PricewaterhouseCoopers faces lawsuits over the Satyam accounting scandal, but the auditor's contract likely limits its liability
Even as shareholders and investors plan to take Satyam Computer Services' auditors, Price Waterhouse, to court for failing to check the alleged falsification in the company's accounts, it is likely that the audit firm could get away lightly as accountancy firms limit the extent of their liability in their contracts with clients.
Typically, auditors restrict the quantum of their liability to the extent of the fees that they receive from the company, say lawyers.
However, the Institute of Chartered Accountants of India can, if convinced about Price Waterhouse's audit failure, blacklist the audit firm.
On Thursday, a day after the Satyam fraud—described as India's Enron—was exposed, ICAI said it is planning to issue a showcause notice to Price Waterhouse by next week. The institute also said that it would examine all communication between Satyam and Price Waterhouse.
Reacting to reports of allegedly overlooking the Satyam accounts, Price Waterhouse on Thursday said: "The audits were conducted by Price Waterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence. Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities. Price Waterhouse will fully meet its obligations to cooperate with the regulators and others."It was learnt that market regulator Sebi had sent a team to Hyderabad to look at Satyam's books and had also met Price Waterhouse partners in the city.
With the magnitude of the collapse of corporate governance in the NYSE-listed company increasingly coming to light, three global partners from the parent PricewaterhouseCoopers are also learnt to have flown in to Bangalore to meet senior partners of their Indian affiliate to try and resolve the issue.
Apart from a possible loss of reputation, the stakes are high for PwC, which audited over 140 companies in India in the previous fiscal year. Price Waterhouse's clients include big names, such as Maruti Suzuki, United Breweries, United Spirits, GMR Infra, Glenmark Pharma, Piramal Healthcare, among others.
According to Economic Laws Practice corporate lawyer Namrata Mehta, it is also important to analyse the legal relationship between the auditor and a company and the auditor and other stakeholders before rushing to take action.
"The contract that the auditor has with the company is not a contract the shareholders or other stakeholders are privy to. Hence, under Indian law, it would be difficult for the shareholders to take any action against the auditors under the Law of Contract."
Interestingly, the Satyam fiasco also finds similarities in an earlier case wherein the Bombay High Court ruled in favour of the auditor. In the 1987 case of Tri-Sure vs A F Ferguson (the auditing firm), the high court held that the "auditor is required to employ reasonable skill and care but is not required to begin with suspicion and to proceed in the manner of trying to detect a fraud or a lie..."
The case also involved falsification of the accounts. The net profit of Tri-Sure was overstated in its prospectus, which invited the public to subscribe to its shares. The abnormal rise in profits was subsequently revealed to be false after an investigation.
The high court said that while high standards needed to be maintained by an auditor, it would be difficult for an audit firm to be suspicious from the very beginning unless prima facie there is sufficient reason to doubt the company.
Another senior lawyer said that shareholder action against the auditor could lie in tort. Tort laws include what constitutes legal injury and establishes the circumstances under which one person may be held liable for another's injury. Torts typically cover intentional acts and accidents. But for this, the shareholders need to satisfy the court on whether the auditors owe a duty of care to the shareholders and that there was a breach of duty by the auditor. "Only then can a claim be made against the auditors," said another lawyer.