If the above is the case, what are the legal liabiliies of PWC in case of Satyam’s frauds? What action the government or ICAI can take against such firms
who do not have the attestion power for financial statements.? The foreign audit firms recruit Indian CAs who are the registered members with ICAI. If any of its member has conducted audit for Satyam, then the action may be taken against the CA s who are the members of ICAI. It means that the punishment may be only to suspend their license for a period of 5 years. So in Satyam case, the legal onus is with the individual CAs who are the employees of PWC India and it will not be easy to take any legal action againt PWC, if upon investigation it is found that auditors have shown professional negligence while conducting the audit or were a part of the fraud. In such a case PWC will lose its reputation and I am afraid that this case will affect its global operations.

Any one can clarify the above position for the benefits of several readers.

So permit me to give my own spin on this.

The Big 4 has a business model that is entirely too risky to make any common sense. And the way they run the firms makes the model even riskier, because compensation and personnel decisions would have to be structured to prioritize delivery excellence and subject matter expertise to some extent over business development and utilization. This is not a rant against aggressive business development and utilization and other such goals as I think that high performance business cultures need those kind of measurements; rather it is a reminder that a business with a precipitous return vs. risk model that fails to structure its affairs around this key difference does so at its extreme peril. Put another way, the attest and audit business is indeed special and different in its risks and demands and public obligation, and they need to do something different than they now are doing, likely radically so.

How is it that anyone cannot believe the business model is a Titanic waiting to happen? Fees, while generally good in terms of putting money in partner’s pockets at the end of each year (but not for a rainy day), and giving many a decent wage in a difficult and challenging profession, are ridiculously low when measured against the litigation liability that looms. Assume that one of these disasters is large enough (and with this economy, there will be some), and that a plaintiff succeeds in getting past summary judgment. The hindsight factor kicks in – making whatever conduct the auditors engaged in appear worse in context than it probably was – and just watch what kind of havoc would wreak with a billion (or worse) kind of judgment from a jury. Merely posting a bond for an appeal would be a financially stressful thing, and imagine if 2-3 such actions were infecting a firm at the same time. These risks are real, could take any one of these firms under or in severe distress, and I find it humorous that instead of substantive responses to Francine’s points one reads posts here about how the blog material is too long or how it is too biased to reach large readership levels. It as if what she is pointing out is too uncomfortable to read. But that is the point, isn’t it? If there are not concrete, plausible responses to her concerns then what is reinforced is a perception that she is spot on.

And to add the disclaimer to avoid bias, I might add that I do find Big 4 professionals as a group one of the finer elements of human capital in the business world – well trained and professional and frankly, invaluable assets. But that is just the reason we want to have these people working in a reformed structure that engages in better risk management, does better work, protect the public more effectively, and so on. Sometimes that takes tough talk.