On Wednesday, January 10, 2018, the Securities and Exchange Board of India (SEBI) issued an order banning all firms in PricewaterhouseCoopers’ (PwC) Indian network over PwC’s involvement in the Satyam fraud case. The order prevents these firms from practicing as chartered accountants in India for a two-year period, and bars them from issuing audit certificates to any listed company in India. The ban will come into effect from financial year 2018-19 onward and will not affect the auditing work for the financial year 2017-18.  

As part of its order, SEBI also ordered PwC pay a fine of INR 130.9 million (US$2.1 million) along with interest at 12% p.a. calculated from January 2009 within 45 days. To date, SEBI’s actions against PwC constitute one of the most severe punishments passed by regulator against a Big Four audit firm in India. 

It should be noted that in 2011, the U.S. Securities and Exchange Commission (SEC) fined the Indian arm of PwC for not following the code of conduct and auditing standards in the performance of its duties related to the Satyam auditing. PwC India affiliates agreed to settle the SEC’s charges and pay a US$6 million penalty, which is the largest ever by a foreign-based accounting firm in an SEC enforcement action. Scratch the surface, and there may be other matters facing PwC in India. 

SATYAM CASE 

In what became known as “India’s Enron,” PwC audited the software services company Satyam Computer Services Ltd., during the financial years 2000 to 2008. During this time, Satyam was considered to have strong governance and oversight, along with strong financial performance. However, the founder and chairman of Satyam, Ramalinga Raju admitted in 2009 that Satyam had manipulated accounts by US$1.47 billion for several years. Satyam’s sales revenue was inflated by accounting for 7,561 fake invoices. 

In the fallout of the Satyam case, PwC was accused of negligence in its audit work after failing to confirm substantial differences in its audit work. Specifically, auditors apparently certified that Satyam had US$1.1 billion in cash when it only had US$78 million. In this instance, PwC auditors failed to check the veracity of Satyam’s monthly bank statements. In fact, SEBI accused the auditors of ignoring the true balance confirmation received by bank statements. 

IMPLICATIONS TO PWC 

The barring of PwC from undertaking accounting and auditing work will impact a significant number of listed companies that currently use a PwC firm as their statutory auditor, including some Tata Group companies, Ashok Leyland, IDFC, Edelweiss Financial Services and even the National Stock Exchange of India. While those PwC firms will be able to complete their work for the current financial year, it seems likely that many listed companies with a PwC firm as statutory auditor will have to change their statutory auditor at shareholder meetings in 2018, even if PwC firms manage to get a court to stay SEBI’s order. Additionally, there may be repercussions to PwC’s business and brand worldwide as a trusted, global accounting and auditing firm. Ultimately, the other Big-Four accounting firms stand to gain from PwC’s loss.  

GOVERNANCE IMPLICATIONS 

SEBI’s actions against PwC come at a time when Indian corporate governance practices are under review. Notably, in October 2017, a committee formed by SEBI and chaired by Uday Kotak (the “Committee”) released its report that reviewed Indian corporate governance practices, which included recommendations to strengthen auditor accountability. 

In its review and recommendations of auditors, the Committee alludes to all stakeholders needing to be granted greater say in maintaining the integrity of the auditors’ professions. Additionally, the Committee highlighted the importance of empowering different related bodies to further scrutinize the practices of external auditors. In particular, the Committee suggested that SEBI have clear powers to act against auditors under the relevant securities laws. Notably, the Committee’s report states: 

“Given SEBI’s mandate to protect the interests of investors in the securities market and regulating listed entities, the Committee recommends that SEBI should have clear powers to act against auditors and other third-party fiduciaries with statutory duties under securities law (as defined under SEBI LODR Regulations), subject to appropriate safeguards. This power ought to extend to act against the impugned individual(s), as well as against the firm in question with respect to their functions concerning listed entities. This power should be provided in case of gross negligence as well, and not just in case of fraud/connivance. This recommendation may be implemented after due consultation with the relevant stakeholders, including the relevant professional services regulators/ institutions.” 

Additionally, the Committee pushed for greater scrutiny in the accounting profession by increasing and strengthening the role of ICAI (Institute of Chartered Accountants of India). The Committee recommended an increase in the maximum penalty that the accounting body can impose on its members and urge them to transparently disclose all actions taken against its members.  

Further, the Committee recommended increased oversight on the accounting practice, by strengthening India’s Quality Review Board (QRB). In its view, the Committee believes that the QRB, being the body that is authorized to oversee the audit practice in India, should be strengthened to meet independence criteria as laid down by the International Forum of Independent Audit Regulations (IFIAR), in order to meet the international standards requirement in accounting profession oversight.  

NEVER LET A CRISIS GO TO WASTE 

The actions taken against PwC by SEBI signal an opportunity for India to move toward strengthening its corporate governance practices. Indeed, as auditors serve as the gatekeepers of a listed company’s accounts and therefore serve an important role for shareholders, auditors will need to ensure they are fulfilling their crucial role. For listed companies, the imperatives for auditors to avoid the pitfalls of PwC may actual lead to strengthened demands for disclosure as auditors will likely become more insistent for receiving verifiable proof of financial performance. For shareholders, the upside may come in the form of more accurate financial reporting.   

Nevertheless, the PwC affair may prove to be a catalyst to force SEBI’s hand (or the Government’s hand for that matter) to make regulatory changes. Although it is unknown which of the Committee’s recommendations may ultimately be implemented by SEBI, the empowering of monitoring bodies to oversee auditors and accounts, as suggested by the Committee, provide an opportunity for India to further increase accountability and transparency in auditing professions. Given the highly important role of external auditors and their responsibility to provide a truthful and unbiased opinion on the company’s financial statements, it is very important that SEBI and other regulatory bodies continuously uphold the highest and most rigorous standards to the profession. For now, all eyes will be on PwC and whether it can successfully appeal SEBI’s ruling in order to maintain its role as statutory auditor for nearly 80 listed companies. 

Jeff Jackson contributed to this report. Jeff is a manager and Decky is an analyst covering the Indian market.