Stocks

Satyam scam: PW’s saga of ignored red flags

PALAK SHAH Mumbai | Updated on January 16, 2018 Published on January 11, 2018

Price Waterhouse ‘failed to follow minimum standards of diligence expected from an auditor’

Like Titanic’s Capital Smith who ignored seven warnings of an iceberg, Price Waterhouse, the Indian affiliate of PricewaterhouseCoopers (PwC), too can be said to have ignored warnings, according to SEBI’s Wednesday order, of a sinking ship that India’s IT major Satyam Computer Services (SCSL) was turning into due to its fraudulently inflated financial numbers.

Nine years after the collapse of SCSL, mainly due to fraudulent book entries, its auditor Price Waterhouse and associates in India are being held guilty by SEBI of gross negligence of duty to follow minimum standards of diligence and care expected from a statutory auditor.

In fact, SEBI has gone a step further and even talked about acquiescence and complicity of Price Waterhouse in the case and stated that several red flags, which were all too obvious for any reasonably professional auditor to miss, failed to engender the necessary professional scepticism in the Price Waterhouse team associated with the SCSL audit.

Colossal lapses

By accepting the information provided by the company at face value and performing a perfunctory job (despite warnings), the auditor has failed to live up to the expectations of shareholders, SEBI’s Whole-Time Member G Mahalingam observed in his order. SEBI observed that guidance notes of Accounting Standards are too stark to ascribe the colossal lapses on the part of auditors to mere negligence. SEBI is also of the view that the auditors have merely accorded their concurrence to the documents produced by the company and thereby totally ignored the discrepancies pointed out by internal audit. In 2009, SCSL’s chief B Ramalinga Raju confessed in a written note that he inflated financial numbers in terms of bank deposits, reserves and fake customer receipts. It is this that Price Waterhouse failed to cross check, which is why it was barred by SEBI from issuing any audit certificate for two years.

Nil independent verification

A key charge against Price Waterhouse is that it did not independently verify the accounts given by SCSL with banks and chose the easy way by accepting them on face value. According to Raju’s own submission, there were 7,561 fake invoices of which SEBI observed that 6,603 gained entry into the official files and earnings were recorded by SCSL of fake customers.

Indicting Price Waterhouse in the fraud, SEBI said though the carefully laid out scheme of fraud and falsification of accounts in SCSL does get attributed to the top management of SCSL, a dispassionate analysis of the whole episode spanning a period of at least eight years would reveal that the perpetration of the fraud could not have been made possible without the knowledge and involvement of the statutory auditors.

“I note thats even a whistleblower’s letter received on December 23, 2008 (which was a few weeks before the confessions by Ramalinga Raju), extending a note of warning to the auditors about the inflation of bank balances, failed to elicit a response, which a prudent auditor would normally provide in case of any sudden exposure of fraud. This becomes more apparent in view of several important happenings around that time, viz, deferment of audit for quarter ended December 31, 2008 by the management of SCSL citing ‘preparedness’, the calling off of the acquisition of Maytas Infra by SCSL due to investor backlash, calling off of the Audit Committee Meeting scheduled on December 29, 2008, resignation of four independent directors during the last week of December 2008 and the decision of the World Bank to bar SCSL from doing business with it for eight years. All these factors turn the needle of suspicion away from negligence to one of acquiescence and complicity on the part of the auditors,” the SEBI order states.

Price Waterhouse’s defence

The auditor has maintained that they acted according to audit procedures and cannot be held liable for tracking down fraud schemes when no suspicion was aroused. Price Waterhouse even challenged SEBI’s jurisdiction over it in court, which said that since professionals are associated with capital markets by way of giving certification and audited statements, SEBI had no jurisdiction over them. The court even said that SEBI should evaluate the evidence available to indicate the role of the auditor in the alleged fraud.

Published on January 11, 2018

A letter from the Editor


Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
null
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.