PwC “Restructures” Indian Consulting Business: Will It Be Enough To Preserve US and UK Interests?

If any doubts remained that PricewaterhouseCoopers International Limited, the international global network “coordinating” firm, does the bidding of its largest and most powerful member firms – primarily PwC US and PwC UK – the latest “restructuring” in India should remove them.

From Livemint.com, Hindustan Times’ project with the Wall Street Journal:

“The Indian arm of global consulting and audit firm PricewaterhouseCoopers (PwC) is ceding control of its prized business process outsourcing (BPO) unit to PwC US, ending years of battle between the Indian partners and other PwC network firms.

Because the Indian arm alone cannot anymore support the envisaged growth of the BPO business—or “global delivery service” in PwC’s parlance—over the next few years, it is being transferred to a joint venture with other PwC network firms, according to Ambarish Dasgupta, executive director of PricewaterhouseCoopers Pvt. Ltd, or PwC India.”

In January of 2009, 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 existence, forcing “bad” partners out and creating “clean” firm.

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.

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.”

Since the scandal started in January 2009 with Raju’s confession, PwC global leaders have visited numerous times, claimed to be victims themselves, made several appeals to the Indian media including trying to squelch my reports, set up an internal “advisory board” with foreign partners and reorganized more than once.

How can any self-respecting attorney still argue – and any lucid judge still believe – that PwC’s global firm is not just a sham legal construct, an artificial vehicle for the strongest member firms to control and potentially exploit their weaker ones, all under the guise of “improving quality and seamless delivery to multinational clients…” ?

PwC UK did the same thing to its Middle East colleagues recently. Sound familiar?

From the London Times Online May 17, 2010:

PricewaterhouseCoopers is ramping up its operations in the Middle East, with plans to more than double fee income in the region to $500 million within two years.

Britain’s biggest professional services firm has identified growth in the region as one of its top strategic priorities for the next decade. It is betting that a surge in spending on infrastructure projects by Arab governments will yield huge consulting fees for foreign advisory firms.

Its British division, which generates more than £2 billion a year from auditing and advisory services, took control of PwC’s Middle East operations last May. Since then, it has poured millions of pounds into the practice in an attempt to unseat Ernst & Young as the dominant accountant in the region.

The Price Waterhouse India member firm is made up of several local firms that provide audit, tax and consulting services. These firms in India are connected by an incestuous partnership structure that is complicated by design. The complexity is ostensibly necessary due to the restrictions in India over foreign ownership of audit firms.

Putting the best, fastest growing business seemingly out of reach of Indian legal and regulatory judgments, sanctions and fines as a result of the Satyam fraud may be wise. But this ploy assumes that only the Indian firm and Indian partners will be found culpable.

That’s a big “if.”

I asked Mark O’Connor, CEO of Monadnock Research LLC for his thoughts:

PwC likely realizes that its India businesses will not escape far reaching liability in the Satyam scandal. Assuming the Livemint.com report is accurate, PwC appears to be moving an Indian jewel out of the exclusive ownership and control of the Indian firms, and out of the exclusive legal jurisdiction of the Indian regulators and courts.

They’ve created a plausible justification for doing what they did – the Indian firms could not provide adequate capital to fund the business and capture the strong demand for future services.

It also offers some level of assurance that value created by those that remain will not be a casualty of past acts. This allows them to stem the tide of defecting talent.

Finally, it also opens up the possibility that the full technology outsourcing business will be folded in eventually. If done now, this would likely be perceived as way “over the top” and as shifting assets off shore to protect them from domestic legal exposure.

The legal maneuverings are even more obvious in light of the long-awaited ruling by the U.S. Supreme Court affirming dismissal of the Morrison v. National Australia Bank case. Among other things, the Court’s opinion will limit securities claims by investors who bought their shares on foreign exchanges. The Satyam consolidated class action suit pending in US District Court, Southern District of New York, alleges claims on behalf of:

“…[plaintiffs] who (a) purchased or otherwise acquired Satyam Computer Services Limited (“Satyam” or “the Company”) American Depositary Shares (“ADSs”) on the New York Stock Exchange (“NYSE”); and/or (b) were investors residing in the United States who purchased or otherwise acquired Satyam common stock on the National Stock Exchange of India (“NSE”) or the Bombay Stock Exchange (“BSE”) between January 6, 2004 and January 6, 2009 (the “Class Period”), and who were damaged by the conduct alleged herein. This action is also brought on behalf of two sub-classes of Satyam employees who received and exercised stock options…”

It looks like the a) plaintiffs will still be good but the b) plaintiffs don’t fit the new post-NAB test. It may depend which exchange was used to exercise the Satyam employees’ options, I suppose, but I wonder if the Court anticipated all scenarios.

PwC’s attorneys want it dismissed in full based on forum non conveniens argments.

US and Indian regulators and investigators are focusing on the wrong thing when investigating the Satyam scandal. It’s not the spectacular audit failure that’s most important. That’s just the inevitable unraveling of something bigger. They need to look at the money flowing between Satyam and PW India. Don’t be surprised if you find that money going outside of India to PwC entities in the US or UK or shells set up in offshore locations.

Follow the money. The level of incestuousness between Satyam, PW India, PwC in other parts of the world, and the Indian government may be greater than anyone initially suspected. Otherwise, how could Satyam, an acknowledged second-tier player in the Indian and global outsourcing arena end up with 185 of the Fortune 500 as clients? Did PW India facilitate, play tour guide, provide “due diligence” for sole- or limited- sourced procurement efforts by PwC’s clients all over the world and collect “referral” and “facilitation” fees, for themselves and on behalf of key players in the PwC global organization from both Satyam and their own fellow PwC partners? Was anything paid to Indian government officials implying an FCPA exposure, too?
We’ve already seen reports of PW partners perhaps enabling and supporting the inflated staffing numbers and global payrolls utilized by Satyam to add credibility to their business strategy and to funnel money out of the company. But did those funds go to only Satyam management?

PwC US and PwC UK want to be closer to their money. PW India Private Ltd, the Indian consulting business, is now and always was an arm of the US and the UK. No more depending on Indian partners. The Indian partners who made the connections and, hypothetically, facilitated the payments to member firms all over the world for referrals to Satyam are under scrutiny and out of the game. The US and UK can’t control what anyone in India will do to save their own skins.

If plaintiffs’ attorneys and US regulators are going to get to the bottom of this and get justice for investors they’d better act quickly. Pretty soon anyone in India who knows anything will be safely tucked into a new firm or nowhere to be found.