Satyam Scandal – PwC Turning Into Tandoori

Everyone is calling it the Indian Enron.

Some have said it has more “shades of Madoff”.

But rest assured, colorful “confession” not withstanding, no one admits to such a major fraud unless pushed. Now there’s new reports that the CEO who broke the story about his own wrongdoing is missing.

From the Hindustan Times:

The country was rocked by possibly its biggest corporate fraud on Wednesday as B. Ramalinga Raju, chairman of Satyam Computer Services, resigned after confessing that the company’s profits and cash reserves had been doctored for several years. This threatens the image of India’s iconic software industry that fuels aspirations for jobs and prosperity among millions of middle-class people.

The revenue figures inflated to keep share prices high and package a shaky business as rosy, revealed a hole well above Rs 7,000 crore and reminded many of the Enron case in the US that led to the conviction of key executives.

The fraud rattled lakhs of employees in the information-technology sector and investors already smarting under the impact of a global financial meltdown and a local slowdown. Key investors — including biggest shareholder Aberdeen — dumped shares as truth became a casualty in the company named Satyam. The company’s share plunged nearly 80 per cent to Rs 40 in India, and 90 per cent in the US, where it is listed on the New York Stock Exchange.

Raju faces a government-led probe after coming clean in what he said was an act of conscience. In a letter addressed to the company’s board, Raju admitted that the balance sheet, riddled with fictitious assets and non-existent cash, contained a big hole that could no longer be concealed….There have been reports that Satyam had been hunting for a buyer for a while. These same reports cited Tech Mahindra and HCL as possible suitors. HT learnt that these companies raised serious questions about the authenticity of Satyam’s books and sought clarifications. This may have forced Raju’s hands.

Actually, Merrill Lynch was hired not too long ago to advise on alternatives to a recent failed acquisition of a firm called Maytas. But as Dennis Howlett reports today, they may have known what’s up. They recently resigned the engagement, prior to the CEO’s stunning disclosure.

“Late last night I started to see reports indicating that Satyam’s investment bankers Merrill Lynch knew what was going on.

According to The Times of India:


“There’s intense speculation as to what finally triggered Raju’s confession of wrongdoing. It’s clearly more than coincidence that it came hot on the heels of investment banker DSP Merrill Lynch’s letter to the company on Tuesday evening terminating its days-old agreement with Satyam to advise it on strategic options because of “material accounting irregularities’’ “  

I chose the summary of the scandal from Hindustan Times for a reason. It was the only one that did not mention PricewaterhouseCoopers, Satyam’s long-term auditors. Every other report does, often with enormous venom and preemptive accusations, and significant speculation about how they could have missed the US $1billion cash hole, amongst other lies and prestidigitation.

My BFF Edith, unfortunately, already gives PwC the “I am duped” defense, before their statements even came out. 

Oh, Edith, don’t be blonde…I mean blind…  

“Riddle me this: in the Satyam affair, where was the billion of missing cash, and why didn’t the auditors catch the discrepancy? Unlike the Madoff scandal in the U.S., Satyam was audited by a Big Four firm – PwC. However, if fraud is involved in the Satyam affair, there may be an argument that the audit firm was defrauded as well.

I commented my opinion of this generosity of spirit on Edith’s part, although I know that deep in her kind heart Edith is only trying to be even handed, balanced, and fair, (which fortunately I do not have to be…)
“…I suspect there is complicity, incompetence or both with either the auditors or their customers or both. Either way, like Parmalat and all the cases which prompted Mark Olson and PCAOB to include “inadequate procedures over confirmations” in his summary of recurring errors cited in PCAOB inspections reports, the auditors missed something really big.”  

I waited up all night for PwC’s press release, finally going to bed at about 1:30 CST.  Just as well, since the eventual statement, issued by PwC India was to say the least, underwhelming. 

The press release is not posted on either the PwC India nor the PwC Global website.
The publication in India reports, however, that regulators are asking for the audit workpapers, a bold move by US standards:  

“…What we do understand is that the Minister of Corporate Affairs, Premchand Gupta, has asked for the financial reports review board to actually come forward with an internal auditing papers of Pricewaterhouse as they conducted the audit in Satyam and should report back to the Ministry in three days after which, perhaps, the ICAI accounting regulator will take over, identify the loopholes, identify where the negligence has been, and possibly, frame formal charges on the auditors.”

Although PwC is claiming that, “The audits were conducted by Pricewaterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence,” I looked to the PCAOB website to see if PwC India has been subject to an onsite inspection.

Fortunately, PwC US, Argentina, Bermuda, Taiwan and UK have been inspected by the PCAOB but, unfortunately, not India. In fact, I do not see a listing on the PCAOB registration roster for the legal entity shown on the PwC website, PricewaterhouseCoopers Private Ltd. I only see registrations for two different legal entities, a Pricewaterhouse and Co. in Calcutta and Pricewaterhouse and Co. in Bangalore.

Satyam is headquartered in Hyderabad.

Is it possible that PricewaterhouseCoopers Private Ltd.,  in general, and their office in Hyderabad in particular, are no more worthy of auditing NYSE listed public companies than Madoff’s Friehling & Horowitz?

As Jim Peterson has well stated and agreed with me on: Satyam is more like Parmalat (or even Ahold) than Enron and the lawsuits are already flying. The chance for PwC India, and maybe PwC Global, to be severely threatened with extinction has a higher than remote possibility.

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34 replies
  1. Independent Accountant
    Independent Accountant says:

    Suppose Satyam was audited by PWC NY, then what? I'm so old I remember the Jake Butcher (JB) bank fiasco of about 1982. JB controlled 4-6 banks in Tennessee. They went bust. Ernst & Young, Big 87654 firm, audited them. The had a cash shortfall of about $450 million, say $1.4 billion today. Whaaaat, E&Y can't audit a "due from banks" account? I guess not. I couldn't care less whether or not "PWC-India" was subject to PCAOB review. What makes anyone think the PCAOB knows what it is doing? Which CPAs audit: Citigroup, Freddie, Fannie, AIG, Lehman, Bear, Wachovia, etc.?

  2. Francine McKenna
    Francine McKenna says:


    Merrill Lynch was obviously concerned about their reputation and ability to get their fees paid. PwC obviously got paid no matter what they did to their reputation.

  3. HP
    HP says:

    A clarification about the PwC India structure. There are 4 legal entities in India: PricewaterhouseCoopers Private Ltd (PwCPL), Price Waterhouse & Co Bangalore, Price Waterhouse & Co Calcutta and Lovelock & Lewes. The latter three are the audit firms and PwCPL only provides consulting/advisory services. As per Indian regulations, there are restrictions on the maximum no. of partners in a firm and on audit firms providing consulting services. Thats the reason for multiple firms.

    The audit for Satyam was most likely conducted under the name of Price Waterhouse & Co Bangalore. However, the Price Waterhouse & Co has a large operation in Hyderabad so it cannot be compared with the Madoff/ Friehling & Horowitz situation.

  4. Francine McKenna
    Francine McKenna says:


    Thank you for the clarification on the legal entities for PwC India

    The three legal entities you idicate are the audit services firms are registered with the PCAOB. However, o e of the leag entities you indicate are providing audit services have ever been inspected by the PCAOB.

    None of this complex legal entity information is apparent from the PwC India website. In fact, the PwC India site that the PwC global site points you to does not show any audit services.

    My comment about comparing PwC India to Madoff’s audit firm was not related to size, but to the fact that the firm has largely gone un regulated and unexamined by the PCAOB. At least they are registered, but that is no guarantee for US investors that they are following standards required by our laws let alone sufficient to protect Indian and other investors in other locations.

  5. Anonymous
    Anonymous says:

    Nothing new in this scandal. Pretty typical of indian firms. In fact there is a covert market for this type of transactions. Average cost of such a transaction is ~ 2% of the cash being moved around. Funny how other Indian Big 4 are responding. They have similar companies in their portfolio.

    You can be wrong but you cannot be out of cash. If Raju had the cash he would have been able to pull it off.

    P.S. I am not condoning it just explaining how Indian markets work.

  6. Chicago Accountant
    Chicago Accountant says:

    “Raju faces a government-led probe after coming clean in what he said was an act of conscience. In a letter addressed to the company’s board, Raju admitted that the balance sheet, riddled with fictitious assets and non-existent cash, contained a big hole that could no longer be concealed….”

    It was a crisis of conscience that just so happened when he couldn’t conceal it anymore. That’s so laughable. Sounds more like, I knew I was going to get caught so I turned myself in.

    The quality of the audits is in question here because of the size of this misstatement. This isn’t incredibly complicated stuff. I am assuming this is some sort of kiting scheme where funds were transferred between banks creating an allusion of extra cash. As the auditor, you need to ask yourself, why there are so many accounts and how large and how frequent are the transactions between the accounts.

    I am not so much concerned with Satyam. It’s terrible, I know. I am more concerned with all the Satyams that are still buried. Will this financial mess expose other Indian or international frauds? Will BPO providers go belly up? If BPO providers go belly up, how will that impact other US companies?

    This could get really, really messy.

  7. Junior
    Junior says:

    Will Satyam be the straw that breaks PwC’s back? As if. Apparently, in Bizarro World, supposedly “ethical” and “trusted” individuals are allowed to run willy-nilly like crack addicts between reasonable behavior and due diligence however they see fit.

    I am willing to wager that the next 6 months will prove to be rough for PwC – and Satyam is only the beginning.

    If the war cry of “hang the accountants” is sounded across America in response to financial chaos, you might as well make martyrs out of the least ethical and least diligent of the bunch.

    We’ve discussed briefly, Francine, how they operate with our largest competitor; PwC will never allow another CPA Review provider to train their uncertified staff as they audit Becker. It’s incestuous. But we all know how they get down…

    Sad. And frightening.

  8. Anonymous
    Anonymous says:

    The Indian legal system is very unstructured, and there are so many loopholes, it’s not even funny. It is light years away from the US legal system. As much as India’s progressed in the past decade, it is still not capable of setting an example by declaring PWC liable, if they are guilty. Also, like a previous poster said, Satyam is most definitely not the only company there with accounting irregularities. They’ve just not been caught yet. I find it hard pressed to believe that PWC India will fall, since this will lead to a plethora of lawsuits on the other firms since many companies in the sensex (indian stock exchange) tanked last year.
    The good thing about Satyam is that it had ADRs in the US, and so this will lead to more global pressure.
    This could be a very intriguing case and one that could shape landscapes if the system does find PWC guilty. Thanks for blogging about this.

  9. Sundeep
    Sundeep says:

    The Internal Auditor – E&Y is equally accountable for the whole mess leaving innocent shareholders clueless… primarily it's the Internal Auditor's responsibility to ensure / vouch for effectiveness of reasonable internal controls to avoid any kind of gross surprises!

  10. Anonymous
    Anonymous says:

    Economic Times should be sued for publishing false information. E&Y is not the internal auditor for Satyam!!! Thats the first thing I checked when the scandal broke out….so go figure if the internal auditors are KPMG or Deloitte or any other non big 4 firm.

  11. Anonymous
    Anonymous says:

    To the person who wrote the article: If PCAOB has written that they have visited Price Waterhouse & Co. bangalore there is a very strong possibility that they would have visited Hyd office only as Hyd is a branch of PW & Co bangalore. Secondly Satyam is the only SEC listed client they have if I am correct!!!! If PCAOB has cleared their methodology of audit, who are we to question it without knowing the facts?

  12. Flame
    Flame says:

    Its surprising how people are ready to beleive all the garbage spewed by the media for PwC even when they realise that media is making errors about E&Y and others? Why are people so ready to beleive that pwc did not check bank account information, do you beleive them to be as stupid as you yourself would have been in the situation. Let the correct information come out before giving your expert opinions, what if they had bank confirmations? what if the money really existed that day? what if the bank statements were forged? If their innocence is proved, will you write a blog apologising for all the venom? Being from the audit profession yourself, I expected better maturity of understanding the rules of audit from you.

  13. Anonymous
    Anonymous says:

    Flame –

    Read more closely. Francine does not have an audit background. This may help explain why there is not a better understanding of audit rules in her blog.

  14. Anonymous
    Anonymous says:

    Many of the comments are based on the assuption that Raju and CFO have been telling truth and therefore PWC didnot do their job well. This is beliving a big cheater.

    Let us give a fair chance to PWC to tell the truth and then comment.

  15. Anonymous
    Anonymous says:


    I worked at PwC Hyderabad more than 10 years ago and I know some of people who have audited Satyam and really think they are folks of integrity. I have a feeling that Raju swindled the money recently in light of some political commitments and he is now insisting on the money never being there in the 1st place. Also, I think PCAOB did review PwC and particularly Satyam files from this news article

  16. Anonymous
    Anonymous says:

    I fully agree with the comment as regards to integrity. I know many professionals in PWC and their integrity is beyond doubt. Todays news of Satyam’s receivable at RS.1700 crores (as declared by new Board) supports PWC’s revenue asssessment at RS.8000 crore in FY 2008. That means money was their but taken out by RAJUs. At the end I am sure PWC will not only come out clean but comeout much stronger.

  17. Anonymous
    Anonymous says:

    You keep drinking the kool aid then…PwC is on death watch – at least in India. No excuse how they missed such a big amount missing.

    A monkey who takes auditing 101 in college would’ve caught this – unless that monkey didn’t want to lose its awesome supplies of bananas that it was getting fed – then it would just find the nearest rug and sweep, sweep, sweep…

  18. Anonymous
    Anonymous says:

    The problem is people keep talking about Auditors without knowing their role and procedures that Auditors follow and his dependence of declaration of Board of Directors. Before calling some one is on death bed one need to understand and then make such insensible statement as it is not the future of PWC but 6000 professionals working with it on PWC in India.

  19. Anonymous
    Anonymous says:

    Unfortunately a few bad apples may make those 6000 PwC India professionals just more beggars in Calcutta.

    Yes, I said it.

  20. Edith Orenstein
    Edith Orenstein says:

    I see you tweeted the WSJ article tonight that Satyam may have used forged doc’s like bank certificates… not surprising, but will get interesting as to what procedures the auditor did and should have done in connection with the bank certification documents they received… someone may get some slack (if they did all they could reasonably be expected to do), others may get hacked, as noted in the Jan. 9 blog post in A Wide Angle View of India … Separately, some articles are raising questions about Satyam’s internal audit function, as noted in this article in the Economic Times (India) …

  21. Francine McKenna
    Francine McKenna says:

    @Tarun Satiya This news report is irresponsible and inaccurate. Both the report and this one are based on non-official leaks. The PCAOb has not issued their report and never comments on their reviews until the report is final. They had better get the report out soon. It’s not surprising that PwC India is saying there was nothing. They are probably still negotiating for the report to say that. However that conclusion will make the PCAOB look very bad. It’s going to be very interesting when that inspection report finally comes out. Heads PwC loses, tails PCAOB loses.

Trackbacks & Pingbacks

  1. […] Satyam Scandal – PwC Turning Into Tandoori, January 8, 2009 […]

  2. […] regulator said: “The PCAOB has conducted inspection work in India. We do not disclose, however, the names of issuers reviewed in the course of our inspections.” PwC Global declined to […]

  3. […] Fortune 500 companies, agreed to pay $125 million to settle U.S. shareholder litigation based on a fraud admitted to by their CEO, Ramalinga Raju on January 7, 2009. From the Hindustan […]

  4. […] regulator said: “The PCAOB has conducted inspection work in India. We do not disclose, however, the names of issuers reviewed in the course of our inspections.” PwC Global declined to […]

  5. […] Satyam scandal broke in January 2009 when the CEO of their audit client Satyam admitted publicly to a massive fraud. After the two PwC […]

  6. […] the scandal started in January 2009 with Raju’s confession, PwC global leaders have visited numerous times, claimed to be victims […]

  7. […] don’t think PwC is a complete dupe for AIG and Goldman Sachs any more than they were in the Satyam fraud case in India. I heard rumors in December 2007 that Goldman Sachs was thinking of dumping PwC. Who knew then how […]

  8. […] don’t think that PwC is a complete dupe to AIG and Goldman Sachs any more than they were in the Satyam fraud case in India.  I heard rumors in December 2007 that Goldman Sachs was thinking of dumping PwC.  Who knew then […]

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