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 Ramakrishna goes on that “it is a good thing that the Government of India superseded the (Satyam) board and imprisoned the fraudsters – including the auditors.”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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Comments

[Kusum]

I agree with James's views completely. To add to what he points out so very well in his various posts:
1. There is no concrete evidence with the authorities to prove that PwC or its partners were involved in the whole scam.

2. Any person who is familiar with the audit process will realise how difficult it is to answer any query without your workpapers, specially for a gigantic company like Satyam and for the past seven years too. The authorities expect them to have a fabulous memory!!!!
3. People should also remember the phrase, "Innocent until proven Guilty". The partners have not yet been proved guilty, hence people should stop making assumptions of their guilt.
4. Pulling off a scam of such proportions, as is being claimed by Raju (not yet proven), takes the involvement of many regulatory authorities, it is not enough for the auditor to sign off the balance sheet and be done with it. Why don't they put behind bars all the officials of such regulatory authorities who failed to do their job? the taxation guys being the first!
5. It is being claimed by Raju that there was no money with the company, it has not yet been proven.

[Ramakrishna Y]

I reproduce the relevant information from The News Report of of Times of India:

Please refer : http://timesofindia.indiatimes.com/Hyderabad/PwC_auditors_aware_of_Satyam_fraud/articleshow/4031368.cms

Quote:

PricewaterhouseCoopers (PwC) auditors manipulated Satyam Computers accounts for money.

According to Crime Investigation Department (CID) sources, Satyam founder B Ramalinga Raju and former chief financial officer (CFO) Vadlamani Srinivas confessed that the auditors of PwC were aware of the fraud and very much involved in executing it.

“Five banks, including HDFC Bank and BNP Paribas, replied to our queries saying that the reconciliation statements of the fixed deposits shown by Satyam Computers at auditing were not issued by them,” a CID officer, who is part of the investigation team, told TOI on Sunday.

According to CID sources, S Gopala Krishnan, who was the auditor for Satyam Computers on behalf of Price Waterhouse between 2000-2001 and 2006-2007, and Srinivas Talluri, the auditor for 2007-2008 fiscal, were well aware of the fraud.

“The auditors falsified accounts,” the CID officer said.

During the grilling by CID officials, Rajus and their CFO V Srinivas reportedly told their interrogators that they had paid handsomely for manipulation of accounts.

“The normal charges could be about Rs 1.5 crore per month,” a source said.

"More details will come out when IT officials start their probe on the income and investments of the arrested individuals," the CID official said.

Several dedicated teams of CID are working on the Satyam issue. According to the sources, one team has focussed on apprehending Akula Rajaiah and Suryanarayanaraju, who have `been out of reach' since searches at SRSR Advisory services office on January 21.

Above is the evidence requested by Ms. Kusum. No doubt it will be produced in Court in due Course
and given due consideration by the Learned Judges.

The whole affair just 'stinks'

[Kusum]

If Mr. Ramakrishna thinks that a news paper clipping is proof of a person's guilt, I have nothing further to tell or educate him about.

For information:
Point One:
The CID had claimed that PwC partners confessed to the fudging of accounts. Later PwC issued a media statement that the partners had never made any such confession and a copy of their response to the CID was also shown on the media proving that what CID earlier claimed was wrong.

Point Two:
Auditors don't prepare the books of accounts of the financial statements, hence it's not them who can fudge the accounts, if anything, they can only certify fudged accounts. The whole idea of auditors fudging the accounts should be preposterous to anybody who knows an iota of auditing and accounting.

Point Three:
Why don't we ask the IT authorities to check about the interest income being reflected by Satyam for the past few years. The same IT department which could not trace the fudged false interest income being reflected by Satyam is now going to check the investments of the individuals!!!

Well let's blame the auditors for all the errors in the accounts. They are guilty!!!! I totally agree. Let's not apply our brain for the other possibilities! We have to blame someone, so why not the statutory auditors as they are a big public name. All others involved, the INTERNAL AUDITOR, THE COMPANY SECRETARY AND THE INCOME TAX ASSESSMENT OFFICER, THE BANKERS, they all are innocent babes with halos around their heads!!

[Y Rsmakrishna]

Indeed, all the others viz.the INTERNAL AUDITOR, THE COMPANY SECRETARY AND THE INCOME TAX ASSESSMENT OFFICER, THE BANKERS, they all are innocent babes with halos around their heads!!
Just as the auditors 'relied upon' the information furnished by their esteemed clients - the others relied upon the Report of a very reputed firm of auditors!

[Kusum]

Some accounting and auditing details which I would like to share with the uneducated in the field of audit:

1. The statutory auditor RELIES on the work of the internal auditor and not the other way round.

2. The statutory auditor RELIES on the certificate from the company secretary not the other way round.

3. The company secretary prepares all the board resolutions for deposit of fixed deposits, bank signatures, etc. Not the auditor, he just checks them.

4. The statutory auditor relies on the bank statements, bank confirmations, remittance certificates from the bankers, not the other way round.

5. The income tax officers are supposed to cross check the interest income and TDS details with the confirmations from the bankers, not with the auditors.

The people making all kinds of allegations against the auditors because they are a Big Name should stop relying completely on the over hyper media and should realise all the finer points that are needed in carrying out a scam of this proportion.

[Skanda Swamy]

I read your article implying your "high and mighty holier than thou" United States being more "just and fair" than the biggest democracy in the world using a heavy hand in imprisoning not only the Satyam debacle perpetrators, but the auditors who, in your view just "had their hands full" instead of being full partners in crime.

In India, even a former Prime Minister was imprisoned for fraud.

George Bush routinely flouted constitution. Dick Cheney shot someone in the face and got away with it. (Accident? Imagine what would have happened if you or I committed that "accident"?)

With the recent "stealing" of $700 Bn taxpayer money and bailing out of Goldman Sachs and AIG by the "honest" people in high places in the US government, do you still believe that we are "just" in this country, with our laws being fairly and impartially being applied, not just to the common man, but to the biggest crooks in our society? Where is the bailout to the people who have landed on the streets due to foreclosure?

I am sure our laws are very effective in giving some parking tickets, and collecting taxes on tips from restaurant workers, but where is the law when the biggest crime of the century is committed?

[Jim Peterson]

Mr Swamy -- Events have clearly evolved some since I wrote this post in February, and not necessarily for the better. With thanks for your thoughts, I have reflected some reactions in a post of August 9.
Jim