The Securities and Exchange Commission has sanctioned five India-based affiliates of PricewaterhouseCoopers that formerly served as independent auditors of Satyam Computer Services Limited for repeatedly conducting deficient audits of the company’s financial statements and enabling a massive accounting fraud to go undetected for several years.
The SEC found that the audit failures by the PW India affiliates—Lovelock & Lewes, Price Waterhouse Bangalore, Price Waterhouse & Co. Bangalore, Price Waterhouse Calcutta, and Price Waterhouse & Co. Calcutta—were not limited to Satyam, but indicated a much larger quality control failure throughout PW India.
The PW India affiliates agreed to settle the SEC’s charges and pay a $6 million penalty, the largest ever by a foreign-based accounting firm in an SEC enforcement action.
In addition, the PW India affiliates agreed to refrain from accepting any new U.S.-based clients for a period of six months, establish training programs for their officers and employees on securities laws and accounting principles; institute new pre-opinion review controls; revise audit policies and procedures; and appoint an independent monitor to ensure these measures are implemented.
In a related settlement Tuesday, Satyam agreed to settle fraud charges, pay a $10 million penalty, and undertake a series of internal reforms. Since the fraud came to light, the India government seized control of the company by dissolving its board of directors and appointing new government-nominated directors, among other things. Additionally, India authorities filed criminal charges against several former officials as well as two lead engagement partners from PW India.
"PW India violated its most fundamental duty as a public watchdog by failing to comply with some of the most elementary auditing standards and procedures in conducting the Sataym audits,” said Robert Khuzami, director of the SEC's Division of Enforcement, in a statement. “The result of this failure was very harmful to Satyam shareholders, employees and vendors,"
The SEC’s order instituting administrative proceedings against the firms finds that PW India staff failed to conduct procedures to confirm Satyam’s cash and cash equivalent balances or its accounts receivables. Specifically, the order finds that PW India’s “failure to properly execute third-party confirmation procedures resulted in the fraud at Satyam going undetected” for years. PW India’s failures in auditing Satyam “were indicative of a quality control failure throughout PW India” because PW India staff “routinely relinquished control of the delivery and receipt of cash confirmations entirely to their audit clients and rarely, if ever, questioned the integrity of the confirmation responses they received from the client by following up with the banks.”
After the fraud at Satyam came to light, PW India replaced virtually all senior management responsible for audit matters. The affiliates suspended its Satyam audit engagement partners from all work and removed from client service all senior audit professionals on the former Satyam audit team.
In addition to the $6 million penalty and previously listed reforms, the PW India affiliates have consented to a censure, as well as the entry of a cease-and-desist order finding that they violated Section 10A(a) of the Exchange Act and were a cause of Satyam’s violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and relevant Rules thereunder.
In a related proceeding, the PW India affiliates also reached a settlement with the Public Company Accounting Oversight Board in which the PW India firms have been censured and agreed to extensive undertakings substantially similar to those set forth in the SEC administrative order. Additionally, Lovelock & Lewes and Price Waterhouse Bangalore have agreed to pay the PCAOB a $1.5 million penalty for their violations of PCAOB rules and standards in relation to the Satyam audit engagement.
“The reliability of global capital markets depends on auditors fulfilling their obligation to investors to perform robust audits, resulting in well-founded audit reports,” said PCAOB Chairman James R. Doty. “Two of the PW India firms, PW Bangalore and Lovelock, repeatedly violated PCAOB rules and standards in conducting the Satyam audits. These confirmation deficiencies contributed directly to the auditors’ failure to uncover the Satyam fraud.”
The PCAOB penalty is in addition to the $6 million penalty imposed today by the SEC against the five firms in the Commission’s own proceeding. The combined $7.5 million U.S. regulatory penalty imposed in this matter is the largest penalty that the SEC and PCAOB have assessed against any registered foreign accounting firm.
The board also found that all five firms violated the PCAOB’s quality control standards. In addition to the penalty, the board imposed significant limitations and undertakings related to the firms' audit activities, required the appointment of an independent monitor, and censured the firms.
In auditing Satyam’s financial statements, PW Bangalore and Lovelock used a procedure to test Satyam’s cash balance that did not comply with the PCAOB auditing standard governing the confirmation process. Contrary to their own audit plan and PCAOB standards, PW Bangalore and Lovelock relied on Satyam management to send confirmation requests to Satyam’s banks, and relied on Satyam management to return purported confirmation responses from the banks to the auditors.
The board found that deficient cash confirmation procedures contributed to the failure of the firms to detect that Satyam’s cash balance was materially overstated. Satyam management used these bank confirmations as part of a cover-up of its scheme to inflate the company’s reported cash balance by approximately $1 billion.
“Accounting firms that audit U.S. issuers, including affiliates of international accounting networks, provide an essential bulwark for investors against issuer clients that are committing fraud. PW Bangalore and Lovelock repeatedly failed to meet their obligation to comply with PCAOB standards, and these failures contributed to PW Bangalore and Lovelock failing to detect the fraud committed by Satyam management,” said Claudius B. Modesti, director of the PCAOB Division of Enforcement and Investigations.
The PCAOB’s investigation also uncovered, and its order found, that the jointly administered system of quality control of the five PW India firms failed to detect a general practice in the cash confirmation process that was not in accordance with PCAOB standards. This pervasive failure continued for many years, and went undetected by PW India’s quality control system. The firms consented to the Board’s order without admitting or denying the PCAOB findings.
As a result of the PCAOB order, the PW India firms will not be able to accept new engagements to audit U.S. issuers until an independent monitor determines that PW India has made significant progress toward completing the undertakings required by the PCAOB order. Also, the PW India firms will not be able to accept new referred U.S. issuer audit work for a period of six months.
In addition, the PW India firms agreed to implement sweeping changes to their quality control policies and procedures, and to certain undertakings intended to improve audit quality at the PW India firms, ensure compliance with PCAOB rules and standards, and protect investors.
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