How did they miss it? Arthur Anderson collapsed because, despite 100's of full-time personnel doing on-site audting, Enron's publicly reported financial statements bore no resemblance to reality. Enron did a masterful job of obfuscation but that was no excuse. Then along comes Satyam who did nothing more clever than telling their auditor that they had way more cash than they actually had (currently only about a $1Billion discrepancy). Obviously this had been underway for quite a while.
Here's the opening statement from my 2007 entry found in category J; Eliminating Waste: "Are you a new potential investor, board member, or CEO of a company? Are you 100% confident that the accounting policies are valid and transparent, that no-one has taken some accounting liberties in the past that still lurk in the shadows, that the operating profit reporting you're receiving is correct?"
I went on to show how very easy-to-do cash flow analysis can verify that publicly reported statements based on accrual accounting are consistent with the true life-blood of any company--it's operating cash flow. Cash accounting was replaced by accrual accounting with good and sound reasoning, but following the cash is still and always the most clear and un-corruptible assessment. In the case of Satyam ongoing cash flow analysis (comparing operating cash flow to reported operating profits) is a simple procedure and should have been done along the way: but it was even easier--simply making contact with the bank where the cash was allegedly held, and getting bank statements. This takes about half a day of one person of an auditing team. How did they miss it?
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