The founder of the outsourcing giant Satyam may have admitted committing the largest corporate fraud in Indian history when he made up $1 billion out of thin air, but Satyam’s auditor, PricewaterhouseCoopers, could pay the price.
Investors are expected to go to court to recoup some of the billions of dollars in equity destroyed as problems at the company came to light. Most are not expected to go after the cash-strapped company, though. They are aiming at Satyam’s deep-pocketed auditor instead.
“Pricewaterhouse has signed the balance sheets, and so they are responsible if there has been a falsification, ” said Ravi Nath, an attorney with the Rajinder Narain law firm in New Delhi. The firm has already been contacted by several Satyam investors who wish to sue PricewaterhouseCoop ers, Nath said.
Auditors are certainly dependent on information they get from a company’s management, Nath said, but “they do have to verify that information. ”
PricewaterhouseCoop ers audited Satyam for at least eight years, and signed off on the company’s filings with securities regulators in the United States, Europe and India. The company’s involvement in the fraud has also drawn criticism from Indian government officials.
“We will soon take coordinated action in the strictest possible manner against erring company officials and auditors,” P.C. Gupta, India’s corporate affairs minister, said in a televised interview Thursday.
PriceWaterhouseCoop ers would not comment Thursday. On Wednesday the company said it was “examining” Raju’s statement and could not comment further.
“If you’re an auditing company and your client says they have $1 billion in cash, you do check with the bank,” said Hugh Young, the head of equities for Aberdeen Asset Management, which was one of the largest investors in Satyam until it sold its holdings as Satyam’s problems came to light. Aberdeen “will look at pursuing any action that will be to the benefit of our clients,” he said, when asked whether he was considering a lawsuit.
No suits are known to have been filed yet against PricewaterhouseCoop ers, and there is a possibility that investors may reach some settlement out of court with the firm or Satyam itself. But taking the accounting firm to court may be investors’ only chance to recoup what they’ve lost.
Satyam is virtually out of cash and is expected to be sold off, whole or in parts, in the coming months. The company’s physical assets, computer networks and desks are tied specifically to the companies that Satyam serves and would be worth little on the open market. And its work force of more than 50,000 could scatter.
“With Satyam’s operations failing to generate the required amount of cash, we believe that it will be impossible for the company to continue its operations,” analysts from First Global, a research company with offices in London, Mumbai and New York, said in a report Wednesday. The clock is ticking – the company has insufficient cash to pay employees salaries, First Global said, which are due by the end of the month.
Accounting firms can take the hit when their clients falsify numbers – most notably, Arthur Andersen imploded after its involvement with the energy company Enron. The firm was sued and convicted by a Texas jury for its involvement in the Enron fraud. That suit was overturned years later, but Arthur Andersen lost customers and businesses, and was forced to close.
Enron and other financial frauds in years past relied on dizzying arrays of off-balance- sheet partnerships and complicated circular trades with willing outside institutions to deceive investors. But the Satyam fraud was absurdly simple: The company said it had about $1.1 billion in cash and bank balances. But, in fact, it had less than $100 million.
What is still unclear is how Pricewaterhouse was duped. Generally, auditors would solicit a certificate from a client’s bank confirming their cash and bank balances.
Satyam’s chief financial officer has submitted his resignation, but the firm’s board is yet to approve it, the company’s interim chief executive said on Thursday, Reuters reported.
Ram Mynampati also said that the liquidity of Satyam’s balance sheet was “not very encouraging now,” but added that the embattled company had “healthy receivables. “
