Sunday, January 11, 2009

Satyam's Fraud Case- Misrepresentation of Cash

Recently, the profession is hit by the significant fraud case involving India's IT Giant- Satyam. Satyam admitted that he has committed fraud, part of the action includes: inflating cash and bank balances by $1 billion dollar!!!

The professions are wondering how could the auditor miss out such a huge misrepresentation in cash and bank balance. In general, audit procederes include:

- agreeing cash and bank balance per Trial Balance amount to Bank Statement
- most importantly, obtaining bank confirmation directly from the client's banker

The confirmations and bank statements provide a certain level of audit comfort zone, given that it's an independent party confirmation, rather than client-generated evidence.

Nevertheless, Pricewaterhouse Coopers, who are the auditor for Satyam Computer Services Ltd, claims that the audits were conducted in accordance with applicable auditing standards and were properly supported by audit evidence. Apparently, the fraud cannot be easily discovered by obtaining bank confirmation. If not, it wuld have been discovered, given that Pricewaterhouse Coopers has been the auditor of Satyam for several years.

We shall wait for further news / reports then.

4 comments:

Anonymous said...

This article says: Pricewaterhouse Coopers...claims that the audits were conducted in accordance with applicable auditing standards and were properly supported by audit evidence. Apparently, the fraud cannot be easily discovered by obtaining bank confirmation. If not, it wuld have been discovered, given that Pricewaterhouse Coopers has been the auditor of Satyam for several years.

The writer seems to assume the following: PwC is honest; PwC followed standards of he PCAOB, formerly GAAS; and the fraud must have been incredibly complex to have fooled such "brilliant" and "honest" auditors that used "appropriate" procedures.

Of course, these premises are all false and completely unsupported by the facts. Cash is the EASIEST thing to audit. HOWEVER, an auditor must still be diligent and skeptical and NOT rely on client-fed information. You can be absolutely sure that either (1) PwC was in on the scam; or (2) they relied on client-fed junk, rather than independent corroboration. These are the ONLY two options! Either way, PwC was motivated by GREED and the lush fees that Satyam gave them for their participation. Either way, they knew that if they exposed Satyam's fraud and withdrew from the engagement, they would not only lose the lush Satyam fees, but would likely lose the lush fees they've been getting from other corrupt, criminal clients on the PwC roster.

Stephanie Ripka said...

After reading your blog, I just want to agree with the comment that cash is the easiest item to audit. If PWC reviewed the general ledger, they may have been able to spot irregularities leading to finding out about the fraud. Not all auditors look at this report, which could be more important than the balance sheet and income statement. IMHO

Stephanie Ripka said...

Did PWC review the general ledger as part of its auditing practices? Cash would be the easiest item to match up with the bank statement, but were they showing cash or profit? The general ledger may have shown irregularities that you would not easily pick up in a balance sheet or income statement.

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