Satyam: What We Know, What I Think, My Predictions

Apologies to William Shakespeare and to one of his most beloved speeches from Romeo and Juliet:
Tis but thy name that is the enemy of PricewaterhouseCoopers;
 Pricewaterhouse & Co India
Thou art thyself, though not really PriceWaterhouseCoopers.
It is neither here, nor there,
Neither men, nor solid rock, nor any other part
Belonging to a true firm.
O, Pricewaterhouse & Co India if only you could be some other name!

What’s in a name?

That which we call Deloitte or KPMG or Ernst and Young
By any other name would smell as rank;
So Pricewaterhouse & Co India would, were they not Pricewaterhouse & Co India call’d,
Retain that dear imperfection which they owe
Without that title. Pricewaterhouse & Co India, will be made to doff thy name
And for a name which is no part of PricewaterhouseCoopers International Limited (PwCIL)
To take all responsibility for their sins to thyself.

What we know:
Saturday January 10, 2009
The CEO and his brother, an MD with Satyam, were arrested and charged with criminal conspiracy, forgery, criminal breach of trust, cheating, and falsification of records, and face jail terms of up to ten years and fines of up to 250m rupees ($5.2m).. CFO, Srinivas Vadlamani, and the new interim CEO Ram Mynamapati both sold off large amounts of Satyam stock in early September. Vadlamani, who is believed to have real estate interests in Dubai, has been taken into custody,…bank statements for the company appear to have gone missing from three Satyam offices that have been raided.

What I think/prediction:
There are more Satyam executives at fault. Reports circulating also point fingers at the independent directors, all of which have blue chip global connections.

Corporate governance in India is under the spotlight, but they’re not the worst of developing countries. China and others will also be scrutinized.

What we know:
From the Financial Times:
US audit regulators raised concerns with Price Waterhouse, an affiliate of PwC, about its audit of Satyam after they visited the firm last spring, it emerged yesterday. The visit was one of a series conducted by officials from the Public Company Accounting Oversight Board to Indian auditors with clients registered in the US, including Satyam.

The 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 comment.

What I think:
Let’s assume that there was an inspection and that PwC was told to tighten audit procedures or that there were specific issues with Satyam. The PCAOB can’t acknowledge officially that an inspection even occurred, which firms were inspected, or whether Satyam was one of the clients. This is per their internal policies and procedures, which are driven by the original Sarbanes-Oxley law that established the audit regulator.

Until the report is finalized, which may be several months from now, PCAOB will be negotiating the contents of their reports with the inspected firms and deciding the allocation of any exceptions and criticisms between the public and private report. If issues were found with firm quality assurance procedures as a whole, these comments may end up in private report rather than publicmand the general public and investors will never see them.

The PCAOB report will be issued in a few months at the earliest and procedures still allow for response from PwC no later than twelve months after the report is issued. Limits on number of partners per firm (legal entity) in India means, in my opinion, that the ability of Indian audit firms to set up the seamless, consistent quality and risk management programs that are necessary is severely constrained. And they are expensive, form a staffig and technology perspective. That may be why PwC had such a hard time making some some of their international offices understand and agree to the necessity of registering with the PCAOB in order to continue any involvement in audit of US public companies as required by the Sarbanes-Oxley Act. Seriously. They got pushback. Take a look at the PCAOB registration dates and the registration applications, which include a required description of quality control processes and infrastructure at the firms outside the US for the Big 4. Oh wait, is that information publicly available?

But, based on reports in the FT, it’s clear that reliable information was obtained by the FT journalists and that Pricewaterhouse & Co India likely knew, as early as last spring, that there were serious concerns with their audit of Satyam. If PwC partners were involved in the fraud, they may have warned Satyam management that they were being scrutinized and tried to convince them to start reversing false entries and unwinding fraudulent transactions.

Or Pricewaterhouse & Co may have realized that their audit tests were inadequate and that serious misstatements could exist. If they tried to step up their testing and procedures in anticipation of responding to the PCAOB later that issues had been remediated, then they may have experienced pushback from the client. In fact, there is evidence that the fraud continued and became larger each month until the Satyam’s CEO’s dramatic confession in January.

1) PwC Global will pull a PwC Japan and reorganize Pricewaterhouse & Co out of existence, forcing “bad” partners out and creating “clean” firm.

Oh wait, that plan is now in motion. They’re already gagging employees and asking them not to come to the office.

From the India Times:

PwC global CEO Samuel DiPiazza, Jr., along with some senior worldwide partners is currently in India to assess the situation, after widespread reports that Price Waterhouse’s alleged overlooking of Satyam accounts could impact the audit firm’s reputation and business in India. It is learnt that the global partners are actively considering restructuring the India unit. 

Although investigations into Price Waterhouse’s role in the Satyam saga have just started, the media glare on the firm has made senior partners uncomfortable and that is the reason a likely reshuffle of the top team is on the cards, said persons familiar with the development. A PwC spokesperson declined to comment on the issue.

The likely reshuffle in PwC could also be because the global parent is serious about the Indian unit, which in the previous fiscal year, is learnt to have made a business of about Rs 800 crore. PwC is also one of the oldest firms in the country, having audited about 140 firms last year, most of them being large blue-chip companies….

Persons close to the development also said that a damage control exercise is likely as global partners are also concerned about the likely impact of the Satyam case on their existing clients. Already, KPMG and Deloitte, archrivals of PwC, have more auditing clients than PwC, especially with Indian companies that have presence in US. 

The reshuffle could likely include shifting current leaders to new responsibilities, said the persons who asked not to be named.

Mr. Ramesh Rajan is the current India head, having been elected as the CEO of PricewaterhouseCoopers’ India network of entities in 2007. Each India CEO has a term for four years. 

Dinesh Kanbar, tax head at PwC, is another name that is doing the rounds. It is widely believed that Mr. Kanbar may be given additional responsibilities, in addition to his current role. There were also unconfirmed reports that some very senior partners were planning to leave the firm.

2) The PCAOB will expedite issuance of the inspection report, if they know what’s good for them. The “legally required” gag order on the details of the inspection, what they found and whether they took a hard line with Pricewaterhouse regarding Satyam, does not serve the interests of the PCAOB in reassuring investors that they are fulfilling their enforcement responsibilities. Given how long it takes for the inspection report to go through the formal process, the PCAOB is going to add to its woes if it follows its usually very slow process, woes exacerbated by the inspection coverage concerns brought to light in the Madoff scandal.

If, in addition, PwC was criticized by the PCAOB last spring for general audit quality assurance issues in its audits and, in particular on the Satyam audit, it may be hard for Pricewaterhouse &Co to remediate these criticisms to PCAOB standards. With a 20 partner limit per firm per Indian law and a long list of multibillion dollar complex clients, there are literally thousands of Indians scrambling at the staff level to do a good job in these firms but there clearly aren’t enough “Chiefs” (Partners) to adequately supervise and monitor quality per US and international standards.

3) PwC Global, as well as its India franchise (and Satyam executives) will be sued, successfully. Contrary to some pundits’ assertions, PwC Global has asserted itself strongly, even more strongly than next tier firm BDO Seidman did/didn’t in the Banco Espirito Santo case, that it takes responsibility for quality across its “network” of firms. The Big 4 audit firms make a strong case for their quality programs, to their clients, to regulators, to professional bodies, everywhere but while defending lawsuits, because they have to. A global network is what their clients take for granted and what the regulatory bodies want them to portray in exchange for their continued support, even if the posture is “more talk than walk.”

From the PwC Global website:
The member firms are linked together through membership in PricewaterhouseCoopers International Limited (PwCIL), a UK membership-based company. PwCIL does not provide services to clients. Its primary activities are to: identify broad market opportunities and develop associated strategies; strengthen PwC’s internal product, skill, and knowledge networks; promote the PwC brand; and develop and work for the consistent application of common risk and quality standards by member firms, including compliance with independence processes.

What we know:
Ernst and Young will not escape eventual scrutiny in this scandal because they:
1) Act as Satyam’s outsourced Internal Audit function
2) Were, based on minutes from the Board of Directors, the valuation advisor for the ill-fated Maytas deals

Ernst and Young (E&Y) did the valuation of Maytas Properties and a Delhi law firm Luthra and Luthra the title diligence of the real estate company’s assets, records of the controversial Board meeting at which Satyam Computer Services was allowed to buy two firms linked to its disgraced promoter B Ramalinga Raju show.

E&Y, which is also the internal auditor for Satyam, has all along denied doing any work for Satyam related to the failed acquisitions and its representative has said it had “no connection of any kind with the transaction”.

The Satyam board, at its meeting on December 16, approved buying 100% of privately-held Maytas Properties for up to Rs 6,410 crore and Maytas Infra, a listed infrastructure company, for about Rs 1,500 crore. The minutes of the meeting show that V Srinivas, the CFO of Satyam, informed the board that E&Y valued Maytas Properties at Rs 6,523 crore.

3) Recently gave Satyam’s CEO their Entrepreneur of the Year Award
B. Ramalinga Raju, chief of Satyam Computer Services’ Ltd., a consulting and information technology services company based in Hyderabad, was adjudged Entrepreneur of the Year for 2007 by Ernst and Young (E&Y) India, part of the global consulting and management firm. Raju will represent India at the E&Y World Entrepreneur of the Year Award at Monte Carlo to be held next May.

What I think:
Ernst and Young, as internal audit co-sourcer, is an essential part of the internal control structure for Satyam, especially as Satyam is required to comply with Sarbanes-Oxley requirements, given their listing on the New York Stock Exchange. Ernst and Young is the first line of defense for fraud and should be highlighting any concerns with appropriate “tone at the top” by Satyam’s management. If they were in collusion with management, or their work was inadequate, incomplete, or inept or they lacked the backbone in raising issues to the Board’s independent directors, then they are equally culpable for the losses, perhaps even more so than Pricewaterhouse & Co. That is unless Pricewaterhouse & Co partners are found to have been complicit in the fraud.

UPDATE: EY India is denying published reports in India that it performed thevaluation of the Maytas companies and is denying that it acts as outsourced internal auditor for Satyam.

Global consultancy firm Ernst & Young on Sunday said it was not engaged by the crisis-ridden Satyam Computer to value Maytas Properties, a company promoted by family of disgraced founder of the IT firm, Ramalinga Raju, in the aborted $ 1.3 billion deal.

“We would like to again clarify that we were not engaged by Satyam Computer Limited or any of its subsidiaries to conduct the valuation of Maytas Properties and learnt of the proposed Maytas/Satyam transaction after it was announced publicly,” the firm said in a statement.

The firm also said it has not been the internal auditor for Satyam Computer Services Limited, reacting to media reports that “E&Y did the valuation of Mytas Properties in the aborted $1.3 billion deal”.

E&Y is the statutory auditor of Mytas Properties, whose acquisition by Satyam computer was aborted following protests from investors…”

It looks like EY did a valuation for their client Maytas but it was used to support the Satyam purchase transaction. Same numbers, different use… EY is trying to distance themselves. Someone better read the contracts.
And which firm supported Satyam in their internal audit activites and Sarbanes-Oxley documentation and testing initiative?

What we know:
On December 17th, “Satyam Computer Services Ltd. plunged the most in 16 years in Mumbai trading as investors reacted to an aborted $1.6 billion bid to buy firms connected to its chairman…Merrill Lynch & Co. cut their investment ratings on the stock following Satyam’s initial announcement, citing corporate governance concerns… Merrill downgraded its rating to “underperform”. “

In a communication dated December 27, Satyam had said it had appointed DSP Merrill Lynch to review strategic options to enhance shareholder value. The move came 10 days after it aborted plans to acquire Maytas Infra and Maytas Properties, two companies promoted by the Raju family. DSP Merrill Lynch terminated the deal with Satyam on January 6, a day before Ramalinga Raju’s revelations.

Between the time the deal was aborted and Raju admitted to fraud, the lenders, including DSP Merrill Lynch, offloaded the shares in the markets as the value of the scrips fell below the trigger price.

By December 2008, Satyam’s financial situation had worsened and a failed attempt to acquire the related Maytas firms, precipitated the hiring of Merrill Lynch to advise on “strategic options”

But after only a few days on the job, Merrill Lynch resigned the engagement Jan 6, citing due to “accounting irregularities”

What I think:
In spite of Merrill Lynch’s longstanding coverage of Satyam and obvious deeper knowledge of Satyam’s financial condition, “governance issues,” habit of self-dealing, legal problems, and other sanctions, Merrill Lynch accepted the “strategic options” engagement and then acted surprised when all was not publicly stated. They were probably worried about getting paid their fee and ruining their reputation further. (Something PwC doesn’t seem to have worried about as they were getting paid their fees regardless and not too worried about their reputation, until recently.)

And some commentators still want to see Merrill Lynch as the hero, justified in their minds because Merrill’s resignation was probably the straw that broke the camel’s back and forced the CEO’s dramatic confession.

The only people who come out of this massive scandal with some credit are DSP Merrill Lynch. Within barely a week of being hired to seek out possible partners for Satyam, Merrill Lynch realized that what the company was saying about itself and what the numbers were saying were vastly different things. It walked out of the contract, and would have been obliged to inform the stock exchange of the reasons for this.

Clearly corporate governance at Satyam was lacking and many for a long time knew this situation:

December 18 Business Week: (after reversal of plans to acquire Maytas firms)
Satyam has faced questions about its corporate governance in the past. In 2000, investors were livid when the company offered rights issues in a subsidiary and tried to favor a family member of the founder. After the dot-com bust of the early 2000s, a CLSA report questioned Satyam’s accounting practices, citing “large accounting gaps” in the company’s Internet businesses and joint ventures. Those incidents have weighed on Satyam’s valuations over the years. “Despite being the fourth-largest IT player, the company has traditionally traded at a discount to its peers,” says Angel Broking’s Harit Shah. Raju’s associates say the issue has peeved the founder for years.

This is in spite of dubious awards to the contrary. (Pre-CEO confession)

The World Council for Corporate Governance, which in September awarded Satyam the Golden Peacock Global Award for Excellence in Corporate Governance, may take steps to “rectify” the company’s status and is reviewing Satyam’s answers to its queries on disclosure, Klaus Bohnke, director general of the London-based group, said in an e-mail.

The award was stripped on January 9th.

19 replies
  1. caustic
    caustic says:

    PwC is but a walking shadow, a poor player
    That struts and frets his hour upon the stage
    And then is heard no more. It is a tale
    Told by an idiot, full of sound and fury
    Signifying nothing.

  2. Anonymous
    Anonymous says:

    even more worrying the PwC USA firm is offshoring parts of their audit to PwC Calcutta- including the confirmation process

  3. Anonymous
    Anonymous says:

    As a PwC employee, I can tell you that there has been no “offshoring” of the confirmation process to PwC Calcutta. That post was either grossly misinformed or a poor attempt at humor.

  4. Chicago Accountant
    Chicago Accountant says:

    “The member firms are linked together through membership in PricewaterhouseCoopers International Limited (PwCIL), a UK membership-based company. PwCIL does not provide services to clients. Its primary activities are to: identify broad market opportunities and develop associated strategies; strengthen PwC’s internal product, skill, and knowledge networks; promote the PwC brand; and develop and work for the consistent application of common risk and quality standards by member firms, including compliance with independence processes.”

    Francine, common standards hardly makes them liable. As long as PwC Global can prove in court that the Indian firm did not follow its standards, it’s probably off the hook. If the Indian firm did follow the standards, they still have a shot at walking away. This is a pretty complicated case involving a number of legal jurisdictions.

    With that said, if PwC Global is on record taking responsibilty for or guaranteeing the work of its firms, this case would become markedly less complicated.

  5. Francine McKenna
    Francine McKenna says:

    @Chicago Accountant

    Yes, this is a very complicated case, and at the same time it’s a very simple, prima facie one. The hew and cry in India given such an egregious lapse of stewardship is, “What’s the point of auditors and audits?”

    The more complicated the case, the more likely there is a lotof discussion and a lot of chance for deep debate about the business of the audit firms, the effectiveness of their model, and their role and responsiblity for safeguarding shareholder interests, locally and as a global firm serving multinationals and companies with investors all over the world.

    How much longer can the global audit firms try to have their cake and eat it too?

    They promote themselves as global firms, with global networks of offices allowing delivery of coordinated, quality services seamlessly worldwide but when one limb of that well oiled marketing machine goes amok, they cut it off like a spastic rogue and claim no responsibility, no liability.

    Tick tock.

  6. Anonymous
    Anonymous says:

    If you’re going to use fancy phrases like “prima facie”, please attempt to use them correctly.


  7. caustic
    caustic says:

    “If you’re going to use fancy phrases like “prima facie”, please attempt to use them correctly.”

    I wonder Anon, do you have the irrepressible desire to say out loud whatever comes your tiny mind? Here’s a quick tip that will make your life better: DON’T.

    My prima facie review of your sensibleness is not looking good.

  8. Chicago Accountant
    Chicago Accountant says:

    Francine, do you have any lawyer friends in litigation? What do they think?

    From my own vantage point, I think the firms are very careful about the language they provide to clients. I also think there is a reason that law firms organize in the same way.

    Lastly, let’s say that PwC is sued in India for several billion USD. If they don’t pay, what’s the repercussion? They pay or they can’t do business in India. Wouldn’t the plaintiffs have to file suit in the UK as well? This is another reason why I say this is complicated.

  9. Anonymous
    Anonymous says:

    As an employee of PwC I can tell you they are offshoring the confirmation process- I know I am on a pilot team doing it!

  10. Anonymous
    Anonymous says:

    Offshoring the confirmation process does not seem like that big of a deal to me (relatively speaking, the whole outsourcing of American jobs is another issue). All of the big 4 are offshoring (as are many of their clients)and this seems like a low risk area to send to India. If properly supervised and controlled, this does not seem to add much risk. Its when firms start shipping the non-routine stuff that the risk gets added.

  11. Anonymous
    Anonymous says:

    We will soon see that the truth is the confirms were fake, and they came straight from the bank. Anyone who’s been to India can understand how bank officials could be bribed into such acts. The place is ass backwards and as much as they have advanced in the past 10-15 years it is still a far cry from anything but a third world country.

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  1. […] brings me back to the PCAOB inspection report of Indian firms from March 2008? Will there ever be a regulatory reaction to the Satyam fraud and the role of […]

  2. […] since the PCAOB admittedly visited India to conduct inspections of registered firms. There were reports at the time the Satyam scandal broke that said Satyam was one of the Price Waterhouse India engagements reviewed […]

  3. […] three days after the CEO of Price Waterhouse India’s client Satyam admitted to a massive fraud, I predicted the following: “PwC Global will pull a PwC Japan and reorganize Pricewaterhouse & Co out of […]

  4. […] the link to my posts on PwC/Satyam, go here, here, here, here, here, here, here, here, here, […]

  5. […] heading down the Misuzu, formerly ChuoAoyama Pricewaterhouse/PricewaterhouseCoopers Aarata path I predicted when the scandal first […]

  6. […] The PCAOB inspected several Indian firms and their clients in the Spring of 2008.  Per reports by the FT, PwC and Satyam were included in this list. PwC’s leadership would have known well in advance […]

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