Two blind accountants, a father/son/brother high wire act, and a $1 billion Indian elephant walk into the room…
If only this was a joke, the opening scene in another Oscar-winning, Holly/Bolly-wood musical. Instead, it’s the cast of characters in the Satyam scandal, mistakenly being called the “Indian Enron.”
Tech Mahindra, 30% owned by British Telecom recently made the highest bid to purchase Satyam even though new audit firms Deloitte and KPMG are still working on restating the Satyam’s accounts. As they say in the circus… There’s a sucker born every minute.
It’s a mistake to characterise the missing billion at Satyam, previously India’s fourth largest outsourcing services provider, as another Enron. Satyam looks more like the pure fraud that took place at Parmalat rather than the sophisticated, by comparison, machinations at Enron that were given a stamp of approval by now defunct auditors Arthur Andersen. The Parmalat scandal and the Satyam scandal share a common theme that proves how bankrupt – pun intended – the “watchdog” role auditors are getting paid to play really is.
It’s the cash, stupid.
Back in 2003, the auditor of Bonlat, a Parmalat subsidiary, was Grant Thornton. They believed that Parmalat held €3.95 billion worth of cash and marketable securities in an account at Bank of America in New York City and certified the 2002 financial statements based upon a false bank confirmation. The bank account and the assets did not exist and the purported confirmation had been forged. Deloitte was the auditors of the Parmalat parent firm. They incorporated the overstated Grant Thornton certified financial statements from Bonlat into the consolidated results.
Satyam, in a similar fashion, showed auditors Price Waterhouse India forged documents from at least four major banks to claim a fabricated cash balance in excess of $1 billion.
Bank confirmations are one of the most fundamental steps an auditor is asked to perform. And yet, in two of the largest scandals in recent years, auditors did not perform this step adequately, if at all. The accounting regulator, the PCAOB, has known for a while that existing standards were not adequate to force auditors to do a good job in this area.
“Existing standards do not address all areas for which direct confirmation with third parties may be preferable to applying other auditing procedures. For example, existing auditing standards do not require an auditor to confirm cash account balances or the terms of significant transactions or agreements.”
In fact, the Parmalat scandal should have been a wake up call for the PCAOB. But instead of the auditors getting better at this simple process, the Price Waterhouse auditors in the Satyam case have now been accused by the Indian version of the FBI, the Serious Fraud Investigation Office (SFIO), of knowingly certifying the inflated and forged balance sheets prepared based on forged data. The chargesheet says that both of the auditors, after facilitating projection of falsified data, made “misleading” presentations to the audit committee of Satyam about the financial health of the company.
This finding by the SFIO was a surprise to Price Waterhouse, according to press reports, since global firm leadership apparently thought that a previous statement by the Satyam CFO, clearing the auditors of involvement, would be enough to get them out of jail. Obviously they do not watch Law and Order: Criminal Intent. A guilty party’s statements about another accused usually lack credibility and are often made with an ulterior motive. The two Price Waterhouse partners accused of the Satyam misdeeds have been in jail since January when the scandal broke.
As with many other examples of “alleged” negligence and complicity by auditors, such as in the recent lawsuit against KPMG in the New Century case, there are often others both in the company and in the firm who tried to tell the audit partners that there was a problem, only to be ignored. According to the SFIO accusation in the Satyam case and lawsuits filed in the KPMG/New Century Case, partners from both firms deliberately ignored their own experts in order to please their clients and, therefore, continue to receive the millions of dollars of fees for the certification of financial statements that proved to be worthless to investors and regulators.
The Parmalat case is still causing headaches for Deloitte. After paying out hundreds of millions of dollars in settlements for multiple Parmalat-related lawsuits, there’s now a suit against their international firm, the umbrella organisation that advertises that it keeps the global network of firms in line. A winning judgment against the international firm in this case will change the way the largest global audit firms do business forever.
To understand the concept of ‘global network of firms” as used by the world’s largest audit firms, just look at the case that’s closest to potentially “piercing the veil” of this sham structure. Cue the current litigation regarding BDO and Banco Espiritu Santo. BDO’s lawyer actually argued against the concept of BDO as a Global firm in order to get their international umbrella firm off the hook for any settlement related to the US firm. (Even his fellow South Florida lawyers concede he’s “shining a turd” in this case.)
It’s likely that not only will PwC’s international arm be faced with a lawsuit similar to the Deloitte International /Parmalat case and the BDO International/Banco Espiritu Santo case, but that PwC’s Chairman Di Piazza may be named as a defendant. The sins of Satyam are staggering. Right now, PwC is operating in crisis mode, trying to protect the huge franchise the firm has serving both large Indian technology firms and brand-name multinationals with operations in India.
The dilemma for the PwC Global senior leadership “crisis team” is that the answer to the burning question, “How could Price Waterhouse India let this happen at Satyam?” has four lousy answers:
a) Price Waterhouse India audit technique and “quality” standards demonstrate the epitome of incompetence and professional negligence,
b) Price Waterhouse India partners colluded with Satyam management to commit the fraud,
c) Price Waterhouse India partners were “duped,”
d) Some combination of all three.
None of the above answers will win PricewaterhouseCoopers International Limited any prizes. If the Price Waterhouse partners are found criminally responsible, lawsuits and sanctions against them by the Indian government may prove fatal to the firm.
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