A double whammy for PwC and a wake-up call for all auditors
Long before the Securities and Exchange Board of India (Sebi) barred Price Waterhouse from auditing listed companies, it was penalized by a number of these very firms. The larger PwC entity (earlier PricewaterhouseCoopers) it is part of is among the top two firms in terms of global fees. In India, however, PwC barely makes it to the top four. Globally, PwC and Deloitte are almost neck and neck in terms of fee income. But in India, its fee income is about a fourth that of Deloitte and roughly half that of EY and KPMG. About seven years ago, or a little after the Satyam scam was discovered, PwC was the number two firm in India as well. In short, the company has already paid a big price for its role in the Satyam fraud.
Even so, Sebi’s action against PwC rightly puts the spotlight on the shortcomings of the auditing profession. A senior partner at a leading audit firm says his first order of business on Thursday was to tell his partners to pull up their socks. “The lesson for audit professionals is that the system will not pardon large wrongs, and large penalties and sanctions are to be expected. In short, everyone needs to be alert all the time,” he says.
Another executive adds, “It is a welcome development. A drastic step on a big name should make audit professionals think before ignoring dubious accounting or business practices.”
To be sure, things have improved since the Satyam fiasco in 2009. Prime Database, which collated the fee data mentioned above, points out that nearly two-thirds of listed companies changed their auditors in fiscal year 2018. Prime’s findings are based on data for around 1,500 companies listed on the National Stock Exchange, and includes addition/deletion of one or more auditors for companies with joint audits. Auditor rotation, now mandated by law, is useful in bringing checks and balances.
But as the senior partner’s comments show, nothing works as well as stringent action by a regulator. To that extent, Sebi’s stance in the matter should be applauded. Without doubt, PwC will throw all of its weight in challenging the order, and may even get a stay in the matter. But even if it does, Sebi’s order itself is incriminating in many ways—the firm’s failure to verify Satyam’s bank balances independently, for instance—and will hurt PwC’s reputation further.
Of course, a moot point here is that while PwC is at the receiving end in this particular case, audit professionals in general haven’t really covered themselves in glory. Look no further than the NPA (non-performing asset) mess most banks are grappling with, which went largely undetected by auditors for years.
As such, Sebi’s order should be seen as a wake-up call by the industry. Some experts have pointed to the irony that while the regulator has barred PwC from auditing listed companies for the next two years, nothing stops it from working with unlisted firms and the government. While this is outside Sebi’s purview, policymakers can take note of the contradiction, especially in cases where the firm is playing the role of an auditor.
Harsha Jethmalani contributed to this story.