The biggest question mark on the Satyam fraud is how a Sensex-30 company carried a non-existent cash reserve of Rs 5,040 crore on its balance sheet that passed muster with all regulatory bodies, in India and abroad, and was certified correct by its audit firm?Price Waterhouse, the Indian arm of PricewaterhouseCoopers (PwC).
Records show fictitious accruals remained on the books of Satyam Computer Services Ltd for years. The company?s balance sheet showed reserves and surplus of Rs 2,517 crore in March 2004. That sum rose to Rs 7,221 crore by March 2008.
But corporate law practice professionals like Namrata Mehta are sure that it would be difficult for shareholders or any other stakeholder to act against the auditors under the Indian Law of Contract. On its part, Price Waterhouse issued a cryptic statement late in the evening, saying, ?We have learnt of the disclosure made by the chairman of Satyam Computer Services and are currently examining the contents of the statement. We are not commenting further on this subject due to issues of client confidentiality.?
Despite this escape clause, professionals said many check & balance methods were possibly not done by the auditors, while there are chances of forgery by the IT company in the records provided to the auditors.
?It seems that the mandatory accounting and auditing tools were not followed by the audit firm and it would be too na?ve to say that they did not have any clues about it. Such kinds of frauds do happen in small unlisted companies, but the Satyam fraud is unprecedented in the history of corporate India and is much beyond the issue of corporate governance,? says KH Viswanathan, executive director of Mumbai-based accounting firm RSM Astute Consulting.
Price Waterhouse has an impressive list of close to 50 clients in India. They include multinationals like Bayer, Bosch, Colage-Palmolive, Glaxosmithkline, Novartis and domestic infrastructure companies like GMR, Lanco, Reliance Infra, Reliance Power and Simplex. UB, United Spirits, Max India are also PwC clients. Some IT companies associated with PwC are HCL, Info Edge, Mastek, Moser Baer and NIIT.
The biggest weakness of PwC is that Price Waterhouse is just one among a clutch of audit firms that carry the PwC label in India, but not necessarily having the level of competence that characterises the mother firm, which is PwC International. In India, the latter can only provide consultancy services because laws here allow only domestic firms to do audit.
Analysts say there would be a series of investigations by Sebi, ROC, ICAI and RBI, and it would take a long time before facts about Satyam come to light.
To judge how much cash a company carries, the audit tools say a stroll by the auditors to the local bank of the company could be very useful. A look at the certified balance of cash provided by the bank would have been useful.
But statutory auditors like PwC usually rely for this exercise on the details provided by the internal auditors. The internal auditor firm reports to the management while the statutory auditor reports to the shareholders.
To obtain evidences from independent sources, the auditors can approach the sources directly. For instance, for verifying the cash at bank, the auditors can write a letter to the bank manager. This comes under the auditing standard SA 505- external conformation written down by ICAI. Did PwC check on the external conformation of the items that were there in the books of accounts?
Meanwhile, ICAI has sought an immediate explanation from PwC on the financial fraud. ?We are writing a letter to PwC and will seek an immediate reply on the issue. Strict action will be taken if the auditors are found guilty and we will ensure that severe punishment will be given to any person who has not worked according to our standards,” ICAI President Ved Jain said.
R Srikanth, CFO, Polaris, said it is the time to enforce a dual auditing pattern in balance sheet preparation, where a second audit firm should do an independent review after the first audit on the companies. However, he was quick to add that financial regulatory laws enacted and enforced by Sebi were no less inferior to its western counterparts like Sarbanes-Oxley Act. The problem has, therefore, been the lack of implementation.