A week after B Ramalinga Raju, the promoter of Satyam Computer Services [Get Quote], confessed to manipulating the accounts for several years, Price Waterhouse, external auditors of the Hyderabad-based software services firm, said its audit report should not be relied upon.

Meanwhile, Satyam confirmed that the three-member government-appointed board had retained two audit firms --Deloitte and KPMG --to assist the company in restating the financial statements to reflect the actual position.

In a carefully worded letter to the company and regulators, the audit firm did not admit to wrongdoing in Satyam, but said it had relied on information and explanations provided by the management.

Price Waterhouse has been Satyam's statutory auditor from June 2000 until the quarter ending September 2008.

Basing its decision on the confession letter faxed by Ramalinga Raju to the market regulator Securities and Exchange Board of India (Sebi) last week, Price Waterhouse, the audit arm of PricewaterhouseCoopers in India, said the company's financial statements would be adversely affected even if only a portion of the letter were true. The audit firm said, however, that it could not quantify the impact without a thorough investigation.

Raju admitted that he had inflated Satyam's revenues and profits for many years, showing non-existent cash balances of around Rs 5,000 crore. He was subsequently arrested by the Andhra Pradesh government and is in jail. Yesterday, the corporate affairs ministry also ordered an investigation by the Serious Fraud Investigation Office (SFIO), which has been given three months to submit its report.

"External auditors are allowed to cancel their audit report if they come across any new information that will materially change the financial statements," said R Bupathy, former president of the Institute of Chartered Accountants of India (ICAI).

A 2003 guidance note released by ICAI asks external auditors to inform the company and other regulators if the earlier audit report cannot be relied upon. This, however, comes into effect only on a prospective basis � that is, only from the date the statutory auditor informs the company and others.

The letter from Price Waterhouse also asks the new board to order an independent investigation under Section 10A of the United States Securities and Exchange Act of 1934, because the "information contained in the chairman's letter indicates that an illegal act could have occurred". Satyam's American Depository Receipts are listed in US stock markets and are thus covered by this Act. 

Deloitte and KPMG to help assess nature of fraud: Deloitte and KPMG are expected to help restate Satyam's accounts, an important step to help regulatory authorities assess the nature of the fraud involved and get an idea of the correct financial position.

It is not, however, clear whether Deloitte and KPMG would replace Price Waterhouse, whose office in Hyderabad was searched by the Andhra Pradesh police Tuesday, as Satyam's statutory auditors.  "New statutory auditors have to be appointed by the shareholders of the company, after the existing auditor resigns," said Uttam Prakash Aggarwal, vice president of ICAI. But the government also has the power to replace the external auditor under section 308 of the Companies Act, said B Ravi, a company law expert. "The government has to issue a direction to the nominee directors," he said.  Aggarwal added that only Deloitte is registered with the institute to undertake statutory audits. Registration with ICAI is a precondition for being appointed an external auditor and the institute stipulates that the audit firm should not have foreign partners.

<B>Political leadership waits for audit reports</B>

The top leadership of the United Progressive Alliance (UPA) government prefers to "assess the depth of the problem" before taking any decision on ways to bail out the tainted Satyam Computer Services Ltd. Prime Minister Manmohan Singh held a special meeting on Satyam issue on Wednesday night but "no final decision was taken," a source close the event claimed.

"We are yet to assess the actual depth of the fraud or the problem in Satyam. We can't act entirely on newspaper reports. We are waiting for fresh audit reports to finalise our action," a senior minister told Business Standard.