Tax Law

Twist in the Satyam - PwC Tale: Two Auditors Detained, Suspended

India had not yet recovered from the shocking revelations of the biggest corporate financial fraud in the IT giant, Satyam Computer Service. A fresh development to hit the story is the detention of two auditors in the Indian arm of PwC, who were involved in the audit process of the ill-fated company. Although the two auditors, Subramani Gopala Krishnan and Talluri Srinivas have not yet been charged with any offence, they have been placed in judicial custody pending police investigations pursuant to their confessions of involvement in colluding with the former Chairman, of Satyam, B Ramalinga Raju in the financial mega-fraud.
The entire activity of inflating profits, cash balances and assets in the financial statements was targeted towards luring more investments in the company. Following the detention, the global head of PwC, Sam DiPiazza rushed to Mumbai cutting short his stay at the World Economic Forum in Davos, at a sudden notice to examine the case and provide support to the Indian arm. The Chief has suspended the two auditors from their normal duties, announcing that they will no longer carry out any activities on behalf of PwC. They continue to retain their position as partners, however.
Earlier during the week, PwC had released a statement in a letter that its audit reports on Satyam’s financial statements should not be relied upon following the arrest of the company’s Chairman, B Ramalinga Raju. It is speculated that the detention of the auditors by the police is fueled by this letter, which is being construed as a statement akin to a confession of a crime. Amidst all this pandemonium, PwC has also remarked that it has offered all its cooperation to the police to further its investigation with the assistance of its auditors, and they have also released a statement that the basis for the detention of the two auditors was not known to them. A clarification has also been issued by PwC that the statement was merely one of a legal fact, and should not be misconstrued as a crime confession to be held against the firm.
While the investigation may take a long time due to the volume of paperwork involved in the scam covering a number of years, Satyam was very quick to immediately announce termination of their ties with PwC as auditors, and PwC has largely remained silent on the merits of the case. While Sam DiPiazza was discussing the case details in Mumbai, PwC also announced the stepping-down of its global head of auditing and accounting unit, Thomas Mathew; however, Mathew is retaining his title of partner. Although he had no direct involvement in the Satyam scam, it was done so as a matter of professional ethics as it was the most appropriate step to be taken by him by excluding himself from the managerial role.
A serious step towards investigation in professional standards has been taken by the Institute of Chartered Accountants of India (ICAI), which has issued a notice to PwC’s audit section, demanding details of its reports concerning Satyam’s accounts over the years. ICAI has the power to strike off the powers of an accounting firm to carry out its professional activities if the involvement of the firm in the manipulation of accounts is clearly established through the investigations. In fact, the Indian police have filed a First Information Report (FIR), which is the commencement of a criminal investigation.
Meanwhile, the newly appointed three-member board of Satyam has appointed Deloitte and KPMG as their new joint auditors. It has also appointed Boston Consulting Group, a management consultancy firm, on revival schemes for the company.  The Satyam board has also appointed bankers Goldman Sachs and Avendus to identify and strategise potential investors and funding for the company. In the meanwhile, the PwC audit firm, which is facing a severe setback and dressing down of image being compared to the Arthur Andersen / Enron scandal, is also attempting to restore client confidence by advising the board to immediately commence an independent investigation under the U.S. Securities and Exchange Act of 1934 to examine the intricacies and details of the scam. PwC is also making best efforts to charm its existing clients in an effort to salvage its tarnished image to avoid any pull–outs. However, the seriousness of the consequences on its professional future cannot be measured at this stage, considering the magnitude of the scam and the intensity of the crime, if the involvement of the firm is proven.

In the meanwhile, in its efforts to salvage Satyam, the newly appointed board, with the advice of   its new auditors KPMG and Deloitte, is strategising and planning to secure funds to pay salaries and other overheads besides appointing a new chief executive and chief financial officer for the troubled company. Reports are also trickling in about indications of a possible buyout of the company by General Electric and Nestle. Meanwhile, India’s leading construction and engineering company, Larsen & Toubro, has raised its stake in Satyam from 4 percent to 12 percent in order to secure its position in the company. American outsourcing company iGate Corp has also indicated its intention to buy Satyam and to fuel its ambition, and was touching base with certain firms to finance the deal.