Satyam Scandal

Satyam Systems, a global IT company based in India, has just been added to a notorious list of companies involved in fraudulent financial activities, one that includes such names as Enron, WorldCom, Societe General, Parmalat, Ahold, Allied Irish, Bearings and Kidder Peabody. Satyam's CEO, Ramalingam Raju, took responsibility for broad accounting improprieties that overstated the company's revenues and profits and reported a cash holding of approximately $1.04 billion that simply did not exist.
This leads one to ask a simple question: How does this keep happening?

At the Columbia Business School, we teach a course called Performance Measurement in which we study some of the dynamics that lead to this type of accounting scandal. In our course, we study the fraud committed at WorldCom and Kidder Peabody in detail. In our studies, a distinct pattern emerges.
It starts small. Typically, executives do not wake up one morning and say, "I feel like adding 5 billion rupees to our revenue today." They usually start by fudging the number a little--and then it grows.
It is usually a response to competitive pressures. Companies have targets that they need to reach every month, quarter and year. These targets can come from their internal budgets or from the expectations of their shareholders and stock market analysts.

The fiddle is easy to rationalize at first. Managers typically have confidence in their skills and believe that their company is fundamentally sound. Given that, it's easy to rationalize that while we're just a little short on the numbers now, we will make it up in the future, and nobody will know.
It gets out of control. When the company is unable to make up the gap, a larger distortion is needed to cover it up. This in turn creates pressure to deliver even better results--which leads to bigger cover-ups, and so on.