PwC failed to follow its own auditing tips

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New Delhi: One of the big four global professional services provider—the PricewaterhouseCoopers—should have followed its own advice. Earning a revenue of over $500 million, the service firm, which was crowned audit firm of the year 2008 during CFO Awards, listed in the top-tier of Australian tax advisers survey 2009 conducted by International Tax Review and won the BRW Client Choice Awards for being the best accounting firm and market leader for three years in a row, has been prolific in prescribing corporate governance ethics in its global reports, and white papers, and has released four global economic crime surveys.

Apart from advocating a convergence of financial reporting and accounting standards across the globe, which PwC maintains will contribute to the free flow of global investment and help achieve substantial benefits for all capital markets, the firm has prescribed tips in its whitepapers released periodically to prevent corporate fraud. Also, it has asked to be uncompromising in matters related to ethics in corporate governance.

In a series of such documents termed viewpoints, PwC addresses many such issues, including how to enhance the effectiveness of auditing committees and raise the bar in reporting norms to the capital market so that companies are not in for unpleasant surprises—whether these are erroneous financial statements, ethical scandals or inadequately managed risks—as these have the potential to “wreak havoc among corporate reputations and affect share price values”.

A PwC viewpoint report, chalking out a plan for auditing firms to follow, says audit committee meetings should ensure that all relevant issues are included and discussed. Active chairs in the committee should also keep a tab on current market developments, discuss issues with management, internal and external auditors, and prepare for meetings. Chairs need to be ready and willing to take the lead, encourage engagement of all directors, set agenda and “run meetings in interests of board and ultimately the shareholders—not for the benefit of management, lawyers, auditors and other advisers”.

Ironically, in Satyam’s case, the auditing firm could have easily detected the status of non-existent cash by simply keeping a tab on the bank statements and deposit receipts of the IT giant, which it failed to do. The PwC report further advises the dynamics of the audit committee—the way in which members interact with each other, chair, board, management and auditors is a vital factor for review and development. Essentially to ensure audit committee members possess the right qualities, experience, a willingness to challenge and fully participate in the committee’s activities.

In Satyam’s case it was ensured that the audit committee is headed by a person like M Rammohan Rao, dean of Indian School of Business and other independent directors, and not B Ramalinga Raju or his brother Rama Raju.

However, the internal auditing team comprising professional accountants and external auditing committee, despite having quality experience, failed to detect the mess, as Raju’s letter would have us believe. It is to be noted that according to analysts, a company receives confirmations for each debtor declared by the company.

Raju’s letter would also have one to infer that there was a minimal interaction between members of the audit committee. Also that none of them had the basic information of bank accounts and company records. B Sai Chandravadhan of Chess Management Services Pvt Ltd said, “The Satyam fiasco could have been prevented by tallying company records with bank records and by taking independent directors into confidence”. The PwC whitepaper recommends formation of disclosure committee (including senior executives) by the management. It hence assures everything that has been considered for disclosure has indeed been considered objectively.

From the PwC Fraud Report know your enemy

The most commonly used terms:

• Fraudulent financial reporting—includes deliberate accounting misstatements, manipulation in accounts, showing fictitious transactions and records, and/or inaccurate or incomplete disclosures done with the intention of misleading users of the accounts

• Asset misappropriation—includes theft of cash, securities, inventory or fixed assets, circumvention of company controls and procedures (eg procurement and payroll fraud), theft of business secrets or other intellectual property, diversion of revenues, asset stripping and other breaches of fiduciary duty

• Unauthorised receipts and expenditures—an umbrella term for engaging in corrupt business practices to influence the awarding of business opportunities, or subverting government objectives

• Disclosure fraud—intentionally providing inaccurate or incomplete information, not just limited to the financial statements in order to paint a false picture