Price Watergate-2

"This week, Wipro, India's third-largest software exporter, revealed that it had been barred by the World Bank more than 18 months ago for four years for offering bank employees shares in its 2000 stock offer in the US. ... [Ramalinga] Raju, in judicial custody until January 23, has reportedly confessed to interrogators that he diverted Satyam funds in speculative land deals for Maytas. He came unstuck after land prices crashed in his home state of Andhra Pradesh. ... [Ramesh] Gupta, a former secretary of the Bombay Shareholders Association, predicted more checks for fraud at other clients of Satyam's auditor, PriceWaterhouseCoopers (PWC). Gupta in particular queried the credibility of PWC and its operations in Dalal Street, Mumbai's financial center. 'Why does PWC get four times the fee that other auditors of companies such as Infosys?', he asked. The Hyderabad police have raided the PWC office since the fraud confession by Raju. The multinational auditor, with offices in 150 countries, is yet to explain haw it passed Satyam's fudged accounts for eight years. ... The fraud opened numerous credibilty cracks, bringing market regulators, various government institutions and market analysts themselves under investigation. The Institute of Chartered Accountants of India (ICAI), which is looking into the role of PWC, is also likely to question market consultants Ernst & Young on its valuation of two Maytas companies, as well as the basis on which E&Y declared Raju the 'E&Y Entrepreneur of the year 2007.' ICAI is itself under the cosh, with the Mumbai-based Small Investors Grievances Forum declaring India's top chartered accountants body, the second-largest in the world, to be among respondents in High Court public interest litigation filed by the Forum on the Satyam fraud. ... The plethora of investigating agencies had not impressed cynics who fear too many sleuths probing the Satyam soup may be a complex coverup for senior politician friends of Raju", Raja Murthy, 16 January 2009 at http://www.atimes.com/.

"The fraud investigation at India's Satyam Computer Services Ltd. [SCSL] could spread to hundreds of other companies connected to the company's jailed founder, B. Ramalinga Raju, prosecutors said Friday. Investigators also have approached several banks to determine whether Satyam account statements were forged to show inflated cash balances, according to people familar with the situation. Satyam bank documents from India's largest private bank, ICICI Bank Ltd., had been forged according to a person familar with the matter", Eric Bellman (EB) and Jackie Range (JR) at the WSJ, 17 January 2009.

"[SCSL], the Indian outsourcer embroiled in a fraud scandal, used forged documents from at least four major banks to claim a cash balance in excess of $1 billlion, according to a person close to the investigation. Investigators have sent Satyam's account-balance statements and letters of confirmation of account balances to officials at HSBC Holdings PLC of the U.K., Citigroup Inc. of the U.S., and HDFC Bank and ICICI Bank Ltd. of India. Based on the banks' reviews, investigators have determined that the documents were forgeries, according to the person close to the investigation. Spokesmen for all four banks declined to comment", Geeta Anand and Romit Guha at the WSJ, 20 January 2009.

"The disgraced former chairman of [SCSL], B. Ramalinga Raju, used salary payments to 13,000 fictitious employees to siphon millions of dollars from the Indian outsourcer for land purchases, prosecutors said Thursday. Prosecutors said ... Satyam has only about 40,000 employees instead of the 53,000 it claims. ... 'The funds of Satyam have been diverted to many other companies,' K. Ajay Kumar, assistant prosecutor, told a packed courtroom. ... S. Bharat Kumar, a defense lawyer for the Raju family ... said it would be impossible for anyone to juggle 13,000 fake employee accounts", EB and Nirag Sheth at the WSJ, 23 January 2009.

"Satyam's former chairman had ticked all of the boxes normally associated with good governance. He had stacked his board with luminaries including professors from Harvard Business School and the Indian School of Business. He chose as his auditor one of the 'Big Four' international accountancies, PWC", Joe Leahy and James Fontanella-Khan at the FT, 23 January 2009.

"Prosecutors pursuing the fraud at [SCSl] said Tuesday the technology outsourcer's founder, B. Ramalinga Raju, should be denied bail because he could slow the investigation if released. Their assertions came after an employee of a company managed by Mr. Raju's familiy told police that he had been instructed to hide documents connected to land purchases by the Raju family, according to prosecutors and a court document reviewed by the [WSJ]. ... Meanwhile, Satyan's government-sponsored board hired Goldman Sachs and Aventus Capital to advise on strategic options", EB and JR at the WSJ, 28 January 2009.

Gupta's point is well taken. In 2008: Infosys paid KPMG $695,000; Satyam paid PWC $1,919,000 in fees. Infosys is slightly larger than Satyam. Did Satyam pay PWC say $600,000 for the (shoddy) audit and $1,319,000 to close its eyes? The ICAI suit is interesting. About 20 years ago, a plaintiff named the AICPA in an accounting malpractice case, alleging the AICPA's defective auditing standards gave rise to the plaintiff's damage. The suit was not permitted to proceed. We'll see if India's courts are more plaintiff friendly than America's.

Did PWC get bank confirmations and monthly statements directly from the banks in question? If not, why not?

Unless people at each of the banks made the forgeries and sent them directly to PWC, PWC is in big trouble here.

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Disagreeing with Bharat Kumar, based on 1973's Equity Funding (EF) scandal, link: http://en.wikipedia.org/wiki/Equity_Funding, it was possible. What is impossible is PWC's not finding a fraud involving 24% of employee accounts. If PWC is so incompetant it couldn't find this, its license should be revoked and it should be put out of business. In the old days, 30 years ago, Arthur Andersen, remember them, used the "TFA", transaction flow approach to auditing. If PWC used TFA it could not have missed this. If the prosecutor is correct, many SCSL employees were involved in this as were some PWC partners and employees. Goldman Sachs (GSG), ready your CNC guillotine, it has some serious work to do in India. SCSL smells more like EF every minute, see US v. Weiner, 578 F2d 757 (9th Cir., 1978) which grew out of the EF case. In it, three CPAs went to prison, link: http://bulk.resource.org/courts.gov/c/F2/578/578.F2d.757.75-2973.html.

Good govenance, whatever that is, is another scam.

GSG? Will those who lost money in this scam arrange for GSG to sell their stock at original cost to the Fed?