The Securities and Exchange Commission has ordered five affiliates of accounting firm PriceWaterhouse India to pay a $6 million fine in connection with sloppy auditing of crooked Indian software firm Satyam Computer Services which collapsed spectacularly in January 2009.
Satyam engaged in fraudulent financial accounting by falsifying the company’s revenue, income, earnings per share, cash, and interest bearing deposits.
The sloppy audits by the affiliates Pricewaterhouse india enabled the massive fraud engaged by the top management of Satyam Computer to go undetected for several years.
After Satyam Computer’s fraud came to light in January 2009, the price of Satyam’s American depository shares (listed then on the New York Stock Exchange) plummeted and institutional investors in the U.S. lost over $450 million.
The five PriceWaterhouse India affiliates that are in the doghouse are Lovelock & Lewes, Price Waterhouse Bangalore, Price Waterhouse & Co. Bangalore, Price Waterhouse Calcutta, and Price Waterhouse & Co. Calcutta.
The five affiliates agreed to settle the SEC charges and pay the fine, the largest ever imposed by the SEC on a foreign accounting firm.
Besides the hefty fine, the Pricewaterhouse India affiliates must not accept any new U.S.-based clients for six months, establish training programs for its officers and employees on securities laws and accounting principles; institute new pre-opinion review controls; revise its audit policies and procedures; and appoint an independent monitor to ensure these measures are implemented.
Here’s what SEC’s Division of Enforcement Director Robert Khuzami had to say about Pricewaterhouse 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 Sataym audits. The result of this failure was very harmful to Satyam shareholders, employees and vendors.
The SEC found that PW India staff failed to conduct procedures to confirm Satyam’s cash and cash equivalent balances or its accounts receivables.
In its order instituting administrative proceedings, the SEC said Pricewaterhouse 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.”
Bolting the Stable Doors After…
Following the disclosures of the Satyam fraud, Pricewaterhouse India replaced the senior management responsible for auditing.
The affiliates are also said to have suspended its Satyam audit engagement partners from all work and removed from client service all senior audit professionals on the former Satyam audit team.
The SEC action against the Pricewaterhouse India affiliates just goes to show that in the Indian corporate milieu a fancy multinational name means nothing. Au contraire, in this instance it meant big losses for U.S. investors.
Satyam Fined Too
In a related action, Satyam agreed to pay a fine of $10 million to settle the SEC’s charges of accounting fraud. Satyam will also be required to provide specific training to its officers and employees concerning securities laws and accounting principles, and improve its internal audit functions. Satyam must also hire an independent consultant to evaluate the internal controls the company is putting in place.
Following the Indian government’s order to Satyam to pick a new strategic investor in a bidding process, Tech Mahindra Limited acquired 42% of Satyam’s shares in India and became the new controlling shareholder of Satyam.
In June 2009, Satyam adopted “Mahindra Satyam” as its new “brand identity” but the company continues to operate under the Satyam name in the U.S.
We are Big Time Crooks, Confesses Satyam