Saturday, January 10, 2009

Satyam Computer: Pricewaterhouse Defends Its Audit Procedures

NEW DELHI -- PricewaterhouseCoopers, which signed off on Satyam Computer Services Ltd.'s finances for several years without detecting the fraud by Satyam's founder and chairman, defended its procedures on Thursday.
PricewaterhouseCoopers said, in a statement sent by email, "The audits were conducted by Pricewaterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence." It said it is cooperating with regulators.
Satyam Chairman B. Ramalinga Raju said Wednesday that he had created a fictitious cash balance of more than $1 billion and inflated accrued interest, profits and debts owed to the company.
A PricewaterhouseCoopers spokesman declined further comment. Srinivas Talluri, the PricewaterhouseCoopers partner who signed off on Satyam's most recent annual accounts in Hyderabad in April last year, couldn't be reached.
Satyam's board relied on the PricewaterhouseCoopers verified results in their deliberations, Satyam's interim Chief Executive Ram Mynampati said at a press conference Thursday. The company is assessing whether it will change its auditor, he said.
Indian accounting standards are broadly similar to international standards. And Satyam adopted international financial reporting standards for results for fiscal 2008. Since the company is listed in New York as well as Mumbai, it is also subject to the Sarbanes-Oxley financial standards regulation.
Among the bookkeeping problems, Mr. Raju said the company stated the amount owed to it by debtors as $545.65 million, compared with an actual position of $444.81 million.
As part of an end-of-year audit, accountants would have had to verify the amount of money owed to the client, said Neeraj Bhagat, chief executive of accountancy firm Neeraj Bhagat & Co. in New Delhi. Normally, auditors contact the client's business partners directly and check that the amount of money owed tallies with what the client says.
Also in his letter, Mr. Raju said the company's cash and bank balance had been inflated by more than $1 billion dollars. This is "the easiest thing to verify," said Vishesh Chandiok, national managing partner in India of accountants Grant Thornton.
Normally, checking bank statements wouldn't be considered sufficient under Indian or U.S. rules -- the auditor would also need to get direct confirmation from the bank.
For investors who relied on Satyam's financial statements, the fraud would have been difficult or impossible to discover. "When a fraud goes so far as to misreport cash, finding warning signs of the fraud becomes quite problematic," said Charles Mulford, an accounting professor at the Georgia Institute of Technology.
There were some red flags though. One indication of fraud accountants often look for is a discrepancy between net income and operating cash flow, the amount of cash a company spits out from its operations.
In its fiscal year ended March 31, 2008, Satyam's net income grew 40%, while operating cash flow grew by 30%. But in the previous fiscal year, net income rose by 20% compared with a 61% increase in operating cash flow, a difference that would have been noted by investors and analysts looking for signs of trouble.
Another warning sign was a sharp increase in assets held in the company's bank deposits. In fiscal 2008, Satyam had $826.7 million worth of bank deposits, a 7.7% increase from fiscal 2007 but more than double the amount from 2006, when the company had $403.7 million in bank deposits.
Satyam also needed to comply with a Sarbanes-Oxley rule requiring companies to document their internal controls for financial reporting, Mr. Chandiok said. Both the chief executive officer and the chief financial officer must certify the company has sufficient controls in place and to confirm those controls are working effectively. This is then certified by the auditors.
India's professional body for accountants, the Institute of Chartered Accountants of India, is investigating Pricewaterhouse's auditing of Satyam, Ved Jain, its president said. It has the power to revoke licenses to practice and debar members.

No comments: