Contributing Lawyers

Canada

Cyndee Todgham Cherniak

United States

Susan Kohn Ross

Australia

Andrew Hudson



Arrest of Satyam PWC Auditors Raises Trade In Services Issues

On January 24, 2009, PricewaterhouseCoopers LLP’s (PWC) Indian affiliate, the auditor of Satyam Computer Services Ltd., reported that two of its audit partners (who worked on the Satyam account) had been arrested in India.  The two PWC audit partners were remanded to judicial custody on charges of “conspiracy and co- participation". PWC may also face scrutiny in the U.S. after Satyam’s New York-listed equities lost 82% of their market value in two weeks. The U.S. Securities and Exchange Commission is investigating whether Satyam misled investors and officials from the SEC plan to coordinate inquiries with counterparts in India.

Is it time to raise a red flag in respect of trade in services?  The General Agreement on Trade in Services has opened doors to service providers.  Trade in Services chapters of free trade agreements also have opened doors to service providers to provide services in foreign jurisdictions.  This is all well and good --- until something goes wrong.

When something goes wrong, the service providers are being painted with the same dark brush of scandal.  Look what happened to Arthur Anderson LLP when Enron imploded.  Look what happened to Loewen in the United States.  The local authorities will want to punish (within and outside the wrongdoer) for reasons of justice and politics.  It should not be overlooked that it always is a popular move to punish the foreigners.

The lessons in the Satyam affair are yet to be fully written.  One of the first lessons should be that service providers who venture into foreign jursidictions should (1) know the local laws and (2) stay within the laws

In order to comply with follow this lesson, some of the best people, the most well-educated, experienced and the most ethical should be sent to the foreign markets.  Facts are coming out that Satyam had about 33 billion rupees ($674 million) of “fictitious and non-existent” accounts, public prosecutor K. Ajay Kumar told a hearing on Jan. 22. The company had about 40,000 employees, compared with the 53,000 claimed by Satyam.  These problems should have been detected by an experienced auditor.

To limit the likelihood of a scandal, the service providers should not have a greed based formula for compensation - meaning that compensation should not be based on taking risks.  We are learning that many of the corporate problems have occurred in part due to greed.

Global risk management is not adequately considered by businesses doing business abroad.  Global compliance and risk management should take on a new priority.  In addition, service chapters of free trade agreements need to establish rules to strike a balance between sovereignty to prosecute white collar criminals and using foreign service providers as scapegoats (not that I am saying that is what is happening in the present circumstances).

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