Hyderabad: Price Waterhouse auditors intentionally failed to apply certain audit standards to Satyam Computer Services Ltd, enabling

the firms founder B. Ramalinga Raju and others to perpetrate Indias largest accounting fraud, the countrys federal investigative agency, the Central Bureau of Investigation (CBI), has said in its latest findings. The findings, which have been reviewed by Mint, form the basis for the agencys claim, in its supplementary charge sheet, filed on 24 November, that it had further evidence on the role of Price Waterhouse auditors in the fraud. The agencys findings are based on its study of audit standards applied by the same Price Waterhouse auditors involved in laffaire Satyam while auditing the accounts of another Hyderabad-based listed software firm, Infotech Enterprises Ltd. Price Waterhouse partners S. Gopalakrishnan and Srinivas Talluri, who had signed off on the accounts of Satyam for eight years till the accounting fraud came to light in January, were also found to have signed off on accounts of Infotech Enterprises for several years till March. PricewaterhouseCoopers Ltd India executive director Jairaj Purandare said his firm was yet to receive a copy of the charge sheet and could respond to the charges only after obtaining legal advice. CBI, which is investigating the fraud at SatyamRaju confessed on 7 January to overstating the software outsourcers accounts by at least Rs7,136 croresaid in its supplementary charge sheet that it had found evidence of an additional Rs4,739 crore fraud at the company. Tech Mahindra Ltd, part of the Mahindra group, gained a controlling stake in Satyam in an auction conducted in April. CBI had, in its first charge sheet on 7 April, accused Ramalinga Raju, his elder brother and then managing director B. Rama Raju, younger brother and director of SRSR Advisory Services Pvt. LtdB. Suryanarayana Raju, and the then chief financial officer Srinivas Vadlamani of perpetrating the fraud. Satyams auditors, Price Waterhouses S. Gopalakrishnan and Srinivas Talluri, also figured among the accused. Three former senior officials of Satyam are also among the accused: vice-president G. Ramakrishna, senior manager D. Venkatapathi Raju, and assistant manager C. Srisailam. All the accused except Suryanarayana Raju, who obtained bail, are in judicial custody in the Chanchalguda Central Prison in Hyderabad. In its latest findings, CBI said that while the same Price Waterhouse auditors, in an effort to ascertain the authenticity of sales invoices raised by Infotech Enterprises, had collected the live invoice samples directly from the relevant computer systems while conducting the statutory audit, they had not done so in the case of Satyam.

In the case of Satyam, CBI added, the auditors preferred to rely upon hard copies supplied by the key accused. Similarly, in the case of Infotech Enterprises, the auditors had obtained direct confirmation on the requisite pro-forma from the bankers and also reviewed online the current account balances of the firm. In the Satyam case, CBI said, the auditors relied upon forged bank confirmation letters supplied by the other accused while conducting the statutory audit and also failed to verify the companys current account balances online. The blatant deviations adopted by the auditors auditing Satyam accounts, CBI added, showed their underlying conspiracy with the other key accused in the accounting fraud. The auditors, the agency said, had written directly to the debtors and vendors while conducting the audit at Infotech Enterprises but failed to adopt similar protocol while auditing Satyam. CBI also claims to have found evidence of Talluri directing his team members to discontinue the procedure of obtaining the confirmations from debtors and vendors in respect of Satyam Computer Services Ltd from September 2007 onwards. The agency also said both auditors paid no heed to the findings of the System Process Audit Team which had pointed out several IT system control deficiencies. The System Process Audit Team at Satyam had, in fact, warned both the Price Waterhouse auditors that these deficiencies are significant in nature which can affect the genuineness of the financial statements of the company and hence reliance cannot be placed on the IT system controls, according to CBIs findings. CBI has accused the auditors of taking part in the conspiracy by failing to inform the (companys) audit committee about the system control deficiencies that were significant in nature. Instead, the auditors had wrongfully presented to the audit committee that the system control deficiencies are insignificant. In an unreleated development PricewaterhouseCoopers announced on Monday the appointment of Gautam Banerjee as chairman of PricewaterhouseCoopers India network of entities. He replaces Ramesh Rajan, who resigned as chairman last week. Price Waterhouse is one of PricewaterhouseCoopers audit arms in India.

Raju, 53, on Wednesday confessed in a letter to Satyam's board of directors to inflating profits for years with "fictitious" assets and non-existent cash. Raju said that about $1.04 billion, or 94% of the cash listed

in assets at the end of the company's second quarter in September, was fictitious. Debate in Mumbai is now focusing on whether Satyam, India's fourth-largest computer software company, or its multinational auditors, PricewaterhouseCoopers (PwC), was more to blame for what is possibly corporate India's worst scandal. Discussion with accountants in the city ranging from senior through mid-level to junior levels left little doubt that questions were being asked most of the accounting firm. Contrary to perceptions that this is a brand new financial scandal, the Satyam fraud appears the latest variant of financial scams involving manipulating information with the aim of duping investors, while involving regulatory and accounting practices not traditionally used in India. Accountants this correspondent conversed with were emphatic that it was impossible for auditors using traditional Indian accounting practices to be unaware of financial irregularities of this magnitude, particularly over a period of years. Perceptions that the Satyam scandal has destroyed confidence in Indian companies also appear misplaced - not least because there was no similar generalized indictment of Western companies after financial frauds involving most notably Enron (2002) and the $9 billion Worldcom accounting fraud the same year. Most notably in this respect, Satyam employed a Western auditor using an international accounting mechanism yet to be introduced widely in India, one that ironically was meant to give investors more transparent and accurate information of the financial state of the company. This claim now rings with the same bitter hollowness as the "best practices" that advocates in the West of "free markets" were stridently urging Asian governments to adopt before the Goldman Sachs-led global crash of last year. The Satyam scandal has in fact come at an interesting time for the Institute of Chartered Accountants of India (ICAI), the six-decade-old main regulatory accounting body based at the blue glass-fronted ICAI Bhawan in New Delhi. The 145,000 member-ICAI, the second-largest accounting association in the world, is in the process of introducing the supposedly superior International Financial Reporting Standards (IFRS) system of accounting in India. PwC uses IFRS and its client Satyam was one of India's first companies to keep accounts in this format. The general verdict of accountants in Mumbai is that Satyam's auditors blew it big time, whatever fraud and forgery the management could have produced to hoodwink them in a scandal that is estimated to have cost Satyam investors $2 billion on January 7 alone as the stock plunged by 77% on news of the fraud. The New York Stock Exchange has since suspended trading in Satyam stocks, though the Bombay Stock Exchange and the National Stock Exchange of India have said they will not being doing so. By midmorning in Mumbai, Satyam shares had slumped to 6.3 rupees, bringing the two-day decline to 91%, according to Bloomberg data. The local unit of PwC said in a statement that Satyam's accounts were supported by "appropriate audit evidence", according to Bloomberg. "Collusion" was a common term used by the accountant community. "My first reaction when I heard about the Satyam fraud was how had their auditors kept quiet about it," said Ramesh Kumar, an accountant with 19 years of experience in various companies. "Auditors not knowing about a fraud this size does not seem possible, particularly with the confession that Satyam has been doing it for years." PwC "will get into very serious trouble over the Satyam fraud", predicted Kumar.

PwC, which calls itself the "world's largest professional services firm", could be worse hit than its client Satyam, with its credibility taking severe damage. The auditing firm, which has offices in 150 countries, has not yet made any substantial media statement on the fraud. PwC, formed in 1998 through the merger of Price Waterhouse and Coopers & Lybrand of London, faces a choice either of being found to be so utterly incompetent that it could not spot a $1.5 billion-sized accounting crater, or that it was party to the investor fraud that presented an annual 24% growth rate in Satyam balance sheets instead of an actual 3% growth rate. Feroz Contractor, proprietor of a three-decade old chartered accountancy firm, said standard and basic accounting procedures of auditing firms using the traditional ICAI method should have spotted through various means any large-scale fudging of books: y Bank balances: certificates from banks confirming the amount balance as shown in the company account books, particularly the bank balance confirmation certificate that the auditor compulsorily has to seek from the client's bank by India's financial year end of March 31. y Cash in hand: the auditor has to physically check the client's cash reserves in sudden surprise inspections. Satyam reported a cash/bank balance of $1.09 billion, while it actually only had about $65 million as of September 30, 2008, a gaping hole that auditors using the supposedly superior IFRS mysteriously failed to see. y Outstanding debts: The chartered accountant corresponds directly to debtors, who confirm through a certificate that they owe such a sum to the firm. This outstanding-dues certificate from each debtor has to reach the auditor directly. Satyam auditors seemingly have failed to spot faked outstanding debts worth $99 million for the financial quarter ending September 2008, thereby showing fake profits and duping investors. "The September quarterly auditing is somewhat cursory and less detailed as the financial year-end auditing," said Contractor. "But the possibility of cursory auditing does not apply in this case as the confession has been of the fraud going on for years." In other words, Satyam auditors have not apparently undertaken what traditionally would have been the minimum independent verification of the client's accounts as a chartered accountant firm is supposed to do. The Institute of Chartered Accountants of India (ICAI) has said it is investigating the role of PwC in the scandal. "We are examining it on a high priority and strict action will be taken against auditors if found guilty," ICAI president Ved Jain told the media. "If found guilty of professional misconduct, the auditors stand to lose their practice licenses." The Satyam fraud could be the tip of a hoodwinking iceberg. "There could be a bigger fraud waiting to be exposed within Satyam," said Vinod Kutty, a 28-year-old accountant. "The initial confession could be only to divert attention from it." The $1.5 billion Satyam fraud refers to accounting figures for the three months through September 2008, though disgraced founder-chairman Raju's 1,080-word confession letter mentions "inflated profits" for the "last several years". Raju also claimed in his confession that "neither myself, nor the managing director (including our spouses) sold any shares in the last eight years - excepting for a small proportion declared and sold for philanthropic purposes" and "that neither me, nor the managing director took even one rupee/dollar from the company and have not benefited in financial terms on account of the inflated results".

Accountants agreed that though the Satyam fraud was more an exception than the norm, investor and governmental distrust of audited company accounts could last for six to eight months. "There could be many Income Tax Department raids on software companies in particular and major companies in general through most of 2009," said Kumar. It's not a happy new year for India Inc hoping worse shocks are not in queue, but perhaps wiser not to entirely dismiss traditional and time-tested systems.