The auditors of Indian software giant Satyam, who were partners of PwC at the time, have been found guilty by a Hyderabad court for their role in the biggest corporate fraud of the country’s recent history, dubbed the Indian Enron for its similarities with the case that shocked the US in the 2000s.
The court has given Subramani Gopalakrishnan and Talluri Srinivas seven-year sentences for their assistance to cover up the scandal as they "knowingly failed to point out the fraud and actively connived" with top senior executives.
The scandal emerged in 2009, when Satyam founder and chairman Ramalinga Raju, who will serve the same sentence, admitted he had inflated the accounts by around $1.47bn.
The court stated the fraud spanned for over a decade, inflating balance sheets certified by the company’s external auditors, which wrongly projected a false growth of 25% every quarter.
The scandal had an international dimension as the company also traded equity shares in the New York Stock Exchange.
In 2012 the US Securities and Exchange Commission criticised the audit firm for its role in the scandal, and fined it $6m.
In April last year the Institute of Chartered Accountants India (ICAI) barred Gopalakrishnan and Srinivas from practising as chartered accountants.
ICAI also barred a third member Prabhakar Gupta, Satyam internal auditor, sentenced on the same grounds as the two ex-PwC partners.
Auditors as whistle-blowers
As a result of the Satyam scandal, Indian corporate laws introduced bold measures to engage auditors in the early detection of fraud.
Under the recently enacted Companies Act, auditors who suspect that fraud has been committed against the audited company have to report it immediately to the central government.
ICAI issued last year guidance to comply with the regulatory changes, which according to the institute, placed an unprecedented level of responsibility on auditors, envisaging them in the role of a whistle-blower.
According to these rules, auditors who have sufficient reason to believe an offence involving fraud is being, or has been, committed by its officers or employees, are required to forward a report to the company’s board or audit committee immediately and seek their reply or observations on the report within 45 days.
Once auditors receive the feedback from the board or audit committee, they must forward it alongside the initial report to the central government within 15 days, which will be no later than 60 days from when the alleged fraud came to the auditor’s knowledge.