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October 27, 2009

Satyam could lead to audit firm registration reform

India’s audit regulator is planning to limit the number of audit firms a network can register in a post-Satyam shake-up that could have wide implications for the Big Four. This follows confusion over the extent of different Price Waterhouse firms’ involvement in India’s largest accounting fraud.

At present, global networks such as PricewaterhouseCoopers have multiple audit firms registered in the country to overcome Indian laws that restrict the number of partners a firm may have to 20. There are nine offices in India affiliated with PricewaterhouseCoopers. These operate in partnership but they are mostly structured as separate legal entities.

The Institute of Chartered Accountants of India’s (ICAI) proposal is to allow only two registered audit firms from the ‘same entity’ This would affect all of the Big Four networks in their current operating structures.

In India, only one registered firm can sign off an audit report and this proposal is designed to prevent global networks from washing their hands of erroneous work that may be carried out by the signing firm.

Opponents of the ICAI’s proposal argue that firms will set up new partnerships under different names and the rules could restrict the ability of large audit firms to serve their clients, having a detrimental affect on capital markets.

The Indian government recently announced it could take action within a couple of months against the firms Price Waterhouse Bangalore, Price Waterhouse New Delhi and Price Waterhouse Kolkata, four Price Waterhouse Bangalore auditors and two former Satyam Computer Services employees implicated in the Satyam accounting scandal.

The auditors are: S Gopalakrishnan and Srinivas Talluri, who were the former auditors of Satyam; P Siva Prasad, who was the head of the audit team; and audit team member C H Ravindranath. They have all been found prima facie guilty by the ICAI.

India’s Corporate Affairs Minister Salman Khurshid said action against auditors could include barring but it is unclear how firms will be punished.

Price Waterhouse said it was only aware of one auditor who had been tapped on the shoulder by the regulator’s disciplinary arm.

“Only one of the Price Waterhouse professionals in question has so far received a notice from the disciplinary committee of the ICAI seeking his reply to the ICAI allegations,” the firm said. “This is the beginning of the disciplinary committee’s process for the recipient alone, not the end of it as characterised in some reports.”

Price Waterhouse labelled the ICAI’s reference to its offices in Kolkata and New Delhi as surprising and disappointing.

“Neither of these firms had anything to do with the Satyam audit nor have they received so far any notice from ICAI alleging misconduct by them. As the ICAI knows, the Price Waterhouse firm registered in Bangalore audited Satyam’s financial statements,” the firm added.

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