While the jury is still out on who the different collaborators are and the extent to which they acted in cahoots with the wrongdoers in Satyam, it is emerging that the role of Price Waterhouse, which has been the companys auditor from 2000, in the entire debacle is kmuch more entrenched than thus far disclosed.
Satyam Computer Services Ltd has branches or subsidiaries in over 60 countries and its statutory auditor in India, Price Waterhouse, would have had to sign off on branch or subsidiary audits and the consolidated quarterly statements with full knowledge of the standing of branches or subsidiaries. Satyams accounting disclosures would naturally have to be in compliance with Indian regulatory standards. However, by virtue of being listed in the US on the NYSE, Price Waterhouse would have also conducted an audit of Satyam under the Sarbanes Oxley Act (SOX) in the US.
Therefore, Satyam would have had to clear regulatory requirements from both an Indian and American context.
Price Waterhouse, which audited the Satyam accounts, is one of the several audit firms that form a network with the overarching PriceWaterhouseCoopers Ltd. The latter provides only consultancy services in India but abroad this is the firm the world recognises. The audit firms approval to Satyams balance sheets in the US and Europe could put the parent entity in trouble.
While it may be the main client service partner in India who would have signed off on the balance sheet and profit & loss statements, there would be an entire team from Price Waterhouse collectively involved in giving clearances to the audit reports and the misappropriations conducted by Satyam, says Sushil Sharma, senior independent chartered accountant, in Delhi.
He says there is no ambiguity to an auditor in the role he or she needs to play in reviewing the books of a company. The basic principles independent of any countrys accounting standards require an auditor to study bank balances and the cash balances of the company. This entails first studying a trial balance which is a summary of all ledger accounts a company maintains and the companys profit & loss account, and it is only after these recordings are found satisfactory that the balance sheet is signed off by an auditor and made publicly available.
Sharma notes, The companys financial statements show that during the period of 2006-2007 and 2007-2008 Satyam provided for cumulative taxation of Rs 423 crore to the government. This was in line with reported revenues of Rs 8,394 crore for 2007-2008 and Rs 6,410 crore for 2006-2007. If in fact the profits claimed were inflated, then the company could make a refund claim to the government. This may help the company keep itself alive for a little time till it finds its feet.
Additionally, the company stated in the most recent full balance sheet, as of March 31, 2008, that Rs 956.29 crore was in current accounts and Rs 3,317.70 crore was in fixed deposit accounts. The latter is what former chairman Ramalinga Raju confessed does not exist. Definitely a probe would include questioning of the key bankers mentioned in the annual report Bank of Baroda, BNP Paribas, Citibank, HDFC Bank, HSBC and ICICI Bank.
Apart from the accounting angle, a whole mlange of legal issues too need attention. Sujjain Talwar, partner at Mumbai-based Economic Laws Practice, comments, There are multiple ways in which this case could unfold. One school of thought would say that the liability to Price Waterhouse would be restricted to Price Waterhouse India. The extent of this liability would be defined either through a liability insurance the firm would have raised when taking on a new client or through clauses outlined in Price Waterhouses letter of engagement with Satyam. Usually this liability would be the total amount of fees or a percentage of fees paid by Satyam to Price Waterhouse as its auditor.
However any liability coverage would protect an accounting firm only from error or negligence and not fraud. If a case of fraud is filed against Price Waterhouse then the liability insurance or letter of engagement raised by Price Waterhouse will not be able to save it. Satyam in 2006-2007 paid Price Waterhouse Rs 3.67 crore and in 2007-2008 Rs 3.73 crore in audit fees.
Given that Satyam is also listed on the NYSE the outcome of this case will be contextual to both India and the US. Talwar adds, Historically, the way such cases have been treated in the US and in the UK are very different from the way they have been treated in India. In India, Price Waterhouse would have a liability to the company and not to shareholders. The Law of Tort in the US, which PricewaterhouseCoopers in the US could be subjected to, would place the firm with, the duty of care to employees and shareholders. In India, the Bhopal gas disaster was subject to the law of tort but ultimately there was no decision from the courts on this case and it was settled outside.
Whereas in the US the law is more disposed towards looking out for the interests of employees and shareholders, in the UK the law is more circumspect and in India judge-made laws would allow people other than the company to take a stance against the auditor. Talwar cites the example of a recent case in the UK where audit firm Moore Stephen won against its client Stone & Rolls on the grounds that the company cant claim against the auditor for failure to detect its own fraud, which in fact means that when the companys bosses themselves have committed the fraud the auditor cannot be blamed. In India, the 1980s saw a case where Tri-sure India Ltd sued its auditors AF Ferguson over misrepresentation in the financial statements, in which the Bombay High Court ruled in favour of the auditor and placed the company with the blame of fraud.
Though the Indian legal system tends to follow the UK system, the Satyam case will reveal whether the law deals with the wrongdoers with a greater penalty as done in the US. In the US courts are allowed to subject normal damages and punitive damages or damages to be paid as punishment upon companies, in India the norm is normal damages and punitive damages are not the practice and therefore wrongdoing companies are not charged as heavily as their counterparts in the US.
With the new board appointees, Deepak Parekh, C Achutan and Kiran Karnik being given the task of getting to the bottom of this scandal, surely questions regarding earlier boards—such as, how was the board constituted, how many rotations have been done and who previously served on the boards, on whose recommendations were the board members invited to the board, and who have been the audit committee members and why werent they more hands on in the review of the companys financial statementsneed to be brought to the forefront.