Five India-based affiliates of PricewaterhouseCoopers (PwC) agreed to pay $7.5 million to regulators to settle charges of conducting deficient audits of Satyam Computer Services and other firms.

The PW India affiliates agreed to pay a $6 million penalty to settle the SEC's charges, the largest ever by a foreign-based accounting firm in an SEC enforcement action.

In a related proceeding, the PW India affiliates also reached a similar settlement with the Public Company Accounting Oversight Board (PCAOB). Two of them agreed to pay the PCAOB a $1.5 million penalty for their violations of PCAOB rules and standards in relation to the Satyam audit engagement.

The combined $7.5 million is the largest penalty that the SEC and PCAOB have assessed against any registered foreign accounting firm.

In a related settlement, Satyam agreed to settle fraud charges, pay a $10 million penalty, and undertake a series of internal reforms. Since the fraud came to light, the India government seized control of the company by dissolving its board of directors and appointing new government-nominated directors, among other things. In addition, India authorities filed criminal charges against several former officials as well as two lead engagement partners from PW India.

The SEC found audit failures by the following five PW India affiliates - Lovelock & Lewes, Price Waterhouse Bangalore, Price Waterhouse & Co. Bangalore, Price Waterhouse Calcutta, and Price Waterhouse & Co. Calcutta. It also said the audit failures were not limited to Satyam, but rather indicative of a much larger quality control failure throughout PW India.

In addition to paying a $6 million penalty, the five PW India affiliates agreed to refrain from accepting any new US-based clients for six months, establish training programs for its officers and employees on securities laws and accounting principles; institute new pre-opinion review controls; revise its audit policies and procedures; and appoint an independent monitor to ensure these measures are implemented.

Under the settlement with the PCAOB, the PW India affiliates were censured and agreed to "extensive undertakings substantially similar" to those imposed by the SEC administrative order. In addition, Lovelock & Lewes and Price Waterhouse Bangalore agreed to pay the PCAOB a $1.5 million penalty for their violations of PCAOB rules and standards in relation to the Satyam audit engagement.

"PW India violated its most fundamental duty as a public watchdog by failing to comply with some of the most elementary auditing standards and procedures in conducting the Sataym audits," said Robert Khuzami, Director of the SEC's Division of Enforcement. "The result of this failure was very harmful to Satyam shareholders, employees and vendors."

As a result of the PCAOB order, the PW India firms will not be able to accept new engagements to audit US issuers until an independent monitor determines that PW India has made significant progress toward completing the undertakings required by the PCAOB order. Also, the PW India firms will not be able to accept new referred US issuer audit work for six months.

In addition, the PW India firms agreed to implement sweeping changes to their quality control policies and procedures, and to certain undertakings intended to improve audit quality at the PW India firms, ensure compliance with PCAOB rules and standards, and protect investors.  

The SEC's order instituting administrative proceedings against the firms finds that PW India staff failed to conduct procedures to confirm Satyam's cash and cash equivalent balances or its accounts receivables. Specifically, the order finds that PW India's "failure to properly execute third-party confirmation procedures resulted in the fraud at Satyam going undetected" for years. PW India's failures in auditing Satyam "were indicative of a quality control failure throughout PW India" because PW India staff "routinely relinquished control of the delivery and receipt of cash confirmations entirely to their audit clients and rarely, if ever, questioned the integrity of the confirmation responses they received from the client by following up with the banks."

After the fraud at Satyam came to light, PW India replaced virtually all senior management responsible for audit matters, according to the regulator. The affiliates suspended its Satyam audit engagement partners from all work and removed from client service all senior audit professionals on the former Satyam audit team.

The PCAOB found that all five firms violated the Board's quality control standards. In addition to the monetary penalty, the Board imposed significant limitations and undertakings related to the firms' audit activities, required the appointment of an independent monitor, and censured the firms. 

The PCAOB asserted that in auditing Satyam's financial statements, PW Bangalore and Lovelock used a procedure to test Satyam's cash balance that did not comply with the PCAOB auditing standard governing the confirmation process. Contrary to their own audit plan and PCAOB standards, PW Bangalore and Lovelock relied on Satyam management to send confirmation requests to Satyam's banks, and relied on Satyam management to return purported confirmation responses from the banks to the auditors, according to the accounting oversight group.

The Board found that deficient cash confirmation procedures contributed to the failure of the firms to detect that Satyam's cash balance was materially overstated. Satyam management used these bank confirmations as part of a cover up of its scheme to inflate the company's reported cash balance by approximately $1 billion. 

The Board also said its investigation uncovered, and its order found, that the jointly administered system of quality control of the five PW India firms failed to detect a general practice in the cash confirmation process that was not in accordance with PCAOB standards. "This pervasive failure continued for many years, and went undetected by PW India's quality control system," it stated in its announcement.

The firms consented to the Board's order without admitting or denying the PCAOB findings.