Wednesday, January 7, 2009

PwC's fate Hangs in Balance

Enron & Worldcom had changed the world of auditing from 'Big 5' to 'Big 4'. The brazen fraud at Satyam has the potential to shrink it to 'Big 3', at least in India. The falsification of accounts by Satyam for the past several years has put a question mark on the very survival of its auditor, PricewaterhouseCoopers (PwC)

PwC had audited about 139 companies in India in the last fiscal. Of this, 97 are listed and 45 are part of BSE 500 Index. A few of these companies are already reviewing their relationship. For instance, Glenmark Pharma has said its board will decide on January 27 on whether to propose a change in the auditor.

Some other large companies audited by PwC include Maruti Suzuki, United Breweries, United Spirits, GMR Infra, Piramal Healthcare and Marico.

The Institute of Chartered Accountants of India (ICAI), an apex body of chartered accountants, is likely to take a strict stand on the issue. ICAI said any member firm found guilty in the Satyam case would be severely punished and the auditors could even be barred from practising for lifetime. Although there is no rule in India to penalise audit firms such as PwC on accounting fraud, a senior ICAI member said tainted auditors can be pulled up.

In 2007, ICAI had found partners of PwC guilty of professional negligence in underproviding for non-performing assets in the now-defunct Global Trust Bank (GTB). But this was only after RBI had blacklisted the firm when a string of irregularities surfaced at GTB. In July 2006, PwC's Japanese affiliate Chuo Aoyama was handed a two-month ban on auditing by Japan's Financial Services Agency, for allegedly certifying false accounts of consumer products major Kanebo.

Senior partners at PwC went into a huddle on Wednesday and remained incommunicado for most part of the day. Late in the day, the firm sent a terse statement: "We have learnt of the disclosure made by the chairman of Satyam Computer Services (Ramalinga Raju) and are currently examining the contents of the statement. We are not commenting further on this subject due to issues of client confidentiality."

Partners at other Big Four firms were cautious in their assessment, as investigations by authorities were yet to commence. "There would be an investigation by ICAI to find out whether there was an audit failure," said Richard Rekhy, head of KPMG India, an arch rival of PwC. "The ICAI's council has its own disciplinary committee that will see whether adequate due diligence was ensured by the concerned auditor," he added. Traditionally, most companies appoint one of the Big Four firms — that includes KPMG, Ernst & Young and Deloitte — to do the statutory audit, as it implies that the company's accounts are above scrutiny.

"This is a major loss of reputation for the auditing profession," said a senior partner at Deloitte India. "The Satyam issue will now put the entire profession in an unpleasant light."

An executive for the 170-member PwC said the statement was delayed as it had to be approved by the global parent firm in the US also. Satyam is

NYSE-listed and any statement from PwC would be examined carefully by the SEC. "We are perplexed as to how a fraud of this magnitude could take place," said one senior PwC executive. "We usually check corporate transactions on a test basis. But this is not a small amount. Frankly speaking, the sheer size of it has left us clueless," he told ET on condition of anonymity. The firm is likely to undertake an internal investigation on its own, he added.

Statutory auditors are typically appointed by a company to audit the balance sheet and to verify whether the accounts presented are a true and fair view of the financial state of affairs. Their appointment is ratified at the annual general meeting (AGM) and is typically valid for one year. The accounting firm can be re-appointed following an approval at each AGM. According to RSM Astute India chairman Suresh Surana: "It needs to be ascertained whether any documentary evidence was presented to the auditors and whether that was forged. This episode also shows that there is too much focus on the short-term performance of a company."

Another fallout of the Satyam situation is that many firms could likely consider withdrawing the appointment of PwC. But the procedure is complex and has to be approved at an annual general meeting. The management of a company can only remove an internal auditor.