Lessons from Satyam

The manner in which the firm was wound down is the only lesson worth preserving

Nine years after the shenanigans in Satyam Computer Services Ltd (Satyam) came to light, Securities and Exchange Board of India (Sebi) in its order has found Pricewaterhouse Cooper (PwC) and its network firms guilty and has barred them from issuing audit certificates to any listed company in India for two years. In addition to barring PwC, Sebi has also ordered PwC and its two erstwhile partners who worked on the Satyam audit to pay Rs 130.9 million, along with interest at 12 per cent per annum from January 2009 on account of wrongful gains. And Sebi registered entities cannot avail PwCs assurance services. This is one of the most stringent orders passed by any regulator against a Big Four auditor.

Looking at the order, it is clear that PwC the regulators and even companies other than Satyam, have muddled through this saga. As the Sebi order has repeatedly stressed PwC failed to do its job as it was even unable to verify whether the money was in the bank.

Since the scam broke, PwC has strengthened its processes, stepped up training of its staff, provided pushback on aggressive interpretations and shed audits of companies with questionable antecedents. But even as PwC has been doing so, it has been fighting regulators in court over a crime its perpetrator has admitted to committing. 

The Companies Act 2013 mandates rotation of individual auditors every five years and of the audit firm after a maximum period of 10 years for listed companies. Roughly 70 companies appointed PwC last year.

These companies can be said to be guilty of reading the regulators mind and suo moto assuming that only a soft penalty will be imposed on the auditor. It never pays to second guess the regulator. These companies will now scramble to appoint a new auditor for FY19 — all along maintaining that they are the victims. 

PwC will no doubt be appealing against the order and in the words of their chairman’s missive to their clients, “expect a positive outcome”. But PwC’s new clients are left cleaning up. Whether the new firms get appointed for two years, the remainder PwC term or five years itself will now be debated.

PwC is allowed to audit the books in FY18, but not in FY19 and FY20. Investors will want to know that if PwC is competent to audit in FY18, then why can it not do so in FY19 and FY20? If Sebi is not convinced about the checks and balances that PwC now has in place, then they should not be allowed to audit the books of accounts in FY18. In this sense, the order contradicts itself. 

There are other subtexts too. Some real, others imagined. One, that this is a reaction to PwC paying a fine in the US but getting away in India and so Indian regulators needed to step up their game. Two, that Sebi is using this to establish jurisdiction over auditors in listed companies. This finds mention in the Kotak Committee and Satyam is a good case to begin. Three, Chartered Accountants (Amendments) Act, 2006 spells out the quantum of fines that can be imposed on auditors by its Disciplinary Committee. Even as the government is proposing to set up the National Financial Reporting Authority, to keep a check on auditors, the proposed maximum fine is Rs 1 million and up to ten times the fees received. This needs a complete overhaul. Penalties need to be increased substantially. In the absence of this change, action will not be punitive, and the best we can hope for is a wobbly fix. Four, the debate on the role, responsibility, and liability of the partners, the partnership, the audit firm and the audit network will continue. Five, PwC has its tentacle spread. Example, it is investigating the CoLo case for NSE. Such cases now need to be unpacked.

Given the above, the optimum outcome would have been if fines were punitive. Allowing, stopping and then allowing PwC from signing of accounts is disruptive. The time since the scandal broke should have been used to negotiate the level of penalty. If the Institute of Chartered Accountants was not on board, the consent mechanism should have been modified to negotiate exemplary fines. The companies should not have second guessed the regulators and having misread them, must unfortunately be prepared to pay the price. PwC should not have appealed various matters in court, but played with a straight bat. The manner in which Satyam was wound down is the only lesson worth preserving. 

Amit Tandon works with Institutional Investor Advisory Services. Views are personal. Twitter: @amit.tandon_in