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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Comments

[Francine McKenna]

Jim, I am a bit surprised you chose to spend so much precious space worrying about the poor PwC partners in custody. Are you sure they have no lawyers? Are you sure there is no due process? Seems to me to be a constant stream of hearings and pleas. After all, the CEO and CFO are still 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.

[Y Ramakrishna]

Sir,
Your comments quoted below as follows:
""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.” "

are totally objectioanble. I daresay that the Indian Legal Procedure and Systems are far more stable and consistent than their counterpart in the U.S where far more Fraudsters have gone scotfree.
U.S Government is afraid of the "N" word as Paul Krugman admits. What is wrong when the Government takes over a failing bank in the interest of depositors who have a far larger stake in the Bank than the shareholders?
As far the auditors, the less said the better! There is evidence that Satyam's Promoter Group used to hold weekly meetings, in which the individuals from the "respectable firm" of PWC regularly to evolve a system of "legally stripping" the concern of its assets!
It is a good thing that the Government of India superceded the Board and imprisoned the fraudsters - including the auditors.
The independence of the auditors can only be insured by introducing a system of rotational appointment by an TOTALLY INDEPENDENT BODY like the Institute of Chartered Accountants who have nearly 45,000 members on their panel. The Companies should be compelled to contribute a certain percentage of their turnover to a Trust which the said body will be administrating and appoint auditors for fixed term - ensure a fair rotation - and make available to the public all the working papers and notes of the audit by displaying the same via their website or some similar platform

[Y Ramakrishna]

Sir,

I refer you to this site:

http://www.retheauditors.com/2009/01/pwc-and-satyam-another-fine-mess-youve.html

You may assess for yourself whether the auditors' (PWC's) imprisonment is justified or not

[Kusum]

It's funny how people can question the sincerity of others but are very confident of their own. I do not agree with Mr. Ramakrishna's views on your blog. Can we ask him where is the evidence which shows that the auditors held weekly meetings with the management for "legally stripping" of the Company. If you have it please produce the same in the court of law, if not stop spreading baseless rumors.

[hypotheek calculator]

I Think in view of legal system of india I agree with fact that the Satyam saga has a long and ugly ways to go.

[Toshinori]

No case shall lie against auditors and others so long as (ed: unless?) their criminalities are established by the investigating authorities. Now there is only a disclosure by Raju that is highly suspect. On the basis of findings made by the investigators, the Government and the shareholders can file a separate suit against Raju (for fraud, falsification of accounts and other transgressions) and auditors (for criminal dereliction of duty if not for complicity, that may or may not be established) and against the other companies in the web (for complicity in diversion of funds) for criminal misdemeanor and one against the bankers as well, for perpetuating the scam by allowing Satyam to carry on showing non-existent fixed deposits parked with them in its annual accounts.