Satyam Computer Services, an Indian-based technology company, committed an accounting fraud on such a grand scale it has been called the Enron of India. Satyam was the fourth biggest technology company in India (Government Accountability Project, 2017). Its downfall reinforced the need for auditing oversight over a firm’s cash balance and financial statements.

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The World Bank helps the needy people around the world through monetary and technological aid (World Bank, 2017). Satyam was World Bank’s primary provider of cyber-security. Satyam’s downfall began in the spring and summer of 2008 when World Bank experienced numerous cyber-attacks, leaving its financial data. The observers blamed the ineptitude of Satyam’s IT system for the security breaches. The World Bank responded by banning Satyam from its list of service providers for eight years in September 2008. The severity of this suspension was fueled by the fact that Satyam was involved in an inappropriate relationship with World Bank’s former Chief Information Officer Mohamed Muhsin few years ago. Muhsin had received kickbacks from Satyam during his tenure at World Bank and was forced to resign in 2005 under the company surveillance. The World Bank also prohibited Muhsin from working for the organization again should he desire to return at a later date. After suspending Satyam and permanently banning Muhsin, World Bank claimed it was not involved in the Muhsin debacle or the cyber-attacks but this claim drew suspicion when the World Bank restored Satyam’s vendor status for new subsidiary accounts (Government Accountability Project, 2017).

Satyam’s CEO Ramalinga Raju confessed on January 7, 2009 he had concealed information about the company’s liabilities, artificially inflated its cash position, and gave the appearance that his company was owed significant funds (McKenna, 2011). Satyam had overstated its cash balance by $1.44 billion (Maher, 2011). Satyam was officially charged with overstating its income, cash flows, and revenue on April 5, 2011 and agreed to pay a $10 million penalty. The fraud was so rampant the Indian government took control of the company (SEC Release 81, 2011). Tech Mahindra bought Satyam in April 2009 and renamed it Mahindra Satyam (McKenna, 2011).

Satyam’s auditor PricewaterhouseCoopers (PwC) was also penalized by the SEC. PwC India also made an agreement with the SEC to sponsor education programs on securities laws and accounting principles for its staff, refuse to accept U.S. clients for six months, and revamp its audit procedures and review controls. The SEC fined PwC $6 million and installed an independent monitoring party to ensure the auditing firm honors its promise (SEC Release 82, 2011). In addition, the PCAOB discovered PwC’s cash confirmation process did not comply with its accepted standards and fined PwC an additional $1.5 million for its role in the Satyam audit (Maher, 2011).

PwC’s actions rose to the level of an auditing failure because the firm never verified Satyam’s cash and accounts receivable balances (SEC 2011-82). PwC India received invoices from Satyam about the company’s cash position but it never investigated the accuracy of these reports by contacting the banks that supplied them (SEC Release 82, 2011). This means PwC India did not comply with the audit procedure of confirmation by directly communicating with an independent party to obtain information about account balances. PwC India relied solely on internal information from Satyam which is the weakest form of audit evidence. The auditors would have been safer had they relied on internal-external information, which is received from a client but is formulated by an independent third party. Better yet, they could have received direct external information from a third party or accumulate direct knowledge by investigating the account balances themselves. PwC India did not demonstrate an appropriate level of professional skepticism because the auditing firm did not adequately examine the information provided by the client, a violation of the Responsibilities Principle. The Responsibilities Principle states auditors must be competent, adhere to ethical standards, and practice professional skepticism at all times (Louwers et al. 2015). However, instead of conforming to the Responsibilities Principle, PW India simply trusted Satyam, which prevented early detection of what turned out to be rampant fraud (SEC Release 82, 2011).

Satyam’s CEO Ramalinga Raju had an opportunity to commit fraud because of PwC India’s weak cash confirmation process as Satyam’s auditors did not properly monitor the company. If PwC India had scrutinized Satyam’s income statement and statement of cash flows more closely, Raju could not have pulled off the fraud. In addition, Satyam’s management bypassed its system of internal controls and claimed $825 million of its total cash balance of $1.1 billion was tied to bank deposits. This is problematic because tie-up of such a large sum to bank deposits usually draws the attention of internal auditors. By overstepping the duties of his internal auditors, Raju was able to conceal the material overstatement of cash (Govindaraj, 2009).

PwC’s cash confirmation process did not comply with the generally accepted auditing standards or GAAS,because the auditing firm never involved a third party. Under GAAS, the auditor must contact a third party directly to confirm the accuracy of certain asset accounts. An auditing firm is required to follow a multi-step process during the confirmation process. The auditors must identify the items in the financial statements of the company that require confirmation. The next step is to formulate a confirmation request, contact a third party with the confirmation request, receive the third party’s opinion about the accuracy of the asset accounts in question, and evaluate the information provided by the third party (PCAOB, 2017). The auditors skipped this multi-step process and merely accepted Satyam’s cash position as provided by the company (Maher, 2011).

PwC should always involve a third party to reduce the potential of an accounting fraud in the future. The involvement of a third party increases the probability of the financial statements being error-free. The absence of a third party makes it easier for a client firm to falsify its assets. Even though an auditing firm may be required to expend more resources to engage a third party, it is ultimately in the auditors’ best interests. A third party reduces the possibility of failure in detecting a client’s accounting fraud. The auditors must uphold the principle of professional skepticism in their work. It is important for the auditors to scrutinize the information they receive from their clients because the clients have an interest in presenting the information in as favorable manner as possible. The auditors could have mitigated the severity of the fraud by adopting a skeptical approach to client-driven information and communicating with a third party.

    References
  • Government Accountability Project. (2017). Satyam Scandal. Government Accountability Project. Retrieved from https://www.whistleblower.org/satyam-scandal
  • Govindaraj, S. (2009, May 21). Learning from Satyam: How to Detect Fraud. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2009-05-21/learning-from-satyam-how-to-detect-fraud
  • Louwers, T. J., Ramsay, R. J., Sinason, D. H., Strawser, J. R., & Thibodeau, J. C. (2015).Auditing & Assurance Services(6thed.). New York, NY: McGraw-Hill Education.
  • Maher, N. (2011, April 6). PwC to pay $7.5m for Satyam audit failures. International Accounting Bulletin. Retrieved from http://www.internationalaccountingbulletin.com/news/pwc-to-pay-75m-for-satyam-audit-failures
  • McKenna, F. (2011, August 5). Satyam: Not The Only Case PwC Worried About. Forbes.Retrieved from http://www.forbes.com/sites/francinemckenna/2011/08/05/satyam-not-the-only-case-pwc-worried-about/#2a93ad5e7f88
  • Public Company Accounting Oversight Board. (2017). AU Section 330 The Confirmation Process. Public Company Accounting Oversight Board (PCAOB). Retrieved from https://pcaobus.org/Standards/Auditing/Pages/AU330.aspx
  • The World Bank. (2017). What We Do. The World Bank Group. Retrieved from http://www.worldbank.org/en/about/what-we-do
  • U.S. Securities and Exchange Commission (SEC). 2011. SEC Charges Satyam ComputerServices With Financial Fraud. SEC Release No. 2011-81. Washington, D.C.: SEC. Retrieved from https://www.sec.gov/news/press/2011/2011-81.htm
  • U.S. Securities and Exchange Commission (SEC). 2011. SEC Charges India-Based Affiliates ofPWC for Role in Satyam Accounting Fraud. SEC Release No. 2011-82. Washington,D.C.: SEC. Retrieved from https://www.sec.gov/news/press/2011/2011-82.htm