PwC And Satyam: It’s Bigger Than A Blown Audit

By • Jul 24th, 2009 • Category: Latest, Pure Content, The Big 4 And Globalization

Mira El Dedazo

Brace yourself.  Fill your coffee cup.  Grab a bagel or two.

This is going to be a long one.

US and Indian regulators and investigators are focusing on the wrong thing when investigating the Satyam scandal.  It’s not the spectacular audit failure that’s most important.  That’s just the inevitable unraveling of something bigger. They need to look at the money flowing between Satyam and PW India.  Don’t be surprised if you find that money going outside of India to PwC entities in the US or UK or shells set up in offshore locations.

Follow the money. The level of incestuousness between Satyam, PW India, PwC in other parts of the world, and the Indian government may be greater than anyone initially suspected.  Otherwise, how could Satyam, an acknowledged second-tier player in the Indian and global outsourcing arena end up with 185 of the Fortune 500 as clients?  Did PW India facilitate, play tour guide, provide “due diligence” for sole- or limited- sourced procurement efforts by PwC’s clients all over the world and collect “referral” and “facilitation” fees, for themselves and on behalf of key players in the PwC global organization from both Satyam and their own fellow PwC partners? Was anything paid to Indian government officials implying an FCPA exposure, too?

We’ve already seen reports of PW partners perhaps enabling and supporting the inflated staffing numbers and global payrolls utilized by Satyam to add credibility to their business strategy and to funnel money out of the company.  But did those funds go to only Satyam management?

Late breaking news last night:

“The Central Bureau of Investigation (CBI) has established that the Raju brothers were funnelling around Rs12 crore every month from Satyam through hawala (money brokers, often used in money laundering operations.) Satyam sent the amount as salaries for over 10,000 fictitious employees abroad…

“They were showing on their books the transfer of Rs12 crore every month as salaries. The transfer for one year was Rs144 crore. This went on for seven years since 2002," the CBI official said. Investigators established that in the last seven years, around Rs1,008 crore may have been transferred abroad. The money may be parked in the US, England, Mauritius and southeast Asian countries.”

I contend that the relationship PwC had with Satyam, its audit client, was not the ideal client relationship under the professional standards auditors are bound to abide by. As a trusted source and former partner with a major firm that was active in this arena during the time in question told me:

“If half of what we think is possible here is true, then PwC had a “perverse” view of what their professional responsibilities and obligations were. Instead of putting the client, the shareholders of their audit client Satyam and other audit clients involved here, first they put their own self interest as individuals and as profit making members of a government-sanctioned oligopoly first. They did not uphold the professional standards shareholders expect of any audit professional in any country in any part of the world.”

I told you back in May how PricewaterhouseCoopers used Satyam to jump start the reemergence of their US consulting practice. PwC highlighted their strategic relationship with Satyam during a meeting with industry analysts last year. Satyam and their involvement with PwC client Idearc was featured in one of only two case studies intended to demonstrate PwC’s resurgent capabilities as a systems integrator.  Satyam’s role as a technical team member and, eventually, as the third-party IT outsourcer of choice for PwC’s client Idearc allowed PwC serve this client in areas where they were forbidden to do so under their 2002 non-compete agreement with IBM.  

The relationship between PwC and Satyam, whether implicit or explicit, was promoted at the July 2008 industry analyst meeting and documented in a report of the meeting prepared by Gartner. Whether backed up by actual contractual and/or project management relationships that tie Satyam to PwC legally in the project for Idearc, a Verizon spin off, or not, just the act of using Satyam to market the consulting practice violates the independence standards audit firms are bound to uphold. 

Why?

Satyam was PwC’s audit client.  And we all know now that a massive fraud has been perpetrated on Satyam shareholders with the complicity, according to the Indian authorities, of two PwC partners, if not the whole firm in India, the US and at a global level.  

After the post came out in May there was enormous interest, in India, in the UK, from my fellow bloggers.  But not from the mainstream US or UK media.  

They say things like, “Much as I’d like to devote a lot of resource to it, I believe my readers have gone a little cold on it and are worrying about things closer to home…” Or they seem strangely, curiously, to be avoiding the story completely.  A well known US journalist, one who has been very good on stories of the accounting firms in the past in my opinion, was quite adamant that the story would take too much “time and money” to pin down since there was no way he could print it without several more examples of a similar relationship as PwC seemed to have with Satyam regarding Idearc.  

Conversation with famous journalist ended, “Let me know if you find any more examples and I’ll think about it.”  

Yeah.  If I have the sources and put in the effort, (given my vast and various resources and funding,) I’m going to send them to you.

Not.

And, so, I do have the sources and, so, I have put in the effort. 

The purpose of describing in detail

  • the Satyam clients who also had a”trusted advisor” relationship with PwC,
  • that continued these relationships after the purchase of PwC Consulting by IBM,
  • and often involved long, expensive IT transformations and SAP implementations,

is to support the consideration of the following scenario:

1) The strategic importance of Satyam as a systems integration partner and technical resource caused global PwC leadership to overlook, look the other way, or not take action on reports of poor quality or lack of independence by Price Waterhouse India partners.

2) PwC leadership –  US, global, and Indian-  enabled and promoted complicity in the fraud called “India’s Enron” for the sake of the global consulting business strategy, in particular the growth of their outsourcing practice.

3) Satyam paid PwC for the privilege of being included in these deals with several multinationals by agreeing to exorbitant, higher than market audit fees as has been reported. 

4) The PW India Audit partners acted as willing, but subordinate, actors, nothing more than “bagmen,” in a much larger plan to collect other incentives for PwC US, PwC UK and the PW India consulting practice as a result of PwC US and UK steering their “trusted advisor” clients to Satyam as an IT outsourcing vendor. They probably even collected actual engagement fees as the Indian outsourcing “go-to guys” from unknowing PwC partners in the US and UK, acting as facilitators, tour guides, providers of “due diligence” for sole- or limited- sourced procurement efforts by PwC’s clients all over the world. PwC US even planned to send a senior partner, Bob Lattimore, to India to keep an eye on this money-train by acting as “the on site US Partner responsible for working with PwC India as one of our key providers/partners for Global Strategic Sourcing activities.”

5) As late as mid-2008, Satyam, for all the support and huge clients handed to them as a result of PwC relationships, was still not one of the top three outsourcers in India.  Many of the companies who did choose Satyam, chose a relatively unknown second-tier Indian firm over known non-Indian firms such as Accenture, ACS, EDS, IBM, and SAIC. You have to wonder how Satyam could have come so far so fast any other way than with an inside track. A bought and paid for inside track. 

6) PwC International Limited and PwC US leadership have been much more active in lobbying the Indian government in this case and in working through the Satyam scandal issues personally, on site. This is quite contrary to their typical approach to stay clear and above it all, given the standard defense of no “manage and control” regarding international member firms. PwC US and Global management are definitely in "red alert" damage control and containment mode.  It’s painfully obvious, wracked with poor PR and communications examples, and unfortunately poorly coordinated with the Indian firm’s efforts to save their own skins first.

7) PwC US, UK, and Global leadership actually want the PW India audit partners to stay in jail and have been shielding them from media and any opportunity to share their side of the story.  Why?  Because what they know about what happened can incriminate others at a very high level both in PwC, in Satyam, and in the Indian government. The potential ripple effects on the Indian and global outsourcing/consulting business are significant. The Satyam scandal lowered confidence in Indian corporate governance and management practices. There is a tacit desire on the part of everyone involved to prevent any more light from shining on the questionable business practices no one wants to admit to openly.  

8) PW India’s lame attempt to distance themselves from the audit was a direct result of the interview given by the PW partners to the New York Times the month before. This interview increased fear in all the scandal partners that the audit partners may use the media to tell a story no one wants told. Unfortunately for PwC, the facts prevailed and they had to abandon those statements almost immediately.

9) The stupidity of using Satyam as a case study during Analyst Day in July of 2008 and the attendant implication of additional independence violations pales by comparison to the potential that Satyam was a vehicle that enabled PwC US, PwC UK, PW India and PwC Global to collect hundreds of millions of dollars in “referral” fees as a result of recommending Satyam as a system integration technical partner and IT outsourcer to their multinational clients. But it was this critical error, caused by greed and hubris of leadership such as Joe Duffy, Juan Pujadas, Dennis Nally and Sam Di Piazza that pointed me in the direction of the other engagements and the pattern of potential corruption of the audit relationship with a NYSE listed client, Satyam.

You probably won’t find any contracts explicitly stating that Satyam is to pay a referral fee to PwC for the clients sent their way.  That would be crazy! Although anal-obsessive auditors/accountants have done crazier things.  

You may find emails, written notes, and contracts with Satyam for audit services and other “consulting” services that are vague or seem inflated.  You may find that some contracts with the multinationals for PwC’s early on systems integration/SAP and business process redesign work includes a mention of Satyam when they provided technical or offshore development support. Because the PwC consulting arm did not know or care that Satyam was an audit client.  

You may find PwC’s hands all over the RFP’s and selection processes in some companies for IT outsourcing and other Satyam- like services that were eventually awarded to Satyam.  If there was even a competitive procurement process. More likely you will find more professionals, like I did, who can testify to the close relationship on the ground between PwC and Satyam and the almost “fait accompli-type” process that resulted in Satyam’s long term contracts in these companies, in spite of their second-tier status and relative obscurity.

To identify the additional PwC US and UK clients where this type of “referral” activity may have occurred, I began with lists of Satyam’s multinational clients published at the time the scandal broke.

From those various reports, I dug deeper into the ones that were either known PwC audit clients or known to be PwC Advisory clients.  Finding the audit clients is easy.  Advisory client information came from published reports of projects, my own knowledge in various markets, and sources in PwC and at those clients. Then I cross-referenced these clients and projects to SAP related engagements.  

Why SAP?  Because that was where PwC had the most comfort and capabilities before the sale of their consulting arm to IBM in 2002. That’s also the software they had the closest relationship to afterward, when the PwC consulting practice in the US was relegated, officially, to doing access/application control related Sarbanes-Oxley staff-augmentation work.  An example of technology-related relationship to SAP is their involvement with the tool Versa. Versa was originally developed by PwC, spun out as an independent entity, and eventually sold to SAP. That’s still the bulk of the work they are doing, even though they have tried to add more technical resources and now have the BearingPoint resources to supplement.

SAP was also critical to Satyam’s business plan. In March 2008 Satyam was certified as SAP’s first Strategic Services Partner in the Middle East and North Africa where it had 150+ personnel.   

From PC World in October of 2007:

[IDC's Albert Pang ] uses system integrator Satyam as an example of the expanse of SAP’s universe. Satyam has nearly 5,000 consultants and developers working for its SAP practice, and it has plans to grow its ERP practices by 50 percent during the next few years, according to Pang. "The average deal size of a SAP implementation at Satyam is about US$1.6 million, just on professional services," Pang writes in his report. "With 150 active customers including the likes of Caterpillar, Mittal and Nestle, Satyam could be doing hundreds of millions of dollars in SAP-related projects in a given year."

Satyam started in 1987 and began trading on the New York Stock Exchange in May 2001. It has been required to file financial reports with the U.S. Securities and Exchange Commission, and PW India has been listed as its auditor, ever since.

The research on the relationships between PwC, Satyam, and a number of other multinationals that ended up as Satyam clients was originally intended to attract journalists to the independence violation story. Although, as I told Dennis Howlett, having one example of a major independence violation is like being “a little bit pregnant.”  It really does not matter how many others you had sex with. It only took one to do the deed. However, as I looked at the patterns of activities, talked with others, and began to see the pervasiveness of PwC’s influence given the timing of Satyam’s involvement with these clients, a different theory emerged.  This theory put the audit scandal and the independence violation of Satyam’s involvement with Idearc exposed during the Analyst Day in perspective.
The potential is a much, much larger, multimillion dollar scandal. 

So we will focus, in detail, on six examples of the PwC/Satyam connection.

  • Nestlé
  • Qantas
  • ArcelorMittal
  • Caterpillar (PwC Audit Client)
  • BP
  • World Bank

There are more.


Some additional client examples are provided at the end.

Additional Note: I have asked for comment from the media/press relations team in each of the client organizations mentioned.  The status and responses received are compiled here.

Nestlé

Sources tell me that Nestlé’s GLOBE project had the goal of introducing common business processes and IT systems throughout the world. GLOBE is Peter Brabeck’s brainchild, however, it was Deputy Executive VP Chris Johnson’s task to make it all happen.  He started in 2000 with many, rumored to be, very expensive consultants from PwC. IBM at the time was already a server vendor but played no role in consulting.

That changed when IBM acquired PwCs system integration business in mid-2002 and absorbed it into IBM Global Services. There are many cases of clients who had a strong relationship with PwC prior to the purchase of the consulting practice by IBM, who maintained that relationship only under the IBM mantle after the acquisition. In this case, project team members just switched from PwC to IBM or became Nestlé employees (the exception.) Of course, more and more IBM products then started being forced into the project.  
Soon after the sale of PwC Consulting to IBM, sources tell me that Satyam started showing up in ever growing numbers at Nestlé as part of an ‘outsourcing to India’ push. The technology companies of choice were now IBM, HP, Microsoft, DELL and SAP….
Journalists describing the Nestlé case study equated the two firm, IBM and PwC:
“Even though they may not have liked it, there was a realization among the [40] market leaders that they couldn’t go any further with the systems they had,” says Ronald Hafner, global relationship partner for Nestlé with IBM Business Consulting Services, a.k.a. PricewaterhouseCoopers. “Market by market didn’t work anymore.
Nestlé originally signed a three-year deal with Satyam in 2004 for SAP application support for the company’s ‘Globe’ project.
The custom development work includes development within mySAP environment, interface to other systems and development of Nestle legacy applications. The project covered under Nestle GLOBE business excellence program enables Satyam to implement global mySAP system around the world based on a global template structure as well as country specific localizations.
June 2007 Food and drinks giant Nestlé has signed a three-year extension to its US$75 million IT outsourcing contract with Indian company Satyam.  Nestlé originally signed a three-year deal with Satyam in 2004 for SAP application support for the company’s ‘Globe’ project–one of the world’s largest global SAP rollouts.

Qantas

June 2002 Qantas has started a preliminary study to look at technological ways to improve efficiency. The Australian airline plans to spend about $A200 million to develop its new technology platform, which is expected to deliver cost savings of up to 15 per cent. The project will look at ways of improving efficiency and co-ordination across a range of areas. A spokesman for Qantas said that Monday, formerly PricewaterhouseCoopers, and IBM Global Services would be engaged to develop and manage the project over 10 years.

July 2002 Qantas is to overhaul the operation of its purchasing, finance, payroll and human resources divisions. The overhaul, which is expected to cost $A200 million…will be preceded by an implementation study…IBM, Oracle and PricewaterhouseCoopers will assist Qantas in the overhaul.

January 2006 Qantas has pulled the plug on an ambitious $200 million e-business outsourcing manoeuvre, axing a contract with IBM six years before the arrangement was due to expire.  Late last year the airline cancelled a contract with IBM to build and operate a company-wide information system known as EQ. The contract, signed in June 2002, was expected to run for 10 years.

The original three-way arrangement with IBM, PricewaterhouseCoopers and Oracle was lauded as a new “vision for the technology-based working environment at Qantas” when announced four years ago.  The plan was to build new human resources, payroll and financial systems based on Oracle software. 

The original contract to build the systems was awarded to PricewaterhouseCoopers Consulting and inherited by IBM when it acquired that consulting business. IBM was also expected to supply infrastructure and hosting services.  The cancellation of the contract is a major blow for IBM, which has been seeking to stress its service capabilities in recent years and to interest customers in handing over more of their operations. However, the computer company retains its infrastructure outsourcing contract with Qantas. 

That $650 million, 10-year contract to run the airline’s data centre and computer server systems still has eight years to run. It was negotiated separately from the EQ project…The project was one of the initiatives unveiled by Fiona Balfour after she became chief information officer at Qantas. Late last year Ms Balfour announced she would leave the airline in March.

November 2006  Qantas awarded Satyam a 7-year AU$multimillion ADM contract covering over 150 applications.

Margaret Jackson, the CEO of Qantas from 2000-2007, is a Chartered Accountant who started her career at Price Waterhouse Australia.

ArcelorMittal

October 2006 To speed up IT standardisation, Mittal embarked on a major enterprise resource planning project last year to build a global SAP template, with a blueprint and standard definitions for most steel industry processes. The project will continue for up to four years..

May 2007 The world’s largest steel company has abandoned a project to standardise business processes and consolidate on a single ERP system worldwide, on the grounds that it would increase, rather than cut, complexity.  The project was designed to improve control across the firm’s expanding business.  Mittal Steel, which merged with rival Arcelor last year to create Arcelor Mittal, had been working on a mammoth project to develop core business processes supported by a standard SAP system for deployment across the world.  But the enlarged firm has rethought its plans and will instead standardise business processes and SAP systems in each of 10 business segments, determined by market and geography.

PwC had an extensive internal audit co-sourcing engagement with ArcelorMittal and then ArcelorMittal announced on June 7, 2007 that Arvind Chopra, Vice President of Internal Assurance, was leaving the Company to join Price Waterhouse Coopers as a partner in London and was replaced by Francis Lefèvre. Mr. Chopra held this position – which is of paramount importance from a Corporate Governance, Compliance and internal control perspective – for over seven years. Like Mr. Chopra previously, Mr. Lefèvre also acts as the Secretary to the Audit Committee.

April 2008 Satyam Computer on Tuesday announced it signed an agreement with steel major Arcelor-Mittal, as one of the two global IT services providers to consolidate sub-contractor activities and help in overall business transformation.  As a part of this deal, Satyam will set up an Arcelor-Mittal Centre of Excellence in Hyderabad. This agreement will focus on enhanced application support, cost advantages, reduced vendor management overheads and help in IT convergence initiatives for Arcelor-Mittal.  The Director and Senior Vice-President, Satyam Computer, Mr Subu D. Subramanian, said Satyam will partner Arcelor-Mittal, a customer since 2003, on the critical transformation initiative of their Information Technology Services in Western Europe.

Caterpillar (PwC Audit Client)

1993 Indian technology services company Satyam Computer Services began working for equipment manufacturer Caterpillar in 1993.

September 1995 William H. Franklin, an accountant who joined Caterpillar Inc., the heavy-equipment giant, as a young executive and eventually became its chairman and chief executive, died in his sleep last Thursday at a nursing home in Peoria, Ill., his son Robert said. He was 86.  Mr. Franklin joined Caterpillar, based in Peoria, in 1941 as assistant controller after becoming familiar with the company while working on its books for Price Waterhouse & Company. By the time he retired from operations in 1975, he had been Caterpillar’s “financial brain” for 30 years, said William Blackie, Mr. Franklin’s mentor and predecessor as chairman.

January 1999 Indian companies to adopt PWC’s formula for shareholder value enhancement. Over 50 Indian companies have evinced keen interest in a methodology developed by PricewaterhouseCoopers to assist them in understanding the measures that stock markets apply…The model which has already been adopted by General Electric, Monsanto, Lloyds, Coca-Cola, Caterpillar and Johnson & Johnson, will be used by the Indian corporates within ten to 16 months, Dr Andrew Black, director, business analysis team of PWC, said early this week in New Delhi.

December 2000 UK – Caterpillar Inc of the US acquired SP Engineering Ltd of Leicester. Previously, in September ####, SP Engineering was placed into administrative receivership, with Mr Robert Hunt and Mr Alistair Grove of accounting firm PricewaterhouseCoopers appointed as joint administrative receivers

December of 2000 “An outside auditor can go a long way toward protecting the integrity of metrics data. “You can make numbers say anything you want if you try long enough, ” Peltier says. Caterpillar, for example, brought in PricewaterhouseCoopers to audit its data and processes, Peltier added.

October 2003 The mother lode of these “other” fees comes from tax consulting, which observers estimate accounts for anywhere between 30% and 40% of the Big Four’s overall revenue in the United States–much of that from audit clients…Caterpillar shelled out $17.4 million to PwC. 

October 2004 Caterpillar Chief Financial Officer McPheeters to Retire, Burritt Elected VP and New CFO. Replacing Burritt as corporate controller will be Bradley M. Halverson, currently director of Corporate Financial Reporting…Halverson, 44, joined Caterpillar as an accountant in 1988, bringing auditing and tax experience from Price Waterhouse.  

January 2004 …Some of the big patent donors in recent years include…Caterpillar which gave $50 million in patents to Mid-America Commercialization Corp. in 2001…Accounting firms like PricewaterhouseCoopers and Ernst &Young, which promoted patent donations as a tax avoidance strategy and issued tax opinions on the deals, could be called on the carpet as well… PricewaterhouseCoopers says it has not recently been in contact with the IRS on the promoter issue, but has discussed it in the past. 

April 2005 As accountants prepare to sift through Rover’s assets many industry commentators wonder what there is left to salvage from the stricken car maker. “There isn’t a lot left,” Phoenix Consortium vice-chairman Peter Beale said after the group called in advisers from PricewaterhouseCoopers. “The parts business was sold off to Caterpillar, so they don’t make any money out of their own parts,” Nick Matthews industry expert at the Warwick Manufacturing Group pointed out.

In April 2008 Satyam acquired the IP and assets of Caterpillar’s Market Research and Customer Analytics (MR&CA) operations for $60m in cash, and set up a BU offering MR&CA services with Caterpillar as its initial client. This unit could potentially be used to service other sectors and may attract buyer interest.

Summer 2009 – fm: ” So you were working at Caterpillar recently?” PwC consultant: “Yes, on a SAP project.”  fm:  “On an SAP project?  But aren’t they Caterpillar’s auditors?”  PwC Consultant: “Yes, but it was an audit client Advisory project.”  fm: “What kind of project is that?” PwC consultant: “You know the kind that we do when a client is implementing SAP.”  fm: “Oh, so you worked with the audit team to help evaluate controls for the audit/internal controls evaluation?”  PwC consult: “No, we didn’t work under the audit team.  It was an Advisory project. Not exactly what I was hired on to do. They said were were going to be doing implementation projects. ” fm: “Well, maybe for non-audit clients.”  PwC Consultant: “Why?  What’s the problem?  We do these kind of live, real time reviews of controls as a part of the implementation project for audit clients all the time.”  fm: “Really?  Oh I see.” PwC Consultant:  “Yeah, well Caterpillar does not make a move without PwC.”

Caterpillar paid PwC $27.7 million dollars in 2008 and $26.1 million in 2007 for audit and “audit related” fees. Non audit related fees were 20 and 18 percent, respectively.

“Audit-related fees” principally includes agreed upon procedures for securitizations, attestation services requested by management, accounting consultations, and pre- or post- implementation reviews of processes or systems.  In addition, tax, tax related, and other fees were another $5.4 and $5 million respectively.   

BP

More-comprehensive outsourcing jobs began with the 1999 contracts between BP/Amoco and PricewaterhouseCoopers ($1.1 billion for company-wide accounting processes)…

In 2002, PwC Consulting was sold to IBM Global Services and IBM inherited the BP finance and accounting contract.  

August 2002 “Industry watchers feel the sector is headed for increased bundling of IT outsourcing and BPO contracts. IT services providers such as Infosys, Wipro, Satyam, HCL Technologies, Hughes and Mphasis have already entered the ITES market…

And what’s pushing them all in this direction? Industry watchers feel it’s the global trend towards bundling of IT services with ITES and the pressure on large Indian IT service vendors to seek newer avenues of growth. And pitching in to prove a point is a Nasscom study commenting on supply-side forces which maintains that several large BPO contracts have been tied together with the underlying IT services. PwC, for instance, is providing backoffice processing and SAP support to BP…

Satyam Computer has also announced the formation of a separate subsidiary, Nipuna, to address the ITES business. It is in parleys with about 20-25 enterprises and is also looking at roping in strategic partners. Recently, the Satyam Computer Chairman, Ramalinga Raju, said the company had constituted a task force to draw up strategies and business development plans.” 

March 2003 “BP has shortlisted four frontline Indian vendors — Wipro, Infosys, Satyam and Tata Consultancy Services (TCS). These companies are also understood to have run pilots for BP and are awaiting a decision…

There was speculation about the order size being around $150 million. However, sources said, “It is difficult to put an exact figure to the order as it is likely to be executed in a phased manner over a couple of years rather than at one go. In fact, two companies — Wipro and Satyam are already working on a SAP implementation project for BP. And this is the way the work is expected to flow — in small chunks rather than one large order.”  An equity analyst with a local brokerage firm said, “There has been talk in the market for sometime now about Satyam being awarded a 200-man month contract from BP.”

When BP first started looking for an outsourcing partner in India in late 2002, the amount at stake was expected to be huge

There are other companies including British Petroleum (BP), which is also scouting for outsourcing opportunities in India. Again, the potential is said to be in the region of hundreds of millions…BP, unlike other companies coming into India, is experienced in outsourcing, though this will be the first time it will outsource to an Indian company. Again the usual suspects for BP’s contract are TCS, Wipro, Infosys and Satyam. BP has some 1,500 software applications to support its refining, marketing, exploration, and corporate activities…

Commenting on due diligence a Satyam official, says “the deal sizes are getting larger and customers are looking for long-term relationships, the due diligence exercise is also getting more detailed. This means the time required for taking a decision is also increasing. Consequently, the focus is on the entire width of services rather than on specific skill sets.” 

June 2004 “IBM has also moved into new territory with customers such as British Petroleum, which not only comes to IBM for IT, but now depends on IBM for its entire finance and accounting functions. “

World Bank

The World Bank Group recently admitted that crucial assumptions of its Doing Business report were misguided, and faces a fundamental critique of its knowledge role…The paying taxes indicator, which the IFC developed with multinational accounting firm Price Waterhouse Coopers (PWC), has been described by Richard Murphy of Tax Research UK as “fundamentally flawed, and horribly biased to value-added tax – which is deeply regressive and wholly unsuitable for the uses PWC propose for it through the World Bank.”

The list of projects performed by PwC member firms all over the world for the World Bank and United Nations is long.

August 2008 The United Nations Office for the Coordination of Humanitarian Affairs (OCHA) today welcomed the very generous donation of $500,000 by PricewaterhouseCoopers (PwC), on behalf of its partners and staff, to the Central Emergency Response Fund (CERF)….PwC’s donation is the largest so far by a private firm to the humanitarian fund. It is part of a larger grant prompted by cyclone Nargis in Myanmar, which led PwC to pledge one million dollars divided equally between the CERF and the UN Food and Agriculture Organization (FAO). PwC also contributed to the earthquake relief efforts for the people of China. The firm donated $250,000 to the United Nations Children’s Fund (UNICEF) to help provide emergency food and health to children affected by the earthquake…PricewaterhouseCoopers has collaborated with the United Nations for years…

Unfortunately Satyam’s relationship with the World Bank, although long and extensive, ended badly.  

February 2003 Dateline Mumbai: The World Bank is in talks with Satyam Computer Services to award a $10-million contract for offshore software development and support, reports a news agency quoting a senior bank official.

June 2003 Satyam had supported the media design of the World Bank intranet, which was ranked among the world’s top 10 best intranet sites by Nielsen Norman (NN) group, a US agency, in October 2002," Mr. Myanmpati said…Mr Rakesh Asthana, Director, Corporate Information Services of World Bank, in a statement said, "With this contract, our relationship with Satyam has matured from a contractual relationship to a strategic partnership. Over the next five years, we see Satyam as a key contributor to the implementation of the World Bank’s IT strategy." Following this arrangement, Satyam will provide World Bank with an ERP solution and extend document management and integrated messaging system among other applications.

The ugly details of the breakup were revealed shortly after the PwC/Satyam scandal hit in December.

Since 2003, according to FOX News sources, the World Bank has paid Satyam hundreds of millions of dollars to write and maintain all the software used by the bank throughout its global information network, including its back-office operations — overseeing data that ranges from accounting and personnel records to trust funds administered for many of the world’s richest nations.

Questions about Satyam first began to arise last October, when FOX News reported that sources at the World Bank had disclosed that one or more Satyam contractors were involved in a series of unprecedented cyber assaults on the world’s foremost anti-poverty organization. World Bank officials vehemently denied the story.

On Nov. 2, FOX News reported that hundreds of former Satyam employees were still working at the World Bank, despite the fact that the company had been ordered off World Bank premises by the institution’s president, Robert Zoellick.  Finally, on Dec. 22, FOX News revealed that the World Bank had admitted in a series of secret meetings that it had formally banned Satyam as a vendor for eight years, starting in February, 2008, for improperly selling preferential shares to the World Bank’s top information technology officer.

January 2009 The World Bank disclosed it had barred two Indian outsourcing firms, Wipro Technologies and Megasoft Consultants Ltd., from doing work with the bank’s headquarters, the Wall Street Journal reported on Tuesday.  Just last month, the bank revealed it had blacklisted Satyam Computer Services Ltd. for eight years. The co-founder of Satyam, B. Ramalinga Raju, has since shocked the industry by admitting to cooking his company’s books by more than 1 billion dollars, according to the report.

Interestingly enough, the World Bank hired PricewaterhouseCoopers to investigate the cyberassaults alleged to have been committed by their audit client Satyam’s contractors.

How convenient.

The World Bank Group’s computer network — one of the largest repositories of sensitive data about the economies of every nation — has been raided repeatedly by outsiders for more than a year, FOX News has learned. It is still not known how much information was stolen. But sources inside the bank confirm that servers in the institution’s highly-restricted treasury unit were deeply penetrated with spy software last April. Invaders also had full access to the rest of the bank’s network for nearly a month in June and July…The bank’s chief information officer, Guy De Poerck, has engaged Price Waterhouse Coopers to do a confidential million-dollar assessment that is expected to tell him what’s going on in his own department.

Even after the World Bank banned Satyam, they were stil getting contracts from related United Nations organizations. 

January 2009 The World Bank, a cornerstone of the United Nations’ global anti-poverty effort, failed to tell the rest of the world organization that it had banned now-imploding Satyam Computer Services last February from further business following a corruption probe — and thus allowed the U.N. to enter into a $6 million deal for technology services with Satyam as recently as this July, FOX News has learned.

Details of the contentious contract, reference number PD/C0102/08, are prominently displayed on a U.N. Procurement Department website, commonly accessed by procurement officials from across the U.N. system. Click here to see the contract award announcement.

The contract award notice proclaims that Satyam was hired effective July 18, 2008, through July 13, 2013, to work on E/Staffing/Talent Management Software, Implementation and Training Services — all within the sensitive U.N. human resources management system.  What made the contract a shock was that it came into force five months after the World Bank — the world’s largest anti-poverty lender and a key member of the U.N. system — banned Satyam as a supplier for eight years, after a three-year investigation revealed extensive improper financial dealings with a top World Bank official…At the time of the investigation and banning, Satyam had been declared a "strategic partner" with the World Bank in all of its information processing activities, and had received hundreds of millions of dollars in World Bank business since the partnership was announced in 2002.

March 2004 PricewaterhouseCoopers has taken the leadership challenge further than most by seconding high-potential individuals to the UN to help project in countries in extreme circumstances…A leadership development scheme which seconds young executives to projects in some of the world’s most crisis-hit areas could pay dividends for HR as well as improving the company’s reputation for corporate social responsibility (CSR).The Ulysses project at consultancy PricewaterhouseCoopers (PwC) demonstrates some of the reasons why HR practitioners should be willing to take a leading role in promoting CSR.

PricewaterhouseCoopers has been a long time financial supporter of the United Nations Development program and has benefitted from this relationship with contracts and projects that allow them to be quite influential in it’s agencies and organizations.

According to a nation-wide survey done by PricewaterhouseCoopers (PwC), a majority of corporates expressed their desire to be good corporate citizens with improved brand image and social reputation and also expressed concern over health and safety needs of their stakeholders.

The survey further reveals that a majority of respondents have opined that ‘social responsibility’ is not the exclusive domain of the government and that the corporate world must venture into it in a big way.

PwC, in association with the Confederation of Indian Industry, British Council and the United Nations Development Programme, carried out the survey during September-October. While the questioners were sent to about 1,000 companies, 102 companies have responded to the survey.

The report was released by Andhra Pradesh chief minister N Chandrababu Naidu here on Thursday at the fifth social summit: 2002, organised jointly by CII and the AP government.

Andhra Pradesh is Satyam’s home state.

July 2009 The Andhra Pradesh government Thursday said the state has posted a 24.5 percent growth in information technology export revenues during 2008-09, higher than the projected national growth of 20.65 percent, but this includes the inflated figures submitted by the scam-tainted Satyam Computer Services. Opposition parties in the Lok Sabha on Wednesday slammed the UPA government at the Centre and the Congress regime in Andhra Pradesh for the “multi-crore, multi-dimensional super scam” in the Satyam Computers Limited as the “gaping holes in the regulatory agencies and other government systems” led to this fraud.

Due to the government’s ‘lethargy’ and ‘failure’ to take follow-up action a mere Rs. 25-crore fraud in 2003 grew into a Rs. 75,000-crore scam now, they charged. They also demanded a probe into the happenings in the Maytas Properties and Maytas Infrastrucutre Limited, promoted by the former Satyam chairman B. Ramalinga Raju’s family, and how the Andhra Pradesh government gave contracts worth Rs. 38,000 crore to the companies whose turnover was a mere Rs. 200 crore during 2004…This issue was even raised in the Lok Sabha by Ramdas Bandu Athawale (RPI-A) then. He also charged that the Andhra Pradesh government was “conspiring to cover up the scam” and that was the reason for not allowing the SEBI or the Serious Frauds Investigation Office to interrogate Raju initially.

 

Other connections of interest:

GE

GE accounts for nearly 5% of Satyam’s revenues. Some aspects of the relationship with GE are particularly close. For example GE Healthcare recently partnered with Satyam to provide support to health provider clients deploying GE Centricity Enterprise healthcare IT solutions. The partnership, which includes joint planning, design and implementation of infrastructures for clients as well as application integration and solution customization for providers, was targeted at the Middle East, with the companies intending to jointly staff a demonstration center in Qatar as a showcase for hospital technologies. PwC also has an alliance relationship with GE Healthcare via its Healthcare Advisory practice. 

GlaxoSmithKline Plc. (PwC Audit client)

Mahindra Satyam, the renamed Satyam Computer Services, said on Thursday it had signed a 5-year multi-million dollar support contract with GlaxoSmithKline Plc.  Satyam said it will provide SAP and other critical systems support to Glaxo’s businesses across the world. Satyam said it had been working with Glaxo since 2002 in providing IT development and support services. GlaxoSmithKline, headquartered in the UK, has been a PricewaterhouseCoopers audit client for more than ten years.

Applied Materials

March, 2007  Satyam yesterday announced that it has won a $200 million contract from semiconductor equipment manufacturer Applied Materials. "The contract is worth $200 million and will be executed over next five years," Satyam Computer Services senior VP Ramesh Shastri said…Satyam has created a dedicated development center for Applied Materials. The facility will be part of Satyam’s Electronic City campus at Bangalore. 

January 2009 Applied Materials, which awarded a $200 million five-year contract in 2008 to Satyam for managing the semiconductor firm’s software application and maintenance work, has expressed concerns over the recent events and, though it is not exploring any immediate termination of the contract, is reportedly trying to restructure the agreement. The company contributes $65-70 million annually to Satyam’s revenues.

January 2009 Satyam could also be forced to renegotiate terms of its existing contracts. Applied Materials, a US-based supplier to the semiconductor industry, which awarded a five-year, $200-million contract last year to Satyam, had already voiced its concerns over Satyam’s botched bid to acquire Maytas Properties and Maytas Infra. “Applied is talking to Satyam for potential contract restructuring,” said a person familiar with the developments at the firm. The company contributes $65-70 million per year to Satyam’s revenues.” 

Cisco (PwC Audit Client)

February 2009 Cisco (PwC audit client) won’t pull out from its contract with Satyam Computer Services Ltd., the Indian provider at the heart of India’s biggest corporate fraud inquiry, Chambers said today.

“The Indian government has acted very swiftly, they have brought in a new leadership. We will not pull our resources out of” the center with Satyam, Chambers said. “We will give it a chance to work through so that they can protect their jobs.”

Nissan

“In March [2006], Nissan North America selected Satyam as the sole information technology service provider. Satyam officials declined to give a value for the five-year deal, but sources then said it could be above $ 100 million."

PwC has been a trusted advisor to Nissan for years, including listing a project performed to streamline financial reporting and their financial close on the PwC Best Practices website. 

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16 Responses »

  1. 4 Days later and still no comments?

  2. @1 007CPA

    Unfortunately I had a glitch in comments over the weekend. Too many spam comments. Fixed now. Let the opinions flow!
    Francine

  3. Hi, fm. I will start piling on.

    I’m sorry, but I’m not convinced yet that you have found anything here.

    I assume your “dedazo” refers to the idea that PwC was hand-picking Satyam to do the outsourcing at its clients (like Mexican presidents got to hand-pick their successors in the Good Ol’ Days).

    To demonstrate that hand-picking was occurring, though, I think you need more convincing evidence than a number of cases where companies retained both PwC and Satyam. I see two possible approaches:

    1) Empirical/statistical. Under this methodology, you don’t need to try to show causation, just correlation. You want to show that Satyam is retained much more frequently at PwC clients than at non-PwC clients. You can then infer some bad reason why that is happening – if Satyam does the outsourcing at 50% of PwC audit clients and 5% of anyone else’s audit clients, that certainly looks fishy. An easy population would be Fortune 500 companies, and you could compare PwC audit clients to everyone else. I understand that PwC does a better job of penetrating its audit clients with non-audit services (within independence guidelines) than other Big 4, so audit clients should be a decent dataset. However, you have chosen to use as examples any company that has a relationship with PwC. Without doing any research, let’s assume 1/4 of the Fortune 500 are audited by PwC. Let’s assume another 1/4 have some level of readily detectable advisory relationship. And let’s assume that 5% of the Fortune 500 outsource to Satyam (as you point out, Satyam is smaller than Wipro or TCS, and some companies don’t outsource at all). Then math suggests that by random chance (assuming my numbers are close to correct), 12-13 Fortune 500 companies should have a relationship with both Satyam and PwC. And you have in fact identified 10. I understand all the data you would need for an empirical analysis is not likely to be publicly available, but I think you need it to come up with a correlation-based analysis.

    2) Anecdotal. For anecdotal evidence to be persuasive, I think you need a “smoking gun.” It’s not enough to show examples of correlation – you have to show causation. I don’t see that any of your examples do that. Again, I understand that there aren’t likely to be smoking guns lying around in public view.

    I follow the logic that PwC might want to use Satyam to leverage itself back into the consulting business. However, I also have reason to believe that PwC understands its SEC independence obligations. Unless there’s more evidence than a few cases of the same company retaining PwC and Satyam, I think any speculation of wrongdoing is just that at this point – speculation.

    So far, the Satyam story seems to me like an object lesson in making really sure that you (as a global Big 4 accounting firm) know what your country practices around the world are getting up to. Which is a pretty good lesson in itself.

  4. @Anonymous Auditor

    Thanks. Those are some really great next steps. For someone else. In fact, one of the experts I spoke to when reviewing this is planning on analyzing the 180-185 clients of Satyam in the Fortune 500 to see if PwC was disproportionately represented as an auditor. I would suspect that they are, since, in general, they have a higher market share, especially with large listed companies outside the US. That expert’s suggestion also made me look at the rest of the top tier technology outsourcing firms to see who their auditors are. It comes out like this.

    Tata Consultancy (Deloitte)
    Wipro (BSR-KPMG)
    Infosys (BSR-KPMG)
    HCL Tech (PwC)
    Cognizant (PwC)

    Interestingly, I did not see HCL and Cognizant get the same kind of top tier name brands on their client list that Satyam did during same period. It may be that Satyam is bigger and better. It may be that HCL and Cognizant do not “pay-to-play.”

    In Deloitte’s case, as another friend mentioned over the weekend, it would have been odd for them to have tried to send business to Tata, since they had a competing business in India at the same time. But stranger examples of “every partner for himself” and the “right hand not knowing what the left hand is doing” are not unusual in the Big 4. KPMG probably is auditor for Wipro and Infosys for the exact reason that they did not want to nor were they able to compete in this arena since that expertise went to BearingPoint who did and could. Better to do what you know how to do than get out of your range.

    With regard to suggestion #2, some folks’ “not compelling” is other folks’ “pretty clear to me.” Depends on your experience. I find that those who never worked in the Big 4 both before and after 2002 in a partner/MD level nor worked extensively in technology in developing countries sometimes can’t image these things happening nor do they comprehend why they are wrong. Having done both at KPMG Consulting, Bearing Point, JP Morgan and PwC (auditing their business alliances program for one…) I feel comfortable taking the anecdotal information I have presented, along with my own personal experience and other confidential information I have which is not published on the blog to protect myself and others, and forming my own hypothesis about what’s possible. I also feel comfortable pointing those via the blog posts who either have time and money and formal legal support (big media journalists and plaintiff’s lawyers) or have the
    authority (regulators in both countries) to areas they might want to look at. I have no interest in soliciting “smoking guns” and will not address them or deal with them unless they fall in my lap unsolicited.

    I’m satisfied that some key folks – plaintiff’s lawyers (based on some inquiries I’ve received) and regulators (based on the news from India) – are
    looking at the right things already.
    Francine

  5. FM,

    Having lived and worked in the developing world for a number of years, I agree that it would not be too surprising to discover behavior in developing world practices that would not have been permitted in the US (note that I use “US” rather than “developed world” intentionally – I do not have the impression that the independence standards have been hammered into Europe or Asia as thoroughly as in the US). In fact, I recall commenting to folks from the PCAOB at the time of its formation that there was a high risk of the next meltdown being in the developing world.

    However, what would surprise me would be to find that the senior US leadership of a Big 4 firm was not only aware of that behavior but was encouraging it, which I believe is what you’re suggesting.

    Best,
    AA

  6. @Anonymous Auditor

    I believe that the portrayal of the relationship between PwC and Satyam during the Idearc project documented in the Gartner report was a accurate depiction of a strategic relationship that existed both to bypass the IBM non-compete agreement and to further the business interests of both Satyam and PwC. PwC was Satyam’s auditors. The analyst day was a high level briefing that I am assuming was authorized by the highest levels of PwC leadership. That tells me that they were aware of this business and working relationship and condoned it in spite of the independence violation. The actual working relationship between PwC and Satyam in this case and the fait accompli nature of Satyam getting the outsourcing contract after working alongside PwC at this client was confirmed to me by parties who were there.

    My opinion is that this was not an anomaly but a pattern of behavior by both PwC and Satyam and that it would not have occurred without financial incentives on both sides. Why do I believe that there are more examples? Because sources told me there were. I chose to find the likely fertile fields for this type of relationship between PwC and Satyam by reviewing publicly available information and allowing you, the reader, to come to your own conclusions. Some may agree, some may not. But deciding to look further into these connections and coming to the conclusion that such a scenario was possible, for me, was based on additional information from sources and my own personal experience.

    I am proposing a hypothesis and asking you to evaluate it based on your own experience. We may come to the same conclusion or we may not. I am interested in your feedback either way.
    Francine

  7. A reader just reminded me about Gene Donnelly’s role in India: “Gene was in-charge of India from 2005 to 2008 on behalf of Sam DiPiazza himself. He was the last word in India. He played havoc with the previous PwC leadership, foisted his henchman Deepak Kapoor as the interim Senior Partner but Kapoor lost in the election to Ramesh Rajan. Ramesh Rajan asked that Gene be taken off his Indian role in late 2008. But during his tenure Gene played politics and many partners left in disgust… ”

    I spoke to a senior partner at PwC last night and he said he didn’t think the guys in the US were smart enough to pull off what I described. Kind of a backhanded alibi. However, what could have happened in India is clearly another kettle of dal.

    Francine

  8. Haha I am not sure the “we aren’t smart enough” defense is going to work but I would LOVE to hear it from PwC leadership. From what I have seen from PwC they’re more than capable of pulling this kind of fraud off. One would hope their ethics refrained them and this is just a big coincidence. I fear for the worst however. I do think that this article lacks a smoking gun but that is for an investigative reported and a prosecutor to obtain. Great work on the article though FM

  9. [...] the Wall Street Journal more than once (some journalists by name), Crain’s Chicago Business, Bloomberg, The Chicago Tribune, even my beloved Financial Times. In some cases proxies did it for me, [...]

  10. [...] want you to shed crocodile tears or pity poor PwC for their long-term, close relationship with another blockbuster Indian fraudster. Nor should you pat them on the back for not being the auditor now. PwC never really left Koss after [...]

  11. [...] organizational changes perceived to have been dictated by PwC International and US leadership have not gone smoothly at Price Waterhouse India, and even more executives have left, in particular [...]

  12. [...] want you to shed crocodile tears or pity poor PwC for their long-term, close relationship with another blockbuster Indian fraudster. Nor should you pat them on the back for not being the auditor now. PwC never really left Koss after [...]

  13. [...] Satyam saga is far from over.  The PCAOB recently sanctioned two fairly low-level PW India staff. (They are [...]

  14. [...] if they can reel in PwC US (and maybe sue in the UK against PwC UK) by proving fraud. I outlined a hypothetical last year. US and Indian regulators and investigators are focusing on the wrong thing when [...]

  15. [...] same benefit of the doubt to PwC when it comes to Satyam.  I’ve written extensively about this case.  PwC makes all kinds of excuses for why they should not be held responsible for this fraud as a [...]

  16. [...] in the corner waiting for their orders after the big boys talk, even though others have said I give them too much credit for being strategic.  Their complacence is calculated. They are much too tied into the work, and [...]

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