The Felonius Calculus?

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Troubled times PwC could be banned for five years for its involvement in the Satyam scandal
Troubled times PwC could be banned for five years for its involvement in the Satyam scandal Photo: Vijay Pandey

JUST DAYS before l’affaire Satyam rattled corporate India and brought Price Waterhouse Coopers India (PwCI), the sister concern of the global consulting major under the spotlight for its role as Satyam’s statutory auditor, the Prime Minister’s Office PMO had ordered an enquiry into the developments surrounding the appointment of the Chief Provident Fund Commissioner. Curious about how three shortlisted candidates (Rajiv Kumar Verma, CVO, Rural Electrification and a top IAS OFFICER, RK Srivastava) were dropped and another shortlisted, the PMO wanted to know more. And the issue came up for discussion again when the Prime Minister, Dr Manmohan Singh, and senior members of his Cabinet discussed the Rs 7000-crore Satyam fraud and PwCI’s role in the crisis. The reason: like the chairman of the Oil and Natural Gas Corporation (ONGC), the Chief Provident Fund Commissioner’s job is also a lucrative one, ostensibly because he presides over cash reserves of more than Rs 200,000 crore. “Anything that involves big cash companies is actually under the scanner,” a top PMO official told TEHELKA.

The PM has agreed to a Rs 2,000 crore package for Satyam to solve the current salary crisis

The official — aware of deliberations at the Prime Minister’s residence — also said that Singh, primarily to ensure salaries for the beleagured company’s 53,000 employees, agreed to a Rs 2,000 crore package, offered in three installments of Rs 500 crore for the next three months, and a fourth installment of Rs 400 crore by June 2009.

Having agreed to a government bailout to save the country’s fourth largest information technology major from possibly going under, officials also said that those attending the meeting — including Home Minister P Chidambaram, Commerce and Industry Minister Kamal Nath, Corporate Affairs Minister Prem Chand Gupta and Planning Commission Deputy Chairman Montek Singh Ahluwalia — were unanimous in their decision to put the audit firm under the strictest scanner possible.

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Fallen Angel

PMO wants to know why the Public Company Accounting Oversight Board of theUSfailed to check the PwC fraud

The Reserve Bank of India has banned PwC from auditing banks and NBFCs after the Global Trust Bank Scandal

PwC had twice admitted its mistakes in income and service tax evasions

The Indian Government has already directed the Serious Fraud Investigation Office to probe both Satyam and PWC

Private banks have said they are reluctant to offer loans to Satyam so that the company tides over it’s cash crunch

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While the Reserve Bank of India (RBI) has already asked private banks employing PwCI to report the fact, the Indian Government has already directed the Serious Fraud Investigation Office (SFIO) to investigate the scam, including the role of PwCI. Interestingly, the RBI had banned PwCI in 2004 from conducting audits of banks and non-banking finance companies (NBFCs) after it was found that it had underprovided for non-performing assets (NPAs) at the erstwhile Global Trust Bank Limited.

The PM, said the official, was also curious to know how even the auditors’ auditor missed the fraud: officials of the Public Company Accounting Oversight Board (PCAOB), set up by the US Securities and Exchange Commission to oversee auditors in the wake of the Enron and WorldCom scandals, visited India last year and reviewed the auditing processes of several international accounting firms that audit US-listed Indian firms. “We were there but cannot reveal names,” said Colleen A Brennan, deputy director, (external relations), in a telephone interview, refusing to comment on The Financial Times report that said the PCAOB had actually raised concerns about housekeeping changes.

PwC’s global parent will reshape it’s Indian arm that did business of Rs 800 crore last year

But that things are moving fast at PwCI and the audit firm is under severe pressure is loud and clear. PwC global CEO Samuel DiPiazza, along with some senior worldwide partners, are still camping in India amidst reports that the new Board of Satyam has decided to remove PwCI and Ernst and Young and award its auditing works to Deloitte and KPMG. “A serious restructuring of India operations is on,” said one source. PwCI, meanwhile, has told the Bombay Stock Exchange (BSE) that the audited reports of Satyam can no longer be relied on, after the software exporter’s founder admitted $1 billion of false accounting.

Tension zone :Bharat Kumar, satyam lawyer, talks to the media; The PwC letter to the Bombay Stock Exchange
Tension zone :Bharat Kumar, satyam lawyer, talks to the media; The PwC letter to the Bombay Stock Exchange Photo: Reuters

MARKET OBSERVERS agree that saving Satyam will not be simple. “But the bailout — unless funds come from the government — will be tough. For any financial institution to extend loans to Satyam to solve its liquidity problems, the bank must know what it’s getting into. At this point, everything is doubtful with Satyam,” says Apurva Shah, research head of Mumbaibased brokerage Prabhudas Lilladhar.

And PwCI is in the grip of a different crisis, and possibly one that is even more severe than the one at Satyam: sources close to the audit firm say the reshuffle is primarily because the global parent is serious about reshaping the Indian unit. It did business worth Rs 800 crore last year, having audited about 140 firms, most of them large blue-chip companies. “A top-level meeting will be held in India this week with almost all senior partners joining. There are chances that some top partners will soon put in their papers and the company could actually exit its auditing business from India. This is PwC’s worst crisis,” the sources told TEHELKA, adding that current heads would be given new responsibilities.

For example, Dinesh Kanbar, PwCI tax head, could assume additional responsibilities. It was not immediately known whether Ramesh Rajan, the current India head, who has completed nearly two years in his position, would retainit. Each India CEO has a four year term. “Though PwCI is repeatedly saying the audits were conducted in accordance with applicable auditing standards and were supported by appropriate audit evidence, the auditors could have easily detected the claims of fictitious cash if they had run a simple check of the company’s bank accounts. Did they deliberately avoid that?” said the sources, adding the PwCI has a chequered past with Indian tax authorities, and that the company has twice admitted its mistakes in income and service tax evasions.

IN FACT, PwCI had to settle the cases with both the departments after it admitted to the mistake and paid both the interest and penalty. The first case revolved around writing back of gratuity provision and not paying tax liable on it. The tax loss in this case was Rs 9.13 lakh. For the records, any expenditure towards providing for gratuity is allowed as tax deduction, but when the deducted amount was not utilised and written back, it had to be counted as income and therefore liable to be taxed.The audit firm did not enter the written back amount in the tax return for 2000- 01 and paid less tax. A 300 percent fine was imposed on the said amount and eventually the Appellate Tribunal lowered the penalty to 100 percent.

In April 2007, PwCI had petitioned the department for compounding of offences for filing an incomplete income-tax return for 2000-01. When the department pushed for legal proceedings, PwCI — in order to avoid litigation — accepted the offence and paid the fine. In another case in the same year, the firm showed a huge amount under miscellaneous expenditures and had, actually repatriated funds to its parent company overseas for certain services without deducting service tax. Later, it paid a whopping amount in taxes, interest and penalty.

“If a top accounting firm that provides tax advisory and audits the accounts evades tax, it is a matter of concern,” the sources added.

Investigating agencies are already probing whether PwCI was a part of the Satyam book fudging that the family indulged in to allegedly drive the scrip up and make a killing over 22 quarters, a clear act of insider trading. That the family sold over 43 million shares (43,872,919, to be precise) and made a cool Rs 1,070.39 crore actually flies in the face of Raju’s confessional statement. “Leads are pointing to a Mauritius-based firm called Lakeview Investments: funds were siphoned from Satyam into a numbered bank account held by Lakeview,” reported the Hyderabad- based Financial Chronicle.

The trail of two land deals by the family has been traced to a bank account inMauritius

The daily also said that the trail of two land deals of the Raju family led to the numbered account. “Investigators are not yet sure of the identity of either those who received the money abroad or the intended beneficiaries. Leads to the money trail have been discovered by officers of the SFIO, who are in the Registrar of Companies team sent to track Satyam group,” the daily said.

Clearly, both the Satyam saga and perhaps even more important — the inexplicable inaction by PwCI — has become even more murky. As revelations into the trail of illegal moves by the family promoters of Satyam are coming out into the open thick and fast, the fact that the company’s auditors — the external oversight arm that is supposed to spot just such possible fudging — were either sleeping, or worse, possibly in cahoots with the mismanagement, is a frightening thought indeed. Either way, it seems certain that for the Indian arm of Price Waterhouse Coopers, its future prospects in India seem about as firm as the price of Satyam shares.

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