Nitin - KFA, Satyam, Enron PDF

AUDIT AND CORPORATE
GOVERNANCE ASSIGNMENT
Topic:
Throw light on the facts and Corporate Governance
problems leading to the following corporate failures:
SUBMITTED BY:
Name: Nitin Sangwan
Course & Section: B.Com. (Hons), Section-B
Roll N0: 1327
Kingfisher Airlines
It started its operations in 2005. It was a wholly owned subsidiary of United
Breweries Limited (UB). The UB group's chairman was Vijay Mallya. He tried to
redefine the entire experience of flying within India by introducing many first-
time services for its passengers such as in- flight entertainment system, exquisite
cuisine and lavish airport lounges, He had a good relationship with the top
politicians than 7,000 crores at that time. The air fares were very competitive
and were not sufficient to cover the high costs of running Kingfisher Airlines. In
2007, KFA acquired Air Deccan, a low-cost airline and also acquired Air Deccan's
international flying rights. KFA started international flight services in 2008. KFA
became a full- service airline, low cost carrier and was operating on international
routes within less than four years of its operation. The expansion of business
was not financed through revenues but loans from banks. Ever since the airline
commenced operations in 2005, it had been reporting losses. After acquiring Air
Deccan, Kingfisher suffered a loss of over 1,000 crores for three consecutive
years.
After four years of its international services, Kingfisher stopped its airline
services because of huge debts, as it was not in a position -to pay the employee
salaries, Airport charges, Fuel bills to the oil companies and bank loans. In 2011,
KFA acknowledged its cash flow problems for the first time and State Bank of
India, its largest creditor declared the loan to KFA as a Non- Performing Asset
(NPA). Various court cases were filed by the employees, the creditors and tax
authorities against KFA. The Directorate General of Civil Aviation suspended its
flying license in October 2012 after KFA failed to address the regulator's concern
about its operations.
Major Governance Issues related to Kingfisher Airlines' Failure:

1. Unethical conduct: There was a frequent change in the top-level LG urn
Co fa is management of Kingfisher Airlines. Mr. Vijay Mallya never took
serious interest in day-to-day operations. Kingfisher was a gift to Siddarth
Mallya (son of Vijay Mallya) by his father on his birthday. Siddarth Mallya
did not have the maturity to run the airlines business because he was too
busy in making Kingfisher Calendar
2. High operational cost: Operational costs of the airline industry ne vee 11,
k of Set high as compared to any industry. KFA had to buy the licenses for
t are very routes it wanted to fly. The company had invested huge
amounts tax and its aircraft maintenance and the salaries for the
employees were very high.
3. Lack of proper management: The Board of directors was constituted

meet the legal requirements but was dominated by the Chairman
Managing Director Mallya who failed to give a strategic direction to KFA
and failed in his duties that could have roped in Mr. Gopinath as CEO of
kingfisher airlines.
4. No heed was paid to audit objections: The management and audit

committee did not pay attention to audit objections raised by the auditors
in September 2011. The auditors had raised questions on accounting
methods used by the airline to calculate costs of maintenance and repairs
of aircraft. According to them they were not in accordance with generally
accepted accounting standards prevalent in India.
5. Executive Compensation: As per a report of India Today, KFA’s CEO Sanjay

Agarwal was the second highest paid among all his peers at UB group and
among country’s three listed airlines in March 2012. The Kingfisher
employees were probably much better paid as per remuneration details
provided in the annual reports despite the fact that the airline was facing
rough situations. The CEO of KFA resigned in February 2014, Mallya was
arrested in London on April 18 2017, but was granted bail. His extradition
hearings are still underway.
Satyam Computer Services Ltd.
It was incorporated on 24 June, 1987 by the two brothers, B. Rama Raju and B
Ramalinga Raju as a private limited company for providing software
development and consultancy services to large companies. In 2001, Satyam
became the world's first ISO 9001:2000 company by BVQI. In September 2008,
it won the " Golden Peacock Award on Corporate Governance" from London-
based World Council for Excellence in Corporate Governance.
On December 16, 2008 Satyam made an abated attempt to invest $1.6 billion in
Maytas Properties and Maytas Infrastructure. On January 7, 2009, the Chairman
announced that the company had been falsifying its accounts for years. He
inflated cash and bank balances, reported accrued interest that was non-
existent, understated liabilities and overstated debtors. He made a confession
of over 77800 crore financial fraud.
After Raju's confession, the chairman, the managing directors, CFO and two
partners of Pricewaterhouse Coopers (external auditors) were arrested. The
Serious Fraud Investigation Office (SFIO) of the Ministry of Corporate Affairs
started investigation. Several class action suits were filed in the US. In April 2009,
Tech Mahindra bought Satyam and renamed it as "Mahindra Satyam".
The main reasons for the collapse of Satyam are as follows:

1. Ineffective Board: Satyam was composed of 'chairman -friendly directors
who failed to question management 's strategy. They were also extremely
slow to act when it was already clear that the company was in financial
distress.
2. Audit Committee's Failure: The audit committee failed to carry out

effective internal control system. They did not report the matter to the
shareholders and regulators.
3. Flaw in External Audit: Pricewaterhouse Coopers did not follow standard

accounting and audit practices. They did not obtain confirmation from
banks for cash balances.
4. Accounting Manipulation: Satyam had created a false impression about

its fixed deposits amounting 3,318.37 crore while they actually held FDRS
of just 79.96 crore. The Company's balance sheet showed accrued interest
of 376 crore which was non-existent.
5. Insider Trading: The promoters offloaded their shares in Satyam to invest

in real estate. They manipulated share prices to make personal gains and
cheated other shareholders and investors.
6. Unwarranted Acquisition: Satyam made acquisitions in India and abroad

without proper planning and these acquisitions turned out to be losing
propositions in the long run. The company allegedly concealed its true
financial position.
7. Dubious role of Rating Agencies: The rating agencies did not investigate
the financial condition of Satyam. They displayed lack of due diligence in
their coverage and assessment of Satyam.
Enron
Enron formed in 1985 by Kenneth Lay-by merging natural gas pipeline
companies, namely Houston Natural Gas and Inter North. Kenneth assumed the
role of Chairperson and CEO. By 2001, Enron became one of the world's largest
energy companies. It was rated the most innovative energy company by the
Future magazine. Enron’s success was phenomenal. The Enron scandal was
revealed in October 2001.
The main reasons for the failure of Enron are as follows:

1. Financial Misrepresentation: The company showed entire sales value as
revenue in its financial statements. As a result, Enron’s revenues
increased from $13.3 billion to $100.8 billion. This 65% annual increase
was unprecedented in the energy industry wherein growth of 2-3 percent
is considered respectable.
2. Non-transparent Entities: Enron created limited partnerships and

companies to provide funds or manage risks. These entities were complex
and non-transparent. In this way, the company concealed huge losses and
created false impression of hedging its investments.
3. Mark-to-Market Accounting: The company adopted mark-to-market

accounting for its long-term contracts. Income was estimated as present
value of net future cash flow. The viability of these contracts and their
related costs were difficult to estimate. Investors were given false or
misleading reports due to large discrepancies between profits and cash.
4. Mismanagement of Risk: Enron bankruptcy was attributed to its reckless

use of derivatives and special purpose entities. By hedging its risks with
special purpose entities, the company retained the risks associated with
the transactions.
5. Executives Compensation: Excessive compensations were given to the

executives in order to maximize bonuses. The focus was on short-term
earnings. Executive stressed high-volume deals instead of cash flows or
profit. On December 31, 2000 stock options accounted for about 13% of
the companies issued shares.
6. Fraudulent Auditing: Both the audit function and accounting function in

Enron were fraudulent and opaque. Management of Enron pressurized
the auditors to deviate from the established auditing standards. There
was a conflict of interest as the auditors earned more as consultancy fees
much more than audit fees.
7. Board’s Failure: Board of directors consisted mostly outsiders with

considerable stakes. There was a lack of effective control over related
party transactions, derivatives and other irregularities.
8. Unethical Practices: Senior executives indulged in unethical practices by

putting self-interest ahead of the company’s interest. Creditors, credit
rating agencies and regulators failed to assess the faulty business model
and wrong accounting policies of Enron. There was no whistle-blower policy.

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AUDIT AND CORPORATE

Major Governance Issues related to Kingfisher Airlines' Failure:

3. Lack of proper management: The Board of directors was constituted

4. No heed was paid to audit objections: The management and audit

5. Executive Compensation: As per a report of India Today, KFA’s CEO Sanjay

The main reasons for the collapse of Satyam are as follows:

2. Audit Committee's Failure: The audit committee failed to carry out

3. Flaw in External Audit: Pricewaterhouse Coopers did not follow standard

4. Accounting Manipulation: Satyam had created a false impression about

5. Insider Trading: The promoters offloaded their shares in Satyam to invest

6. Unwarranted Acquisition: Satyam made acquisitions in India and abroad

The main reasons for the failure of Enron are as follows:

2. Non-transparent Entities: Enron created limited partnerships and

3. Mark-to-Market Accounting: The company adopted mark-to-market

4. Mismanagement of Risk: Enron bankruptcy was attributed to its reckless

5. Executives Compensation: Excessive compensations were given to the

6. Fraudulent Auditing: Both the audit function and accounting function in

7. Board’s Failure: Board of directors consisted mostly outsiders with

8. Unethical Practices: Senior executives indulged in unethical practices by

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