What led to decision?
In January 2009, Satyam Computer Services’ chairman B. Ramalinga Raju wrote a letter admitting that the company’s balance sheet was fudged and included inflated and non-existent cash and bank balances. Price Waterhouse (PW) was the auditor. Satyam Computer Services was later acquired by Tech Mahindra.
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The letter led to the Securities and Exchange Board of India (SEBI) initiating an investigation. Price Waterhouse, among the top four consultancy and audit firms known as the ‘Big Four’ in industry parlance, was issued the first show cause notice in February 2009.
On January 10 this year, nine years after the fraud came to light, the capital market regulator issued a 108-page order, barring Price Waterhouse from auditing any Indian-listed company for two years.
Further, the regulator directed the firm and its two former partners, S. Gopalakrishnan and Srinivas Talluri, to pay up ₹13.09 crore along with 12% interest a year since January 2009.
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How did the audit go wrong?
While Mr. Gopalakrishnan signed the Satyam accounts between April 2000 and March 2007, Mr. Talluri did it between April 2007 and September 2008. According to the regulator, Price Waterhouse based its audit on documents (such as bank account statements and fixed deposits) sourced from the company without trying to get direct confirmation from the banks. The regulator felt that if the auditor had sought confirmation from the banks, the accounting fraud could have been unearthed much earlier. “A common investor’s reliance on the audit certifications of Satyam Computers at the relevant point of time was dependent on the fact that it was attested by one of the internationally reputed firms called Price Waterhouse. The public had no reason to believe that the audit reports were false and misleading,” the SEBI order said.
“The impact of accounting frauds is far more adverse in dimension that the investors feel cheated on realising that they were led along the garden path all along. It strikes at the very root of the regulatory fabric which ensures protection of their interest and secures market integrity,” the order said.
What is Price Waterhouse’s record?
SEBI is not the first regulator to act against Price Waterhouse in the Satyam matter. The order by the Indian regulator comes almost seven years after the U.S. Securities and Exchange Commission (SEC) agreed to a $6 million settlement over charges against the Indian affiliates of Price Waterhouse related to deficient auditing of Satyam. Incidentally, in 2011, it was the then largest-ever penalty levied on a foreign-based accounting firm in an SEC enforcement action. The Price Waterhouse affiliates had also agreed to refrain from accepting any U.S.-based clients for six months and revise audit policies and procedures. In a related development, Satyam Computer also agreed to settle fraud charges by paying $10 million in penalty and undertake a series of internal reforms.
What happens now?
Price Waterhouse has filed an appeal against the SEBI order at the Securities Appellate Tribunal (SAT), which heard the matter on Friday, but refused to stay the two-year ban. It, however, allowed it to continue servicing clients whose financial year started on January 1, 2018. The tribunal has posted the matter for February. If Price Waterhouse loses its appeal, it can file a writ petition in the High Court on the grounds that the capital market regulator exercised jurisdiction beyond its powers. Incidentally, the auditing major has appealed to the SAT on similar grounds.
In the past, during the investigation and in a petition filed at the Bombay High Court, Price Waterhouse said SEBI did not have the power to act against auditors since auditing firms were regulated by the Institute of Chartered Accountants of India (ICAI).
Price Waterhouse said in a statement that it was “disappointed with the findings of the SEBI investigations and the adjudication order and the order relates to a fraud that took place nearly a decade ago in which we played no part and had no knowledge of.” It said it was “confident of getting a stay...”