9 years on, accounting firm PricewaterhouseCoopers finally penalised for the Satyam scam

By Aditya Gupta

It has been nine years since Ramalinga Raju came clean about his involvement in the Satyam scam. Satyam Computers began in Hyderabad, and soon created a name for itself in the business process outsourcing sector. The company was soon competing with revenues and performance standards at an international level. As it is often said, however, all that shines is not gold, and thus Satyam too was not what it presented itself to be.

The Satyam scam

The Satyam accounting fraud is often referred to as the Enron scam of India, as it managed to be a part of the ten biggest accounting scandals of all time. The entire scam revolved around the manipulation of accounts to present a rosy figure, leading to the inflation of stock prices. With this inflation comes the increased profits of the shareholders, hence a situation where nearly everyone is happy, therefore leaving no room for suspicion. The assets of the company were overestimated by $1.04 billion, by presenting an investment in non-interest bearing deposits. This inflation was fabricated by creating over 5,000 fake salary accounts from Ramalinga Raju’s personal computer. Due to such a positive image of the company prevalent amongst the public, the growth rate of Satyam in 2008 went up to 35%, along with operating profits increasing at 21% and Earnings per Share (EPS) jumping from $0.12 to $0.62. This price soar was visible across the Indian as well as American markets; its share was peaking to Rs. 526.25. Satyam was doing better than ever before and was bound to grow further.

This period of boon soon came to an end when Ramalinga Raju began to look for a way out and figured that there was no longer any form of escape. Satyam had decided to acquire Maytas Infrastructures Limited in the hope that it could use Maytas’ assets in its own book in order to cover up the massive blank spaces that had been created over time. Satyam’s mistake was that it did not inform the shareholders who were greatly aggravated, and a few even left the board. This was the point where Ramalinga Raju realised there was no escaping from this and decided to confess his fraud.

Consequences of Raju’s confession

Every document involved in Satyam’s business was legally authorised and signed by PricewaterhouseCoopers (PwC). It is a shock in itself that none of the Board members knew about the scam, and that even the auditing firm had no idea, as every document eventually goes through them. This directly points to the fact that nobody ever thought such a thing would ever happen. PwC still admits to having played no part in the execution of this scandal, but a small detail recently revealed that the case could have been completely different. Satyam used to pay PwC twice the amount any other firm paid to its auditing firm. Could this have been a bribe to cover up? We may never find out, but there certainly is some evidence of PwC’s involvement. This scam revealed the underbelly of the corporate world. It is the common view that this scam not one of accounting fraud or legal negligence, this was a scam of corporate governance. Greed took of over basic human nature. The shareholders lost a sum of $2.82 billion, because of the selfish ideals of a small group of people. The Chief Executive Officer (CEO), Chief Financial Officer (CFO), internal auditor and mysteriously, the auditing firm can all be held responsible for this loss.

Looking back at this entire fiasco, one thing which stills bats the eye is that accounts were not individually verified by the banks in question. Now, this could be out of pure negligence, or the fact that accounts had the signature of PwC on them, making them authorised and no longer requiring a need for verification.

PwC held accountable

Over SEBI’s 9-year long investigation, many facts have come to light, which has led to PwC’s diminished reputation in the market along with the legal action taken against it. The primary factor being that Merrill Lynch could find the discrepancy in the accounts in a period of mere 10 days, where PwC couldn’t locate any errors in 10 years.

So finally, PwC has been a fined a sum of $7 million for the losses it caused to the shareholders. PwC cannot audit any publicly listed companies or any of their intermediaries for a period of two years. S. Gopalakrishnan and Srinivas Talluri must disgorge their wrongful earnings by the repayment of a sum of Rs. 13,09,01,664 with interest at the rate of 12% p.a. calculated from January 7^th, 2009. This sum must be repaid with a period of 45 days.

It has taken nine years to come to this conclusion, where the auditing firm is being made to pay compensation. Nonetheless, after such a traumatic incident with Satyam, PwC has still managed to maintain its name in the market. Satyam has yet again started soaring to new heights. Hence, one mistake doesn’t necessarily lead to the end of a company, an adage which clearly serves to be true with PwC as well, which may soon regain its reputation as one of the big four auditing firms in the market. Regaining the people’s trust is a long process, one which the company must endure.

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