Investors raise questions over PwC Satyam audit

Rhys Blakely in Mumbai

Furious Indian investors are demanding to know how PricewaterhouseCoopers (PwC), one of the world’s largest accountancy firms, missed a systematic £1 billion fraud at Satyam, the IT outsourcing giant, for as long as seven years.

In contrast, Merrill Lynch, the US bank, became aware of the deception in just ten days.

PwC’s role in “India’s Enron” comes under the spotlight amid allegations that large Indian companies regularly use misleading accounting techniques and bully analysts, accountants and auditors into staying quiet.

B. Ramalinga Raju, the former chairman of Satyam, shocked corporate India on Wednesday when he confessed to inflating the company’s profitability, which led to more than £1 billion in fictitious cash and other assets on its books.

 

 

 

Investors had been told that a $1 billion cash pile Satyam possessed was, in fact, just $78 million, Mr Raju disclosed in a letter to the board – a straightforward falsehood that the company’s auditors might have detected had they run a rudimentary check of the group’s bank accounts, according to experts.

“It’s hard to miss $1 billion of cash,” Dennis Beresford, a former chairman of the Financial Accounting Standards Board, the US accounting watchdog, said.

Satyam’s bogus accounts had been audited by Price Waterhouse, the Indian-based auditor, which is a member firm of PricewarterhouseCoooper International, since the financial year 2000-2001.

The company’s balance sheet as of March 31, 2008 was signed off by Srinivas Talluri, a partner of Price Waterhouse in Hyderabad, the southern Indian city where Satyam is based.

Merrill Lynch had been retained by Satyam ten days before Mr Raju’s confession, to explore merger opportunities for the outsourcing giant, which was already struggling with corporate governance issues.

Just hours before Mr Raju admitted to the fraud, Merrill Lynch severed its ties with the company. “In the course of our engagement, we came to understand that there were material accounting irregularities, which prompted our aforesaid decision,” a spokesman for Merrill said.

PwC said today: “The audits were conducted by Price Waterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence.

“Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities. Price Waterhouse will fully meet its obligations to cooperate with the regulators and others.”

Analysts said that the Satyam scandal had underscored the need for urgent reform to India’s creaking corporate governance standards.

The country, for instance, does not restrict auditors from carrying out consulting work for the companies they audit.

Saurabh Mukherjea, of Noble, the London-based investment bank, said: “We have run into listed companies where the advisory arms of the audit firm earn consultancy fees for help with M&A, new entity structuring and tax minimisation.”

In most Western countries rules limit such activities, which could trigger conflicts of interest for auditors.

Mr Mukherjea suggested that the Satyam fraud should not come as a shock. “Our experiences … suggest that manipulative accounting and aggressive promoter [owner] practices are more common in India than is generally believed to be the case,” he said.

“Many [Indian] firms have become so convinced of their own invincibility that they do not even bother denying irregularities when confronted with the evidence. They simply threaten you.”

Analysts say that creative accounting techniques, such as recording revenue ahead of time, booking fictitious sales, manipulating expenses and the disbursal of cash to outside companies in which a group’s directors have an interest are commonplace in India.

Foreign institutional investors are also weary of the influence exerted by India’s politicians over the country’s regulatory system.

PwC’s roll in the Satyam scandal will now be probed by the Securities and Exchange Board of India, the markets watchdog, and the Indian government’s anti-corruption office.

The Institute of Chartered Accountants of India is also investigating and has the power to bar Price Waterhouse from working in the country indefinitely, a spokesman for the body said. Satyam was also listed on the New York Stock Exchange and faces a class action lawsuit in the US.