Consider, again, the $825 million Satyam reported as investments in bank deposits in its consolidated balance sheet as of Mar. 31, 2008. If one were to substitute the line item "investments in bank deposits" with "Chairman Raju's personal account," this scenario assumes significance. As such, the hypothesis we raise is that Satyam was a legitimate cash-generating business over time; that Raju misappropriated Satyam's cash; and, that most of the misappropriation was probably not reflected on the company's books.If this is true, it implies a major failure in corporate governance, including a significant audit failure by Satyam's external auditors. Ironicly, cash is generally considered one of the easiest accounts to audit and junior auditors often complain when assigned to audit of a company's cash balance because the task is perceived to be very basic.
While the authors conclude that, "Only a detailed analysis of the cash flow statements could have caught [the fraud]," I am not completely convinced. While closer scrutiny of the cash flow statements may have helped raise some red flags, I am not sure that it would have been sufficient to uncover this fraud. Instead, I believe that Satyam's auditors would have been more likely to catch the fraud by engaging in additional strategic reasoning.
In other words, Satyam's management was most likely able to fool the auditors by considering the auditor's standard procedures for auditing cash and developing some method of fooling those audit procedures. If the auditors had considered how Satyam's behavior might change in response to their basic procedures, the auditors may have been able to develop better procedures that may have caught the fictitious balance.