Being Expedient: PwC Settles Satyam U.S. Class Action

Last week I wrote about PwC’s settlement of their Satyam class action lawsuits in New York for Forbes:

The American Lawyer called the April clean sweep of Satyam litigation by PricewaterhouseCoopers (PwC) and its Indian affiliates a “chance to do some spring cleaning”.

Price Waterhouse Bangalore, PricewaterhouseCoopers Private Limited, and Lovelock & Lewes – PW India firms – and PwC U.S. and PwC International agreed to a $25.5 million securities class action settlement in New York.

It was a quiet almost-end, reached through mediation, to a sordid chapter in PwC’s history.

The Satyam scandal started for the rest of the world in January of 2009 when the company’s CEO, Ramalinga Raju, announced he had been “riding a tiger” to try to stay ahead of a massive fraud he’d perpetrated. Coming so soon after the financial system failures in the US and the UK in late 2008, and while the rest of the world was preoccupied with the ongoing, deepening financial crisis, the details of the fraud came out in fits and starts.

I covered the story here, continuously, from the beginning. (A list of all stories I’ve written on the Satyam case here, at Forbes, and in other publications, is included at the bottom of this post.)

Price Waterhouse (PW) India’s relationship with Satyam and, therefore, PwC US and PwC International’s relationship with Satyam, started quite a while ago. PW India was Satyam’s auditor since 2000.

The Public Company Auditing Oversight Board (PCAOB) inspected the PW India audit firm for the first time in the Spring of 2008. PCAOB is the US accounting regulator that was established by the Sarbanes-Oxley Act of 2002. We did not see a copy of that inspection report until three years later, this past April, when the SEC and PCAOB jointly issued sanctions and a $7.5 million fine against the PW India firm.

That three-year-old inspection report was finally issued yesterday. It revealed a type-two error:

“Following the performance of the inspection procedures, a significant issue came to light that had not been identified in the inspection review.”

And that’s pretty much all the public section of the PCAOB inspection report says. It does describe, briefly, the subsequent events that forced the regulator to throw out any conclusions they had come to during the inspection.

However, the class action plaintiffs’ First Amended Complaint, filed February 17, 2011, revealed that the PCAOB had identified some concerns about how PW India was conducting its work on Satyam, the only engagement they reviewed.

220. PwC USA’s pattern of being confronted with red flags and accepting PwC India’s curiously lackadaisical response to audit deficiencies is seen again following an inspection of Satyam’s audit engagement by the PCAOB in March 2008. In response to the PCAOB’s concern over “inadequate audit documentation” for certain “multiple element contracts” by Satyam when Satyam had previously wrote to the SEC that it had no such contracts, in April 2008, Gopalakrishnan, Talluri and various PwC USA and PwC Global Capital Markets Group (GCMG) personnel, including Peter Ferraro, discussed via email the PCAOB’s concern.

PwC GCMG accepted without further question Talluri’s remark, “[I]n the light of the overall recommendation relating to documentation on the file, we are enhancing the quality of documentation in general . . .,” and Gopalakrishnan’s contention, “While I could understand what PCAOB was looking for, I am yet to understand what you were looking for in the name of incremental procedures/quality review. At the end of the day we have to convince the client what we are searching for behind the lines as if they have withheld material information from us. . . . We never had a history of any serious concern or sharing of information by the client which had any impact on our audit. They have been extremely transparent and consultative in approach throughout the period and were conservative in approach throughout the period and were conservative in their out look as far as business dealings are concerned.”

Because of the PCAOB’s limitations under the Sarbanes-Oxley law, the public, investors, and PW India’s clients never knew about these concerns. All inspections are confidential until final. All issuer names are redacted from inspection reports based on PCAOB prior policy and practice. PCAOB disciplinary proceedings are confidential until final. No one would have ever seen these details if not for the lawsuit and Satyam’s cooperation with the plaintiffs.

From the First Amended Complaint:

These documents were initially produced by Satyam to the SEC in connection with SEC investigation HO-11044. In addition to certain bank statements and work orders, Satyam produced hundreds of emails by and among high-level PricewaterhouseCoopers personnel regarding the Satyam account. Based on the covering pages, the emails were first produced in 12 bound books to India’s Central Bureau of Investigation by PricewaterhouseCoopers. Lead Plaintiffs received the email production from Satyam in PDF format and without the referenced attachments. Given that PricewaterhouseCoopers worked on the Satyam engagement for over eight years, it is unlikely that the production represents the universe of PricewaterhouseCoopers’ correspondence regarding the audits. Nonetheless, the documents Satyam produced to the SEC, and in turn to Lead Plaintiffs, provide detail as to the various Defendants’ roles in the acts alleged herein.

Although these suits have been settled, litigation and the media scrutiny over PwC’s role in Satyam scandals are not finished yet. Two of the PW India partners – one since retired from the firm and one on leave of absence – are on trial in India, accused of complicity in and knowledge of the fraud. The firm will suffer the ignominy of the scandal in that country for a while and have a regulator-mandated monitor watching every move the Indian practice makes.

Mahindra Stayam, as it’s called now, is still threatening to sue PwC entities to recoup some of the $125 million Satyam paid out in their settlement of the class action claims. Some of that money, if there are recoveries, will go to those that sued under the class action.

The Indian press is expressing frustration that investors holding shares listed at Indian exchanges will have to wait a long time to see any justice or potential recovery for their losses.

The Hundustan Times: Legal experts say that in the absence of a provision for class action suits there is nothing that investors can do but wait for the Securities and Exchange Board of India (Sebi) case pending in Bombay High Court, or hope that a consent order is passed by Sebi in agreement with the company. Others say the agreement in the US lays ground for similar action in India. In 2009 Midas Touch Investors Association filed a case with the Consumer Court and Supreme Court but it was not admitted, as the petition was ambiguous.

By singling out a single country practice for sanctions and disciplinary action, US regulators imply the work of an audit of a US-listed, foreign, multinational company is performed in isolation.

It is not.

From the First Amended Complaint: Notably, Satyam’s audited and unaudited financial statements prepared under Indian GAAP for the quarter and half year ended September 30, 2004, filed as exhibits to the October 25, 2004 6-K, were signed on behalf of the Board of Directors and by Price Waterhouse, by Gopalakrishnan, in “Santa Clara [California], USA.” Santa Clara, California is a location of Satyam’s US operations.

PwC International has also paid for the legal counsel to both PW India partners, Gopalakrishnan and Talluri, who are on trial in India.

It’s common for the global audit firms to want it both ways. When they promote themselves and their services to clients, regulators, legislators, and the media, they invoke the brand image of a “seamless global network of firms operating under a brand bound by common methodologies, standards, and ethics.”

When something goes wrong, they often try to publicly ignore the problem, relegating it to a “foreign” issue. They are quick to distance themselves from the “rogue” partners and firms, sometimes going so far as to pull their legal support or sue them in order to save their own skins.

In this case, the emphasis on PW India as the bad guys, the problem children, and on the accused Indian partners as rogues and anomalies, relieves the US firm and the rest of the global firm, including the International coordinating firm, from taking any responsibility. It makes the US and the International firm look like the supportive, higher quality, more ethical and knowledgeable members of the global network.

Notice this public relations statement from PwC after the settlement of the US class actions lawsuit that also named the US firm and the International firm as defendants.

It doesn’t mention them by name.

From American Lawyer: A PwC spokeswoman released this statement: “PW India has reached an agreement to settle the US civil class action litigation arising out of its audits of Satyam Computer Services Limited. The settlement agreement, if approved, would release all of the named PwC defendants.”

The resolution of this case also furthers the illusion that, like a rogue trader, the failure of the Indian member firm and its partners has nothing to do with the failure of the PwC global firm, the regulators, and, ultimately, the legislators to demand true, seamless service delivery of high quality and consistent compliance with auditing standards.

That would be impossible, in my opinion, because the regulators – notwithstanding their earnest words of late –  and the legislators are stuck in a time warp, promoting an audit product that depends on a fractured, separate but hardly equal network of sovereign legal entities tied together only by a brand name that belies the greed of all involved and, in the case of PwC, out-sized professional arrogance.

Why would any US listed company, whether based in India or with substantial operations in India, use PW India as an auditor or to support their audit?

The SEC and PCAOB judged the quality of their work in the past as grossly below standards. Going forward, for at least two years, all audit work by PW India will have to be checked, double checked, and then checked again by staff outside of India or imported at great cost. That means extra time and maybe money for companies.

Don’t be fooled. It’s no bargain to you, as a client, if they don’t pass on these extra costs. The PW India audit practice that works with non-India listed companies will be doing your work while attending numerous re-training and compliance sessions at the same time. The practice will probably operate at a loss for the next few years to cover those costs. That means your work will be performed by severely stressed and significantly overworked professionals, as more and more professionals probably leave for greener pastures.

Not the best service provider choice, in my opinion, for your legal and regulatory reporting requirements in India.

The SEC and PCAOB may believe their sanctions and fines were a “job well done”. But the paltry fine and crippling remediation mandates are like shooting a dead guy in the eye.

It’s too little too late and it’s just for show.

If the SEC and PCAOB really meant to clean up this mess they would have shut the PW India audit operation down completely.

That will never happen. Any sanctions, let alone significant sanctions, against any of the Big Four audit fIrms, and especially PwC, in the US or as an international global firm, are blocked at the starting gate by the “too few to fail” policy.

The Big Four audit firms are so embedded in the government’s work as a well as the work of government proxies – the big banks, GE, Boeing, and the money moguls like Blackstone and  Blackrock- that they’re necessary evils for both support and political cover. Any crippling sanction such as debarment or a fine that effectively takes a large global firm out of play would severely impact the ongoing work of the New York Fed and the Treasury as well as similar government entities in the UK and Ireland.

If there was any question about the close relationship between the regulators and the firms, a recent revolving door transaction should put those doubts to bed.

From Going Concern: PwC has announced the appointment of Kayla Gillan, formerly SEC Chair Mary Schapiro’s Deputy Chief of Staff, as the firm’s head of the newly created Regulatory Relations Group. This confirms a report by Bloomberg from last week.

Ms Gillan is no lightweight as she is a founding member of the PCAOB, served as general counsel for CalPERS and Chief Administrative Officer for Risk Metrics. The ecstatic Bob Moritz: “[PwC is] extremely fortunate to gain the experience, insights and future contributions of such a highly accomplished professional, one whose career has been dedicated to serving investors and other market participants,” BoMo said, adding, “Kayla Gillan is an example of making the investment to drive this transformation.”

Gillan wasn’t the first such instance and she won’t be the last. Instead of an honorable class of career public servants, this country is promoting an entitlement class of public cronies.

Here’s the list of my articles about Satyam, from earliest to the most recent prior to this one.

Satyam Scandal – PwC Turning Into Tandoori, January 8, 2009

Satyam – What We Know, What I Think, My Predictions, January 12, 2009

Price Waterhouse India’s Slumdog Millionaires – Cheating Pays, January 13, 2009

PwC and Satyam – Another Fine Mess You’ve Gotten Yourself Into, January 26, 2009

Round And Round She Goes, Where She Stops Nobody Knows, January 28, 2009

The Plot Thickens – Price Waterhouse India Plausibly Culpable, April 19, 2009

Satyam’s Bollywood Tragicomic Soap Opera, Apr. 23, 2009