India's capital market regulator has banned global auditing firm Price Waterhouse (PW) from auditing listed companies in India for two years for its alleged role of collusion with the directors and employees of erstwhile Satyam Computer ServicesBSE 0.00 %, in perpetrating the country's biggest corporate accounting scandal.
"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 ... for a period of two years," Sebi wholetime member G Mahalingam said in a late night order on Wednesday.
"Any enforcement measure taken by Sebi with a preventive and remedial object, as envisaged under Section 11B of the Sebi Act, would not serve the purpose unless the directions bring within its fold the PW network operating in India. The objective of insulating the securities market from such fraudulent accounting practices perpetrated by an international firm of repute will be ineffective if the directions do not bring within its sweep the brand name PW," Sebi said. "The network structure of operation adopted by the international accounting firm should not be used as a shield to avoid legal implications arising out of the certifications issued under the brand name of the network."
The regulator has banned former Price Waterhouse partners S Gopalakrishnan and Srinivas Talluri, who had signed off on the accounts of Satyam for eight years till the accounting fraud came to light in January 2009, from auditing listed companies for three years.
PW Bangalore, Gopalakrishnan and Talluri have been directed to disgorge wrongful gains of Rs 13.09 crore with an interest of 12% per annum from January 7, 2009, till the date of payment.
Sebi said PW firms benefited from the relationship with Satyam Computers by having collectively received a fee of Rs 23.31 core during 2000-08. Of this, Rs 13.09 crore was paid to PW Bangalore for Satyam's audit.
"Listed companies and intermediaries registered with Sebi shall not engage any firm forming part of the PW network for issuing any certificate with respect to compliance of statutory obligations which Sebi is competent to administer and enforce, under various laws for a period of two years," Sebi said in its 108-page order.
Sebi said the order would come into force with immediate effect. However, to remove operational difficulties, the order will not impact audit assignments relating to FY18 undertaken by firms forming a part of the PW network.
"As laid down by the Hon'ble Supreme Court, it is incumbent on Sebi to take stern view of market abuse and fraudulent practices, particularly when persons tasked with protecting the interest of investors are themselves hand-in-glove with the main perpetrators of the fraud," Sebi said.
Price Waterhouse said it was disappointed. "We are disappointed with the findings of the Sebi investigations and the adjudication order. The Sebi order relates to a fraud that took place nearly a decade ago in which we played no part and had no knowledge of. As we have said since 2009, there has been no intentional wrongdoing by PW firms in the unprecedented management-perpetrated fraud at Satyam, nor have we seen any material evidence to the contrary. We believe that the order is also not in line with the directions of the Hon'ble Bombay High Court order of 2010 and so we are confident of getting a stay before this order becomes effective," the firm said.
"We have however learnt the lessons of Satyam and invested heavily over the last nine years in building a robust and high-quality audit practice, as also confirmed in 2015 by an independent monitor appointed by the US SEC (Securities and Exchange Commission) and PCAOB (Public Company Accounting Oversight Board)," Price Waterhouse added.
The case relates to the Satyam scandal, where the promoter and chairman B Ramalinga Raju fudged the accounts by Rs 9,000 crore. On January 7, 2009, Raju confessed the largescale financial manipulation in the books of Satyam.
Following this, Sebi initiated an investigation and found that certain directors and employees of Satyam had connived and collaborated in the overstatement, fabrication and misrepresentation in the book of accounts and financial statements of the company. The investigation also noted that the statutory auditors of Satyam had connived with the directors and employees in falsifying the financial statements.
"A common investor's reliance on the audit certifications of Satyam Computer 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," Sebi said.