PwC and Satyam – Another Fine Mess You’ve Gotten Yourself IntoBy Francine • Jan 26th, 2009 • Category: Pure Content, The Big 4 And Globalization
If only the firm was just milking a gag…
It was only a couple of days ago that Price Waterhouse India was plotting their defense to this “everything old is new again” fine mess they’ve gotten themselves into.
Dateline: NEW DELHI
January 24, 2009
Price Waterhouse will defend its role as an auditor of the disgraced Satyam Computer Services, citing the 1986 verdict of the Bombay High Court that said an auditor should not be held responsible for tracking down ingenious and carefully-laid schemes of fraud in a company.
Lawyers privy to the development, who requested anonymity, said as per the contract between the auditor and Satyam, the onus of providing accurate information was on the company. “This is a standard across the audit industry,” said a lawyer to ET. The scope of an auditor’s work is different from that of a detective, or of a law enforcement agency, making it difficult to detect orchestrated fraud even if all audit practices are religiously followed, he added.
However, a significant expectations gap exists.
“In a November 2006 report, Global Capital Markets & the Global Economy, the CEOs of the six largest audit firms stated ‘there is a significant expectation gap between what various stakeholders believe auditors do, or should do, in detecting fraud and what auditors are capable of doing at prices companies or investors are willing to pay.’ The CEOs point out that fraud detection methods recommended under SAS 99 are not perfect, and that auditors are often restricted in their methods to detect the red flags of fraud. As an example, the CEOs cite the limitation of using indirect means during the audit, such as reviews of anomalies and interviews not conducted under oath, to ascertain if the possibility of fraud exists.”
Some auditors work under an old idea that they have little or no responsibility to detect fraud during an audit. However, in October 2002, the Auditing Standards Board of the American Institute of Certified Public Accountants announced it has approved a new standard that gives U.S. auditors expanded guidance for detecting material fraud.
The AICPA called the standard an effort “to restore investor confidence in U.S. capital markets and to re-establish audited financial statements as a clear picture window into Corporate America.”
In addition, PCAOB inspectors noted instances in which auditors did not post all proposed audit adjustments in excess of the posting threshold to the summary schedule, thus rendering the summary incomplete. Inspectors also noted instances in which auditors had netted the effects of known misstatements that individually met the posting threshold. The net effect of those particular misstatements was lower than the posting threshold for the summary of unadjusted differences. As a result, those misstatements were improperly excluded from the evaluation of potential misstatements. Furthermore, inspection teams observed that some auditors did not adequately scrutinize late adjustments, significantly affecting financial results, that were proposed by management and that partially or completely offset adjustments previously proposed by the auditors.
AU § 316.08 recognizes that “[m]anagement has a unique ability to perpetrate fraud because it frequently is in a position to directly or indirectly manipulate accounting records and to present fraudulent financial information. Fraudulent financial reporting often involves management override of controls that otherwise may appear to be operating effectively.”
AU § 316.41 states that auditors ordinarily should presume that revenue recognition is a fraud risk, thus requiring the auditor to respond with appropriate audit procedures. Numerous financial frauds have been perpetrated by management through premature or fictitious revenue recognition schemes.
“We feel strongly that the standard will substantially change auditor performance, thereby improving the likelihood that auditors will detect material misstatements due to fraud,” said Melancon. “The standard reminds auditors that they must approach every audit with professional skepticism and not assume that management is honest. It puts fraud at the forefront of the auditor’s mind.”
Increased Emphasis on Professional Skepticism….Throughout the audit, the engagement team should think about and explore the question, “If someone wanted to perpetrate a fraud, how would it be done?” From these discussions, the engagement team should be in a better position to design audit tests responsive to the risks of fraud.
Discussions with Management. The engagement team is expected to inquire of management and others in the organization as to the risk of fraud and whether they are aware of any frauds. The auditors should make a point of talking to employees in and outside management. Giving employees and others the opportunity to “blow the whistle” may encourage someone to step forward. It might also help deter others from committing fraud if they are concerned that a co-worker will turn them in.
Unpredictable Audit Tests. During an audit, the engagement team should test areas, locations and accounts that otherwise might not be tested. The team should design tests that would be unpredictable and unexpected by the client.
PCAOB inspection teams have identified instances in which auditors who had not requested confirmations of account balances or had not received responses to positive confirmation requests either failed to obtain, or failed to include evidence in their audit documentation that they had obtained, sufficient other evidence regarding the existence of accounts receivable balances.
PCAOB inspection teams noted instances in which it did not appear that the auditor had performed adequate procedures with respect to evaluating the risk of management override of controls. More specifically, in some instances it did not appear that the auditor had appropriately addressed the risk of managing controls with respect to journal entries and accounting estimates.
I could go on. The report does. Unfortunately it does not anticipate the possibility that the auditors themselves might solicit bribes to cover up a fraud.
But it looks like that is just what’s happened in India with Satyam, according to reports this weekend. (If anyone is keeping track, the answer to the PwC Slumdog Millionaire Sweepstakes was b. )
Times of India
PricewaterhouseCoopers (PwC) auditors manipulated Satyam Computers accounts for money.
According to Crime Investigation Department (CID) sources, Satyam founder B Ramalinga Raju and former chief financial officer (CFO) Vadlamani Srinivas confessed that the auditors of PwC were aware of the fraud and very much involved in executing it.
“Five banks, including HDFC Bank and BNP Paribas, replied to our queries saying that the reconciliation statements of the fixed deposits shown by Satyam Computers at auditing were not issued by them,” a CID officer, who is part of the investigation team, told TOI on Sunday.
According to CID sources, S Gopala Krishnan, who was the auditor for Satyam Computers on behalf of Price Waterhouse between 2000-2001 and 2006-2007, and Srinivas Talluri, the auditor for 2007-2008 fiscal, were well aware of the fraud.
“The auditors falsified accounts,” the CID officer said.
During the grilling by CID officials, Rajus and their CFO V Srinivas reportedly told their interrogators that they had paid handsomely for manipulation of accounts.
“The normal charges could be about Rs 1.5 crore per month,” a source said.
My compadre Dennis Howlett saw my Tweets last night that broke the blockbuster news for US readers. He immediately wrote up his doom and gloom scenario. He’s bet me that PwC as a global firm will fail by the end of the year.
“My initial reaction was one of skepticism. How could two qualified accountants, working at the highest level of a global brand leader be so crazy as to risk the firm and their future for what must have been a modest bribe? But then I’ve seen far less involved and the same self destructive mentality take people down.
During a conversation with Francine McKenna, she made the point: “PwC is a three strike business. Yukos in Russia, Japan and now India. Where else do they have issues? Is anyone asking what’s going on in south east asia…places like Vietnam and Cambodia.” I’m not convinced anyone cares about those countries but China? What about South American territories like Brazil, Chile, Mexico? Is PwC operating to standards that stand scrutiny in those places?”
I called PwC US spokesperson Mike Ascolese at home last night. I wanted to give him a heads up. I sent him copies of the news reports from India and said this:
“I look forward to PwC US statement regard to exposure due to litigation in the US re Satyam ADRs, PCAOB response, and US firm review/approval of US GAAP financial statements.”
He had not yet heard this news. As of the time of publishing this post, he had not yet gotten back to me with a statement.
I also requested a statement from Colleen Brennan at the PCAOB.
“I look forward to PCAOB statement regard to exposure due to litigation in the US re Satyam ADRs, PwC US firm review/approval of US GAAP financial statements., as well as status of the inspection report of PwC India audit firms.”
Colleen’s response to me this morning:
What next? Regardless of the legal outcome, these admissions cast a long shadow over PwC Global. It must now be patently obvious that PwC has no control over its associates and affiliates. It cannot therefore be reasonably described as a global firm. More worrying – what does it say about other territories where PwC trades.
So, as well as having no defense at either the Indian, US, or international level to this damning development, Pricewaterhouse Coopers LLP US and the US regulator have no PR spin either.