Market phenomenon: “Satyam Computer Scandal, 2009”

Q1.a) Explain why you chose this market phenomenon for your analysis?
Answer: One phenomenon that affects all continents and all sectors of the economy is Fraud. It
encompasses a wide-range of illicit practices and illegal acts involving intentional deception, or
misrepresentation. According to the Association of Certified Fraud Examiners (ACFE), fraud is “a
deception or misrepresentation that an individual or entity makes knowing that misrepresentation
could result in some unauthorized benefit to the individual or to the entity or some other party” [1].

Corporate fraud impacts organizations in several areas: financial, operational and psychological [10].
While the monetary loss owing to fraud is significant, the full impact of fraud on an organization can be
staggering. In fact, the losses to reputation, goodwill, and customer relations can be devastating.
Organizations of all types and sizes are subject to it. On a number of occasions over the past few
decades, major public companies have experienced financial reporting fraud, resulting in turmoil in the
capital markets, a loss of shareholder value, and, in some cases, the bankruptcy of the company itself.

Here we are looking into the case of “Satyam Computers Scandal, 2009” where financial reporting fraud
had happened. The Satyam scandal is a classic case of negligence of fiduciary duties, total collapse of
ethical standards, and a lack of corporate social responsibility.

1.b) Define your “unit of analysis” of the market phenomenon:

Mr. Ramalinga Raju (Chairman and Founder of Satyam) is our unit of analysis.

1.c) Why do you choose this unit of analysis? Justify your choice.
Generally, there are three groups of business people who commit financial statement frauds. They
range from senior management (CEO and CFO); mid- and lower-level management and organizational
criminals [9]. CEOs and CFOs commit accounting frauds to conceal true business performance, to
preserve personal status and control and to maintain personal income and wealth.

On January 7, 2009, Mr. Raju disclosed in a letter (see Annexure) to Satyam Computers Limited Board of
Directors that “he had been manipulating the company’s accounting numbers for years”. He claimed
that he overstated assets on Satyam’s balance sheet by $1.47 billion. Nearly $1.04 billion in bank loans
and cash that the company claimed to own was non-existent. Using his personal computer, Mr. Raju
created numerous bank statements to advance the fraud. He falsified the bank accounts to inflate the
balance sheet with balances that did not exist. He inflated the income statement by claiming interest
income from the fake bank accounts. He also revealed that he created 6000 fake salary accounts over
the past few years and appropriated the money after the company deposited it.

Greed for money, power, competition, success and prestige compelled Mr. Raju to “ride the tiger”,
which led to violation of all duties imposed on them as fiduciaries—the duty of care, the duty of
negligence, the duty of loyalty, the duty of disclosure towards the stakeholders.
In order to evaluate and understand the severity of Satyam’s fraud, it is important to understand factors
that contributed to the “unethical” decisions made by Raju. It is helpful to evaluate the driving-forces
behind Satyam’s decisions: Ramalinga Raju. Finally, attempt to learn some “lessons” from Satyam fraud
for the future.

Q2. Apply the Eleven Laws of Systems Thinking (see Chapter 2) as Assurance of Learning
(AOL1) that studies any market phenomenon. Explain each Law and its potential for
explaining and predicting behavior of the phenomena you have chosen for investigation.
Illustrate the application of each Law by past, current or projected examples.
Answer:
11 laws of systems thinking that help us understand systems better are:

1. Today's problems come from yesterday's solutions.

Leaders are happy to solve problems, but don't always think about intended and unintended
consequences. Too often our solutions strike back to create new problems.

Whenever Satyam needed more income to meet analyst estimates, it simply created “fictitious” sources
and it did so numerous times, without the auditors ever discovering the fraud. Suspiciously, Satyam also
paid PwC twice what other firms would charge for the audit, which raises questions about whether PwC
was complicit in the fraud

2. The harder you push, the harder the system pushes back.

Humans have a stubborn tendency to bully our way through tough situations when things are not
working out as we would hope. We charge ahead without taking time to think through solutions to find
better alternatives. Sometimes we solve problems; more often, especially in the current environment,
we find ourselves up to our ears in more problems.

Mr Raju admitted to over Rs. 7,000 crore accounting fraud, saying Satyam had overstated profits and
falsified assets for years. He wrote, "Every attempt made to eliminate the gap failed. As the promoters
held a small percentage of equity, the concern was the poor performance would result in a takeover,
thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten".

3. Behavior grows better before it grows worse.

Short-term solutions give temporary improvement at best but never eliminate fundamental issues and
problems. These underlying problems will make the situation worse in the long run.

Raju used short term solutions (of overstating profits and falsified assets) to attract investors and
shareholders so that Satyam could grow fastly in less time. But it only went worse as the gap was about
to get exposed.
4. The easy way out leads back in.

Leaders often have a few quick fixes in their "quiver" of solutions that have brought quick and easy
success in the past. Too often, the easy way out is retrofitting these fixes to any situation without regard
to the unique contexts, people and timing.

5. The cure can be worse than the disease.

Often, the easy and familiar solution is not only ineffective but addictive and dangerous. It might even
induce dependency.

6. Faster is slower.

At the first taste of success, it is tempting to advance at full speed without caution. Remember that the
optimal rate of growth or change is far slower than the fastest growth or change that is possible.

7. Cause and effect are not always closely related in time and space.

We are good at finding causes, even if they are just symptoms unrelated to root causes.

8. Small changes can produce big results -- but the areas of highest leverage are often the least
obvious.

The most grand and splashy solutions -- like changing organization policy, vision, branding or tagline --
seldom work for transforming change. Small, ordinary but consistent and repetitive changes can make a
huge difference.

9. You can have your cake and eat it too -- but not all at once.

Rigid "either-or" choices are not uncommon. Remember that this is not a dilemma if we change our
perspective or the "rules" of the system.

10. Dividing an elephant in half does not produce two small elephants.

As a leader, you can fail to see the system as a whole at your peril. This flaw in perception and vision
often leads to suboptimal decisions, repeated tasks, lost time and energy, and maybe even losing
followers.

11. There is no blame.

People and organizations like to blame, point fingers and raise suspicions about events, situations,
problems, errors and mistakes. Sometimes we even believe the blame we throw around. In reality, we
and the cause of events, situations, problems, errors and mistakes are part of the system.

Understanding systems thinking and principles is essential to transforming business processes in a

organization.
Q.4) Apply now the Ten Archetypes of Systems Thinking (see also Chapter 2) as Assurance of Learning
(AOL3) that studies any market phenomenon. Explain each Archetype and its potential for explaining
and predicting, past or expected structures of market behavior of the same phenomenon under
investigation. Illustrate the application of each Archetype by past, current or projected examples. [20
marks]

Systems-thinking literature has identified ten systems archetypes that we now briefly review.Each
archetype has been coupled with a “management principle” that explains the archetype.

Archetype 1: Limits to Growth

Management Principle: Do not push growth; remove the factors limiting growth.

Archetypes are limits to growth structures. Individuals and organizations grow for a while, and then
slow down or stop growing. Many well-intentioned efforts to improve can meet with bumps or limits to
growth. Often growth suddenly comes to a halt, and even reverses itself. Limits to growth structures
operate in organizations at many levels.

Archetype 2: Shifting the Burden.

Management Principle: Beware the symptomatic solution.

This archetype basically deals with symptoms, not the actual problem. It deals with a problem symptom
that prompts someone to intervene and solve it. The solution that is obvious and immediately
implementable usually relieves the problem symptom very quickly. Symptomatic solutions address only
the symptoms of a problem, and not the fundamental causes, not the actual problem, and tend to have
short-term benefits at best. There is always an underlying problem that generates the symptoms; it may
be obscure and difficult to notice, or too costly to confront. Thus, you “shift the burden” of the problem
to well-intentioned easy fixes that may work well for the short-term.

Archetype 3: “Fixes that Backfire”

Management Principle: A continuing series of fixes to a stubborn problem improves only momentarily.

The familiar expression “The squeaky wheel gets the oil,” or “Whoever makes the greatest noise, grabs
the attention,” are indicative of “fixes that backfire.” Suppose you are annoyed with a squeaky wheel in
your car, and instead of lubricating it with proper oil, you hastily throw a can of water on the wheel. The
noise stops momentarily, but to return louder. The air and water have joined forces to rust the joint.
Suppose, not knowing the problem you splash water again onto the wheel, thinking it worked last time.
You keep on doing this whole day or a whole week. At the end, the wheel has stopped squeaking
altogether, because by now it is encased with rust. A solution is quickly implemented (the fix) which
alleviates the symptoms (in the balancing loop). But the unintended consequences of the fix (the vicious
cycle of the reinforcing loop) actually worsen the performance that we are attempting to correct.

Archetype 4: “Tragedy of the Commons”

Management Principle: A continuing increase of use of a common resource will eventually overstrain
the resource until it crashes.

Any new resource (e.g., a new expressway, a new airport, a new mall, a new charter school, a children’s
park, a new credit union) always opens with people benefiting individually by sharing a common
resource (e.g., the City or state budget). Soon, at some point, the amount of traffic grows too large for
the “commons” to support; congestion, overcrowding, and overuse lessen the benefits of the common
resource for everyone – the tragedy of the commons!

Archetype 5: “Accidental Adversaries”

Management Principle: Understand your partners’ needs, see if you are unintentionally undermining
them, and look for ways that support each other

Jennifer Kemeny proposed this archetype (Senge et al., 1994, p. 145-148). It explains how groups or
people who ought to be or want to be in partnership with each other, end up bitterly opposed. They get
locked up in fierce combat and resentment. The archetype of accidental adversaries applies to teams
working across functions or disciplines, strategic alliances among overspecialized engineers, joint
ventures between organizations, aggressive marketing among highly imaginative and innovative
promotional artists, union-management battles, civil wars, family disputes, and teenager rivalry. Is
there a structural reason for this adversarial stance?

Archetype 6: “Success to the Successful”

Management Principle: Should the success of the successful spell failure of the failed? Break this
vicious zero-sum game cycle. [See also Senge et al. (2000, p. 355-359)]

This archetype states that given the equal opportunities when two systems are competing with each
other, one system gets better and better and other one gets worse and worse. This archetype consists
of two reinforcing loops which interact in such a way as to create a single reinforcing loop wherein if one
loop increases the other decreases. It basically says that if a system does well, we tend to appreciate
that system and allocate more resources to that system. We tend to pull the resources from the less
effective system as they are giving less output and in turn, these less performing systems are neglected
and they become more inefficient or nonproductive assets (NPAs) over the time. This problem can be
avoided by taking into account the success as the success of both the systems together, breaking the
competitive nature of success and encouraging and giving more resources to less efficient systems so
that they can also equally contribute to success. This will bring a greater shared success as a whole.
Archetype 7: “Balancing Process with Delay”

Management Principle: In a sluggish system, aggressiveness produces instability. Either be patient or

make the system more responsive. [See Senge (1990, p. 378-379)]

This archetype is based on the principle that in a sluggish system, aggressiveness produces instability.
Either be patient or make the system more responsive. It explains the system in which the response to
action is delayed. If the agents do not perceive the delayed feedback, they might overshoot or
underestimate the requisite action in order to reach their goals. This could be avoided by being patient
or by increasing the responsive nature of systems.

Archetype 8: “Growth and Underinvestment”

Management Principle: If there is a genuine potential for growth, build capacity in advance of demand,
as a strategy for creating demand. [See Senge (1990, p. 122-125, 389-390)]

This archetype states that if there is a genuine potential for growth, one must build capacity in advance
of demand, as a strategy for creating demand. This archetype operates whenever a company reduces its
growth by investing less. Underinvestment means building less capacity than is really needed to serve
rising customer demand. We also lower our goals and performance standards to justify
underinvestment.

Archetype 9: “Escalation”

Management Principle: Look for a way for both sides to win, or to achieve their objectives

Two groups or organizations, each see their welfare as dependent on a relative advantage over the
other. Whenever, one side get ahead, the other feels threatened, and acts more aggressively to
reestablish its advantage. This situation, in turn, disturbs the other and makes it more aggressive, and
so on. Often, each organization sees its own aggressive behavior as a “defensive” response to the other
organization’s aggression. Obviously, each side acting in “defense” keeps building-up aggressive
defenses that escalate far beyond the desires of each side.

Archetype 10: “Eroding Goals”

Management Principle: Hold the vision; do not compromise established standards for short-term gains.

This is a subset of Archetype 2: Shifting the Burden. The organization shifts the burden by adopting a
short-term solution that essentially compromises its long-term goals and performance standards. The
basis of this archetype is to hold the vision; do not compromise established standards for short-term
gains. The organization shifts the burden by adopting a short-term solution that essentially compromises
its long-term goals and performance standards
Q.7) Apply critical thinking and LEMS to the phenomena (see Chapter 13): Study its legal
(e.g., approval, legitimacy, license, safety, vigilance, security, liability, quality, …), ethical (is
it the right thing, economically justifiable, due-diligence, right trade-offs, socially desirable,
form versus function, nationally benefiting, ecologically sound, sustainability-wise planetary
and cosmic, ethical audit, …?), moral (is it doing the right thing rightly, in the right time,
right place, right people, highest number of stakeholders, with right moral principles, right
moral standards, right moral categorical imperatives, moral audit, …?) and spiritual (Is it
doing right thing, rightly and for the right reasons and intentions, motivations and
aspirations, right spirit of dharma, spiritual audit, …?

Answer:

Critical Thinking: The LEMS Lens

•Legality: Are you deciding and doing at least legally (i.e., following the Law of the Land)?

•Ethicality: Are you deciding and doing the right thing (i.e., following the injunctions of the industry,
product/service domain or Codes specific to the firm)?

•Morality: Are you deciding and doing the right things rightly (i.e., following your moral conscience or
moral beliefs and convictions)?

•Spirituality or Dharma: Are you deciding and doing the right things righty and for the right reasons or
intentions (i.e., following your professional calling or avocation or spiritual identity or dharma)?

REFERENCES

[1] ACFE, “Report to the Nation on Occupational Fraud and Abuse,” The Association of Certified Fraud
Examiners, 2010. www.acfe.com

[2] COSO, “Fraudulent Financial Reporting: 1987-2007,” Committee of Sponsoring Organizations of

[8] A. R. Reuber and E. Fischer, “Organizations Behaving Badly: When Are Discreditable Actions Likely to
Damage Organizational Reputation?” Journal of Business Ethics, Vol. 93, No. 1, 2009, pp. 39-50.
doi:10.1007/s10551-009-0180-3

[9] D. L. Crumbley, L. E. Heitger and G. S. Smith, “Forensic and Investigative Accounting Chicago: CCH
Incorporated,” 2003.

10] C. E. Crutchley, M. R. H. Jensen and Marshall, “Climate for Scandal: Corporate Environments that
Contribute to Accounting Fraud,” The Financial Review, Vol. 42, No. 1, 2007, pp. 53-73.