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PWC has written the following letter to BSE and addressed to Satyam’s Board.  The text of the letter published at www.cxotoday.com is reproduced below with my questions, presented in blue font.

Dear Sirs,

Re:      Our audit of your financial statements

1. As statutory auditors, we performed audits of Satyam Computer Services Limited (the “Company”) from the quarter ended June 2000 until the quarter ended September 30, 2008 (“Audit Period”).

Q. What was the fee earned during this period from Satyam for audit services and other consulting services?

2.The above-referred financial statements were prepared by the management of the Company.

Q. Agreed that the financial statements were prepared by the management of the Company. Was it not audited by you?

Q. Can you prove that no part of the financial statements were made / amended at your office including the notes to the accounts?  Were the notes on accounts verbatim drafted by Satyam’s management?  Is it possible that some part of the financial statement or notes to the financial statement were amended to meet the changes in the Indian Accounting Standards (IAS) and International Financial Reporting Standards (IFRS)?

If it is not the case, how certain notes to the financial statements of Satyam is verbatim matching with other financial statements prepared by other companies which are also audited by PWC?

3. We planned and performed the required audit procedures on such financial statements, and examined the books and records of the Company produced before us by the Company management.   We placed reliance on management controls over financial reporting, and the information and explanations provided by the management, as also the verbal and written representations made to us during the course of our audits.

Q. When you say “required audit procedures” how the required audit procedures are determined? Who is responsible to decide what is “required audit procedures”?

Q. Is there a possibility to err in judgment when finalizing “required audit procedures”?

Q. Is there a possibility to totally ignore certain aspects of a business when deciding “required audit procedures”?

Q. Is there a possibility to follow the same audit procedure year after year for checking certain things without suitably amending the “required audit procedures” and thereby ignore significant changes in accounting / control systems?

Q. Before placing “reliance on management controls over financial reporting, and the information and explanations provided by the management, as also the verbal and written representations made during the course of our audits”, did you undertake any “required audit procedure” to satisfy yourself the amount of reliance that can be placed on the management controls, information and explanations as also the verbal and written representations?

Q. What were the “required procedures” adopted by you to satisfy yourself on the issues highlighted in the previous question?

Q. Were there any, significant or insignificant, anomalies/ shortcoming found in the controls, information and explanations provided as also the verbal and written representations?

Q. How were these resolved?  Were there any unresolved issues? Were there any unresolved issues pending for many years?

Q. What about the various statements you have given under MAOCARO (Manufacturing And Other Companies Auditors’ Report Order) wherein you have expressed satisfaction over “internal controls in effect in the company”, “no knowledge of fraud” etc.?  What tests were performed to assure yourself that you can rely on the management’s views on these?

Q. Were you and your Satyam audit team, conscious all the time, of the fact that you were representing the shareholders?

4. As you are aware, vide a letter dated January 7, 2009 {“Chairman’s Letter”) addressed to the erstwhile Board of Directors of the Company, the former Chairman of the Company, Mr. Ramalinga Raju has stated that the financial  statements of the Company have been inaccurate for successive years.  The contents of the said letter, even if partially accurate, may have a material effect (which effect is currently unknown and cannot be quantified without a thorough investigation) on the veracity of the Company’s financial statements presented to us during the Audit Period. Consequently, our opinions on the financial statements may be rendered inaccurate and unreliable, a copy of the Chairman’s Letter, extracted from the official website of the National Stock Exchange is annexed hereto as Annexure A, for the sake of record.

Q. What are the letters written by the Auditors to, namely, Audit Committee, Board of Directors on the financial statements at the end of each audit and whether any of such letters pointed out any concern related to internal controls, insufficiency of information and explanations, unsatisfactory responses from management? Simply put, what were the contents of the management report / letter issued by the Auditors?

5. The ICAI has issued a guidance note on revision of audit reports in January 2003 (“Guidance Note”) which prescribes steps to be followed by the auditor to prevent reliance on audit reports in such circumstances.  In view of the contents of the letter our audit reports and opinions in relation to the financial statements for the Audit Period should no longer be relied upon.

Q. What are the various guidance notes and Statement on Standard Auditing Practices and Indian Accounting Standards  issued by the ICAI and applicable for auditing a Company like Satyam, including those related to Code of Conduct applicable for Chartered Accountants in practice.  Can the Auditors confirm that all of these were completely followed by them while conducting the audit and while forming a opinion on the financial statements?

6. Such a requirement is also prescribed under the generally accepted accounting standards in the United States, where, as you are aware, the American Depository Receipts of the Company are listed.   We wish to inform you that pursuant to Section 10A of the United States Securities and Exchange Act of 1934, the information contained in the Chairman’s Letter indicates that an illegal act could have occurred.  Accordingly, we advise that the Board of Directors of the Company should promptly commence an independent investigation pursuant to Section I0A of the United States Securities and Exchange Act of 1934 in order to determine whether such illegal acts occurred and, if so, the nature and extent of such acts,

Q. My question for point 5 is repeated for point 6 as well with suitable modification for GAAP in place of IAS and other India specific guidance notes.

7.  We hope to work with the Company and provide assistance to the new Board of Directors to address any issues that arise in the course oF such investigation, to enable both the Company and us as your statutory auditors to fulfill obligations under applicable law.

Q. Were you fulfilling all your obligations under all the applicable laws while doing the audit?

8. We wish to advise that the Company should promptly notify any person or entity that is known to be relying upon or is likely to rely upon our audit report that our audit opinion should no longer be retted upon.

Q. How does it matter if the opinion being withdrawn now relates to past years relying upon which decisions have already been taken and monies have already been lost or made?

9.  Consequently, such notification should be made to at least the Company’s shareholders, lenders, creditors, Indian regulatory authorities and the United States Securities and Exchange Commission, and indeed to all stock exchanges, whether in India or abroad, where the securities of the Company are listed.  We expect such notification would be made promptly and request that the Company advise us as soon as the notification has been made. Since we are required under the Guidance Note to mark a copy of this letter to the relevant regulatory authorities, we have done so.

Q. All stake holders are happy to receive your guidance as above.  Why no guidance was given to them at the end of each audit?  Were there no occasion in your entire audit history with Satyam for blowing this whistle?  How many times whistles were not blown because you made a judgement on MATERIALITY instead of IMPORTANCE?

These are questions asked in stakeholder’s interest.  Answering these questions will help us to put you back in the high esteem in which we are accustomed to seeing you.

http://www.sathyamurthy.com/2009/01/12/satyam-two-in-one/

http://www.sathyamurthy.com/2009/01/07/satyam-what-the-auditors-should-check-and-report/

http://www.sathyamurthy.com/2009/01/07/satyam-fraud-unravelling-the-mystery/

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