PwC banned from India for two years due to failure over Satyam

PwC has been banned from auditing listed companies in India for two years as of 31 March by India's regulator Sebi due to its failure to detect fraud over $1bn at IT services firm Satyam Computer Services. In a damning report, Sebi said PwC ignored many red flags and "glaring anomalies...which were all too obvious for any reasonable professional auditor to miss." PwC at present audits 43 of India’s 500 most valuable listed companies, like Tata Steel, and this move by Sebi will cause audits to cease by PwC of 75 Indian companies. However, the ban only applies to listed companies in India, not for unlisted subsidiaries of multinationals.

Indian regulator the Securities and Exchange Board of India (Sebi) has banned Big Four firm PwC from auditing listed companies in the country for two years, coming into effect 31 March.

The ban was imposed due to PwC’s failure to detect fraud over $1bn at IT services company Satyam Computer Services in one of the country’s largest corporate scandals, dubbed India’s Enron.

Sebi stated that as Satyam’s auditor PwC ignored several red flags and “glaring anomalies” in the company’s reports “which were all too obvious for any reasonable professional auditor to miss”.

In 2009 Satyam chairman Ramalinga Raju resigned and confessed to wide-ranging fraud spanning five years, which saw the company inflating its earnings by over $1bn and overstating the company’s headcount by 13,000.

In discussing the fraud Raju explained: “It was like riding a tiger, not knowing when to get off without being eaten”, as the deception grew to “unmanageable proportions.”

Raju and 10 other co-conspirators were convicted of corporate fraud in 2015 but are currently all out on bail.

In a damning 108 page order Sebi claims the fraud was able to flourish partly due to PwC’s failure to “independently check the veracity of the monthly bank statements”.

Sebi explained it was compelled to take a “stern view of market abuse and fraudulent practices, particularly when persons tasked with protecting the interest of investors are themselves hand-in-glove with the main perpetrators of the fraud”.

PwC denied any intentional wrongdoing, stating: “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.”

“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.”

The ban prevents PwC from auditing any listed companies in India, but this does not apply to unlisted subsidiaries of multinationals.

PwC and affiliate firms will be permitted to complete any outstanding audits for the financial year 2017-2018, as well as any audits for clients who follow the financial year beginning January 2018. However, the Big Four firm will not be permitted to take on any new assignments or clients.

Along with the audit ban PwC was ordered to return wrongful gains of Rs130m ($2m), along with 12% interest per year for the past eight years.

When the scandal was uncovered the firm was fined $6bn by the SEC (US Securities and Exchange Commission) for falling short of audit standards.

Following revelations of fraud Satyam Computers collapsed in 2009, costing shareholders over $2bn. The company was then sold to rival Tech Mahindra, becoming Mahindra Satyam in a merger in 2012.

PwC audits 43 of India’s 500 most valuable listed companies, including Tata Steel, and the ban will cease its audits of 75 Indian companies.

The Big Four firm is seeking a stay on the ban.

An earlier version of this article incorrectly stated PwC’s appeal was rejected by the Securities and Appellate Tribunal (SAT). The SAT did not agree to stay the order but has agreed to hear the appeal by the end of February.