PwC audit in spotlight after $1bn fraud at Indian outsourcer

Accounting fraud by Satyam chairman is being called 'India's Enron'.

PricewaterhouseCoopers has said it will cooperate fully with regualtors after a $1bn accounting fraud was uncovered at its audit client Satyam Computer Services, one of India's largest offshore outsourcers.

The chairman of Satyam, Ramalinga Raju, one of India's largest outsourcing providers, has resigned after admitting to inflating profits by about $1bn (£682m) over a number of years.

The fraud, which has been described as 'India's Enron', has rocked the country's outsourcing industry.

In a statement, Pricewaterhouse India said:

'The audits [of Satyam] were conducted by Price Waterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence. ''Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities. Price Waterhouse will fully meet its obligations to cooperate with the regulators and others.'

Satyam's share price collapsed by more than 60% after its fraud emerged, and reports claimed that Merrill Lynch has terminated its contract with the company.

Investors of Satyam, embroiled in a billion-dollar fraud scandal, are demanding to know why auditors from PricewatehouseCoopers failed to detect the accounting irregularity.

PwC's role in the Satyam scandal is set to be investigated by the Securities and Exchange Board of India, the markets watchdog, and the Indian government's anti-corruption office, the Times reported.

Only ten days after being brought in by the company to explore merger opportunities, Merril Lynch found that the books did not balance. PwC India has been handling Satyam's audit since 2000.

When PwC's affiliate in Japan, ChuoAoyama, found itself embroiled in a scandal not only did it suffer a two month ban from auditing by the country's financial watchdog, its clients started to leave in droves. PwC was so concerned it revealed plans to open a new Tokyo firm using the PwC brand.

This was hugely damaging for the business in Japan but the firm, internationally, was unaffected.
Likewise when Grant Thornton International got caught up in Italy's Parmalat scandal, the chief executive David McDonnell unceremoniously dumped the Italian network member Grant Thornton Spa.
Both actions appeared to stop the reputational contagion spreading to the rest of the firm. Unlike, of course, with Andersen once the Enron explosion took place.

So, the question is: if it really turns sour for PwC in India what effect will it have on the rest of the firm worldwide?

So here's a prediction. The Satyam debacle could be horrible for PwC in India. But even if it turns out to be bigger than the $1bn being touted, and the auditor involved in some inappropriate way (though once again there is no way of concluding that at the moment) the effect on PwC worldwide will be negligible.

Source: Accountancy Age