PwC facing two-year auditing ban in India

PwC is facing a two-year ban from auditing listed companies in India, following a probe by the Securities and Exchange Board of India (SEBI) into the 2009 accounting scandal at one of the firm’s clients, Satyam Computer Services, which became known as ‘India’s Enron’

At the beginning of 2009 Satyam’s chairman resigned, confessing he had been involved in manipulating the accounts at the company to overstate profits by many millions of pounds.

Subsequent investigations into the corporate scandal saw PwC fined $6m (£4.45m) by the US Securities and Exchanges Commission and $1.5m (£1.1m) by the Public Accounting Oversight Board for audit failures.

Now SEBI has ordered Price Waterhouse Bangalore and two former partners to repay ‘wrongful gains’ of Rs13,09,01,664 (£1.5m) with interest calculated at the rate of 12% per annum from January 7, 2009 till the date of payment.

The order also states that any entities or firms practicing as chartered accountants in India under the brand and banner of PW, shall not directly or indirectly issue any certificate of audit of listed companies, or their intermediaries that are registered with the regulator for a period of two years.

The regulator’s 108-page ruling is critical of PwC’s role as auditors of the IT supplier in the years up to 2009, when the fraud was discovered.

It states that while the Satyam’s top management carried out a ‘carefully laid out scheme of fraud and falsification of accounts’, ‘a dispassionate analysis of the whole episode spanning over a period of at least eight years would reveal that the perpetration of the fraud could not have been made possible without the knowledge and involvement of the statutory auditors.’

SEBI alleges that PwC auditors failed to look closely enough at daily and weekly transaction data, and relied too heavily on monthly reports.

In its finding, the regulator says that any enforcement measure ‘would not serve the purpose unless the directions bring within its fold the PriceWaterhouse network operating in India.’ 

SEBI said: ‘The network structure of operations adopted by the international accounting firm should not be used as  a  shield  to  avoid  legal  implications  arising  out  of  the  certifications  issued  under  the  brand name of the network.’

In a statement put out locally in India, PwC said: ‘The SEBI order relates to a fraud that took place nearly a decade ago in which we played no part and had no knowledge of.

‘There has been no intentional wrong doing by PW firms in the unprecedented management perpetrated fraud at Satyam, nor have we seen any material evidence to the contrary.’

PwC has indicated it intends to go to court to get a stay on the order before it becomes effective.

To avoid operational difficulties, SEBI said its order will not impact audit assignments relating to the ongoing 2017-18 financial year, already undertaken by firms forming part of the PwC network.

PwC has also been criticised in a US court over its failure to uncover a $2bn (£1.47bn) fraud at Colonial Bank, which subsequently collapsed in 2009. The multi-billion dollar fraud involved Colonial Bank’s largest client, the mortgage company Taylor, Bean & Whitaker, which was overdrawn but covered up the deficit by fraudulently selling mortgages to the bank which had already been sold, with the assistance of some bank finance employees.

Several senior executives at the mortgage company and bank were found guilty over the fraud, which was carried out between 2002 and 2009, and were given jail sentences.

The Federal Deposit Insurance Corp’s (FDIC) case alleged PwC was professionally negligent, as the firm should have tracked the fraudulent movements sooner.

SEBI’s enforcement order in relation to PwC and the Satyam audit is here.

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