Satyam, Five Audit Firms Pay $17.5 Million in Penalties

Satyam and five audit firms under the PwC umbrella are paying $17.5 million and facing other sanctions and reforms imposed by regulators in connection with a $1 billion fraud scheme.

The Securities and Exchange Commission is extracting $10 million from Satyam to settle charges that the company overstated revenue, income, and cash balances over a five-year period by creating more than 6,000 fake invoices that flowed into the general ledger and financial statements. Five Price Waterhouse India affiliate firms—Lovelock & Lewes, Price Waterhouse Bangalore, Price Waterhouse & Co. Bangalore, Price Waterhouse Calcutta, and Price Waterhouse & Co. Calcutta—agreed to settle SEC charges and pay a $6 million penalty, the largest ever paid by a foreign-based accounting firm in an SEC enforcement action. The Public Company Accounting Oversight Board also imposed a $1.5 million penalty against two of the five firms and other sanctions and remedies against all five firms.

The SEC says the audit firms failed to carry out proper third-party confirmations to verify balances for cash and cash equivalents, enabling the fraud to continue for several years. The PCAOB says the audit firms allowed Satyam management to send its own confirmation requests to its bankers and relied on Satyam management to provide confirmation responses from the banks to the auditors, giving Satyam a curtain behind which it could falsify documents to inflate cash balances. The PCAOB pins the blame for the faulty confirmation process on two specific firms, PW Bangalore and Lovelock. The audit regulator says all five firms, however, administered inadequate quality control, allowing the practice to continue undetected.

Satyam senior and mid-level leaders, including former Chairman B. Ramalinga Raju, are already under criminal charges, with a trial underway in India. In addition to the $10 million penalty, the SEC is requiring Satyam to hire an independent consultant and comply with certain reform measures. Against the audit firms, the SEC imposed a censure and cease-and-desist order. The PCAOB also required the audit firms to implement changes to quality control procedures and barred the PW India firms from accepting new engagements for U.S. issuers until an independent monitor gives an all-clear signal.

The SEC and PCAOB acknowledged assistance from one another in conducting their respective investigations and settling the charges. The PCAOB said its staff assumed responsibility for a significant portion of the investigation. “In this manner both organizations were able to obtain the necessary investigative information without duplicating their efforts,” the PCAOB said in a statement. The SEC said its investigation is continuing.