UNCLAS SECTION 01 OF 02 KOLKATA 000034

SENSITIVE
SIPDIS

STATE FOR SCA/INS AND EEB
USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD
TREASURY FOR OFFICE OF SOUTH ASIA (MNUGENT)

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD IN
SUBJECT: PRICEWATERHOUSECOOPERS FEELS THE HEAT FROM SATYAM

REF: CHENNAI 7

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1. (SBU) Summary: Two partners from PricewaterhouseCoopers (PWC)
remain in judicial custody in connection to admissions of large
scale fraud by the chairman and founder of Satyam Computers
Limited (Reftel). PWC leadership contends that the charges are
politically motivated and that there is no evidence of fraud or
criminal negligence by PWC partners. This comes at a time when
the Institute of Chartered Accountants of India (ICAI) is
pressing the GOI to further reduce the type of work done by
international accounting firms in India. End summary.

PWC Claims Political Motivated Arrests


2. (SBU) Kolkata ConGen met on February 6 with Ambarish
Dasgupta, the director of PricewaterhouseCooper's (PWC) Kolkata
office to discuss the January arrests of two PWC partners,
Srinivas Talluri and S. Gopalakrishnanon. These partners signed
Satyam's last two audit reports and have been accused of fraud
and criminal negligence. The media had extensive coverage of
the arrests and the partners' subsequent suspension from PWC.
Dasgupta claimed that the Satyam scandal took PWC by surprise
and they immediately brought in staff from their United Kingdom
and the U.S. offices to review their files to ensure that PWC's
audits of Satyam were properly done. While acknowledging that
there is always room for improvements, he said that the review
did not reveal any indication of fraud or major problems in
auditing. He said that the last audit was through the end of
September 2009. They had not yet begun to audit the next
quarter, which is when funds allegedly disappeared. He said
that PWC is confident that they are clean, stressing that an
auditor cannot (and is not expected to) detect fraudulent
documents submitted by a company.


3. (SBU) Dasgupta explained that PWC suspended the partners in
order to keep an arm's length from the investigation, but they
are providing financial and moral support to the partners. He
said that their supervisor resigned because of his personal
feeling that he morally failed his staff and that PWC did no

t
seek his resignation. PWC objects to the press characterization
of the suspension of the 2 partners and resignation of their
supervisor as an admission of guilt by PWC and stressed that PWC
has found no evidence of fraud by these 2 partners.


4. (SBU) Dasgupta stressed that PWC has cooperated fully with
investigators and will continue to do so. According to
Dasgupta, no charges have been filed, but local police
authorities have acknowledged that they found no evidence of
fraud and the police are now only pursuing possible charges of
criminal negligence. The partners remain in judicial custody, a
status that prohibits police interrogation, and were most
recently denied bail on February 3. PWC is concerned that
vested interests are involved in these arrests, but is not sure
exactly who is behind it and why. PWC's concern now is that any
police investigation be conducted quickly, transparently and
fairly. The investigation has been moved from the Andhra
Pradesh state Criminal Investigation Division to the federal
Criminal Bureau of Investigation at PWC's request and PWC hopes
this move will reduce the politicization of the investigation.
Dasgupta confirmed that DiPiazza met with the corporate affairs
minister Prem Chand Gupta to discuss the case, but had the
impression that Gupta is still trying to understand what is
going on. PWC has not previously dealt with Gupta and cannot
gauge his capabilities.

Is Pressure on PWC to Drive Out Foreign Accounting Firms?


5. (SBU) Dasgupta speculated that one motivation behind the
arrests is to put greater pressure on foreign accounting firms
practicing in India. Currently, foreign firms are not allowed
to perform accounting, offer auditing services or engage in
taxation practice, but they are allowed to perform management
consulting services. Therefore, international firms have had to
enter into partnerships with individual accountants, but these
partnerships are limited to twenty partners and partnerships
with firms are not allowed. He explained that PWC provides
accounting services because they were operating in India before
the new restrictions were imposed. New Delhi EconOff recently
met with Richard Rekhy, the Chief Operating Officer of KPMG in
Gurgaon and Vikram Aggarwal, Partner of BSR and Company shortly
after Satyam's board asked them and Deloitte to discuss media
statements by Ved Jain, the president of the Institute of
Chartered Accountants of India (ICAI), claiming that KPMG is not
allowed to practice in India because they are not registered
with ICAI.


KOLKATA 00000034 002.2 OF 002



6. (SBU) Both Mr. Rekhy and Aggarwal said that the scope of
work they were asked to do by the Satyam board was not the type
of work reserved for chartered accountants in India and that the
Satyam board would clarify this with ICAI. They said that the
motive behind the statements was not to stop them from doing the
work at Satyam but to revive a long standing argument between
ICAI and international firms regarding the scope of work that
they could perform in India. ICAI's position is that even
consulting services is tantamount to allowing international
firms to have surrogate practices and that they should not be
allowed to do indirectly what they cannot do directly. The KPMG
and BSR executives stated that another reason ICAI doesn't want
to allow international firms greater inroads is because Indian
accounting firms are not allowed to practice in other countries,
and until they receive reciprocity they do not intend to relax
their position. Mr. Rekhy and Aggarwal also said that many of
ICAI's members believe if they can shut international firms out
of the market the business currently performed by international
firms will fall to them.

Comment


7. (SBU) It is still too early to know what or who is behind
Talluri and Gopalakrishnanon's arrests. However, if police are
eventually unable to substantiate claims of malfeasance and
criminal negligence, particularly after leaking negative
information to the press, there is a good chance the arrests
were politically motivated. The PWC arrests come amidst
ongoing, unresolved service trade disputes between India and the
U.S. regarding each country's permission to allow the others'
accountants to practice in their home markets, making a
difficult environment for American firms even tougher.
PAYNE