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January 27, 2009

ICAI president leaps to defence of Indian profession

Institute of Chartered Accountants of India (ICAI) president Ved Jain has defended the Indian audit profession in the wake of one of the nation’s largest cases of corporate fraud.

Jain has also argued that the fact the fraud was not picked up by the auditors is not a sign the nation needs its own version of the US Public Company Accounting Oversight Board (PCAOB).

The scandal came to the light on 7 January when Satyam Computer Services founder and chair Ramalinga Raju wrote to the company’s board, admitting to fraud totalling more than INR7,000 crore ($1.44 billion). Most of the missing assets were in the form of cash and bank balances.

Satyam employs about 53,000 people and reported revenue of $2.14 billion in its 2008 fiscal year.

Price Waterhouse, the Indian member firm of PricewaterhouseCoopers, has come under investigation for its audit of Satyam’s accounts from 2000 to 2008.

Jain said the whole profession is concerned by the incident.

“It has raised serious issues about our profession here,” he said. “But we are sure that all indications to date are that it is one accident that has happened.”

Jain said the institute believes it is impossible for an auditor to miss the inconsistencies for such a long period.

“It is very difficult to believe auditors can overlook this. If that is the case then the whole of the auditing and accounting profession needs to have a relook at their role,” he said.

After former global accounting firm Arthur Andersen was implicated in the collapse of Enron in the US, part of the US government’s response was to form the PCAOB, which is independent from the profession. The Indian audit profession is regulated by the professional body, the ICAI, however, Jain said similar action in India is not warranted. He said the PCAOB had oversight of Price Waterhouse because Satyam is listed on the New York Stock Exchange.

“I have been told the PCAOB team has visited and inspected Price Waterhouse last year,” he said. “So the obvious answer is the PCAOB is not the answer to this problem.”

Jain said the fraud is not a sign the regulatory system needs to be re-examined.

“It is human greed that has overtaken the persons. We need to identify who is involved and how they did it,” he said.

The institute has established a special committee to investigate Price Waterhouse.

The committee chair and ICAI vice-president Uttam Agarwal told The Accountant he has received Price Waterhouse’s working papers and reports from the past five years.

The technical team is examining the documents and in early February will reveal the findings.

Indian law gives the ICAI power to discipline individual chartered accountants, but not firms as a whole. However, the institute has devised a ‘naming and shaming’ technique. It plans to publish on its website the names of firms with partners that have been found guilty of misconduct.

The ICAI has also asked the Securities and Exchange Board of India (SEBI) to forbid listed entities from appointing as auditors a firm whose partners have been found guilty of professional misconduct by the ICAI.

Police investigation

Price Waterhouse chief relationship partner S. Gopalakrishnan and engagement leader Srinivas Taluri have been detained by police as part of the fraud investigation.

Gopalakrishnan is an elected member of the ICAI council.

Agarwal said Gopalakrishnan has not been asked to stand down, but is not participating in any meetings related to the case.

Agarwal was unable to comment on what damage the Satyam affair will have on the reputation of Price Waterhouse in India. He said no evidence has emerged so far of any faults in the firm’s audits or collusion between the firm and the former Satyam chair. However, Indian media claims police investigations have found evidence of collusion.

It is also too early to say whether audit rules are effective, or need to be revisited, Agarwal said. Jain said positives have emerged from the situation, including the co-operation between authorities.

“We will ensure that expeditious and exemplary punishment will be given to whoever is guilty so as to discourage people from doing these type of things in the future,” he said.

Carolyn Canham

TIMELINE Satyam fraud case – how it unfolded

• 7 JanuarySatyam founder and chair Ramalinga Raju writes to the company’s board, admitting to a hole of more than $1.44 billion

• 9 JanuaryThe SEBI decides to bring in peer review of the working papers of auditors of the companies constituting the National Stock Exchange of India’s Nifty 50 and the Bombay Stock Exchange Sensitive Index

• 10 JanuaryICAI serves Price Waterhouse with a show-cause notice regarding its audit of Satyam’s accounts

• 12 JanuaryICAI says it will publicly name firms whose partners have been found guilty of misconduct

• 13 January – Price Waterhouse writes to the Satyam board to say that in the light of Raju’s confession, its audit reports for the quarter ended 30 June 2000 until the quarter ended 30 September 2008 should no longer be replied upon

– The ICAI forms a high-level committee to look into issues arising from the case

– The Indian media reports police search the offices of Price Waterhouse in Hyderabad

• 14 JanuarySatyam appoints Deloitte and KPMG to restate its accounts • 25 JanuaryPolice detain Price Waterhouse chief relationship partner S Gopalakrishnan and engagement leader Srinivas Taluri to investigate them for fraud and criminal breach of trust

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