January, 11, 2018
India’s securities regulator has banned the global accountancy firm PwC from auditing listed companies in the country for two years, after it failed to spot a $1.7bn fraud at the now defunct Satyam Computer Services.
In a 108-page report, the Securities and Exchange Board of India said Price Waterhouse — PwC’s Indian audit unit — had neglected to check “glaring anomalies” in the financial details reported by Satyam, whose downfall followed one of the worst financial scandals in Indian corporate history.
For about five years beginning in 2003, Sebi said, Satyam inflated its revenue by accounting for 7,561 fake invoices. The fraud persisted in part because Satyam’s auditor, PwC, “did not independently check the veracity of the monthly bank statements”. It relied upon assurances from Satyam ”without any further examination or inquiry into the matter and ignored the balance confirmations received directly from banks which were showing true balances”, the report said. As well as the auditing suspension, Sebi ordered PwC to disgorge wrongful gains of about Rs130m ($2m).
PwC said “there has been no intentional wrongdoing by [PwC] firms in the unprecedented management perpetrated fraud at Satyam”, and that it had strengthened its processes since the scandal broke. It added that it was “disappointed” and would seek a stay on the order before it became effective at the end of March, on the grounds that it was out of line with a prior High Court order.
According to an analysis by India’s Economic Times newspaper last June, PwC had audit mandates from 43 of India’s 500 most valuable listed companies, including Tata Steel, United Spirits and financial group IDFC. This was the lowest figure among the so-called Big Four global accountancy firms.
Deloitte had the highest number of mandates at 89. PwC’s ability to audit the unlisted subsidiaries of multinational companies — a significant part of its business — is not affected by the ban. The regulator’s move against PwC is the latest aftershock from a scandal that imposed heavy losses on investors, and shook the reputation of an IT industry widely considered more transparent than more traditional sectors in India.
In 2009 Ramalinga Raju, Satyam’s then chairman, admitted to overstating the company’s cash balance by $1bn, as well as exaggerating the company’s headcount by 13,000. “It was like riding a tiger, not knowing when to get off without being eaten,” he wrote of the growing deception. The company later admitted that the total irregularities amounted to $1.7bn. Satyam was sold in 2012 to rival Tech Mahindra, which dropped the company’s brand. Raju received a seven-year jail sentence in April 2015, one of four Satyam executives to be convicted in connection with the fraud.
Sebi had previously issued fines worth $291m to the former executives. In its ruling on PwC, Sebi said it was incumbent upon it to take a “stern view of market abuse and fraudulent practices, particularly when persons tasked with protecting the interest of investors are themselves hand-in-glove with the main perpetrators of the fraud”.