A day after B Ramalinga Raju blew the lid off the Rs 7,000-crore fraud at Satyam Computer Services, there was anger and anxiety in equal measure in the audit community: Anger at devious promoters and ineffective independent directors, anxiety at what could happen to one of the biggest names in accounting, Price Waterhouse.
Partners of Price Waterhouse, the accounting arm of PricewaterhouseCoopers, were incommunicado. Several knowledgeable accountants said that its procedures were robust. “But if a promoter has fabricated everything, what can an auditor do,” said an executive of a Gurgaon-based professional services firm.
Some accountants said that the need to publish audited results quarter after quarter on a strict deadline has taken it toll on the quality of audit. “It has put a lot of pressure on auditors,” said another accountant. Most agreed the Satyam affair was a wake-up call for all auditors.
If he is found guilty, action could be taken against Srinivas Talluri, the Price Waterhouse partner who signed the auditor’s report. “According to the Chartered Accountants Act, we can take action only against individual members who have signed in the auditor’s report, not the firm,” said Uttam Prakash Agarwal, vice-president of the Institute of Chartered Accountants of India (ICAI).
In the last three years, ICAI had taken disciplinary action against 120 members. In seven cases, the licence of members was cancelled for more than five years, said ICAI President Ved Jain. In all the seven cases, the courts had endorsed ICAI’s decision. Punishment exceeding five years was given only in cases involving frauds or misrepresentation of financial statements, as seems in the case of Satyam Computers. However, only one licence was cancelled for life in the last three years, he said.
However, the class action lawsuits in the US could include the firm as well. “If found negligent, there could be a civil liability. If found guilty of colluding with the promoters, there could be criminal liabilities,” said Grant Thornton National Managing Partner Vishesh Chandiok.
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If something like this happens, everybody admitted, the firm could meet the same fate as Arthur Andersen after the Enron fiasco. In 2002, Arthur Andersen was found guilty and most of its clients and partners left. Though the United States Supreme Court subsequently overturned the finding, it couldn’t become a viable business again.
PwC, to be sure, has had a brush with trouble earlier. In India, its name had come up in the Global Trust Bank and DSQ Software cases. Elsewhere, in 2006, its Japanese affiliate was handed out a two-month ban. In January 2007, it was named as a co-defendant in a class action lawsuit against Dell. In July 2007, it settled another class action lawsuit brought by the shareholders of Tyco International.
Meanwhile, anger mounted amongst audit firms on the role of independent directors on the boards of companies. “There is no enforcement of the norms for independent directors and corporate governance,” said Chandiok. “There is a clear rule that audit partners and their families will not hold securities of their clients. Who monitors it?”
“How much time do independent directors spend with the internal and external auditors of a company?” asked another accountant.