The U.S. Securities and Exchange Commission (SEC) on Wednesday fined the software firm, Satyam Computer Services Ltd. (now Mahindra Satyam), and its auditors PriceWaterhouse India up to $17.5 million for accounts bungling that went undetected for several years.
The SEC said in a statement that Satyam Computer Services agreed to pay $10 million in fine for settlement of the charge of fraudulently “overstating the company's revenue, income and cash balances by more than $1 billion over five years.”
The SEC has also asked PriceWaterhouse India to pay $6 million in penalty for conducting “deficient audits of the company's financial statements and enabling a massive accounting fraud to go undetected for several years.”
Lovelock & Lewes and PriceWaterhouse Bangalore agreed to pay the Public Company Accounting Oversight Board (PCAOB) $1.5 million in fine for violating PCAOB rules and standards in relation to the Satyam audit engagement.
“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,” said Robert Khuzami, Director of the SEC's Division of Enforcement.
While Satyam could not be contacted for comment, Deepak Kapoor, chairman of the PWC network of firms in India, said: “Our settlements with the SEC and the PCAOB are positive steps and important milestones for PW India. The confession of fraud at Satyam by its chairman was a shock to the Indian business community and to all concerned.”
The SEC statement said PW India affiliates agreed to refrain from accepting any new U.S.-based clients for six months; establish training programmes 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.
Cheryl Scarboro, Chief of the SEC's Foreign Corrupt Practices Act Unit, said: “PW India failed to conduct even the most fundamental audit procedures. 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 scepticism and care.”
The SEC's order instituting administrative proceedings against the firms found that PW India staff failed to conduct procedures to confirm Satyam's cash and cash equivalent balances or its accounts receivables. It also found that PW India's “failure to properly execute third-party confirmation procedures resulted in the fraud at Satyam going undetected” for years.
The SEC statement said 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.”
In January 2008, Satyam founder B. Ramalinga Raju admitted to an accounting fraud (of Rs.7,000 crore) spread over five years.
The SEC complaint to the U.S. District Court said that former senior officials of Satyam used false invoices and forged bank statements to inflate the company's cash balances. — PTI