Hyderabad: Price Waterhouse auditors ³intentionally´ failed to apply certain audit standards to Satyam Computer Services Ltd, enabling

the firm¶s founder B. Ramalinga Raju and others to perpetrate India¶s largest accounting fraud, the country¶s federal investigative agency, the Central Bureau of Investigation (CBI), has said in its latest findings. The findings, which have been reviewed by Mint, form the basis for the agency¶s claim, in its supplementary charge sheet, filed on 24 November, that it had further evidence on the role of Price Waterhouse auditors in the fraud. The agency¶s findings are based on its study of audit standards applied by the same Price Waterhouse auditors involved in l¶affaire Satyam while auditing the accounts of another Hyderabad-based listed software firm, Infotech Enterprises Ltd. Price Waterhouse partners S. Gopalakrishnan and Srinivas Talluri, who had signed off on the accounts of Satyam for eight years till the accounting fraud came to light in January, were also found to have signed off on accounts of Infotech Enterprises for several years till March. PricewaterhouseCoopers Ltd India executive director Jairaj Purandare said his firm was yet to receive a copy of the charge sheet and could respond to the charges only after obtaining legal advice. CBI, which is investigating the fraud at Satyam²Raju confessed on 7 January to overstating the software outsourcer¶s accounts by at least Rs7,136 crore²said in its supplementary charge sheet that it had found evidence of an additional Rs4,739 crore fraud at the company. Tech Mahindra Ltd, part of the Mahindra group, gained a controlling stake in Satyam in an auction conducted in April. CBI had, in its first charge sheet on 7 April, accused Ramalinga Raju, his elder brother and then managing director B. Rama Raju, younger brother and director of SRSR Advisory Services Pvt. LtdB. Suryanarayana Raju, and the then chief financial officer Srinivas Vadlamani of perpetrating the fraud. Satyam¶s auditors, Price Waterhouse¶s S. Gopalakrishnan and Srinivas Talluri, also figured among the accused. Three former senior officials of Satyam are also among the accused: vice-president G. Ramakrishna, senior manager D. Venkatapathi Raju, and assistant manager C. Srisailam. All the accused except Suryanarayana Raju, who obtained bail, are in judicial custody in the Chanchalguda Central Prison in Hyderabad. In its latest findings, CBI said that while the same Price Waterhouse auditors, in an effort to ascertain the authenticity of sales invoices raised by Infotech Enterprises, had collected the live invoice samples directly from the relevant computer systems while conducting the statutory audit, they had not done so in the case of Satyam.

´ The System Process Audit Team at Satyam had. the auditors ³relied upon forged bank confirmation letters supplied by the other accused while conducting the statutory audit³ and also failed to verify the company¶s current account balances online. in fact. who resigned as chairman last week. the auditors had ³wrongfully presented to the audit committee that the system control deficiencies are insignificant´. 53. showed their ³underlying conspiracy´ with the other key accused in the accounting fraud. Similarly. the auditors had obtained direct confirmation on the requisite pro-forma from the bankers and also reviewed online the current account balances of the firm. He replaces Ramesh Rajan. warned both the Price Waterhouse auditors that ³these deficiencies are significant in nature which can affect the genuineness of the financial statements of the company and hence reliance cannot be placed on the IT system controls. The ³blatant deviations´ adopted by the auditors auditing Satyam accounts. in the case of Infotech Enterprises. Price Waterhouse is one of PricewaterhouseCooper¶s audit arms in India. CBI also claims to have found evidence of Talluri directing his team members to ³discontinue the procedure of obtaining the confirmations from debtors and vendors in respect of Satyam Computer Services Ltd from September 2007 onwards´. or 94% of the cash listed .In the case of Satyam. In the Satyam case.´ according to CBI¶s findings. the agency said. In an unreleated development PricewaterhouseCoopers announced on Monday the appointment of Gautam Banerjee as chairman of PricewaterhouseCoopers India network of entities. had written directly to the debtors and vendors while conducting the audit at Infotech Enterprises but ³failed to adopt similar protocol´ while auditing Satyam. The auditors. CBI added. The agency also said both auditors ³paid no heed to the findings of the System Process Audit Team´ which had pointed out ³several IT system control deficiencies. CBI added. the auditors preferred to rely upon hard copies supplied by the key accused. CBI said. Raju said that about $1. Instead. on Wednesday confessed in a letter to Satyam's board of directors to inflating profits for years with "fictitious" assets and non-existent cash. Raju.04 billion. CBI has accused the auditors of taking part in the conspiracy by failing to inform the (company¶s) audit committee about the system control deficiencies that were ³significant in nature´.

according to Bloomberg.3 rupees. while involving regulatory and accounting practices not traditionally used in India. according to Bloomberg data. or its multinational auditors." PwC "will get into very serious trouble over the Satyam fraud". particularly over a period of years. predicted Kumar. one that ironically was meant to give investors more transparent and accurate information of the financial state of the company." said Ramesh Kumar. The local unit of PwC said in a statement that Satyam's accounts were supported by "appropriate audit evidence". PwC uses IFRS and its client Satyam was one of India's first companies to keep accounts in this format. the Satyam fraud appears the latest variant of financial scams involving manipulating information with the aim of duping investors. Satyam employed a Western auditor using an international accounting mechanism yet to be introduced widely in India. The Satyam scandal has in fact come at an interesting time for the Institute of Chartered Accountants of India (ICAI). Accountants this correspondent conversed with were emphatic that it was impossible for auditors using traditional Indian accounting practices to be unaware of financial irregularities of this magnitude. By midmorning in Mumbai. was more to blame for what is possibly corporate India's worst scandal. Most notably in this respect. Discussion with accountants in the city ranging from senior through mid-level to junior levels left little doubt that questions were being asked most of the accounting firm. an accountant with 19 years of experience in various companies. the second-largest accounting association in the world. bringing the two-day decline to 91%. The general verdict of accountants in Mumbai is that Satyam's auditors blew it big time. whatever fraud and forgery the management could have produced to hoodwink them in a scandal that is estimated to have cost Satyam investors $2 billion on January 7 alone as the stock plunged by 77% on news of the fraud. This claim now rings with the same bitter hollowness as the "best practices" that advocates in the West of "free markets" were stridently urging Asian governments to adopt before the Goldman Sachs-led global crash of last year. though the Bombay Stock Exchange and the National Stock Exchange of India have said they will not being doing so. particularly with the confession that Satyam has been doing it for years. The 145. "Collusion" was a common term used by the accountant community. . Contrary to perceptions that this is a brand new financial scandal. the six-decade-old main regulatory accounting body based at the blue glass-fronted ICAI Bhawan in New Delhi.in assets at the end of the company's second quarter in September.000 member-ICAI.not least because there was no similar generalized indictment of Western companies after financial frauds involving most notably Enron (2002) and the $9 billion Worldcom accounting fraud the same year. was fictitious. "My first reaction when I heard about the Satyam fraud was how had their auditors kept quiet about it. Debate in Mumbai is now focusing on whether Satyam. PricewaterhouseCoopers (PwC). is in the process of introducing the supposedly superior International Financial Reporting Standards (IFRS) system of accounting in India. Satyam shares had slumped to 6. "Auditors not knowing about a fraud this size does not seem possible. The New York Stock Exchange has since suspended trading in Satyam stocks. India's fourth-largest computer software company. Perceptions that the Satyam scandal has destroyed confidence in Indian companies also appear misplaced .

This outstanding-dues certificate from each debtor has to reach the auditor directly." ICAI president Ved Jain told the media. could be worse hit than its client Satyam. 2008. . Satyam auditors seemingly have failed to spot faked outstanding debts worth $99 million for the financial quarter ending September 2008. which has offices in 150 countries.080-word confession letter mentions "inflated profits" for the "last several years". nor the managing director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results". The auditing firm. thereby showing fake profits and duping investors. has not yet made any substantial media statement on the fraud. y Cash in hand: the auditor has to physically check the client's cash reserves in sudden surprise inspections. The Institute of Chartered Accountants of India (ICAI) has said it is investigating the role of PwC in the scandal. "The September quarterly auditing is somewhat cursory and less detailed as the financial year-end auditing. "The initial confession could be only to divert attention from it. a gaping hole that auditors using the supposedly superior IFRS mysteriously failed to see. with its credibility taking severe damage. "If found guilty of professional misconduct. who confirm through a certificate that they owe such a sum to the firm. Satyam auditors have not apparently undertaken what traditionally would have been the minimum independent verification of the client's accounts as a chartered accountant firm is supposed to do. y Outstanding debts: The chartered accountant corresponds directly to debtors. Satyam reported a cash/bank balance of $1.excepting for a small proportion declared and sold for philanthropic purposes" and "that neither me. "We are examining it on a high priority and strict action will be taken against auditors if found guilty. Feroz Contractor. faces a choice either of being found to be so utterly incompetent that it could not spot a $1.09 billion." The $1.5 billion Satyam fraud refers to accounting figures for the three months through September 2008. "There could be a bigger fraud waiting to be exposed within Satyam. said standard and basic accounting procedures of auditing firms using the traditional ICAI method should have spotted through various means any large-scale fudging of books: y Bank balances: certificates from banks confirming the amount balance as shown in the company account books. proprietor of a three-decade old chartered accountancy firm. formed in 1998 through the merger of Price Waterhouse and Coopers & Lybrand of London." said Contractor. while it actually only had about $65 million as of September 30. though disgraced founder-chairman Raju's 1. particularly the bank balance confirmation certificate that the auditor compulsorily has to seek from the client's bank by India's financial year end of March 31. or that it was party to the investor fraud that presented an annual 24% growth rate in Satyam balance sheets instead of an actual 3% growth rate." The Satyam fraud could be the tip of a hoodwinking iceberg." In other words.5 billion-sized accounting crater. PwC. nor the managing director (including our spouses) sold any shares in the last eight years .PwC. a 28-year-old accountant. Raju also claimed in his confession that "neither myself. which calls itself the "world's largest professional services firm"." said Vinod Kutty. "But the possibility of cursory auditing does not apply in this case as the confession has been of the fraud going on for years. the auditors stand to lose their practice licenses.

but perhaps wiser not to entirely dismiss traditional and time-tested systems. ." said Kumar. It's not a happy new year for India Inc hoping worse shocks are not in queue.Accountants agreed that though the Satyam fraud was more an exception than the norm. "There could be many Income Tax Department raids on software companies in particular and major companies in general through most of 2009. investor and governmental distrust of audited company accounts could last for six to eight months.

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