SEC settles charges in US$1bil Indian accounting fraud

  • Business
  • Wednesday, 06 Apr 2011

WASHINGTON: Federal securities regulators settled charges against Satyam Computer Services and sanctioned its accountants, adding to the damage from a massive accounting fraud that prompted a takeover of the company by the Indian government and criminal charges against its former executives.

The Securities and Exchange Commission said Tuesday that Satyam will pay a $10 million penalty, improve employee training and hire outside consultants to settle allegations that it fraudulently overstated its revenue, income and cash balances by more than $1 billion over five years.

In a related action, the company's accountants agreed to a $6 million penalty for conducting deficient audits that allowed the fraud to go undetected for years, the SEC said. The accountants are affiliates of PricewaterhouseCoopers, and are based in India.

The accounting failures "were not limited to Satyam, but rather indicative of a much larger quality control failure throughout PW India," the SEC said. PW India staff routinely failed to confirm clients' claims about their cash accounts, it said.

Satyam, a massive outsourcing company based in Hyderabad, India, created more than 6,000 phony invoices to justify bogus ledgers that doubled the company's actual assets from 2005 to 2009, the SEC said. The cooked books misled holders of Satyam's American Depository Shares, which traded on the NYSE, the SEC said.

U.S. regulators police all investments traded on U.S. exchanges. Satyam's common shares trade primarily on Indian exchanges.

Satyam neither admitted nor denied the alleged wrongdoing in settling the charges, the SEC said. The auditors consented to the SEC's broad censure, which bars them from taking on new clients and subjects them to greater scrutiny.

Seven former Satyam executives and two partners from its audit firms face criminal charges in an ongoing trial in India.

The PWC affiliates involved in the settlement are: Lovelock & Lewes, Price Waterhouse Bangalore, Price Waterhouse & Co. Bangalore, Price Waterhouse Calcutta and Price Waterhouse & Co. Calcutta.

In addition to the penalty, the auditors agreed not to accept U.S.-based clients for six months, the SEC said. It said they will improve employee training, add internal controls and appoint a new independent monitor.

The penalty against the auditors is the largest ever for a foreign-based accountant in an SEC enforcement action, the SEC said.

The fraud at Satyam came to light in January 2009, when chairman and co-founder Ramalinga Raju admitted to lying about the company's financial results since 2005.

Continuing the fraud over time "was like riding a tiger, not knowing how to get off without being eaten," Raju said in a letter to directors.

Raju is among the former executives facing criminal charges.

The Indian government overhauled Satyam, removing its top managers and replacing its board of directors. Satyam's new controlling shareholder was selected through a government-run bidding process.

The moves "transformed Satyam into a new company," giving shareholders a chance to recoup their losses, SEC enforcement director Robert Khuzami said in a statement. He said the response shows how regulators can coordinate their responses to cross-border misconduct.

Satyam's new executives and directors cooperated with the SEC inquiry, the SEC said. It said the investigations of Satyam and its auditors are ongoing.

The PW India affiliates also settled similar allegations by the Public Company Accounting Oversight Board, the SEC said. - AP

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