Re:Balance -- Jim Peterson

Liability of Professionals -- Mark Your Calendars

Herewith a two-fold endorsement -- particularly for readers who are securities and litigation practitioners in the United States.

It's been my pleasure to follow with appreciation and admiration the very valuable resource developed by Bruce Carton, Securities Docket, a source of news that well belongs on the subscription list of the well-informed. 

This also commends to your attention Bruce's next offering in his series of webcasts --"Liability of Professionals in the Financial Crisis" -- scheduled for live broadcast next Tuesday, February 24, at 2.00 pm EST and available thereafter. On the panel will be two top speakers -- Stuart Grant and Michael Young -- prominent spokesmen respectively for the perspectives of plaintiffs and defendants.

I have followed with interest Bruce's earlier webcasts, which have been commendably substantive, focussed and well-managed. Sign-up is easy through the link on his site -- those finding of interest the issues discussed here will find it worth the effort. 

Prisoners of Satyam: Price Waterhouse Auditors Still Under Arrest

An eye for an eye and a tooth for a tooth.
The system seems fair
But is really quite ruthless.
For in time all involved
Become eyeless & toothless.  

The succinct wisdom of the late poet and trenchant social critic Jodie Hansen frames the dust-up started by my criticism of the extended jailing of the Indian audit partners of Price Waterhouse responsible for that firm’s work on Satyam Computers Services – here. That mis-treatment began with their arrest over the January 24-25 weekend and continues, bail applications having failed, apparently at least to late this month.

The PwC organization and its people have their hands amply full in defense, both in India and in the shareholder cases promptly filed in the US, and it is not my point, nor for anyone at this stage, to pre-judge the outcome.

Rather, it is right to scrutinize the means and quality of government response. One American reader, known to me as a wise counselor and teacher, wrote that:

“The Rule of Law has protected us (in America) from the get-go. Here we believe that not only must the result be in accord with law, we give equal importance to the process.”

The contrasting view of a reader in India was that my views were “totally objectionable,” on two grounds.

First, Mr. Ramakrishna asserts, “the Indian legal procedures and systems are far more stable and consistent than their counterparts in the US where far more fraudsters have gone scot-free.”

This is subject to test. Checking the recent roster of the post-Enron convicted and incarcerated – Messrs. Ebbers, Skilling, Fastow, Kozlowski, Black and Rigas come to mind, and adding Weiss and Lerach to boot – the wheels of justice seem to have ground along.

What would be fair grounds for criticism, though, to anyone evaluating the tax-payer impact of the world’s various bail-out packages or checking a retirement fund statement, is whether any of these machinations have wrought the least deterrent effect – either in the US or anywhere else in the world.

Mr. Ramakrishna goes on that “it is a good thing that the Government of India superseded the (Satyam) board and imprisoned the fraudsters – including the auditors.” His basis is evidently the long logical leap that audit quality is to be achieved by mandatory rotational appointment of auditors for a fixed term, and public posting to a website of all audit notes and working papers.

Global-level discussion has long since explored and declined to act on a roster of impractical and unachievable solutions to the persistent issues of audit quality – here. The only country to experiment with mandatory rotation is Italy, with conspicuous lack of success: There, required rotation led to an increase in concentration of large-company work by the large firms, while the 2003 exposure of a € 20 billion hole in the balance sheet of dairy products giant Parmalat exposed the gaping question of any positive impact on corporate reporting and governance.

This Indian reader also cited the critical observations about PwC of my estimable colleague Francine McKenna – Re:TheAuditors – whose characteristic umbrage at the behavior of the large firms was equally directed to me:

“I am a bit surprised you chose to spend so much precious space worrying about the poor PwC partners in custody…. It may be unusual by our standards. In fact it’s downright rare. But at this stage, I’m sure you’ll find lots of folks in the US wishing a few more CEOs, CFOs and auditors were sitting behind bars, examining their consciences.”

Sorry, but even appreciating the natural instinct for punishment and vindication, I will worry.

For what’s the rush? The careers of the PwC partners are in shreds, no matter what. They will never again put pen to a professional opinion, even if their firm does survive – which is far from sure.

The measure of a society’s civility is in how it treats its least – the poor, sick and hungry; the minorities and the disadvantaged. And, importantly, the accused. And those rights extend no less to a professional auditor than to a slumdog – else they dependably protect neither one.

Popular confidence essential for stable democratic institutions rests on trust in the agencies of government. Which requires that the exercise of power by those with the authority to use it be done not in a hasty rush to punitive judgment, but with the restraint and good process that engender credibility.

Robert Bolt’s 1966 play, “A Man for All Seasons,” made the case for the law’s restraint:

Sir Thomas More: What would you do? Cut a great road through the law to get to the Devil?
Roper: Yes. I’d cut down every law in England to do that!
More: Oh? And when the last law was down, and the Devil turned ‘round on you, where would you hide, Roper, the laws all being flat? …. Do you really think you could stand upright in the winds that would blow then? Yes, I’d give the Devil benefit of the law, for my own safety’s sake!

The alternatives are the tyranny of petty officialdom, red tape and corruption; pervasive short-term opportunism by those exploiting the cozy roles of insiders; and, not least, a citizenry both cynical and fearful.

Those choices are made at the local country level. It’s their resolution that determines whether a polity – Indian or otherwise -- deserves full and equal participation in a mature globalized economy.

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Satyam's Auditors from PwC Remain in Custody -- A Prisoners' Dilemma for "Indian Justice"

Even as I said last month that the Indian government’s reaction to the billion-dollar fraud confessed by Ramalinga Raju, the CEO of Satyam Computer Services, would be protracted, disruptive and expensive – here – one manifestation both expected and unpleasant was an excess of prosecutorial zeal.

The Satyam saga has a long and ugly ways to go. But for PricewaterhouseCoopers, auditors of Satyam from 2000 until recently sacked, it is unjust and offensive that its Indian engagement partners – S Gopalakrishnan and Talluri Srinivas -- should be in confinement for what is now almost two weeks and counting.

PwC and its people will eventually have a lot to answer for – the extent is presently unknown, and an impossible topic for uninformed speculation. In a best case, the two individuals are already professionally ruined; the firm’s Indian practice will take a serious reputational hit, even if it survives; and the eventual settlement cost of the flurry of shareholder suits will be painful.

That’s the best case. At worst, although the leadership of the profession could never be heard to admit it aloud, Satyam could be the fatal bullet in the global game of Russian roulette that the Big Four are playing with their survival.

No position is taken here on the defensibility of PwC’s work for Satyam – that’s entirely premature, until a credible legal process works its way. Nor, as regular readers know, am I an apologist for the large firms – neither for the persistence of their inability to learn from and surmount their recurring performance short-comings, nor for their mismanagement of the public dialogue in fruitless pursuit of impractical and politically unachievable “reforms.”

But – to be held without bail or lawyers, much less the consultation with their colleagues and their papers by which to answer charges and mount a defense, PwC’s personnel are suffering their fate in a country whose system of oversight and enforcement is immature, unpredictable and therefore extremely dangerous.

Due process of law should be expected in the official reaction to financial frauds, not the Alice-In-Wonderland policy of “sentence first – verdict afterwards.”  

Put otherwise, measured by comparison to systems evolved in their handling of corporate malfeasance, the operation of the “Indian justice system” is revealed to be as oxymoronic as the maligned Dark Ages version of the “Holy Roman Empire.”

Starkly showing the impotence of the large firms in the face of localized over-reaction, not even global PwC managing partner Sam DiPiazza’s short-cutting the World Economic Conference in Davos in favor of a hasty charm-offensive tour around the ministries of Mumbai has been able to spring the locks for his partners. 

When the dust settles and the prisoners from PwC are eventually released back to liberty, the global firms must re-assess their business model: They are over-exposed to the potential for employee hazard and business catastrophe, by the tri-fold interaction of their own uneven performance across international borders, clumsy enforcement agencies having dubious and disproportionate impacts, and porous leakage into the big-country legal systems where litigation exposures already threaten their ruin.

One potential solution, which would redound on the small-firm practitioners whose voices of hostility and criticism dominate the Indian accountancy regulator – and whose capacity to step in and carry out the challenges of a large multi-national audit engagement is precisely nil – would be to simply declare the Big Four’s services unavailable for use by local companies in the capital markets and securities exchanges of the more developed countries.

Under such a showing that “enough is enough,” the Big Four would -- both in India and other candidate countries coming readily to mind – continue with both their purely local clients and their inward referrals on local operations of global enterprises. What they would not do, however, is voluntarily expose their continued global existence to the vagaries of oversight by agencies lacking either competence or experience at that level.

The large accounting firms serve their clients, after all, as free-standing private enterprises. They are neither the nationalized minions of small-bore bureaucrats nor obliged to practice in a form of coerced servitude to hostile and chauvinistic government agencies.

They have the opportunity – as expected by their people who should deservedly be able to work without daily fear of being hauled off to indefinite imprisonment – to declare their entitlement to fair, measured and even-handed justice.

So far in India, that standard is not met.       

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