PwC: rotten to the core or just plain stupid?

I hope that my good friend Vinnie Mirchandani doesn't take offense to the title of this post. PwC is his alma mater in a past life.

I hope that my good friend Vinnie Mirchandani doesn't take offense to the title of this post. PwC is his alma mater in a past life. However, events at Satyam in India, which have not received the attention they deserve in the US, have taken a decidedly weird or comic turn, depending on your point of view. A brief summary:

  • Satyam's CEO admitted to defrauding the company of around $1 billion in cash in January
  • He was thrown in jail along with the two PwC partners who had signed off on Satyam's accounts
  • Assorted other Satyam managers were also thrown in jail
  • Satyam was eventually rescued in a fire sale deal

More was said by:

Sam Diaz: Fraud and deception at Satyam was deep

Brian Sommer: De-Briefing the Satyam Sale

When the story originally broke, my colleague Francine McKenna and I had many a conversation trying to understand what the heck happened. How could one person, or as it turned out, a small band of conspirators, spirit away $1 billion without anyone noticing and especially the auditors of record, PricewaterhouseCoopers? It didn't make sense. Regardless of management's actions, that seemed to put PwC on the hook for a substantial negligence and/or fraud suit.

On the ground, PwC parachuted its US based big guns into India in the shape of then CEO Sam DiPiazza and more recently, freshly minted CEO Dennis Nally. You'd have thought they were there to sort out the mess but instead were reported to be shmoozing Indian politicans. Why? Because the viability of PwC's Indian business hinges on its government contracts. It is rumored that as much as 35% of PwC's Indian business is tied to government deals.

In the meantime, Francine has been ferreting around this story, adding color and speculating as to what might happen to PwC. Her view is that PwC is most definitely on the hook. One of the pillars of her argument are the links between PwC as auditors and consultants to/with Satyam. Under SEC rules the consulting links would create major problems for PwC as auditors. Analyst group Gartner is reported to have determined there were business arrangements between Satyam and PwC as consultants, something PwC denied:

This refers to the report, Satyam, PwC had business links: Report, (FC, May 28). We have read the Gartner report in detail and find no justification for the comment that “the Gartner report indicates that PwC was in a strategic partnership with Satyam”.

We also find no reference to Satyam as PwC’s “system integration partner” in the report. In our response to our letter dated June 2, you admitted that “The part of ‘strategic partnership’ was our interpretation” (your interpretation). This is precisely the point that we are making — you had drawn a wrong and unsustainable inference.

No PwC firm has ever sought or created a joint business relationship with Satyam Computer Services. The only relationship PwC had with Satyam was as an audit client of Price Waterhouse.

Francine's opinion:

PwC obviously is more worried about its reputation in India than about anyone in the United States reading my blog or forming any opinion on this issue.  Maybe it’s because some major media here are saps, still giving PwC the benefit of the doubt and ignoring all other aspects of the story that are negative to PwC. They gave the imprisoned PW partners, whose remand was extended once again,  a forum to cry crocodile tears about their treatment and the injustice of it all.

Ouch! But you can't blame her for coming to that conclusion. Now it gets crazier still. Yesterday, Times of India reports [my emphasis added] reports:

The questioning of Ramesh Rajan, chairman and CEO of PricewaterhouseCoopers, India (PwC) by CBI last week, has revealed that the Satyam balance sheets were in fact audited by Lovelock & Lewes and not Price Waterhouse (PW). It is also learnt that the auditing fees, though deposited in the name of Price Waterhouse, Bangalore, was later transferred into the account of Lovelock & Lewes. "It is from here that the partners S Gopalakrishnan and Srinivas Talluri withdrew the money," sources involved in the investigation of the case told TOI.

Apart from Rajan, other senior partners of PW, from Delhi and Kolkata, were also summoned by the CBI last week. The partners denied any association with PW, Bangalore and said that Gopalakrishnan and Talluri were not entitled to sign any balance sheet on behalf of PW. "So as it turns out, the auditors who are partners with PW, Bangalore, wrongly signed under the name of PW, and also outsourced the work to Lovelock & Lewes," said sources adding that investigations confirm that the entire auditing team at Satyam is from Lovelock & Lewes.

On being questioned by CBI about this "outsourcing" of work , Rajan, who is also a partner with PW, Bangalore said that the firm has no manpower and, hence, as part of an internal arrangement gives out their work to Lovelock and Lewes. "But this is not acceptable, considering that the two firms are completely different entities," said sources.

An India-based auditing firm, Lovelock & Lewes, though is a network firm of the international consulting body PwC, has no authority to audit under PwC's name.

Let's try straighten this out. In one place PwC says it has no business relationship with Satyam other than as an audit client and then in another it says that it didn't in fact audit Satyam. Color me cynical but this sounds like an attempt to have it both ways in the hope that people's memories are sufficiently short they'll buy into the latest 'version' of events. Regardless, PwC appears to have set out a prima facie case for investors looking towards recompense in the wake of the Satyam collapse and subsequent fire sale. In making these wildly contradictory statements, PwC have in effect put a gun to their own heads and pulled the trigger.

There is an alternative view. If you take the statements at face value then the only other conclusion you can reasonably reach is that the partners of PwC India are monumentally inept. Unfortunately for PwC, ineptitude isn't a viable defense. If PwC is inept then what is the global leadership doing to help turn things around? Precious little it seems other than attempting to keep Indian politicians sweet.

All of which begs the question: can you trust PwC or are they just plain stupid? If the partners in the firm can't get their story straight then what about the rest of the firm? What does this say about the ability and quality of work the firm undertakes?

On the one hand they strenuously assert they are a network of independent firms for audit purposes but with a global brand. On the other hand they seem so confident of their position that they plan to expand significantly in India. In my world you can't have it both ways and expect to be taken seriously. More important, if as seems likely, PwC is on the hook for massive damages, what about their long term viability? I for one can't wait to see how PwC spins this one.

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