Satyam Computer Services Essay
In early 2009 the chairman of Satyam Computer Services admitted publicly to a fraud taking place in the company. Satyam reported in the financial statements billions of dollars in profits and cash assets that never existed. The public auditor’s responsible for auditing the financial statements of Satyam Computer Services at the time was PW India, an affiliate of Pricewaterhouse Coopers. The Securities and Exchange Commission determined that Satyam was able to commit the financial statement fraud due to the negligence of the audit team.
The audit team tasked with auditing the records of Satyam failed to confirm cash balances in bank accounts which were grossly over represented. Later it was determined that the more than one billion dollars Satyam claimed to have was actually no more than sixty-six million. During the audits of Satyam Computer Services, the audit team at PW India never sought confirmations for the cash balances that management asserted which is a clear violation of auditing standards.
The SEC, during the investigation, determined that many audit teams in PW India accepted cash confirmations directly from the management of their clients and almost never questioned the reliability of the confirmations received. It was also revealed that sometimes the banks would send statements directly to the auditors even though they weren’t directed to do so. Even though the bank statements showed different balances then those given to the auditors by management, the audit team never questioned the differences in amount.
Procedures, for reviewing audits, were put into place to assure that all audits are completed with the highest degree of professional care. The Satyam audit team was warned by a partner from a different Pricewaterhouse Coopers firm that their cash confirmation procedures were deficient, but nothing was done to correct the deficiency. Due to this deficiency the Satyam fraud was not uncovered. As a result Satyam Computer Services was fined 10 million dollars by the SEC for fraud and PW India was fined 7. million dollars by the SEC and PCAOB.
The critical issue in this case is that PWC India did not act in accordance with PCAOB or AICPA standards and codes of professional conduct. The critical factors are as follows: * The auditors did not act with due professional care. * The auditors did not appropriately assess the risks of material misstatements. * The audit team did not exercise professional skepticism. * The auditors did not act with integrity or in the best interest of the users of the financial statements.
Due professional care, as required by the PCAOB, require the auditors to maintain professional knowledge and skill at the level required to ensure that clients receive competent professional service and to act in accordance with professional standards. This is the most vital part of the audit process to make certain that the audit will be handled with, ultimately, the users of the financial statements best interest in mind. PWC India, in their audit of Satyam, had completely disregarded this fundamental requirement of auditors.
By relying on the confirmations given to them by management, the auditors did not provide the users of the financial statements with the skill and professionalism they are trusted with. As a result, they completely missed an obvious fraud taking place at Satyam and if the executive of Satyam hadn’t admitted to the fraud PWC India’s controls would have never caught the overstatement. Another relevant issue here is that the audit team did not appropriately assess the risks of material misstatements which resulted in the fraud.
Before an audit, in the planning stage, the audit team should have identified accounts, transactions, and disclosures that could affect the financial statements significantly if they were materially misstated. The auditors at PWC India did not properly identify that the risk that the assertions of management about the cash accounts would result in a high risk of material misstatement. Cash accounts regardless of industry should require a special attention during an audit.
The professional judgment of the auditors was lacking in the audit of Satyam’s cash balances. When evaluating the risks of certain accounts the auditors should have asked themselves whether there is a risk of fraud, whether there is subjectivity in measuring the financial information, and whether there is any unusual balances in the accounts. The answer to these questions should have all been yes in this case and there is no reason why they shouldn’t have properly confirmed the cash balances.
One of the many requirements of an auditor is to exercise professional skepticism. The auditor must take what’s given to him with a ‘grain of salt’ and also question and confirm the existence, occurrence, and accuracy of account balances. In the audit of Satyam, the auditors acted with no professional skepticism whatsoever. If the auditors are not doing their due diligence, the audit risk will rise due to the increase in detection risk. Management took advantage of the fact that the auditors procedures of detecting material misstatements were lacking.
This article’s relevance to the auditing profession is enormous. From here, auditors should learn to not take anything for granted and to always question what is put in front of you, unless it is from a completely objective source. The auditors at PWC India did not follow the basic requirements of an audit engagement which resulted in a major fraud. Even when the banks sent account confirmations directly to the auditors, despite not being requested to do so, the auditors still did not question the discrepancies.
The gross negligence in this case should be an example to all auditors; do not take anything for granted. The quality control review also failed in this case. Auditors need to heed the advice of the review team. Here, the audit team ignored the recommendations of the review team to confirm cash balances with the banks. Quality control reviews are very significant to an engagement and auditors should not take recommendations without due consideration.
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