Monday, 23 December 2013

Audit firms responsible for accurate records, says analyst

A long-serving financial analyst has said that financial firms are established to ensure that companies do not intentionally commit large-scale fraud.

Ramanuj Venkatesh, Senior Analyst,
Deloitte and Touche
Reproduced with permission
"The finance sector is a very important sector," says Ramanuj Venkatesh, a Senior Analyst who works for professional finance firm Deloitte and Touche.

"[They] help in regulating different investment companies by setting in all these kinds of standards and setting in all these kinds of principles that companies need to follow," he adds

"They enforce these kind of laws."

He then uses the example of the 2009 Satyam Computer Services scandal where Indian IT company Satyam Computer Services admitted to the falsification of their accounts which was not picked up by the company's auditors, PricewaterhouseCoopers (PWC).

The company's Chairman Ramalinga Raju admitted to falsification of accounts by $1.47 billion, as a result of which he tendered his resignation from the company.

As part of the consequences, the Satyam Board of Directors were removed from their post, the company were fined $10 million and agreed to undertake internal restructuring.

The issue was with PWC," says Ramanuj. "These guys actually made a fundamental mistake in the Satyam case and in fact, they had signed off the audit report stating that the financials are true and fair when it was quite evident that there was embezzlement of funds.

This embezzlement was because the accounts had stated that Satyam had on staff 53,000 employees, when it was later discovered that only 40,000 were actually employed. Mr. Raju drew $3 million to pay these 13,000 non-existent employees. He now faces up to 10 years in jail.

Founder and former Chairman of Satyam Computer Services Ramalinga Raju at the World Economic Forum.
Reproduced with permission courtesy World Economic Forum and Wikipedia
"It was their responsibility and it was not that much of the client's responsibility," Ramanuj explains. "It was the auditors' responsibility to check, that 'have funds been embezzled in this case?'.

"It was the auditor's responsibility to provide reasonable assurance that the financials were true and fair in terms of their figures and they should've caught [on] to this problem of embezzlement of funds."

Because of PWC's negligence, they were fined $6 million by the United States Securities and Exchange Commission.

Soon after the scandal, Satyam was acquired by Indian industrial giant Mahindra, as part of its expansion into the technology sector. As of August 2013, Satyam has been merged with Mahindra's technology arm, TechMahindra.

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