PricewaterhouseCoopers Issues Statement, Change from Previous Stance

The Satyam Scam Saga continues, and much as we like to step away to other matters, there continues to be interesting new developments which catch our attention.

Now The Economic Times of India reports that PricewaterhouseCoopers sent a statement to the Bombay Stock Exchange and to the newly-constituted board of Satyam Computers, saying, “The former chairman has stated that the financial statements of the company have been inaccurate for successive years. The contents of the said letter, even if partially accurate, may have a material effect (which is currently unknown and cannot be quantified without thorough investigations) on the veracity of the company’s financial statements presented to us during the audit period. Consequently, our opinions on the financial statements may be rendered inaccurate and unreliable.”

Further, to comply with the local norms set by the Institute of Chartered Accountants of India, PricewaterhouseCoopers stated, “ICAI has issued a guidance note on the revision of audit reports in January 2003, which prescribes steps to be followed by the auditor to prevent reliance on audit report in such circumstances (inaccurate financial statements). In view of the contents of the (Satyam) chairman’s letter, we hereby, in accordance with the Guidance Note, state that our audit reports and opinions in relation to the financial statements for the audit period should no longer be relied upon.”

In another development, the Board selected Deloitte & Touche and KPMG as joint statutory auditors to replace PwC.

There is a fine line to walk here and perhaps a deeper question to debate. What exactly is PwC saying in their statement and what do they really mean? Does not the external auditor have the responsibility or authority to verify the “company’s financial statements presented to us during the audit period”? If these were not double checked against other internal or external documentation, is the auditor or the company to blame? This is a different stance than what PwC has been saying all this time, but is it really admission of guilt? We know that the financial statements are clearly wrong, but is the opinion of the auditors also equally “inaccurate and unreliable”?

In a similar circumstance in 2001, the inaccurate audit of Enron by a few Andersen personnel led to a criminal indictment by the Department of Justice of the United States at the instigation of the Bush Administration, leading the firm to complete dissolution. The travesty was the Supreme Court overturned the decision much after the firm was gone.

The Enron situation should provide some context to what should appropriately happen next, is the fault, if any, assignable to the Satyam audit personnel / to the PwC India firm / to the PwC Global firm? There are no clear answers, we have to wait on developments and the acts of all the parties involved.