Securities and Exchange Board of India found Pricewaterhouse Coopers guilty of complicity in the fraud that led to the decline of Ramalinga Raju’s Satyam Computers
Over nine years after the Rs 7136 crore Satyam Scam rocked India, Securities and Exchange Board of India (Sebi), late on Wednesday night (January 10) banned international auditing giant Pricewaterhouse Coopers (PwC) and its network entities from issuing audit certificates to any listed company in India for a period of two years.
The stock market regulator has also ordered disgorgement of over Rs 13 crore wrongful gains – along with interest calculated at 12 per cent per annum for the past nine years – from PwC and its two erstwhile partners who worked on the books of accounts of the B Ramalinga Raju-owned Satyam Computers at the time when the fraud was reported.
The decision of Sebi comes after two efforts by PwC to settle the case through consent mechanism and arbitration failed to yield any positive result.
“We are disappointed with the findings of the Sebi investigations and the adjudication order… we are confident of getting a stay before this order becomes effective,” Price Waterhouse said in a statement.
In its 108-page order – seen as the most strident ruling by the market regulator against any auditing company so far – Sebi said the company’s entities/ firms practicing as chartered accountants in India under the brand and banner of Price Waterhouse are banned from directly or indirectly issuing any certificate of audit of listed companies, compliance of obligations of listed companies and intermediaries registered with the regulator.
However, Sebi noted that the order would not impact audit assignments relating to the financial year 2017-18 undertaken by the firms forming part of the PW network.
The auditor’s Bengaluru firm and two erstwhile partners — S Gopalakrishnan and Srinivas Talluri — have been directed to disgorge the wrongful gains of “Rs 13,09,01,664 with interest calculated at the rate of 12 per cent per annum from January 7, 2009 till the date of payment”. This amount has to be paid within a period of 45 days.
Gopalakrishnan and Talluri have also been restrained from directly or indirectly issuing any certificate of audit of listed companies, compliance of obligations of listed companies and intermediaries registered with Sebi for three years.
Price Waterhouse had earlier approached the Supreme Court challenging Sebi’s jurisdiction over auditors. However, the apex court had asked the regulator to expeditiously pass the order in the matter after giving due opportunity, including access to documents, to the parties concerned.
Matters related to Satyam were also looked into by US regulators as PwC is also a listed company in the American market. However, the American authorities had agreed to settle case.
Sebi said the objective of insulating the securities market from such fraudulent accounting practices perpetrated by an international firm of repute will be ineffective if the directions do not bring within its sweep, the brand name PW.
The network structure of operations adopted by the international accounting firm should not be used as a shield to avoid legal implications arising out of the certifications issued under the brand name of the network, the Sebi order said.
Price Waterhouse has, expectedly, rejected the charges brought out against it by Sebi while expressing its disappointment on the ban. “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,” the accounting firm said in a statement issued as a response to the Sebi order.
In August 2010, the Bombay High Court had ruled that no directions can be issued against PwC if there is only some omission without proof of connivance and intent to fraud.
During the course of quasi-judicial proceedings, the auditing major had 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’.
With the Sebi order now jeopardising its operations in India, the international auditing giant claimed that Price Waterhouse Network firms in the country had learnt the lessons of Satyam and invested heavily over the last nine years in building a robust and high quality audit practice.
The scam – estimated at a staggering Rs 7136 crore – had come to light in January 2009 after Satyam Computer’s then chairman B Ramalinga Raju admitted in a letter to the company’s board and stock exchanges to have inflated revenue and profit over several years through an accounting fraud. The swindle was projected as India’s biggest accounting scam. The promoters – Ramalinga Raju and his kin – allegedly inflated revenue, fabricated invoices, falsified accounts and income tax returns, and forged fixed deposit receipts to paint a robust picture of the company’s financial strength.
PwC was the auditor of the company between 2000 and 2008; the period when these manipulations seemed to have taken place. According to Sebi, it needs to be borne in mind that PW firms have benefited from the relationship with Satyam Computer Services by having collectively received a fee of over Rs 23 crore during these years.
Out of this amount, over Rs 13 crore was ostensibly paid towards PW Bangalore for the audit of Satyam Computer Services as submitted by it. “Given that this remuneration was the identifiable monetary gain made by PW in its association with the audit of SCSL, it is clear that this wrongful gain is liable to be disgorged… the entire gain made from PW’s relationship with SCSL shall be treated as wrongful gain liable to be disgorged,” the Sebi has now concluded.
Further explaining why it was taking the strong action against PwC, Sebi said: “The acts of the auditor induced the public to trade consistently in the shares of the company.”
During its investigations against Price Waterhouse, Sebi found that the company relied on the documents, such as bank account statements fixed deposit statement, that originated or had been sourced from the company itself. “Bank statements should have been directly verified with the banks… 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,” Sebi said.