Mumbai: The Securities and Exchange Board of India (Sebi) in a late Wednesday night order banned all the firms in the Price Waterhouse network (PW firms) from auditing listed companies for two years. Sebi found the audit firm guilty in the nine-year-old Rs7,136 crore Satyam Computer Services Ltd scam. In its 108-page order, the market regulator said the firm was complicit with the main perpetrators of the accounting fraud and did not comply with auditing standards. Here is a low-down of what Sebi said.
The strictures against PW
PW and the audit firms in its network (PwC India) cannot audit listed companies and intermediaries (such as brokers) for a period of two years; however, this will not impact audits undertaken for financial year 2017-18. Price Waterhouse, Bangalore and two senior partners—S. Gopalakrishnan and Srinivas Talluri—who had certified Satyam’s audit reports in 2000-2008, must disgorge Rs13 crore in ill-gotten gains including interests.
The order has been passed under the Prevention of Fraudulent and Unfair Trade Practices (PFUTP) regulations and Section 11 of Sebi Act which empowers the regulator to pass directions in the interest of investors.
What did PW say?
“We are disappointed with the findings of the Sebi investigations and the adjudication order. The Sebi order relates to a fraud that took place nearly a decade ago in which we played no part and had no knowledge of. As we have said since 2009, there has been no intentional wrong doing by PW firms in the unprecedented management perpetrated fraud at Satyam, nor have we seen any material evidence to the contrary. We believe that the order is also not in line with the directions of the Hon’ble Bombay High Court order of 2010 and so we are confident of getting a stay before this order becomes effective," said a spokesperson at the accounting firm in an emailed response.
PW is referring to an August 2010 order of the high court which ruled that no direction can be issued against them if there is only some omission without proof of connivance and intent to fraud.
During the course of Sebi's quasi-judicial proceedings, PW argued that ‘an auditor is not required to be a detective in the process of audit and it is sufficient to show that reasonable care and due diligence was administered by the auditor’.
What is the scam and role of PW?
The fraud surfaced in January 2009 when B. Ramalinga Raju, the then chairman of Satyam Computer, admitted in a letter to the company’s board and stock exchanges to have inflated revenue and profit over several years in an accounting fraud to the tune of Rs7,136 crore, making it India’s biggest accounting scam. The promoters allegedly inflated revenue, fabricated invoices, falsified accounts and income tax returns, and forged fixed deposit receipts to paint a rosy picture of the company’s financials. Sebi investigated the auditor's role in the accounting fraud. PW was acting as the auditor of the company between 2000-2008. The main objectives were to prove fraud or connivance of the PW’s partners with the promoters of Satyam in fudging the company’s books.
Why the strictures?
According to Sebi, PW showed a total disregard for stipulated auditing practice, indicating its complicity in the manipulation.
“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 PW. The public had no reason to believe that the audit reports were false and misleading," said G. Mahalingam, whole-time member, Sebi.
Sebi added that the long period of accounts falsification and the lack of PW’s attention towards fudged accounts pointed to a systemic problem in the firm's accounting processes.
As per Sebi, the auditors made material representations in the certifications without any supporting document.
“The acts of the auditor induced the public to trade consistently in the shares of the company," it said.
During its investigations, the market regulator found that PW relied on the documents, such as bank account statements fixed deposit statement, that originated or had been sourced from the company itself. And according to the regulator, taking direct confirmation of bank balances could have exposed the scam earlier.
“Bank statements should have been directly verified with the banks," said Sebi.
“By relying on the bank statements obtained from the auditee company merely on the ground that the statements looked genuine and did not arouse suspicion, PW clearly defied the auditing standards and principles," it added.
As per the regulator, an auditor is supposed to proceed with the audit with an attitude of professional scepticism and not get swayed by ‘one’s (company) reputation during the critical process of evaluation’
In July 2010, the firm had approached the Bombay high court and questioned the regulator’s jurisdiction. The court allowed the regulator to proceed with its investigations if it is able to prove that PW had a role in the fraud. In 2011, the firm had approached the Securities and Appellate Tribunal (SAT) asking for examination of the evidence, and the case went in the favour of the firm. Sebi then filed an appeal in the Supreme Court against the SAT order in 2012. On 3 July 2017, the SC allowed for examination of documents and ordered Sebi to conclude its proceedings in six months. The deadline expired on 9 January 2018. In September 2017, the firm had applied to settle the proceedings via consent; the plea was not considered.