Talk Point: Is SEBI’s ban on PwC over the Satyam scandal well deserved or too little too late?

Illustration by Siddhant Gupta

On Wednesday, SEBI banned PwC and all its audit firms from auditing any listed company in India for two years, after finding it guilty in the Satyam scam. ThePrint asks:

Is SEBI’s ban on PwC over the Satyam scandal well deserved or too little too late?

Banning PwC seems an overreaction, will create a big vacuum

Ameet Hariani
Managing partner of Hariani & Co., Advocates and Solicitors

There are a number of ways of looking at SEBI’s decision.

The whole issue has happened because of Satyam. It happened because two partners of PwC were either negligent, or in cahoots with the management of Satyam.

The question remains — was PwC, as an organisation, involved in entirety in the scam? In my view, it wasn’t. Either a couple of partners were negligent or conspired with the management.

Yes, the issue shows that there was a lack diligence on the part of PwC partners. They relied on bank certificates given by the management. The certificates were genuine, but were dated, and within the say, one-month period, the management had encashed the deposits. As of the date of the report, the deposits had disappeared.

Now, it is possible the partners were led astray by the management and they had acted in good faith.

Banning PwC from auditing listed companies for two years seems to be a bit of an overreaction.

The amount of time SEBI has taken to arrive at a decision is a separate issue altogether. The process could have been expedited, but everyone had to be heard.

The result of the proceeding could have been a monetary penalty. PwC today is one of the Big Four. There are only about six big accounting multi-national corporations — Deloitte, Ernst and Young, KPMG, PwC, BDO and Grant Thornton.

Banning PwC will create a big vacuum. All parts of PwC are banned from doing any audits. This will have grave implications on many listed companies. It’s like throwing out the baby with the bath water.

In the United States, when ENRON went bankrupt, the issue regarding Arthur Andersen was a much wider issue. There was a systemic fraud covering several offices.

When it comes to Satyam,  there was no systemic widespread issue covering several offices of the PwC organisation.

There will obviously be an appeal against this judgment. I believe PwC will challenge the ban, but may agree to a fine or penalty.

Auditors ignore several issues for fear of losing the account, so it’s a welcome step 

Prithvi Haldea
Founder-Chairman of Prime Database

It is a common belief that auditing quality has fallen over the years. Audits are not considered as trustworthy as they should be.

Since a lot of decisions are based upon the audit, if the accounting information is not good, it is indeed criminal, and does many a time lead to bad decisions. Today, everyone knows that you can’t trust a balance sheet in its entirety.

Poor audits happen as they are not done in an exhaustive and independent manner. It now depends substantially upon the representations made by the management. Thus, a lot of accounting we see is not of the quality that it should be.

There are also cases where the auditors are party to malpractices. This happens because, ironically, the company you audit is the one that pays you. That is an obvious conflict of interest. Unless there are major differences of opinion, the auditors tend to ignore several issues because highlighting them may cost them the account.

The present regulatory body has not taken sufficient and significant action against defaulting auditors in the past. Taking cognisance of this, the Companies Act provides for a new auditors’ oversight body — the National Financial Reporting Authority, the NFRA, which unfortunately due to vested interests, has not been made functional as yet.

The government has recently made a statement seeking to activate the NFRA at the earliest. It is a clear belief that the regulatory function hasn’t been performed by the institute and a new, well-governed body is required.

SEBI has in the past noticed several accounting discrepancies though limited only to listed companies. Calling out and punishing such a misstatement of accounts is a major step that it has taken. It seeks to increase the accountability by asserting its power over the companies under its wing. It also sends a message to the audit firms that their malpractices won’t be tolerated anymore.

It is a welcome step that will act as deterrent and increase accountability in auditing. It may be a late action, but it is better late than never.

Compiled by Deeksha Bhardwaj