JOIN US The US Securities & Exchange Commission (SEC) has sanctioned five India-based affiliates of PricewaterhouseCoopers (PwC) that formerly served as independent auditors of Satyam Computer Services Limited.
These Indian PwC affiliates have been accused of repeatedly conducting deficient audits of Satyam's financial statements and enabling a massive accounting fraud to go undetected for several years.
As a result, PwC has agreed to pay a US$ 6 million penalty, the largest ever by a foreign-based accounting firm in an SEC enforcement action.
In a statement, SEC said investigations revealed that the audit failures by the PW India affiliates -- Lovelock & Lewes, Price Waterhouse Bangalore, Price Waterhouse & Co. Bangalore, Price Waterhouse Calcutta and Price Waterhouse & Co. Calcutta -- were not limited to Satyam, but rather indicative of a much larger quality control failure throughout PW India.
In addition, the PW India affiliates agreed to refrain from accepting any new US-based clients for a period of six months, establish training programmes for their officers and employees on securities laws and accounting principles; institute new pre-opinion review controls; revise audit policies and procedures; and appoint an independent monitor to ensure these measures are implemented. In a related settlement on Wednesday, Satyam agreed to settle fraud charges, pay a US$ 10 million penalty and undertake a series of internal reforms. Since the fraud came to light, the India government seized control of the company by dissolving its board of directors and appointing new government-nominated directors, among other things.
Criminal charges
Additionally, India authorities filed criminal charges against several former officials as well as two lead engagement partners from PW India.
“PW India violated its most fundamental duty as a public watchdog by failing to comply with some of the most elementary auditing standards and procedures in conducting the Satyam audits. The result of this failure was very harmful to Satyam shareholders, employees and vendors,” said Robert Khuzami, Director of the SEC's Division of Enforcement.
“PW India failed to conduct even the most fundamental audit procedures,” said Cheryl Scarboro, the Chief of the SEC's Foreign Corrupt Practices Act Unit. “Audit firms worldwide must take seriously their critical gate-keeping duties whenever they perform audit engagements for SEC-registered issuers and their affiliates and conduct proper audits that exercise professional skepticism and care,” he said in a statement. The SEC's order instituting administrative proceedings against the firms finds that PW India staff failed to conduct procedures to confirm Satyam's cash and cash-equivalent balances or its accounts receivables.
Specifically, the order finds that PW India's “failure to properly execute third-party confirmation procedures resulted in the fraud at Satyam going undetected” for years.
PW India’s failures in auditing Satyam “were indicative of a quality control failure throughout PW India” because PW India staff “routinely relinquished control of the delivery and receipt of cash confirmations entirely to their audit clients and rarely, if ever, questioned the integrity of the confirmation responses they received from the client by following up with the banks,” SEC said in a statement.
After the fraud at Satyam came to light, PW India replaced virtually all senior management responsible for audit matters. The affiliates suspended its Satyam audit engagement partners from all work and removed from client service all senior audit professionals on the former Satyam audit team, SEC statement said.
In a related proceeding, the PW India affiliates also reached a settlement with the Public Company Accounting Oversight Board (PCAOB) in which the PW India firms have been censured and agreed to extensive undertakings substantially similar to those set forth in the SEC administrative order.
Additionally, Lovelock & Lewes and Price Waterhouse Bangalore have agreed to pay the PCAOB a USD 1.5 million penalty for their violations of PCAOB rules and standards in relation to the Satyam audit engagement, the official statement said.
No wrongdoing
Meanwhile, Price Waterhouse (PW), in a statement, said in New Delhi that there was no “intentional wrongdoing” by its professionals in the US$1 billion Satyam accounting fraud case.
“Neither of the orders (by US SEC and PCAOB) found that PW India or any of its professionals engaged in any intentional wrongdoing or was otherwise involved in the fraud perpetrated by Satyam management,” it said.
“The limitation for six months is only on PW’s ability to accept new Indian audit clients which are affiliated with an SEC registrant, where either the Indian subsidiary accounts for 10 per cent or more of the consolidated assets, revenues or expenses or a full scope audit opinion of the Indian affiliate is to be performed,” it clarified.
It added that “the settlements mark the end of Satyam-related US regulatory enquiries concerning PW India and are a positive step and important milestone in putting the Satyam issue behind PW India”.