The Securities and Exchange Board of India (SEBI), on Wednesday, barred Price Waterhouse (PW) from auditing any listed company in India for a period of two years for its alleged role in the multi-crore Satyam scam.
"Entities/firms practicing as Chartered Accountants in India under the brand and banner of PW, shall not directly or indirectly issue any certificate of audit of listed companies, compliance of obligations of listed companies and intermediaries registered with SEBI and the requirements under the SEBI Act, 1992, the SCRA 1956, the Depositories Act, 1996, those provisions of the Companies Act 2013 which are administered by SEBI under section 24 thereof, the Rules, Regulations and Guidelines made under those Acts which are administered by SEBI for a period of two years," SEBI whole-time member G. Mahalingam ruled.
SEBI has also ordered PW Bangalore and its two erstwhile partners — S. Gopalakrishnan and Srinivas Talluri — to jointly and severally disgorge the wrongful gains of “Rs 13,09,01,664 with interest calculated at the rate of 12 per cent per annum from January 7, 2009 till the date of payment”. The amount needs to be paid within 45 days.
It, however, clarified that the order will not impact audit assignments relating to the financial year 2017-18 undertaken by the firms forming part of the PW network.
The Case Journey
The order comes 9 years after the scam at Satyam Computer Services came to light with its founder Ramalinga Raju admitting to cooking up books in 2009. The SEBI had then issued a notice to PW, noting that it had accepted Satyam’s monthly bank statements as final even though they didn’t match with the company’s daily bank statements. SEBI had also found that PW had not complied with the auditing standards prescribed by the Institute of Chartered Accountants of India.
This notice was challenged before the Bombay High Court, contending that SEBI did not have jurisdiction over auditors. The High Court had, however, rejected this argument. Thereafter, PW had contested the notice before the Securities Appellate Tribunal (SAT), asserting that SEBI had denied it the right to cross-examine witnesses. The SAT had accepted such contentions and had directed SEBI to cross-examine several individuals, including Mr. Raju. SEBI's appeal against this order was unsuccessful.
In the 108-page order, SEBI opined that PW displayed a complete disregard for stipulated auditing practice, indicating its complicity in the manipulation.
"A common investor’s reliance on the audit certifications of SCSL at the relevant point of time was dependent on the fact that it was attested by one of the internationally reputed firms called PW. The public had no reason to believe that the audit reports were false and misleading. In this context, the long period during which the falsification of account books took place, without the same drawing the attention of PWCIL or other PW entities in India, points to a systemic problem in the audit processes carried out by the PW entities. This failure of quality control system of PW India has also been pointed out by SEC and PCAOB in their orders cited in the foregoing paras," it observed.
SEBI noted that PW had relied on the documents, such as bank account statements fixed deposit statement, that originated or had been sourced from the company itself. It then opined that verifying or taking direct confirmation of bank balances from the banks could have exposed the scam earlier.
SEBI, therefore, felt outraged at the long period of accounts falsification, asserting that it pointed to a systemic problem in the firm's accounting processes. It observed, "All these lapses and several others as dealt with before in this order, on the part of the statutory auditors, do throw up gaping holes in the auditing process followed by the auditors. The auditors could have done justice to their audit process had they just followed the Auditing Standards and Guidance Notes scrupulously. I find that while the Noticees have justified their acts by selectively quoting from various AAS, the marked departures from the spelt-out Auditing standards and Guidance Notes are too stark to ascribe the colossal lapses on the part of auditors to mere negligence. It is inconceivable that the attitude of professional skepticism was missing in the entire exercise spanning over 8 long years."