PwC finds itself in middle of USL-Mallya crossfire

The discrepancies in the auditor's reports of pre-2011 and post-2011 periods is under scrutiny

After taking a reputational knock in the Satyam scam, auditing firm Price Waterhouse finds itself in the eye of yet another corporate storm. For, the firm, which had cleared the United Spirits Ltd (USL)’s annual report for FY11, had four years later conducted a forensic probe on USL, under the Diageo management. Corporate lawyers say the conflict of interest could weaken USL's case against Vijay Mallya who has challenged the probe report, saying it is based on half-truths.

By the annual report of FY11, USL's accounts were signed by Usha Narayanan of Price Waterhouse (PW). The agency did not seek a reappointment in FY12, and the company appointed Walker Chandiok & Co as the auditor.

Both PW and Chandiok cleared the accounts of USL, which were later investigated by PricewaterhouseCoopers (PwC) UK again, after the board asked the firm in late 2014 to investigate loans and advances worth Rs 2,100 crore from USL to various United Breweries (UB) group entities.

Corporate lawyers see a “conflict of interest” in PwC’s role as auditor as well as an investigator. “This is not in the right spirit of corporate governance,” said a Mumbai-based corporate lawyer.

While PwC gives a clean chit to USL (then owned by Vijay Mallya) in FY11, in the 2015 report, PwC raises questions over the loans and advances to UB entities. It did not raise any red flags on related-party transaction. Similarly, the FY12 report by Walker Chandiok & Co again did not raise any red flag over the alleged fund diversion.

A PwC UK spokesperson said: "PwC UK was engaged in September 2014 to investigate, with the assistance of PwC India, a specific set of issues as part of an internal inquiry initiated by the board of USL. This was completely separate, independent and carried out by people not involved in the historic statutory audits of USL performed by Price Waterhouse in India, the last of which was for the year ended March  2011."

The PwC inquiry revealed that between 2010 and 2013, funds were diverted from USL and its subsidiaries to certain UB group companies and in particular, Kingfisher Airlines. The airline shut the shop soon after.

USL appointments
USL on Monday appointed Vinod Rao the head of finance and V Ramachandran the company secretary and compliance officer, the Press Trust of India reported.

These appointments came in the wake of Diageo-owned United Spirits' Board asking its erstwhile promoter and current Chairman Vijay Mallya to quit alleging fund diversion to Kingfisher and other UB Group entities.     

The PwC inquiry prima facie revealed that between 2010 and July 2013, certain transactions entered into on behalf of USL appear to have been undertaken to show a lower exposure of the USL and its subsidiaries to United Breweries (Holdings) Ltd than that which actually existed at the relevant time, i.e., prior to July 2013, as per a statement by United Spirits.

It was on the basis of this report that the board of USL asked Mallya to resign as the chairman of USL this Saturday. After a defiant Mallya refused to resign, the company decided to call a shareholders’ meeting to oust Mallya apart from informing the relevant authorities. But Mallya says the PwC report is based on half-truths and is “parroting” the script written by current Managing Director and CEO Anand Kripalu.

United Spirits was taken over by British liquor major Diageo in November 2012 in a $2.1-billion deal.  After its takeover, USL had asked PwC to conduct an audit after the new auditor BSR & Co pointed out lack of clarity on liabilities worth Rs 2,100 crore in its report for the FY14. The due diligence conducted by Deloitte LLP for Diageo was also silent on these related party transactions.  

No wonder, Mallya is on the offensive. "PwC made no effort to contact the then USL board members or auditors to verify the position and seek clarity. In addition, the current USL board consists of directors appointed at the behest of Diageo and who have absolutely no knowledge of the past," Mallya said. As per an agreement with Diageo, Mallya can remain the Chairman and director of USL for five years beginning 2013.

"The PwC report is based on half-truths and twisted facts against the previous management and a robust challenge to the report will be submitted. The inferences and allegations are unjustified and false and we were deprived of the opportunity to place correct and complete facts before the new board of USL," Mallya said.

USL stock fell by 3.5 per cent on Monday and closed at Rs 3,294 on the BSE.