Financial Fraud in Satyam Computers Paralyzes Former Accounting Firms

Lucas Gilmore, “Big 4″ observer
April 06, 2011 /

In a more than 2 years of investigation into the major financial fraud in India’s IT service provider Satyam, which faces charges of falsified financials, regulators have, for the first time, dealt out the biggest penalty for a group of accounting firms involved in the crime.

Five accounting firms in India under PricewaterhouseCoopers agreed to pay a total of $7.5 million to settle charges of violating audit rules and standards.

The complaint from the US Securities and Exchange Commission and Public Company Accounting Oversight Board came more than one month after the Afghan Finance Ministry blamed PricewaterhouseCoopers in Pakistan for the scale of crisis befalling the Kabul Bank, Afghanistan’s largest bank in the private sector.

The Institute of Chartered Accountants of India (ICAI) has previously censured auditors from PricewaterhouseCoopers who were involved in Satyam scandal in 2009.

At issue was the alleged financial overstatement made by Satyam Computer Services Limited that inflated the Indian IT service provider’s cash balances by $1 billion, resulting in the investors to believe the business was more viable than not.

“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,” said SEC’s enforcement head Robert Khuzami.

In PCAOB’s disciplinary settlement order filed against Price Waterhouse Bangalore, Lovelock & Lewes, Price Waterhouse & Co., Bangalore, Price Waterhouse, Calcutta, and Price Waterhouse & Co., Calcutta, the Indian accounting firms allegedly violated PCAOB rules and standards when they audited Satyam Computer Services.

PCAOB imposed a $1.5 million settlement on Satyam while the SEC ordered the IT service provider to pay $6 million.

In addition, the five accounting firms will also have to comply to limitations and undertakings set up by the regulators as part of the settlement such as refusing to accept new engagements to audit U.S. issuers until an independent monitoring body determines that the accounting firms have completed the undertakings. The prevention to audit US issuers is effective for six months.

According to court papers, PW Bangalore and Lovelock audited Satyam’s cash balance using test procedures that did not comply with the PCAOB auditing standard governing the confirmation process. Instead, the two accounting firms depended on Satyam “to send confirmation requests to Satyam’s banks” and “to return purported confirmation responses from the banks to the auditors.”

“These confirmation deficiencies contributed directly to the auditors’ failure to uncover the Satyam fraud,” said PCAOB chair James Doty.

As a result, the accounting firms failed to see the inflated financials in Satyam’s reports. Based on the findings of PCAOB’s investigation, the accounting firms failed to detect a general practice in the cash confirmation process within Satyam that did not comply with PCAOB standards for many years.

The accounting firms agreed to settle the charges without admitting or denying the allegations. They also assured of a sweeping revamp in their quality control system to comply with PCAOB standards.

 

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