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Satyam Publishes Financials, India Seeks Auditor Liability – Impacts on Big Four

Satyam Publishes Financials, India Seeks Auditor Liability – Impacts on Big Four

Susan Black,
13 October 2010

(blog) We have blogged extensively about the fraud at Satyam Computers, when it was exposed by a letter from its erstwhile Chairman Ramalinga Raju on January 7, 2009, and shocked investors all over the world.

Since then, this story has taken a number of melodramatic twists and turns.

PricewaterhouseCoopers PwC India were auditors of the company and issued a statement that financials from 2000 to 2008 should not be relied upon. Later, Deloitte and KPMG were hired as forensic accountants and to publish recent financial results. The company, formerly called Satyam Computer Services Ltd., was bought by India s Tech Mahindra Ltd. in April 2009.

Mahindra Satyam reportedly hired 100 forensic investigators for auditing the books, but it said its investigation was incomplete owing to destroyed evidence. In addition, the ongoing criminal investigation also reduced access to crucial sources and records, like the computer files of the former chairman, managing director and CFO.

But just a few days ago, on September 29, 2010, Mahindra Satyam, published the audited financials for the company for years ending March 2009 and March 2010, as also the “as-published” results for years ending March 2008.

In summary, sales for year ending March 2008 was Rupees (Rs.). 84.7 billion, for year ending March 2009 was Rs. 88.1 billion and for year ending March 2010 was Rs. 54.8 billion.

The corresponding profit from operations for year ending March 2008 was Rs. 16.7 billion, for year ending March 2009 was Rs. (0.2) billion and for year ending March 2010 was Rs. 2.4 billion.

There were a number of extraordinary charges in 2009 and 2010 which reduced net profits.

The corresponding net profit for year ending March 2008 was Rs. 16.9 billion, for year ending March 2009 was Rs. (81.8) billion and for year ending March 2010 was Rs. (1.2) billion.

So it appears from these scrubbed financials that sales did decrease sharply from 2009 to 2010 but the company actually turned to producing positive operating profits.

But that’s not all with Satyam.

On September 17th, 2010, the company received a Wells notice from the SEC with potential civil fraud suit to follow. The company is also defending numerous shareholder and class action lawsuits.

The company’s stock (NYSE: SAY) is likely to delist its ADRs on or before October 14, 2010, as it will be unable to meet crucial NYSE deadline for filing GAAP statements. As per the NYSE regulation, Mahindra Satyam is required to file its restated US GAAP financial statements for the period ended March 31, 2009 on or prior to the October 15, 2010 compliance date.

And there’s action from the Indian government as well, this time to consider changing laws towards multinational audit firms, to maintain them accountable for professional wrongdoings by their Indian affiliates. Currently, domestic laws do not allow regulatory action against the global network of such firms, even if their Indian affiliates are found guilty of professional negligence. Reportedly, the government has been studying various ways and means by which it can imbibe greater transparency and accountability in the functioning of audit firms.

The Institute of Chartered Accountants of India is discussing on the global stage to gain support for the move to expand accountability of the global networks outside the country. This action appears to have met only with limited success as yet.

That’s sure to cause consternation in all the Big Four firms, as Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers all have large high-growth practices in India with great potential for revenues and profitability. And they are not willing to buy the government’s plan. “Each country should rely upon its own set of regulations and oversight to take care of any audit failure, rather than getting into each others’ jurisdiction,” an auditor with a global firm said, seeking anonymity (source: RTT News)

While PwC Global was not directly involved in the audit of erstwhile Satyam Computer Services, its local associates Price Waterhouse and Lovelock & Lewes did perform the audit. And PricewaterhouseCoopers Global has escaped the scrutiny of Indian laws.

KPMG, E&Y and Deloitte also have informal tie-ups with Indian firms for Indian audits. While Deloitte and PwC has similar names for their consulting and the audit divisions in India, KPMG and E&Y have tie-ups with domestic firms that do not share the parent’s name. For instance, KPMG has a tie-up with a domestic firm by the name of BSR & Co, while E&Y works through SR Batliboi & Co.

So this saga continues, and there will be consequences for the Big Four if current laws do change in a country that they continuously promote as one of their highest potential areas. (blog)

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