• Satyam’s Internal Auditor: All Roar, No Bite

    By • Feb 14th, 2011 • Category: The Big 4 And Globalization

    This post was originally published at GoingConcern.com on December 17, 2009.

    India’s Central Bureau of Investigation (CBI) recently arrested Mahindra Satyam’s internal audit head V S Prabhakar Gupta for his alleged involvement in the Satyam fraud. Gupta, who is Global Head of Internal Audit at Mahinda Satyam, held the same position in Satyam Computer Services Limited.

    “… arrest on November 21 of the company’s former global head of internal audit V S Prabhakar Gupta, who has been charged with “willful suppression of auditing irregularities.”

    Ironically, in 2006 Mr. VSP Gupta and his team at Satyam,  “joined the elite list of companies across the world to have received the “Recognition of Commitment Award (ROC)” from The Institute of Internal Auditors, USA (IIA).”

    IIA Communications Manager Scott McCallum responded regarding the “award”:

    “Although their press release indicated that it was an “award,” in actuality, it was a “recognition” presented by The IIA after their company submitted required documentation demonstrating their “commitment” to internal audit quality… Any company was eligible to receive this same “recognition”.  Satyam was not singled out as superior… The IIA had not attested to the quality of their internal audit practices or compliance with IIA Standards through a Quality Assurance Review.”

    Internal auditors have a tough job.  Some companies are very supportive of the function. But many only look at internal audit as a necessary evil and a cost center. In the end, even with a professional code of ethics and a reporting relationship directly with the Audit Committee, internal auditors are still beholden to the company, as an employee or paid vendor. They are human – subject to self-interest and, potentially, coercion in the name of keeping their job/engagement.

    It’s pretty unusual for internal auditors to get caught up in scandals. They’re typically “inside” guys not flashy “outside” guys. As employees or vendors, they are often left with a Hobson’s choice: Lose their job/client by objecting or quit, tell story, and be blackballed.

    Was Mr. Gupta really an active player in the scandal or just a passive enabler?  Some reports paint him as a strategic advisor who gave scammy ideas to the CEO/CFO.

    “Gupta had connived with the conspirators in not raising his voice when there were indications of bungling of accounts by the management, particularly in creation of fictitious invoices. As the head of internal audit, Gupta did not resist the management when it denied access of software highlighting irregularities to an independent audit committee.”

    I have been accused of naïveté regarding Indian business practices:

    “…India ranks around 120 on the Transparency International’s list of most corrupt countries….almost all Indian listed companies except maybe the Tata group and HDFC companies are riddled with some degree of fraud or corruption.”

    India is actually 84th.  My reporting of the Satyam scandal is unfair how?

    The Indian regulators’ latest charges confirm my earliest suspicions – that the Satyam scandal was deeper, more widespread, and required the complicity of many, both inside and outside the company. The PwC India partners are still in jail a year later awaiting trial for their crimes.

    The investigative agency also claims to have collected more evidence against PricewaterhouseCoopers’ two auditors Subramani Gopalakrishnan and Talluri Srinivas, who have already been charged with ‘knowingly certifying forged and inflated balance sheets’. “Further evidence collected revealed the role of two statutory auditors in the fraud.”

    The commenter went on to say it’s “the sheer hard work of the employees of [Price Waterhouse India] which has kept the firm afloat for 125 yrs…it is not uncommon for the firm to have partners who are related to each other as we live a long family tradition. Typically the partners of the firm are very conservative and many times would marry there sons and daughters in families which have a long tradition in public accounting therefore creating a more and more refined gene pool of public accountants who go on to serve the firm.”

    So, Price Waterhouse auditors in India are a “super race” of the best and brightest?  Half-human and half- sly, cunning Bengali tiger?

    Who knew?

    is
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    6 Responses »

    1. The IIA does not take a strong enough stand with the listing authorities or the SEC on the independance of the Internal Audit function from management. Even when reporting to the board pay and promotion opprotunities are set by management at most companies. Additionally, the IIA will not take a stronger posiition on Internla Audit not reporting to the CFO or proposing to the SEC to require disclosure (8K) on the departure of the Head of Internal Audit at the company.

    2. From the IIA’s website: http://www.theiia.org/guidance/quality/quality-faq/?C=369 retrieved 17.2.2011
      ——————————
      Is there an award or certification for an internal audit activity that demonstrates a high level of commitment to quality internal auditing?
      In the past, Quality at The IIA has recognized applicants who meet the specific criteria of the Commitment to Quality in Internal Audit (CQIA) and, more recently, the Recognition of Commitment (ROC). These awards were available to all internal audit activities that submitted an application fee and met specific criteria in the areas of quality, outreach and professionalism, based on a point system. Effective January 1, 2006, the ROC program was sun-setted by the Committee on Quality. At the most recent Committee on Quality meeting, the concept of a new quality recognition plaque was approved for Organizations that have a QAR completed by the IIA and receive their “General Conformance” to the Standards.
      ——————————
      So, was it an award or was it not?

      The internal audit profession (on behalf of business and society) really needs an institution to set a “gold standard for internal auditing”. I do not think that the IIA (International) does this right now.The IIA in the UK , which appears to be an entirely different organisation, appears to be closer to the mark with more rigourous exams and training. Perhaps this is a subject for a future column?

      BR

      Ross

    3. The CPAs and external auditors in India must be more corrupt than those in the U.S. After all, none of the CPAs with the big firms and internal auditors in the U.S. have even been indicted for fraud. So they must be clean.

    4. […] India, for example, the Satyam’s internal auditor is accused of being complicit in the fraud perpetrated by executives and allegedly supported by external auditors PwC. But in […]

    5. […] It’s Bigger Than A Blown Audit, July 24, 2009 McKenna Quoted In The Guardian, July 25, 2009 Satyam’s Internal Auditor: All Roar, No Bite, December 17, 2009 Roopen Roy, Deloitte India, On Audit Firm Mergers, January 21, 2010 Worlds Apart […]

    6. The IIA is not enforcing its Code of Ethics. When a complaint is filed against a member for non-compliance with IIA Standards, the IIA uses the excuse they are not “holding out” as being in compliance with the standards. Unfortunately, the standards and Code of Ethics do not use the qualifier “holding out”. Therefore, the IIA’s Code of Ethics is misleading and deceptive. This practice of non-enforcement of the Code of Ethics by the IIA may have been going on for years.

      Very unprofessional and unethical on IIA’s part.

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