MUMBAI -- The Securities and Exchange Board of India has banned global consulting firm PwC from auditing listed companies for two years because it failed to uncover a 71.36 billion-rupee ($1.18 billion) accounting scam at Satyam Computer Services from 2003-2008.
The regulator also told PwC Bangalore and partners, S. Gopalakrishnan and Srinivas Talluri, to disgorge 130 million rupees in wrongful gains as a result of failing to spot overstated revenues over those five years. The two senior partners audited Satyam between 2000 and 2008.
The fraud at Satyam, now Tech Mahindra, became India's Enron after founding Chairman Ramalinga Raju admitted in a letter to the stock exchanges in 2009 that he had inflated revenues for many years. The event shocked the Indian markets and triggered investigations by different agencies.
"Entities/firms practicing as chartered accountants in India under the brand and banner of PW, shall not directly or indirectly issue any certificate of audit of listed companies ... for a period of two years," Sebi said in an order late Wednesday night.
Sebi's move is unprecedented -- it has never banned an entire network of audit firms for wrongdoing by some of its partners or associate firms. A Sebi director G. Mahalingam said that the whole network had to be punished in order to insulate the securities market from such fraudulent accounting practices.
"The network structure of operation adopted by the international accounting firm should not be used as a shield to avoid legal implications," Mahalingam said in the 108-page order.
The Big Four accounting firms -- KPMG, PwC, Deloitte, and EY -- are not allowed to directly audit accounts in India, but through affiliate firms. The government has long been mulling a way to hold these firms directly responsible for lapses, including allowing them to practice in India so they can be made accountable.
PwC said it was "disappointed" in the Sebi order and said it "played no part and had no knowledge of" the fraud. The firm said it was confident of staying the order.
"We have, however, learnt the lessons of Satyam and invested heavily over the last nine years in building a robust and high-quality audit practice," it said.
Satyam was India's fourth largest technology firm before the fraud disclosure January 2009 that resulted in the government taking over the company. It was later sold off to Mahindra and Mahindra's tech arm, Tech Mahindra.
The Indian judgement is the latest in a string of blows PwC has suffered in recent years to its global reputation. In the U.S, on New Year's Eve, a federal judge in Alabama found the firm's failure to spot a years-long fraud involving fake mortgages at Colonial Bank amounted to professional negligence. Judge Barbara Rothstein will now determine how much PwC owes to the Federal Deposit Insurance Corp., which spent $2.8 billion when it stepped in to protect depositors after Colonial's 2009 collapse.
In the U.K., PwC is under investigation by the accounting watchdog over accounting irregularities at the Italian arm of BT, the telecoms group, which resulted in a 530 million pound ($715 million) write-down. BT has since switched auditor, dropping PwC after over 30 years. Earlier the firm was fined a record 5 million pounds by the regulator for "misconduct" in relation to the audit of Connaught, a FTSE 250 social housing maintenance group put into administration in 2010.
Other Big Four firms have also been embroiled in scandals, notably KPMG which has had to apologize to the South African parliament after it was found to have missed apparent irregularities at businesses controlled by the controversial Gupta family which has ties with President Jacob Zuma.
The Big Four have come under fire for their roles in auditing financial companies involved in the 2007 global financial crisis and, more recently, in advising companies and rich individuals on tax avoidance schemes, including those disclosed in the huge Paradise Papers leak of client information.
Stefan Wagstyl, Commentary editor, Nikkei Asian Review contributed to this story.