PWC faces questions over 'India's Enron' role

Accountancy giant PricewaterhouseCoopers is facing deepening scrutiny over its audit of Satyam - the IT giant known as "India's Enron" - whose founder admitted fabricating cash and other non-existent assets of more than £1 billion ($2.59 billion).

The audit of Satyam was not, as previously thought, carried out by PWC's main operation in India but by a small subsidiary called Lovelock & Lewes, according to the Central Bureau of Investigation, which looks into serious and complex Indian fraud cases.

The subsidiary was part of the old Coopers & Lybrand network swallowed up by PWC. Its role may have contributed to confusion over whether PWC was responsible for signing off the accounts.

The accountant's London office said it deployed Lovelock & Lewes because, under a quirk of Indian law, audit firms cannot employ more than 20 people and are not allowed to use their international brand name for audits.

PWC argues that its Indian arm is a separate legal entity from the global operation. Therefore, it says, the main firm would not be liable for any damages linked to the Satyam collapse. Nevertheless, sources in London concede that the global firm could be embroiled in future class actions by investors.

In a further twist, it has emerged that PWC and Satyam had business links as well as an audit relationship in the United States. Both worked on a major IT contract for Idearc, a spinoff of telecom firm Verizon, in the US. Satyam shares are quoted on Wall St, where under securities and exchange commission rules, auditors should not have business relations with their clients.

PWC says this was the only contract on which they both worked and that they were hired independently by the client, Idearc.

Shares in Satyam plummeted when its founder B. Ramalinga Raju admitted fabricating revenues last December. The auditors, S. Gopalakrishnan and Srinivas Talluri, have been suspended and arrested.

The Satyam affair compounds the woes of PWC, which was also involved in audit work at collapsed companies AIG and Northern Rock. Last week an angry AIG shareholder questioned the level of fees paid to PWC. In the past two years it received US$250 million for auditing the insurance giant, which had to be bailed out by the US Government to the tune of US$182.5 billion ($291 billion).

PWC, which had audited the insurer for many years, was last year fined US$97 million after AIG produced incorrect accounts and had to make a near US$4 billion restatement of earnings.

Edward Liddy, AIG's chief executive, defended the accountant, saying it had raised early concerns about controls at the division blamed for bringing it to the brink of ruin.

Last year a committee of British members of Parliament raised concerns over a possible conflict of interest for PWC in its role as auditor of the bank Northern Rock. PWC acted as adviser on its securitisations and gave the bank a clean bill of health to its shareholders.

Accountants believe that US investors will take action against audit firms for their role in the collapse of financial giants.

In the US, KPMG is being sued for US$1 billion in damages by the trustee of a collapsed US sub-prime lender, New Century Financial.

KPMG is accused of conducting "reckless and grossly negligent audits" that failed to show the lender's financial problems.

The auditing firm has denied any wrongdoing.

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