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Investors Lose Because of Auditors' Bank Confirmation Deficiencies to Uncover Satyam's $1 Billion Inflated Cash Balance, According to Confirmation.com
Apr 06, 2011 (06:04 PM EDT)
BRENTWOOD, Tenn., April 6, 2011 /PRNewswire/ -- Confirmation.com, the world’s leading provider of secure audit confirmation services, comments on yesterday’s news about the Securities and Exchange Commission (SEC) charging India-based Satyam Computer Services Limited with fraudulently overstating the company’s cash balances by more than $1 billion and hiding that fact from its auditors by manipulating the auditor’s bank confirmation process.
The SEC's complaint states that former senior officials at Satyam used false invoices and forged bank statements to inflate the company's cash balances and make it appear far more profitable to investors. According to the SEC's complaint, Satyam's former senior managers engineered a scheme that created more than 6,000 phony invoices to be used in Satyam's general ledger and financial statements. Satyam employees also created bogus bank statements to reflect payment of the sham invoices. This resulted in more than $1 billion in fictitious cash and cash-related balances, representing half of the company's total assets.
In a related statement, the SEC sanctioned Satyam's former independent auditors, five India-based affiliates of Pricewaterhouse (PW), for violations of federal securities laws and improper professional conduct while auditing the company's financial statements from 2005 through January 2009.
"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 Satyam audits. The result of this failure was very harmful to Satyam shareholders, employees and vendors," said Robert Khuzami, Director of the SEC's Division of Enforcement.
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."
"The reliability of global capital markets depends on auditors fulfilling their obligation to investors to perform robust audits, resulting in well-founded audit reports. Two of the PW India firms, PW Bangalore and Lovelock, repeatedly violated PCAOB rules and standards in conducting the Satyam audits. These confirmation deficiencies contributed directly to the auditors' failure to uncover the Satyam fraud," said James R. Doty, PCAOB Chairman.
Because of the continued deficiencies world-wide surrounding audit confirmations, in the last two years the Auditing Standards Board (ASB) and the International Auditing and Assurance Standards Board (IAASB) issued new standards that allow secure electronic audit confirmations to help auditors more easily detect financial frauds involving audit confirmation irregularities. The Public Company Accounting Oversight Board (PCAOB) is currently seeking final SEC approval of its revised AU 330 standard, The Confirmation Process, which, if approved by the SEC, will also allow for the more secure electronic audit confirmations.
"The Satyam accounting fraud is truly a disappointing loss to investors and investor confidence," said Brian Fox, CPA and Founder of Confirmation.com. "But most unfortunately it is not an isolated event as we see with the announcement just last week of the purported bank confirmation fraud at China Century Dragon Media and prior to that the audit confirmation frauds at companies like Parmalat, Refco, Ahold and Kmart. In order to regain the investing community's confidence in the financial statements, we have seen many firms turning to the secure electronic confirmations provided by Confirmation.com to help assist in identifying confirmation fraud."
Confirmation.com is used by more than 8,000 accounting firms and all of the Top 10 banks in the U.S. to manage their audit confirmation requests and to reduce the occurrence of bank confirmation fraud. In total, more than $3 trillion has been confirmed by auditors through Confirmation.com, improving the quality of those audits and helping to regain investor and lender confidence in the financial statements.
About Capital Confirmation, Inc.
As the exclusive Preferred Provider of Electronic Confirmations for the AICPA Trusted Business Advisor™ Solutions and for the American Bankers Association, Capital Confirmation, Inc. provides secure online confirmation services for auditors, banks and their shared clients. Capital Confirmation's patented cloud-based Confirmation.com service minimizes fraud and brings efficiency to the audit confirmation process. Several hundred In-Network responding companies including all of the Top 10 banks in the U.S. and over 8,000 accounting firms in more than 100 countries trust Confirmation.com for their audit confirmation needs.
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SOURCE Capital Confirmation, Inc.