The Satyam - PwC Scandal: The Bleak Road Ahead

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01-14-2009 | 03:49 PM

26/01/16, 15:02

The Satyam - PwC Scandal: The Bleak Road Ahead

Author: Jyo5 Dialani

The Satyam - PwC Scandal: The Bleak Road Ahead

Amidst the gloomy world economy and daily news of the global crisis, business closures and rising unemployment, the last thing one needed to hear was a nancial fraud of
mammoth propor9ons as the one exposed at Satyam Computer Services Limited, the fourth largest so?ware company in India, ranked a?er Tata Consultancy Services, Infosys
Technologies and Wipro. The fraud, amoun9ng to $1.4 billion has sent shockwaves throughout the IT industry and is expected to create a ripple eect involving related par9es,
the extent of which cannot be es9mated at this stage. Apart from the top brass at Satyam, who have been arrested and are in judicial custody a?er having confessed to the crime,
the companys statutory auditor, PwC India, has come under a microscopic lens and is certainly going to face harsh consequences for falsica9on of accounts and audi9ng of
inated cash reserves in the company.
The world was in disbelief when news broke out on 7th January of the confession of the then Chairman of Satyam, Ramalinga Raju. In his confession, Raju had admiQed that for
the last seven years he had fabricated cash reserves and assets in the company amoun9ng to about $1.4 billion, which saw the value of shares plummet to record lows resul9ng in
elimina9on of about $2.2 billion of investor wealth. The mo9ve expressed by him was to show more income in the account to avoid others from involving in the company aairs
and any other possible hos9le takeover situa9on resul9ng in manipula9ons of balance sheets to aQract more business and show unavailable amount as available cash in hand.
Satyam was founded in 1987 by Ramalinga Raju. It earned a reputa9on by helping companies troubleshoot the famous Year 2000 (Y2K) computer virus. Following that success,
the company expanded its services and earned substan9al revenues through providing so?ware support and programmes, some of which provided so?ware solu9ons to
companies to carry out internet based transac9ons. Gradually, the companys success story grew rapidly and helped it earn pres9gious clients such as General Electric, General
Motors, Nestle, Telstra Corp to name a few. A scandal of such scale in a company which was considered the pillar of modern Indian IT industry was unimaginable, and has shaken
investor and client condence across the world. Today, the former chairman, his younger brother and former MD, B. Rama Raju, and the former CFO, Vadlamani Srinivas are
languishing in the Central prison in Hyderabad, capital of Andhra Pradesh, awai9ng a bail hearing which is slated for January 16.
In this entire saga of fraud, manipulations, confessions and arrest, a vital question that arose was with regard to the credibility of PwC auditors. Certainly, this
incident has catapulted scores of angered reactions from shareholders, clients and the public at large against the auditors. The former CFO, Vadlamani Srinivas, in
his confessional statement to the police, blamed PwC and B Ramalinga Raju for perpetrating the financial fraud. According to his statement, PwC never pointed out
any deficiencies or irregularities in the accounts. One alarming disclosure by him was that the bank fixed deposits were fictitious and were manipulated by the
management and the audit department. This naturally leads to a conclusion of a possibility of forgery in bank documents to reflect fictitious deposits, which also
exposes the bankers of the company to questions on their involvement in the scam. The companys main bankers are ICICI Bank, Bank of Baroda, BNP Paribas,
Citibank, HDFC Bank and HSBC who will probably be next in line to investigations on their role.
As part of the audit process, PwC is cast with a responsibility to demand certificates from banks regarding cash balances of the companys accounts. It will surely
be investigated whether the banks did in reality certify the cash balances or whether forged documents and certificates were provided to PwC. This being the initial
stage of the expose, it is premature to say which direction the investigations will take. But it seems to be a consolidated view that PwC could not have bypassed
such a serious fraud without any wilful involvement. The accounting firm is already finding itself in the midst of an angry storm of attacks, investigations, lawsuits,
claims and client withdrawals. Certain investors, who have lost millions in this scam, have already initiated lawsuits against it. The Institute of Chartered
Accountants of India (ICAI), which is a statutory body established for the regulation of the profession of Chartered Accountants in India, will serve a show cause
notice on PwC after collecting all necessary information from SEBI (Securities and Exchange Board of India) and ROC (Registrar of Companies). Action against the
accountants who are involved in the scam and found guilty can result even in life long suspension of their practising certificates.
In the aftermath of this sordid expose, many listed companies who share a common factor with the defamed Satyam, its PwC auditors are finding themselves in a
drastic situation of falling stock prices. Investors, having lost trust in companies having PwC as their auditors, are indulging in heavy sell out in anticipation of a
further drop in share prices. The markets are witnessing investors selling off companies whose auditors are PwC -- and buying other companies in the same
sectors, whose auditors are not PwC. This is a huge blotch on the reputation of the accounting major, which is being compared with the infamous Arthur Andersen,
embroiled in the Enron controversy. The fall can be attributed only to PwCs involvement, as the other companies in the same sector are faring well who do not
have PwC as their auditors. Stock brokers are believed to be advising strongly to clients to sell off shares in companies having the firm as their auditors. Industry
experts hold a view that this outcome is only expected and justified. Certifying the existence of $1.4 billion in the books of Satyam is bound to cost investor
confidence. In this entire episode, PwC has chosen to remain silent and has not commented. However, the role played by PwC in this story is crucial and it will be
the subject matter of investigations in due course in order to get to the root of the matter.
One such issue that may be raised is the quantum of fees earned by PwC from Satyam as compared to the fees paid by its industry peers. Between 2003 and
2008, the audit fee earned by PwC from Satyam increased over 300 percent. Other companies in the information technology (IT) sector have not increased their
payments to their auditors, to that extent. PwC earned an audit fee of Rs 4.3 crore (about $878,000 USD) for the financial year 2007-08, which is twice the amount
spent by other IT companies in the same league towards audit fees. Even Tata Consultancy Services (TCS), the largest Indian IT company, had spent only Rs 2.77
crores (about $566,000 USD) as auditor remuneration in the year. This aspect will surely be the highlight of investigations. As far as PwCs role in Satyam is
concerned, the newly constituted three member board has announced that PwC is longer their auditor, and they are considering proposals from two accounting
firms to have been finalised on January 14.
Kiran Karnik, former President of Nasscomm and one of the three members of the newly constituted board of the company held a view that the scam will not affect
the Indian software industry. Commenting on the high standards of transparency and governance of the Indian IT industry, he expressed his faith in the industry and
negated the apprehension of negative impact of this one as an unfortunate case on the entire IT industry. However, the Indian Prime Minister, concerned over the
intensity of the financial fraud in Satyam and the possible harm to the image of the Indain IT industry in the world, is taking it seriously and taking stock of the
situation. The Indian Prime Minister is meeting with senior SEBI officials and officials in the Finance Ministry to discuss and determine further steps to be taken in
this regard.
In the meanwhile, Andhra Pradesh police have begun scrutiny of the records seized during the searches at the Satyam office premises and residences of the
former Chariman, MD and CFO. A joint search operation was carried out by the AP CID, officials of SEBI, Serious Fraud Investigation Office (SFIO) and Registrar
of Companies.
On January 13, Indian police also carried out a search in the office premises of PwC Hyderabad. In the wake of this controversy, the auditing firm issued a
statement that theyhad worked "in accordance with applicable auditing standards and were supported by appropriate audit evidence." In the statement, they have
also assured PwC will fully meet its obligations to cooperate with the regulators and others in the whole process of enquiry.
Satyam is being sued by investors in at least three class actions in the United States Federal Court, following the decline in its share prices. In the overall
recessionary picture in the U.S. and European Markets, supplemented by the blow of the Satyam scam and the overall weakness in the Indian markets, it is a

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The Satyam - PwC Scandal: The Bleak Road Ahead

26/01/16, 15:02

common sentiment shared by markets that Foreign Institutional Investors may pull out investments from Indian markets and reinvest in other emerging markets.
However, the coming days will be significant in determining the fate of both Satyam and PwC, as well as the overall Indian IT sector, as the ramifications could last
across continents and for a long period of time.

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Interna5onal Tax

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