Corporate Crime: A Comparison of Culture at Enron and Satyam

Deepti Khedekar Faculty Mentor: Larry Carstenson University of Nebraska at Kearney

Abstract: To be able to compare what happened at Enron and Satyam, one needs to look into the basic functioning of companies. The pertinent question here is how were these companies able to misrepresent their assets to such a proportion without the knowledge of anyone within their organizations? Was it loyalty or fear or both that kept employees in these organizations from blowing the whistle on the wrongdoers? While the result of both frauds was an initial rise in stock price and although the scam in Satyam Computers Services Ltd. is being called ‘The Indian Enron’, there are several differences between these two episodes. This paper lays down the differences between Enron and Satyam and explores the corporate culture prevalent in and the U.S. to explain the possible differences in the route the management of the two companies took to falsify the information.

Key concepts: Nepotism, cronyism, micro-geographies, corporate culture, cross-cultural studies, Special Purpose Entities, Mark to Market accounting, corporate governance

Introduction It is about commitment to values, about There are several definitions of ethical business conduct and about corporate governance. The Securities making a distinction between personal and Exchange Board of India defines it and corporate funds in the management as “the acceptance by management of of a company.” (Sapovadia & Patel, the inalienable rights of the 2009) shareholders as the true owners of the Good corporate governance corporation and of their own role as works in a well functioning chain of trustees on behalf of the shareholders. power. To protect the investors’ rights,

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financiers, auditors, boards of directors here is how were these companies able and financial analysts work together and to misrepresent their assets to such a maintain transparency in the system proportion without the knowledge of (Healy & Palepu, 2003). These anyone within their organizations? Was governance bodies also act as a check it loyalty or fear or both that kept on each other. Governmental agencies employees in these organizations from such as the S.E.C. handle the overall blowing the whistle on the wrongdoers? functioning of this system. While the result of both frauds was an The failures of this system and initial rise in stock price and although the urgent need to improve it have been the scam in Satyam Computers Inc. is the media’s hottest topic for the past being called ‘The Indian Enron’, there few months now. The shocking Madoff are several differences between these , the fall of Satyam two episodes. This paper lays down the Computers and now the fraud charges differences between Enron and Satyam against Texas banker R. and explores the corporate culture have all shaken the confidence of prevalent in India and the U.S. to investors in an already shaky economy. explain the possible differences in the Several explanations are being issued as route the management of the two the corporate world tries to understand companies took to falsify the why these gross distortions take place, information. The hypothesis is that and even more incredulously, how they there is high likelihood that the cultural manage to go unnoticed until it is too set up of different countries may have a late. The and the major impact on how scams of this type resulting stringent regulations have are conducted within their obviously not been successful in organizations, that there may be a preventing situations of the same type different set of motives and unique from happening. One of the reasons for irregularities in the system that allow this could be the fact that these for such crimes to occur. falsifications often start small and subsequently become unmanageable. Benefits of effective corporate This seems to result in an unfortunate governance series of actions; once started they are difficult to stop and they consequently When Satyam Computers blow out of proportion before hitting declared bankruptcy, the economy of the media. As Mr. , the the country was already in the founder of Satyam Computers doldrums. The problems at Wall Street mentioned in his letter to the board of had spread to the rest of the globe, directors, the fraud ‘was like riding a especially India where a lot of the work tiger, not knowing how to get off from the U.S. is outsourced. With the without being eaten’. downfall of the fourth largest company To be able to compare what the stock market crashed even more, happened at Enron and Satyam, one dragging the economy lower. It is quite needs to look into the basic functioning logical to link corporate governance to of companies. The pertinent question not only the financial system of an

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organization but to the economy of the the problem with the Indian corporate whole country (Chakrabarti, 2005). sector is that often the majority Another straight forward shareholders of the company are also reasoning for the emphasis on good the top management. Family members corporate governance is that when a are given preference in important company follows all the rules it is positions without formal procedures supposed to follow and keeps its that need to be followed to check their proceedings transparent, there are low suitability. Unfortunately, the legal chances of the organization losing its system of the country is also slow and money over law suits. corruption is prevalent in most sectors of the government. Court cases drag on Models of corporate governance for extremely long durations, sometimes decades, and it becomes There are two basic structures unfeasible to process anything through into which corporate governance can be the legal system (Chakrabarti, 2005). categorized; the market based Anglo- Saxon pattern followed by countries like Satyam Computers Private Ltd. the U.S., India and U.K. and the bank based model that is followed by The Indian corporate structure companies in Germany and Japan. In has shown promise the past few years. the bank based model, a country’s With a majority English speaking major banks hold the reins of the population, there has been great companies’ functioning. They are demand for call centers from companies primarily responsible for the supervision in developed countries, especially the of the organization and have their U.S. and U.K. The sheer number of representatives in the body of qualified, talented young people in the stakeholders. country has made it a haven for Foreign In the Anglo-Saxon model of Direct Investment (FDI). Besides, the corporate governance, checks on the country’s banking system has long management are kept through the supported the advancement of financial market. The shareholders companies. As a result India has been display their discontent with the on the global map for Information management by selling the company Technology (IT) for quite some time shares. This results in the share prices now. The rapid pace at which the of the company nose-diving and this country was developing its corporate makes the company vulnerable to being structure reminded many of the seized by another. An acquisition of the American capitalist economy. However, company by another would mean new after a decade or so of spurt in growth, management, and it is this fear of being the Indian corporate sector is being seized by another organization, more called to line. than shareholder action, that makes the Satyam Computers Private Ltd. management follow regulations. was started in 1987 by its founder Mr. However, hostile takeovers are Ramalinga Raju in Andra Pradesh, India. not common in Asian countries. Also, In a short span of time Satyam climbed

Economics & Business Journal: Inquiries & Perspectives 158 Volume 3 Number 1 October 2010 Corporate Crime: Enron & Satyam Khedekar the corporate ladder to be recognized Saxon model, there are some very as the fourth largest company in India. important distinctions that need to be It offers services such as Business made. Culturally speaking, India, like Process Outsourcing (BPO) and other Asian countries, is notorious for consultancy in several IT, engineering corruption, cronyism and nepotism (Yu and management departments. Very & Xu, 2001). Nepotism refers to the soon prominent Fortune 500 companies hiring of members of the same family to like Nestle, GE and GM from the U.S. positions in an organization. It is widely came to be top customers on Satyam’s held to be unfavorable because it is client list. assumed that people who are given a On January 7th 2009, Mr. job or promotion because of their Ramalinga Raju declared that he had relation to the higher-ups are not been showing nonexistent profits on the qualified for the positions. Nepotism in company’s books for the past several the corporate sector in India has given years. This billion dollar fraud episode is rise to a unique set of circumstances, famously being called ‘India’s Enron’. making its issues different from those The incident has made the foreign that are encountered in the U.S. investor question India’s capacity to corporate sector. The presence of govern its corporate sector and family members in high ranking maintain high standards of positions has been the crux of many transparency. After the episode came governance problems in India. In most to light, Satyam’s shares have gone family owned businesses in India, down by more than half. In April 2009, relatives and kin form the majority just four months after Mr. Raju’s shareholders of the company. With declaration of fraud, the company was family influence in senior management, finally taken over by Tech Mahindra. decisions often cater to the profit of the Today, Mr. Ramalinga Raju (ex-chairman family unit instead of the business or of the company) and his brother Mr. the other stakeholders of the company. Rama Raju (ex- Managing Director) have As a result of a lethargic legal system been put into prison in Chanchalguda improper recruitment of this type is not Central jail in Hyderabad, India. Linked prevented by the government. to the Satyam fraud is the attempt The view towards nepotism also made by Mr. Raju to transfer the differs very widely based on geography. company’s funds to Maytas properties, Cross-cultural studies show that cultural which is a real estate company owned diversities affect the way people in by Mr. Raju’s sons. different countries view nepotism along with its advantages and disadvantages India: nepotism, cronyism and (Abdalla, Maghrabi & Raggad, 1995). An corruption example can be given of Indian politics where nepotism has long been Although the corporate sector in established as an accepted method of both India and the U.S. is based on the entry into the system. The country’s Anglo- first Prime Minister, Jawaharlal Nehru, his daughter, Indira Gandhi, her son

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Rajiv and his wife Sonia Gandhi have all control. There is high likelihood for been active members of the Indian nepotism to occur in “micro- political system and benefit from the geographies where several external enthusiastic support of the Indian factors like socio-cultural, economic, masses, most of who want the country educational, and political structures to be lead by a ‘Gandhi’. As a result force people to support their close “the world's most populous democracy relatives or friends” (Arasli & Tumer, has sometimes looked suspiciously like a 2008). Another reason why family family business” (The Economist, 2009). members were given priority was to Legally speaking, even in the encourage and maintain a healthy U.S., nepotism is a complex issue rapport between the people responsible because there are no formal, uniform for running a successful business. It has laws regulating it. Issues related to been widely accepted that this ease in nepotism have to be decided on a case- relationships creates a homogeneous to-case basis, according to the laws of work environment as people coming the state. What makes this issue even into the organization have pre-formed more complex is the fact that several bonds (Bennett- Alexander & Hartman, cases related to nepotism clash with 2009). prevailing policies that regulate As the corporate sector in India discrimination against marital status, grew, families continued to keep all sex, age and even racial discrimination. decision-making authority in their Another reason why nepotism is hands. However, this has not been in not a good practice is because of the the best interest of the minority reputation of unprofessionalism that stakeholders of the company. The gets attached to organizations majority shareholders and higher practicing this form of employee management make all decisions based recruitment. A 1965 Harvard Business on what will be most profitable for the Review article on nepotism states that family. The general trend has been to more than sixty percent of executives in try and transfer company funds into their study had a negative attitude to other family owned businesses; the the practice of hiring relatives into a Maytas incident in the Satyam scandal is company (Harvard Business Review, a classic example. There have been 1965). While the U.S. has reached a rumors that the problems in Satyam stage where it does not allow ‘paired were linked to its connection with employment’ (Padgett & Morris, 2005), Maytas which is a real estate company India has barely begun to consider the owned by Mr. Raju’s sons detrimental effects of giving precedence (Ramachandraiah, 2009). Poor and to family over other qualified unprofessional land valuation candidates. techniques had resulted in the Maytas The practice started out when properties, which were owned by the there was no legal protection for assets Raju family, being valued at a price of that were handed to a non-family one crore rupees (about twenty member. As a result, most families tried thousand dollars) per acre when the to keep all financial matters within their value of the property was actually ten

Economics & Business Journal: Inquiries & Perspectives 160 Volume 3 Number 1 October 2010 Corporate Crime: Enron & Satyam Khedekar lakh rupees (about two hundred and then sell their shares when stock thousand dollars) per acre (Sandhir, prices are high, getting rid of it before 2009). When questioned, Mr. Raju the prices drop, thus leaving the declared that trying to transfer the shareholders to bear the burden of the funds into Maytas was the last remedy crash (Coffee, 2002). that he resorted to, to disguise the While Satyam’s contributions to fictional company assets. Fortunately, the Indian society through charitable as this move was strongly opposed by programs put it on the radar as one of the shareholders, the deal did not go the nation’s most coveted companies, through. However, the action has like other Indian companies, it evidently nevertheless made foreign investors lacked in basic transparency and question the tendency of Indian accountability. The scandal has alerted companies to employ family members foreign investors who are now in an unqualified manner. Some questioning the credibility of Indian researchers maintain that nepotism in companies, dealing a severe blow to the India has created an image of overly Indian corporate sector. conservative, paternalistic organizations In the past few years family which have poor succession planning controlled businesses in India have had and tunnel vision and which are problems related to corporate rampant with role confusion (Das & governance. Research has revealed that Gupta, 2008). family based businesses make lower The corporate scene is not profits and are in higher danger of similar in western countries. In the U.S. facing crashed stock prices during an and the U.K. senior management might economic downturn (Sapovadia & Patel, try to inflate the assets of the company 2009). There is also a very high chance to obtain better compensation that is of family owned businesses offered as an incentive and is directly encountering the threat of acquisition related to the quarterly profits of the by another company or losses because company. Previously management had of internal rivalry, as can be observed in to hold their shares for a period of six the Ambani family’s struggle for power. months to evaluate the steadiness of stock price in the market before selling The Indian Corporate Sector them. However, as a result of changes made to Section (16) of the Securities As a developing nation, India has Exchange Act of 1934, higher been in the forefront of economic management is now allowed to sell progress among third world countries. their shares when the price of company After attaining independence in 1947, stock goes up, courtesy several Indians inherited a well functioning ‘acceptable’ accounting practices such stock market (Dharmapala & Khanna, as the validation of accounts receivables 2008). Today almost a million as ‘cash on hand’. This pattern has been companies are registered in India in a very convenient for higher corporate sector that has been management; they increase assets recognized by most of the western through dubious accounting practices countries to be ‘booming’.

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The country has also recognized known of how well the rules are being the importance of setting regulations to followed. govern the corporate sector which has When the corporate sector of become increasingly responsible for the the country was in its infant stages in rapid development of this agrarian the late nineties, the Development economy. The most important step Finance Institutions of India (DFIs) acted taken by the Indian government as the main lenders of credit to Indian towards this is the establishment of the companies. They were also the majority Securities and Exchange Board of India shareholders of the companies to whom (SEBI) in 1992. The committee they lent and had their representatives established by the Confederation of on the company boards. This clearly Indian Industries (CII) under Mr. Rahul shows the high level of control the DFIs Bajaj, which developed the Code for could have had in the companies’ Desirable Corporate Governance, was functioning, to the extent that the another major move. In the years 2000 system seems similar to the bank based and 2003 the SEBI formed two model of corporate governance. committees, one under Mr. Kumar However, most often companies did not Mangalam Birla and the latter under Mr. repay the loans they had taken from the Narayan Murthy, the former CEO of DFIs and there was nothing that the Infosys (Sur & Chakraborty, 2006). boards could do. When the net worth However, although these steps of these companies was completely have been taken from time to time, depleted, they would be referred by the Indian corporate past has not been Sick Industrial Companies Act (SICA) to devoid of scandals. Just previous to the the Board for Industrial and Financial formation of the SEBI, India had to come Reconstruction (BIFR) which proved to to terms with the Harshad Mehta Stock be an unsuccessful undertaking. market scam. Also, as a result of scams Most of India’s problems seem in the late eighties and early nineties, to root from its legal system. All legal the London Stock Exchange conducted systems are based on one of the four an enquiry under Sir Adrian Cadbury systems found in the world- the English which submitted the famous Cadbury common law, the French civil law, the Committee report in 1992 to restore the German civil law and the Scandinavian faith of investors in company auditing civil law. Both the Indian and the U.S. (Dutta, 2006). legal systems are built on the English Other regulations that have common law; however there is a world been passed include the Industrial of difference in the way that law is Development and Regulation Act implemented in these two countries. (1951), the Companies Act (1956), the While the de jure protection offered Industrial Policy Resolution (1956), the seems strong, the de facto protection Security Contract Act (1956) and the does not come up to the standards of Accounting standards set forth by the developed countries. ICAI. While these regulations have all Another interesting aspect of laid down severe penalties, little is this issue that needs to be considered from the shareholders’ point of view is

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the shareholder’s index and the rule of Patel, 2009), companies not following law index. The shareholder’s index is a the rule are rarely penalized. India range from 0 to 6 which tries to admittedly has superior financial determine whether the shareholders transparency as compared to other rights are protected by a particular legal Asian countries (Chakrabarti, 2005); system on paper, meaning whether however, legal implementation of proper rules and regulations have been regulations has a long way to go as laid down, whether they have been compared to standards in the U.S. checked for loopholes. The rule of law Consequently, the law that has been index attempts to understand whether laid down to govern the corporate the regulations that have been laid sector ends up remaining on paper and down are being followed to protect the the victims of such flagrant violations, shareholders of companies under a usually the minority shareholders and particular legal system. Research has lenders, continue to suffer. revealed the fact that while the legal system in India scores well on the Enron shareholder’s index, it does not do so according to the rule of law index As compared to the relatively (Chakrabarti, 2005). recent Satyam scam, Enron has been A 2006 Ministry of Company very well documented and researched. affairs statement revealed that nearly Enron, a company that had become one four hundred companies in the Mumbai of the world’s leading energy dealers, Stock Exchange face charges related to recruiting more than 22,000 employees, violation of corporate governance declared bankruptcy in 2001. For norms (Sapovadia & Patel, 2009). These several years this Houston, Texas based infringements have been of several company had, through systematic and types. Often majority stakeholders of willful accounting manipulation, inflated the company, with no thought to other its assets. Enron’s accounting firm, investors, try to transfer the company’s Arthur Andersen, recognized as one of funds to other family projects similar to the best and most coveted accounting the Maytas deal. Often the auditors of firms in the U.S., crashed because of its the company are prevented or bribed to involvement in the fraud. not display the actual financial position At its zenith, Enron was of the company. As the Boards of considered the company of the twenty Directors are usually comprised of first century. It was applauded for the cronies of the majority shareholder, measures it took to strengthen who also has his people in the senior employee security through benefits and management positions of the company, compensation. The media was bursting most of these breaches are watched by with stories of its philanthropy and mute spectators who are nominal contributions to sustainability. After the authorities in the company. Although 1988 deregulation of electrical power the Companies Act makes the filing of markets (Sims & Brinkmann, 2003), the annual returns and submitting of company was given free rein to operate. balance sheets mandatory (Sapovadia & It began linking itself with several

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contracts, many of which were million dollars in profit from the extremely complicated in nature. These transaction (Tonge, Greer & Lawton, contracts and operations were often 2003). Other such contracts included international and involved intricate names like Compaq, IBM, Saks transactions that were difficult to Incorporated, and Blockbuster. In the account for (Healy and Palepu, 2003). example of Blockbuster Video, a Eventually, Enron began using several transaction was signed in which Enron questionable accounting techniques, agreed to supply several U.S. cities with such as mark to market accounting, to entertainment. Projects were set up in keep these operations running. The several cities to supply homes with company also created many Special entertainment and plans were made to Purpose Entities (SPEs). These were ‘encode and stream the entertainment established to look like a ‘legitimate’ over its global broadband network’. So segment of the company and regularly far so good. However, there were received funds, thus concealing the doubts about the technical workability losses of the company. of this project and whether it would Mark to market accounting has have market demand in the future. been held as one of the main Despite these misgivings, Enron techniques used by Enron’s senior proceeded to calculate a profit of 110 management to drive up the profits of million dollars from this deal (Healy & the company on the books. This Palepu, 2003). ingenious calculation consisted of Enron Enron also relied on Special taking into account revenues that the Purpose Entities and other forms of so- company was supposed to receive, but called ‘structured finance’ (Deakin & which it had not yet received, and Konzelmann, 2004) methods to portray computing the profit the company a picture of profit without showing the would accumulate from increased losses. Often these SPEs were off-shore energy prices and interest rates in the entities that had been vaguely future based on these revenues (Healy documented in the company. Funds & Palepu, 2003). In a steady market and were often transferred to these projects a stable economy, these predictions for developmental and other purposes would have come true. This is probably to “move some 1.27 billion dollars of why the GAAP in the U.S. requires assets off the Enron balance sheet, companies to make use of Fair Value delay reporting losses, hide debt, inflate Accounting. However, Enron’s profit and revenues and enrich some of calculations of profit went too far ahead the executives who ran them” (Tonge, into the future. In 2001, Enron had Greer & Lawton, 2003). The made deals with Quaker Oats to provide transactions that were carried out to its plants with energy. Enron Energy account for these entities were Services signed an agreement that was complex, intricate and very difficult to to last for ten years. It had not even understand, a fact which served the begun supplying Quaker with the people who were running them very promised energy and staff but had well. The misuse of these accounting already calculated a profit of 23.4 techniques may have started small, but

Economics & Business Journal: Inquiries & Perspectives 164 Volume 3 Number 1 October 2010 Corporate Crime: Enron & Satyam Khedekar soon grew out of control until the ‘the spirit of law’ (Duska, 2005). An company had to declare bankruptcy. external auditor’s primary responsibility The ability to keep the transactions of lies to the shareholders of a company; these SPEs away from the parent the people who have bought shares and company enabled Enron to falsify its who rely on auditors like themselves for exact status on the balance sheets. an accurate picture of the company’s Enron had managed to convince the SEC financial position. The SEC requires that the SPEs were not its subsidiaries; public listed companies to present as a result its transactions were not audited financial reports in order to intensely scrutinized (Sims & make sure that there are no Brinkmann, 2003). The fact that irregularities in their functioning and to external vendors were allowed to invest alert shareholders of any that might in these transactions (Deakin & emerge (Stabus, 2005). After Enron Konzelmann, 2004) and therefore declared bankruptcy, Arthur Andersen legitimately demand a certain share of was held responsible for not blowing the profits added to the complexity of the whistle on the fraud that was taking the situation. place there and ultimately lost all An example can be given of the standing in the market. Andersen Raptors SPEs which were a group of initially approved the SPE transactions projects that worked based on the that Enron was conducting and although sponsorship they received from other the unconventionality of the financial projects. As a result of this external and accounting methods used to funding, Enron was able to use creative conduct these deals was briefly accounting techniques to keep losses discussed, not much resistance was from being shown on its financial shown. The demerits of the auditing statements although the company had firm acting as consultants to Enron have provided most of the funding for their been argued widely among experts; functioning (Benston & Hartgraves, most hold the opinion that these two 2002). There were hundreds of such services could have created conflicting entities started by Enron by the late interests and as a result prevented 1990s. While some were used to fund Andersen from being good auditors. the purchase of contracts to supply gas, Many others believe that the Andersen several were formed with the main case could easily be an example of objective to manipulate assets to bribery; the fees that the firm received further the company’s attempts in from Enron accounted for 27 percent of acquiring stakes in other companies and its total auditing fees (Healy & Palepu, joint ventures (Healy & Palepu, 2004). 2004). The firm seemed to have Enron’s risk-spreading included the struggled with trying to provide ethically practice of entering into SPE consistent advice as auditors and transactions with non-existent investors suggestions as consultants that may not (example Chewco). have borne too much weight on right or Enron’s auditors, Arthur wrong. Whatever the case was, Enron Andersen, have been blamed for having and other corporate scandals are clearly met the letter of the law but violating affected by inefficiency and “decline in

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the professional standards of the legal competitiveness and allowed it, but and accounting gatekeepers” (Coffee, there came a time when Enron could no 2002). longer continue the façade. Even when Be it Enron or Satyam, the ability the executives realized that the fraud to swindle the investors was created could not be hidden for too long, they due to the failure of the regulators and tried everything in their means to auditors. These ‘gatekeepers’ are the persuade the investors to keep holding ones who the investor traditionally on to and even buy more shares. The depends on to get information on how Enron failure in this sense can be called the company is doing. Although there is a leadership failure, as the very leaders always a possibility of charismatic of the company directed their workers management influencing shareholders towards taking unethical actions. This (which in the case of Enron was founder resulted in the rest of the employees Kenneth Lay), when the financial following suit because ‘if the boss position of a company is kept thought it was OK, then it probably was transparent by auditors there are lower OK’. When the company started failing chances of deception. Unfortunately, publicly, the supposed leaders engaged the investor can still be hoodwinked if in finger pointing and raced to save the gatekeepers are bribed into silence. their own skin, giving no thought to the The recent case of financer R. Allen hundreds of shareholders whose savings Stanford is another unfortunate they had wiped out. There is also example where the Texas banker paid evidence of senior executives being an Antigua banking regulator around a responsible for destroying documents hundred thousand dollars for his help to that could have been used to prove keep the S.E.C. away. Enron’s illegal dealings. Employees One needs to understand that have stated that those who noticed and the above mentioned incidents were all wanted to report irregularities were part of the corporate culture that the concerned about getting fired. A lot can company had created. In the search for be said about the culture that the perfection and to maintain their leaders at Enron created. They set the standing in the business world, Enron wrong role models, rewarded risky rule developed and encouraged a culture of breaking and created a ‘win-at-all-cost’ finding loopholes in the ethical and legal system (Sims & Brinkmann, 2003). All in system. Their goal in some sense all, it was HR techniques of motivation seemed to be to “circumvent systems gone awry. The company gave the term that were designed to protect the competitive advantage a dangerous company and the shareholders” twist. Their performance appraisal (Berenbeim, 2002). ‘Minor’ rule system has been called the ‘rank and breaking was considered acceptable for yank’ system; employees who followed the achievement of the higher goals of the culture set by leaders and raked in the company. Everything was driven profits were awarded bonuses while the based on the bottom-line. The Enron ones who did not were fired (Tonge, executives of the time seemed to have Greer & Lawton, 2003). assumed that this came under healthy

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Discussion openly this is done. In a country where giving and taking bribes is While both Enron and Satyam commonplace, legislators will have to were involved in corporate crimes pay more emphasis on drawing future where the senior management of the regulations that help avoid such a companies inflated assets, they used situation to spread to the corporate very unique means to accomplish the sector of the country. The U.S. ends. The first clear difference is the attempted to achieve a goal of stricter transfer of funds to other entities in regulation by passing the Sarbanes- order to separate those transactions Oxley; India is in the process of from the parent company. In the case strengthening accountability in higher of Enron, mark to market accounting management and auditors by making and reliance on SPEs enabled the amendments to Clause 49 of the Listings company to achieve the purpose. Also, Agreement. Enron was unique in the sense that the There’s also something to be company had placed enormous powers said about corruption and familial in the hands of its CFO to carry out connections within a company. It is transactions which were not scrutinized common knowledge that lack of by the board (Coffee, 2002). Andrew evidence regarding the involvement of Fastow and his management team board of directors in a fraud, both in the skillfully created hundreds of special U.S. and in India, is frustrating for purpose entities before their investors. Most people feel certain that declaration of bankruptcy in 2001. crimes of such high magnitude cannot While the management at Satyam tried be conducted without the knowledge of to accomplish something of the same those people who are closely related to kind through the Maytas deal, the the functioning of the company. This differentiating angle here is the fact that line of thought takes on more meaning Maytas was a family holding. Enron when we consider the degree of found loopholes in the legal system and nepotism in the Indian corporate sector. was eventually successful in maintaining As mentioned previously, in many the pretense of the fake off-shore companies where the majority entities and duping the public, but it had shareholder is a family, relatives are to find those loopholes. The scene in directly allotted positions of power. India seems to be a little different. Even This has been an unquestioned practice though regulations in both the countries for several years. Family members are almost the same on paper, Indian expect to be given senior positions and companies in general seem to find not doing so can sometimes be bending the law, openly and quite construed as being a traitor to the directly, easier than U.S. firms. community. The practice is so widely Although the Maytas deal was not accepted that not much is done in the allowed to go through due to investor form of following anti-discrimination resistance, there is plenty of evidence to policies. However, while this practice is show the ease with which companies in discriminatory and against the principles India disregard regulation and how of employment law, it bears even

Economics & Business Journal: Inquiries & Perspectives 167 Volume 3 Number 1 October 2010 Corporate Crime: Enron & Satyam Khedekar greater consequences when corporate culture which respects community crimes of this kind become easier. With norms. Studies have shown that while the whole family involved in the Americans tend to use words like ‘best’, company there’s often the attitude of ‘achievement’ and ‘success’, Asians tend wanting the company to earn profits for to use words like ‘growth’, ‘endure’ and the family as opposed to benefiting all ‘advancement’ (Baillie, Dunn & Zheng, the stakeholders. There’s high 2004). One might assume that America probability of the family being in has reached a stage where the culture cahoots while conducting bogus expects people to achieve even when it transactions and this risk can be might be injurious to them and people eliminated by a stricter adherence to around them in the long run. A lot can anti-nepotism policies. While recruiting be said about the harmful effects of family is not always a bad thing, cultural expectation; in the case of the especially when worthy heirs are tested U.S., the very culture of competition for their merit before being allowed to seems to have lead to the downfall of hold a position (Brendan, 2004), the Enron. trade-offs of this policy have to be kept in mind and emphasis should be placed Suggestions for future research on developing a system of checks to avoid any concentration of power once The Satyam fraud came to light the company starts trading in public on the 21st January, 2009; as a result, securities. there is very limited research data In Enron, crime was possible as a available on it. Future research can result of cooperation among senior focus on newer data that may be management and an unhealthy published subsequent to this paper to emphasis on aggressive competition. add the latest dimension. Corporate Western culture, and especially the U.S., culture and the effect it could have on is celebrated for its focus on employees, independent auditors and individualism and goal- directed boards of directors has been the main behavior. The ability to work hard, be focus of this paper. It emphasizes on competitive and reach the pinnacle of how certain forms of behavior are success is admired. This has been true tolerated due to some accepted norms. to such an extent that people from In a country where familial relations are eastern countries come to the U.S. to held in high deference, certain ways of try to achieve the ‘American Dream’. A functioning that might not be tolerated clarification that needs to be made here in some other countries are endured. is that Asian cultures also have a This throws light on the importance of competitive culture. However, in these the human resources division of every countries the kind of competition that is company and the urgent need for laws encouraged differs. In Asian countries that prevent this manner of functioning competition does not take the from being considered ‘OK’. The U.S. aggressive form of driving out has diversity training due to its stringent competition but focuses more on anti-discrimination laws; it is time improving oneself. It is a more inclusive Indians became wary of the issues that

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Economics & Business Journal: Inquiries & Perspectives 169 Volume 3 Number 1 October 2010 Corporate Crime: Enron & Satyam Khedekar

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Economics & Business Journal: Inquiries & Perspectives 170 Volume 3 Number 1 October 2010 Corporate Crime: Enron & Satyam Khedekar

Acknowledgements

Several people are responsible for this paper becoming a reality. All the researchers who wrote articles on Enron and Satyam, and from whom I have integrated essential information, are truly the ones who should get credit for this paper. I would like to thank the University of Nebraska- Kearney’s Summer Student Research Program, especially Dr. Falconer and Ms. Holcomb, for giving me the opportunity to work on this paper. I would also like to thank my mentor, Dr. Larry Carstenson, without whose guidance I would have floundered trying to make sense of the enormous amount of material that is present on corporate governance. I thank him for helping me focus and find what I was looking for. While they have not contributed directly for this paper, credit also goes to my family and friends for their constant support.

Economics & Business Journal: Inquiries & Perspectives 171 Volume 3 Number 1 October 2010