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Scam-Tainted Get Off Scot-Free

The legal system has not been able to stop a Price Waterhouse unit from wriggling free of the Satyam scandal, leaving investors open to further attacks

Last week, a Delhi High Court decision forced the Institute of Chartered Accountants to withdraw a notice it had issued to Price Waterhouse’s Delhi unit about the Satyam scandal. The high court decision recognised that the Delhi unit had nothing to do with the Bangalore unit. It was the Bangalore unit whose partners were alleged to be complicit in, the founder and former Chairman of Satyam, Ramalinga Raju’s crimes.

While this decision must be legally correct, it nonetheless amounts to Price Waterhouse successfully pulling off a dirty trick on the investing public. It must be remembered that the auditor of a listed company is providing a service to the entire investing public. The auditor plays a central role in the system and the functioning of the capital markets is critically dependent on investors being able to trust the auditor.

The quality of accounts being what they are in this country, the identity (or brand) of the auditor is an important input to the investing process. It is a sad reality that the mere fact of a company’s accounts being audited is meaningless in India. Every investor and analyst who reads an annual report checks who the auditor is. A balance sheet of a large company that has the stamp of a small unknown accounting firm, or that of a quasi-in-house favourite, carries a certain connotation of its own.

It is implicit in this framework that when you read the name of a globally recognised accounting brand name in a balance sheet, you expect to be able to trust that the name actually represents that organisation. You expect that across that entire organisation, there would be an internal system of checks, balances and responsibility. You expect that the entities that share the benefits of a global brand would also share a quality and fraud-control mechanism and would be liable if this mechanism is found to be dysfunctional (or non-existent, as it appears in this case).

Apparently, you would be a naive fool to expect any of this.

When you bought the Satyam stock and saw the name Price Waterhouse in the annual report, it didn’t mean what you thought it meant. Satyam’s promoter committed an unprecedented corporate crime with the active complicity of auditors who worked under the name Price Waterhouse, but the rest of Price Waterhouse was able to stand up and say, “Fooled you, guys! Satyam’s Price Waterhouse was just those bunch of criminals in Bangalore, they had nothing to do with us.”

The fact that such chicanery is absolutely fine with our legal and regulatory system is a scandal, and leaves us open to attack by many more Rajus who are no doubt flourishing undetected today.