Absolutely, the concepts of: (a) audit firms providing non-audit services to the same clients which they audit; and (b) the fact that audit firms are engaged in and remunerated by the same organization which is subject to the audit, are two commonly recognized problems with respect to the maintenance of the integrity of the audit process.

Andrews last blog post..India’s Enron

Positive and uplifting topics are so often less interesting. I would hope you continue covering complex issues that make people think. It’s more fun!

I can’t speak about the accounting branches in India and this is a pretty blatant case, but I do work with the big CPA firms in the US. In the past, I’ve been audited myself. Since Enron, I think some things have changed, but not a lot. Part of the problem is the drive for profit. A lot of these firms offer auditing services as well as professional consulting services, such as tax shelter planning, estate planning, etc. The former is where a lot of the big money is, not the actual auditing. I believe there is greater separation of the two, particularly following the fall of Arthur Anderson, but there is still pressure to keep clients. It may be hard to offer consulting services if you fail a client on their audit. Also, if you fail them on that audit, they may choose to simply go to another firm and you have lost revenue.

I don’t know how to audit the auditors, but really, these companies are offering types of financial services. They are just like law firms that thrive on billable hours and “advocating for the client” no matter what. They even have lobbyists in Washington.

i don’t know how to maintain integrity on a companywide basis when you still have to keep bringing in the money.

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It would not be realistic to expect auditors to pick up every financial fraud. As you say, fraud can be deliberately hidden and audit firms, which have to work within a budget if their services are to be provided on a cost competitive basis, are bound to some degree by constraints relating to staff time and resources.

However, on this occasion, from my understanding, PWC does in fact stand accused (by India’s regulator, the Central Bureau of Investigation) of knowingly certifying accounts which were fraudulent.

It will be interesting to see what the courts have to say, but from my understanding, the issue in this case is not a failure on behalf of the auditors to detect fraudulent activity, but rather of the auditors signing off on accounts which they knew were false.

Andrews last blog post..India’s Enron

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Right on – they got caught in the end and not only are they facing the prospect of hefty legal penalties as a result of this saga, but considerable damage has been done to the reputation of the firm on a worldwide basis as a result.

Giovanna,

Thanks. Will do.

Andrews last blog post..India’s Enron

And really, if a company is that big like PWC, they can pull the strings to make the situation less then it really is. Meaning they can get away with it but it doesn’t mean they will always get away with it because it will eventually catch up to them.

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I’m not exactly certain about this. I know that the scandal hit the media after the Chairman acknowledged the fraud and resigned, but I am not exactly certain about the circumstances which led to the acknowledgement.

You raise a good question in terms of the beneficiaries of this scandal. As I understand it, Satyam itself was the main beneficiary (at least in the short run), and the company apparently felt that the inflated sales figures would help to attract prospective investors, customers and staff.

From the viewpoint of the auditors (PWC), I am not particularly certain whether or not they knew that the invoices were false and continued to certify the accounts anyway, or whether they were just simply plain incompetent. It will be interesting to see what the courts decide on this matter.

Whatever the case, they were paid fees in excess of what was considered to be the standard market rate in India for audit services, and so were no doubt very keen to retain Satyam as a very good paying client.

Andrews last blog post..India’s Enron

Also, how exactly did it come to the point that someone said wait, their statements have inflated sales figure, do you know?

toms last blog post..#8 That’s embarrassing:”sorry, your card was declined”

I am not certain about the American situation, but I am fairly certain that the situation you describe still applies in my home country of Australia today, whereby partners of an accounting firm are unable to use a corporate structure as an effective shield against their personal assets.

Instead, the vast majority of partners take out professional indemnity insurance to cover themselves from litigation.

I’m sure that the majority of auditors and audit firms exercise an appropriate level of diligence whilst in the process of performing their duties. No doubt the same could have been said about the vast majority of partners and staff at Anderson, and I would be certain that the same would apply today for the majority of those at PWC.

You would think, given the risks in terms of reputation and litigation, that audit firms would refuse to sign off on financial reports unless they were completely comfortable that such reports were free of material misstatement.

Unfortunately, as the above example clearly demonstrates, this is not always the case.

Andrews last blog post..India’s Enron