MUMBAI -- Troubled audit firm Price Waterhouse's plans to seek a stay order against the Indian regulator's ban on its local audit affiliates over the Satyam fraud case are likely to create uncertainty for the 75 listed companies it audits, including Tata Steel and Hindalco Industries.
Price Waterhouse, the Indian affiliate of global consulting and audit group PwC, is confident of getting a stay order against the ban, imposed this week by the Securities and Exchange Board of India (Sebi) for failing to uncover a 71.36 billion-rupee ($1.18 billion) accounting scam at Satyam Computer Services from 2003-2008. The firm said it was "disappointed" by Sebi's move and said it "played no part and had no knowledge of" the fraud. "We have, however, learned the lessons of Satyam and invested heavily over the last nine years in building a robust and high-quality audit practice," it said.
Price Waterhouse is reported to receive 30% of its revenues from audit practices, while the rest come from advisory and consulting. The firm has over 3,000 employees in India, covering 11 accountancy affiliates. It has been given until March to finish the audits of existing clients, and if it does not win a stay order, it will be forced to cease operations for two years.
This poses big problems for its clients.
Under Indian corporate law, companies hire an audit firm for a period of five years only, after which they are forced to rotate. The appointment of an auditor requires a shareholder resolution and board approval. But for removal, the first step would be for Price Waterhouse to offer to resign.
J.N. Gupta, Stakeholders Empowerment Services managing director and a former director at Sebi, said a company can call for a special resolution to remove an auditor, after giving it an opportunity to be heard. It would next have to approach the Corporate Affairs Ministry to apply for the removal.
Analysts say it is unlikely that Price Waterhouse will offer to resign from its audit positions given the strong stance it has taken against Sebi's action. Companies may also not want to go through a removal process and appoint a new auditor, especially if the appointment is still fresh. Tata Steel and Hindalco Industries changed their auditors in the financial year that started March 2017, according to data compiled by Prime Database.
"Companies will be in a sticky position if Price Waterhouse refuses to resign," said Gupta. "The question is to what extent will they go against a Sebi order."
Many of these companies have large balance sheets, and comprise 4.4% of the 1,692 companies listed on the National Stock Exchange, India's largest exchange by transaction value. None of them has yet disclosed how they will act.
"Why should they resign? They [Price Waterhouse] got their audits for years beyond March 2018 and if they manage to get a stay, the matter ends there," said Amarjeet Chopra, former president of the Institute of Chartered Accountants of India. "You cannot put a blanket ban [on the entire network of firms] on the basis of the fault of two companies [under the Price Waterhouse umbrella]."
The fraud at Satyam, now Tech Mahindra, became known as India's Enron scandal after founding chairman Ramalinga Raju admitted in a letter to the stock exchanges in 2009 that he had inflated revenues for many years. The event shocked the Indian markets and triggered investigations by several agencies.
In the wake of the scandal, competitors such as KPMG, Ernst & Young, Deloitte and some local accountancy firms managed to significantly increase their client numbers.
"The Big Four, between them, handled a high 420 assignments of the total 1,589 companies, or 26% of the total in 2016-17 (financial year ended March 2017). Their dominance was even stronger in the Nifty-500 subset, where they handled 253 of the 500 audits, or 51% of the total," said Prime Database. Deloitte dominates the market with 162 clients, followed by Ernst & Young and KPMG.
The affair, however, may make it difficult for Price Waterhouse to win new clients because of the damage to its reputation, and the uncertainty that a court proceeding for a stay order would bring.
New Delhi (Sputnik) — India's market regulator, the Securities and Exchange Board of India (SEBI), has imposed a two year ban on global accountancy firm Price Waterhouse (PwC) from auditing listed companies in the country after it failed to check irregularities in a $1.7 billion auditing fraud at the defunct Satyam Computer Services.
In an unprecedented 108-page order, which stems from the Satyam scandal of January 2009, SEBI bars a total of 11 entities that operate under the PwC umbrella: two PwC entities in Bangalore; two in Calcutta; two in Delhi and one in Chennai; Lovelock and Lewes affiliates in Hyderabad and Mumbai; and two Dalal & Shah firms in Mumbai and Ahmedabad from auditing listed companies in India.
The order comes into force with immediate effect. However, to avoid operational difficulties, SEBI has not stopped the ongoing assignment of PwC India.
"For removal of operational difficulties, this order will not impact audit assignments relating to the financial year 2017-18 undertaken by the firms forming part of the PwC network," SEBI said.
SEBI also ordered PwC, Bangalore and two of its erstwhile partners to jointly forfeit "wrongful gains" of about $2.06 million plus interest within 45 days.
The Satyam fraud, one of the biggest financial frauds in the country, came to the fore in the year 2009, when its's founder Ramalinga Raju admitted and confessed before market regulator SEBI about large-scale financial manipulations in the account books of Satyam Computer Service Ltd. The Satyam promoters inflated revenue and profits to showcase a healthy picture of the company when PwC was its auditor. Raju was sentenced to a seven year jail term in 2015 in connection with the fraud, along with other executives responsible for the fraud.Meanwhile, PwC is hopeful of taking a stay on the SEBI 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," Price Waterhouse said in a release.
"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," said Price Waterhouse, adding it was confident of getting a court to stay the order before it becomes effective.