Price Waterhouse India’s Slumdog Millionaires – Cheating Pays

To understand the concept of ‘global network of firms” as used by the world’s largest audit firms, we need to review a case that’s closest to potentially “piercing the veil” of this sham structure.

Cue the current litigation regarding BDO and Banco Espiritu Santo. Their lawyer actually argued against the concept of BDO as a Global firm in order to get their international umbrella firm off the hook for any settlement related to the US firm. (Even his fellow South Florida lawyers concede he’s “shining a turd” in this case.)

“The appeals court’s opinion notes that BDO Seidman used BDO International’s literature, responded to its requests, and complied with its audit manuals. The international firm also had the right to review the U.S. firm’s management at any time. “BDO International did control the means — the management, audit manuals, and software — used by BDO Seidman to conduct its work for the Banco plaintiffs,” the court wrote.

Formed more than three decades ago, BDO International has 626 member-firm offices in 110 countries, according to BDO’s website. Run by a staff of fewer than 10 people working in Brussels, the organization acts as a coordinating office for all the “independent” firms, Walsh told Adds BDO International’s attorney, Mark Raymond of Broad and Cassel, “One article has called them a parent company. They’re not. They are simply a coordinating network to facilitate communications between numerous members.”

I would be incredulous if I hadn’t heard senior members of the firms themselves argue out of both sides of their mouths at a PCAOB Standing Advisory Group meeting in Washington DC last year. The last topic that day was, “Global Quality Control Practices.”

Go here for a podcast of the discussion.

In it you’ll hear a panel of Big 4 and next tier firm representatives describe how each of their umbrella firms does or doesn’t conduct inspections of affiliate firms all over the world. (The Big 4 does, the “next tier” does or doesn’t “depending”, and the “next, next tier” firms do not, depending on the local firms inspecting themselves and reporting back.)

The primary problem for the audit firms is enforcement and discipline. The only practical alternative for them if a local firm does not want to live up to the “global standards” is to kick them out of the network. We have seen that with PwC Japan and Grant Thornton Milan. But that’s an extreme step and can cause disruption for the firm, a la Arthur Andersen, but more importantly disruption for clients that depend on the “global network.”

But how “real ” is this global network? Do the firms really work together seamlessly, depending on each other without question to do work locally and bring it all together under one global partner for a large multinational?

Not exactly. Listen to the podcast and the description of the duplication of effort and lack of cooperation that often occurs.

The dilemma for the PwC Global senior leadership “crisis team” now in India is that the answer to the burning question, “How could Price Waterhouse India let this happen at Satyam?” has four possible answers:
a) Price Waterhouse India audit technique and “quality” standards demonstrate the epitome of incompetence and professional negligence,
b) Price Waterhouse India partners colluded with Satyam management to commit the fraud,
c) Price Waterhouse India partners were “duped,”
d) Some combination of all three.
None of the answers will win PricewaterhouseCoopers  International Limited a prize.
So let’s look at the history of Price Waterhouse India and its partners and the role that PwC Global has, or has not, played.
I’m hearing that Price Waterhouse India has been playing fast and loose with quality and pushing the envelope on independence for a while. Price Waterhouse holds a special place in the Indian business community due to their long presence in India, more than 100 years.  They are grandfathered in to many of the rules that have been established more recently for others.
For example, partners who retire are not permitted to hold positions in boards of companies that are audited by their former firm. Price Waterhouse India has done exactly the opposite. As soon as Amal Ganguli retired as a senior partner in 2003 and immediately he joined the boards of the companies he himself audited : HCL, NIIT,NDTV and Maruti –just to name a few.
Similarly Satyabrata Ghosh another retired senior partner joined the board of Global Trust Bank while his protégé Amal Ganguli signed the accounts. In the last year just before Global Trust Bank collapsed, Satyabrata Ghosh was a director of the bank while his own nephew Partha Ghosh a partner of the firm signed the accounts of the bank.
The tone at the top in Price Waterhouse India  is said to be very much like the firm that they are unfortunately being compared to, since their client, Satyam, is being called “India’s Enron.”  If a partner is a rain-maker he is spared, even if there are disciplinary proceedings pending.
In another recent serious disciplinary action against Price Waterhouse India, the DSQ Software case which ruined thousands of investors, creditors and employees, the signing partner instead of being disciplined was rewarded with the top job in the firm.
Even after the collapse of the Global Trust Bank, the signing partner S Gopalakrishnan, who is now being questioned by police with regard to Satyam,  instead of being punished was promoted to a leadership position.
Despite repeated audit failures,  the PwC Global leadership and the Pricewaterhouse India leadership was busy playing politics instead of tightening the quality and independence standards. In the case of Global Trust, the local and global risk management team failed to secure the resignation of S Gopalakrishnan (fondly called Gopal) — a member of the Central Council of the Institute of Chartered Accountants (the regulator who is now investigating the partners involved again) because he was the current firm Chairman’s election agent in his victory against Deepak Kapoor.
At Price Waterhouse India, several of the retired partners serve on the boards of its audit clients while they continue to earn generous pensions from Price Waterhouse under the garb of “consultancy fees”.
PW India performs lucrative non-audit work through an “independent” company called Pricewaterhouse Coopers Private Ltd. but the fig-leaf of independence falls off on two counts:
1) The three legal entities that conduct external audits of clients and are registered with the PCAOB in the United States, Lovelock and Lewes, Price Waterhouse and Co Bangalore and Price Waterhouse  & Co Kolkata, are all licensed by the same parent PwC International, London, and
2) Ramesh Rajan is the Senior Partner of Lovelock & Lewes and Price Waterhouse and the Chairman of PricewaterhouseCoopers Private Ltd.
In order to be highly profitable the firm has, in the past, precipitously cut costs, drastically reduced manpower, and pruned partner supervision time resulting, obviously, in an adverse impact on the quality of audits. The average earnings of partners are higher than the other Big 4 and most partners are driven by chauffeurs in Mercedes and BMW sedans unlike any other Big 4 firm. I have heard via sources that there is a pervasive culture amongst the partners of pretension and arrogance.
It can’t be a coincidence that the same two Lovelock partners were involved in three clients that have nearly collapsed due to widespread fraud and accounting manipulation. Price Waterhouse India and PwC International Ltd. are paying dearly for not disciplining or tossing out “at fault” partners when the first two scams came to light. (Although even in the US, the firms are loathe to throw out a partner unless forced.) The Satyam collapse is by far the most devastating in scale and scope.
33 replies
  1. Chicago Accountant
    Chicago Accountant says:

    “But how “real ” is this global network? Do the firms really work together seamlessly, depending on each other without question to do work locally and bring it all together under one global partner for a large multinational?”

    That’s exactly my point. That’s why the “veil” argument doesn’t make sense because these firms don’t really cooperate well with each other at all. The working seamlessly together is a facade. Working with a member firm is like pulling teeth.

    If BDO International directed management, then you can establish control and you can use the corporate veil argument. Personally, I am skeptical of the common manuals and methodologies. There is still a significant amount of judgment that takes place even when common standards and methodologies are in place.

  2. Tiff
    Tiff says:

    @ Chicago Accountant

    “Working with a member firm is like pulling teeth.”

    You couldn’t have said it better. Just because some firm halfway around the world has the same letterhead doesn’t mean that they share any kind of standards, methodologies, etc.

    Every international office that I know of is a “network hub” rather than a “parent company.” That is, the international office is the liason between member firms, rather than the parent company of member firms. Any shared resources such as an international audit manual are an attempt to share interpretations/applications of authoritative guidance, rather than to provide some sort of “global firm management.”

    (I like to use the TV station analogy – the NBC affiliate in Chicago and the NBC affiliate in New York are each independently owned. The network NBC provides programming, promotional templates, etc. for each affiliate, but each affiliate is independently owned and operated and is not micro-managed by the network.)

    To complicate matters, it’s interesting to note that local firms move in and out of an international network from time to time; I believe that happed with BDO in France a couple years ago.

  3. Anonymous
    Anonymous says:

    Once upon a time, Arthur Andersen existed. It was then a “one firm firm” – a true global partnership with local offices grown organically over time. Every partner in a country is also at the same time a partner of a Geneva based entity, linking their faith together. But then Enron happened and due to its global nature, it disappeared from the face of earth.

  4. Anonymous
    Anonymous says:

    Indeed, the only way to move up in PwC is by screwing up something that is logical and all it requires is common sense. It is amazing how many dummies we have in this organization as leaders, but hell yes, that is the way it works in corporate America “is who you know not what you know.”

  5. Anonymous
    Anonymous says:

    Anonymous @ 1/15 7:26 AM —

    I don’t agree with you that PwC’s leadership is comprised of “dummies”. As I’ve posted before, most of the leadership in the Big 4 is good-looking and smooth-talking. They are generally hard-working, earnest folks who made good administrators and managers … but typically they are poor leaders. I’ve concluded the reason for that phenomenon is because the partner selection process acts to filter out the charismatic change agent folks who make good leaders. The partner selection process also (at least in my experience) acts to filter out highly technical “SME” folks in favor of generalists who have a “high Advisory (or audit or tax) IQ” and can “deliver the firm”.

    On the negative side, most of the partnership is (at the moment, given the current economic environment) filled with self-dealing, back-stabbing folks who would sell their own mothers for a chance at making their revenue numbers. They would do nearly anything to make their numbers. Put the client’s needs first? Don’t be ridiculous! Survival comes before client service.

    Your comment on “it’s who you know not what you know” is appropos given the partner sounding and vetting process. To make partner, one must have a strong sponsor with deep relationships throughout the firm (and who can cash in favors on your behalf) and one must have a number of current partners speak well on one’s behalf. If you don’t have both of those working for you, partner promotion is highly unlikely … regardless of your business case.

    — Tenacious T.

  6. Anonymous
    Anonymous says:

    You really need to proof read your posts. The quality of your spelling/grammar has really gone downhill.

  7. Kusum
    Kusum says:

    Have you ever visited the Indian PwC office? If not then I will suggest that you keep your suggestions to your self. PwC India is a network firm of PwC global and its policies and procedures are also reviewed by the Global offices. If there was something untoward happening in the Indian offices then why did’nt Global question it? They should have stopped these things from happening if it was so wrong. The point is that the partners are as professional here as they are abroad given the market and local culture in India.

    Satyam was the only SEC clinet in India, in which even Global PwC was involved. The file has gone through several international internal reviews and cleared them as well. So if you are critisizing some one them critisize the whole PwC system, not just India. Dont be a hypocrite in just badmouthing India.

    Let me remind you, the biggest scam which brought about SOX, Enron, took place in the USA. Even the madoff scam took place in the US. What were their auditors doing? Did you write a post on that?

  8. Wyman
    Wyman says:

    I think that it is unfair to refer to PwC’s leadership as “dummies.” Was Andersen really a partnership of “dummies?” Or were they a good accounting firm that had independence issues in a few offices. Everybody is so quick to call out Arthur Andersen; however people should really be calling our Arthur Andersen Houston. I understand the need to be critical of auditors not doing their job, especially in this current economy. But, be careful what you say because there are plenty of partners at Big 4 firms filled with honesty, integrity, and a good work ethic.

    With that said, making partner is becoming more of a war of attrition than a leadership position. Those than can stick around for years, build a big network, and can sell the firm. Not all auditors are natural-born leaders, but you hope that those who make partner can at least lead by example with the experience and industry knowledge they have accumulated.

  9. Tenacious Truman
    Tenacious Truman says:


    Your post at 5:53 AM strikes me as being a bit naive. It’s pretty clear that Andersen had problems at the national level. In particular, Andersen’s policies let the local partner override the decisions of the national Professional Standards Group. “After noting problems [with Enron’s accounting practices] as early as 1999, Bass [member of the PSG] was stifled when Enron … demanded that he have no dealings with the company and Duncan acquiesced. Bass later testified that memos showing he had signed off on certain transaction had been changed without his knowledge …” Several Andersen accountants had concerns regarding Enron’s accounting for the Merlin SPE but “Duncan and other senior partners overruled their concerns.” (Final Accounting, page 212.)

    So as you can see, it was not simply a matter of “independence issues in a few offices” — it was a culture of greed where $100 million in fees was allowed to override the firm’s risk and quality protocols designed to protect the firm, its employees … and Enron shareholders as well. It IS all about tone at the top, and the more you look at the top of the Big 4, the more the tone rings hollow.

    — Tenacious T.

  10. Ramakrishna Y
    Ramakrishna Y says:

    Hi Francine!
    What do you think?
    Please refer:


    ICAI tightens auditing norms to prevent frauds
    10 Mar 2009, 0034 hrs IST, TIMES NEWS NETWORK & AGENCIES

    NEW DELHI: To prevent recurrence of Satyam-like frauds, the ICAI on Monday tightened the auditing standards by introducing new guidelines which will
    enable auditors interlink information and reports of other stakeholders and evaluate them.

    The two new standards on auditing, said Atul Kumar Gupta, member of the regional council of Institute of Chartered Accountants of India (ICAI), “will enable auditors to interlink the information and reports of other stakeholders, evaluate them, and substantiate the credibility of financial statement.”

    The Standard of Accounting (SA 720), introduced for the first time by the ICAI, deals with auditor’s responsibilities in relation to information, other than audited financial statements, provided by companies in annual reports. These auditing standards, Gupta said, will also help auditors “to go beyond just receiving the evidences by evaluating them on prudence principles.”

    So, auditors will now play a wider role in the affairs of a company and apart from financial statements, they will also inspect ‘other information’ to look for possible material inconsistencies. Other information includes a report by management or those charged with governance on operations; financial summaries or highlights; planned capital expenditures; financial ratios and selected quarterly data.

    The standard (SA 720) specifies an auditor’s responsibility in relation to other information in documents containing audited financial statements like an annual report. The standard is a first of its kind for Indian auditors who need to study other information to identify any material inconsistencies vis-a-vis the audited financial statements to make the audit reports fool-proof.

    The standard effective for audits of all financial statements for periods beginning on or after April 1, 2010 said the auditor shall make appropriate arrangements with management or those charged with governance to obtain the other information before preparing report. “If it is not possible to obtain all the other information prior to the date of the auditors report, the auditor shall read such other information as soon as practicable,” the standard says.

    If the auditor comes across an apparent material misstatement of fact while scrutinising other information, he should raise the matter with management. And in case the management refuses to correct the misstatement, the auditor should report the matter.

    The other matter approved by the ICAI council is a revision of the standard related to audit evidence. “Audit evidence is fundamental aspect on which the final audit opinion and the audit report is based. The quality and effectiveness of an audit is, therefore, to a large extent affected by the adequacy and appropriateness of the auditors procedures in gathering and evaluating the audit evidence,” ICAI said.

    The revised version contains greater guidance for the auditors on critical aspects of audit evidence such as what constitutes sufficient appropriate audit evidence, information to be used as audit evidence, factors to consider in selecting items for testing, how to respond in case of inconsistency in or doubts over reliability of audit evidence.


  11. Anonymous
    Anonymous says:

    All the firms have issues. The one thing that sets PWC apart from the others is their arrogance. All the firms have a model that those who hang around and suck up get to partner. They are not usually good leaders, maybe not even good adminisrators, and intellectual neophites. They know the party line of the firm they work for and that is all that matters.

  12. Richard
    Richard says:

    One correction on the reference to PwC’s action regarding its Japan network member firm as “…kick them out of the network. We have seen that with PwC Japan…”. As I remember the event, PwC’s actions were not a voluntary enforcement of the firm’s global standards. Because of one or more legal cases against the firm, PwC Japan was prohibited by the government agency equivalent to the SEC from providing audit services for a period of time that coincided with the normal reporting year end for Japanese companies. As a result, PwC had to very quickly work out arrangements with another Japanese firm to provide audit services under the PwC Japan banner and terminated the relationship with the previous Japanese firm that had been doing business as PwC Japan. Up until the suspension by the Japanese government, PwC Global was apparently quite satisfied with its previous network firm in Japan (at least for public consumption). The way the move was handled and reported in the Asia press, it appeared that PwC was more concerned about the potential loss of audit revenues than the audit practices violations of its previous Japan member firm. It was never reported whether or not PwC Global provided additional QA oversight for the new Japan firm in its initial year of auditing under the PwC name. However, it is difficult to believe that a firm not previously following the PwC international standards (to what ever degree anyone reading this blog feels that there are unified global standards among the international networks) was able to make an immediate and complete transition from their previous audit practices and standards to those publicly stated to exist for PwC globally.

  13. fm
    fm says:

    @ Richard

    Thanks for your comment. I would add…PwC International effectively kicked the tainted firm out of their network, the firm where their partners had been indicted. In signing up another firm to the network, neither the “PwC” partners who moved there, nor the other Big 4 wanted anything to do with the clients that had been audited by the former PwC firm. Most of the staff went to the other Big 3 firms in Japan, and PwC begged them to take them. PwC in Japan audit is now a distant number 4 from being number 1 prior to the scandal. Which is why they are trying to build up their advisory practice with the purchase of BearingPoint Japan.

  14. People  Who Change
    People Who Change says:

    Hi, i think your post on this one is not objective. It appears that though a lot of personal information of the firm has been collated but it lacks context. I know a lot about the firm as many generations from my family have worked with the firm. My uncle when he qualified as CA was top 50 in the country on the exam every subsequent generation in the family strives to produce public accountants and go on to serve with firm on merit. Therefore it is not uncommon for the firm to have partners who are related to each other as we live a long family tradition. Typically the partners of the firm are very conservative and many times would marry there sons and daughters in families which have a long tradition in public accounting therefore creating a more and more refined gene pool of public accountants who go on to serve the firm.
    Secondly, it is the sheer hard work of the employees of the firm which has kept it afloat for 125 yrs the biggest problem is that you need to wake up to the fact that India ranks around 120 on the transparency internationals list of most corrupt countries. Therefore which basically means that almost all Indian listed companies except maybe the Tata group and HDFC companies a are riddled with some degree of fraud or corruption. This maybe a broad generalisation but because of my long family background in public accounting i know this to be reasonably true.

    Which basically means the auditors are left the unenviable job of making a subjective judgement of what level of corruption is OK under a contemporary standard. The second aspect is that audit fee in India is very low the audit fee for Satyam a $2billion dollar is US$700K try to aggregate what the salary cost of the audit team on Satyam would have been in a year and you will come to a conclusion that the firm was incurring a huge financial loss on the audit every year. So the reason maybe some of the old partners were asked to continue is that they are the only folks who are ready to take the risk of assuming the attest risk of a large listed company without really getting fully paid for assuming such a tremendous assurance risk..

    Basically it seems to be that the blog has been written based on some western value sets or assumption without realising the business context or setting in which the audit failure happened…maybe the reason gopal was the signing partner was because he was on the board of ICAI for 12 yrs and considered to be technically very sound and maybe the best qualified to be a signing partner of a complex audit..

  15. Francine
    Francine says:

    @People Who Change

    Thanks for your comment. I will admit I have never been to India but I am well aware of the culture and the challenges you must face. In fact, much of the interest and ongoing encouragement to me to continue writing about Satyam has come from Indians both in India and in the US. They really want to see the story read and critiqued outside of India in order to escape the “level of corruption that is acceptable under a contemporary standard” that hampers an objective look at it in India.

    The bottom line is that Satyam was listed on the NYSE and issued ADRs to US and other investors. For that reason, the standard must be higher or else the company must be prohibited from participating in the US stock market and keep their corrupt activities in India.

    Once Satyam both decided to list on the NYSE and to use a firm like Price Waterhouse as their accountants, a member firm and an important business unit of a global accounting firm, they were playing in a much bigger league. This bigger league sets additional expectations and higher standards than that which you as a legacy accountant in India unfortunately have to put up with every day.

    Perhaps Gopal and the other partners took on the money losing Satyam audit becasue there was other money in it, as I have hypothesized in a later post. Think about it.

    Speaking of cultural differences…”Typically the partners of the firm are very conservative and many times would marry there sons and daughters in families which have a long tradition in public accounting therefore creating a more and more refined gene pool of public accountants who go on to serve the firm.”
    Developing a super gene pool of future accountants by selectively intermarrying the top accountants in the US is something that had not occurred to me as a potential solution to our crisis here. I will have to discuss that one over a beer with Dennis Howlett.


  16. Ats
    Ats says:

    As ex PwC (India) I agree with some of you, the indian entity was “loosely” run by cronies, incompetent partners . Infact to start with there was never any standard or guideline for becoming a partner in PwC . A staff today could all of a sudden become a partner without your consent or knowlege and you could be reporting to him the next day. The member firm Lovelock & Lewes ( which today they are dumping and blaming for Satyam fiasco was used by partners to take control of PwC, and eject PW partners. Ramesh Rajan ex chairman used to boast of his political connections and with Satyam money flowing in courtsey Gopal, PW partners were bulldozed into submission.

    PwC UK or USA never interfered, review partners from UK visiting India for quality checks or as they said ‘file check” were busy collecting gifts, enjoying lavish food and excursions. Nobody including regulators in India ever questioned why a Lovelock partner is signing as PwC partner, why proposals were submitted in Lovelock name yet audit was awarded to PwC and vice versa There is much more to it. Regulators, Corporates are equally to be blamed. Ramesh did /could not handle it well, possibly because of rift between the partners, see how EY India GETS/GOT away !!!!!

Trackbacks & Pingbacks

  1. […] Price Waterhouse India’s Slumdog Millionaires – Cheating Pays, January 13, 2009 […]

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