets and liabilities of the firm or company is transferred
and shall vest in the LLP.
An LLP like a company, is required to maintain annual books of accounts reflecting a true and
fair view of the LLP, the statement of accounts and solvency must be filed with the registrar. The
accounts of an LLP need to be audited unless any class of LLPs has been exempted from this
requirement by the Central Government.
Company Form
As per Companies Act, 2013
Company means a company incorporated under this Act or under any previous company law;
Company limited by guarantee means a company having the liability of its members limited
by the memorandum to such amount as the members may respectively undertake to contribute to
the assets of the company in the event of its being wound up;
Company limited by shares means a company having the liability of its members limited by
the memorandum to the amount, if any, unpaid on the shares respectively held by them.
Private Limited Company

Private company means a company having a minimum paid-up share capital of one lakh
rupees or such higher paid-up share capital as may be prescribed, and which by its articles,
(i) Restricts the right to transfer its shares;
(ii) Except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they
shall, for the purposes of this clause, be treated as a single member:
Provided further that
(A) Persons who are in the employment of the company; and

(B) Persons who, having been formerly in the employment of the company were members of the
company while in that employment and have continued to be members after the employment
ceased, shall not be included in the number of members; and
(iii) Prohibits any invitation to the public to subscribe for any securities of the company.
Public Limited Company
Public company means a company which
(a) Is not a private company;
(b) Has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as
may be prescribed:
Provided that a company which is a subsidiary of a company, not being a private company, shall
be deemed to be public company for the purposes of this Act even where such subsidiary
company continues to be a private company in its articles.

Difference between Public limited company and private limited company

Basis

Private limited company Public limited company

Meaning

Minimum
Capital:
Rs. Minimum
Capital:
Rs.
100000Right to transfer the 500000Subsidiary of a Public
shares Restricted
Co. is deemed to be a public
Co.

Minimum Members Required

2 (Two), Maximum 200 (Two 7 (Seven)

Hundred)

Name of the Company

Private Limited as Last Word

Public Limited as Last Word

Provision of entrenchment in To be agreed and approved by To be agreed and approved

the Articles
all the members
through a Special Resolution
Issue of Securities

By way of Right Issue or To Public through Prospectus

Bonus Issue Through Private (Public Offer)By way of Right
Placement
Issue or Bonus Issue Through
Private Placement

Public
Offer
to
Dematerialized Form

be

in Not Applicable

In case of public offer of

securities, the securities have to
be in Dematerialized

Securities in Public Offer to be Not Applicable

listed in Stock exchanges

Securities offered in Public

Offer, to be listed in Recognized
Stock Exchanges

Purchase / Loan for Purchase Not allowed to Purchase its Not allowed to Purchase its own
of Own Shares
own Shares
Shares No Financial assistance
to be given to purchase its own
shares
Acceptance of Deposits

Not allowed to accept deposit

Allowed if Paid up share capital

is Rs. 100 Crores or more or
Turnover of Rs. 500 Crores or
more - See

Internal Audit

Applicable in case of

Applicable in case of

1. Turnover >= Rs. 200 Crore 1.Paid Up Capital >= Rs. 50

in preceding financial year
Crore in the preceding financial
year
Or
OR
2.
Loans from bank or
NBFCs >= Rs. 100 Crore in 2. Turnover >= Rs. 200 Crore in
preceding financial year
preceding financial year
OR
3.
Loans from bank or
NBFCs >= Rs. 100 Crore in
preceding financial year,
OR
4.
Public Deposit >= Rs. 25
Crore in preceding financial

year

Annual Evaluation
Boards Report

Rotation of Auditor

Sources

the Not Applicable

If Paid up share capital is Rs.

25 Crore or more, the details of
annual evaluation in the Boards
Report

Applicable in case of Paid up Applicable in case of Paid up

Capital is Rs. 20 Crore or Capital is Rs. 10 Crore or more
more -

No.
of
Directors
Independent Directors

Restriction
on
Remuneration

in

and 2 (Two);Not required to 3 (Three); and In case of Listed

appoint independent director
Companies, at least One-Third
as independent directors

Managerial No restriction on amount of Managerial Remuneration is

managerial remuneration
Restricted to 11% of Net profit
(subject to conditions), OR at
least Rs. 30 lakh p.a. depending
upon paid up capital

1.

Report of the public enquiry into Kabul Bank Crisis, Independent Joint Anti-Corruption
Monitoring And Evaluation Committee; Retrived from:
http://www.globalsecurity.org/military/library/report/2012/ijacmec-kabul-bank-inquiry.pdf

2.

Afghan elite ransacked $900m from Kabul Bank, The Guardian;

http://www.theguardian.com/world/2012/nov/28/afghan-elite-ransacked-kabul-bank

3.

Corporate Accounting Fraud: A Case Study of Satyam Computers Limited:

http://www.scirp.org/journal/PaperInformation.aspx?paperID=30220#.VaTnwXi-igR

4.

Governance, Ethics and Social Responsibility of Business: Anil Kumar and Jyotsna Rajan Arora

5.

Concepts of Business law, 2011: S.K. Aggarwal

6.

The Limited liability Partnership Act, 2008: http://www.mca.gov.in/MinistryV2/llpact.html

7.

Definitions as per Companies Act 2013, Ministry of Corporate affairs:

http://www.mca.gov.in/SearchableActs/Section2.htm

INVENTORIES OF COMPANIES
1. AUTOMOBILE COMPANY
Raw Materials: seats, wheels, engines, nuts and bolts etc.
Work in progress: Vehicles that are being assembled and are under process
Finished Goods: Cars that are ready for sale.
2. SERVICE INDUSTRY COMPANY: TCS

Balance sheet Source: http://www.tcs.com/investors/Documents/Annual

%20Reports/TCS_Annual_Report_2013-2014.pdf
Notes forming part of Financial Accounts provides:

3. BANKING COMPANY:
A Banking Company in India prepares its Balance sheet as per Schedule III of
Banking Regulations Act 1949. There is no head of Inventories in a banking
companys balance sheet. However, as a bank deals with money, it can be said that

banks keep money balances and cash in order to meet their customers
requirements.

Source: http://www.icaiknowledgegateway.org/littledms/folder1/chapter-6financial-statements-of-banking-companies.pdf