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Power struggle at PwC

PricewaterhouseCoopers faces its toughest test in its 138 years in India—partners pulling away as it builds back its cred. Here's how it is at the inner circle of India's top audit firm.

Suman Layak | Print Edition: February 21, 2010

Soon after the January 7, 2009 confession by B. Ramalinga Raju, Chairman, Satyam Computer, that he had cooked the books of the software services vendor, it was clear that it would not be just the business he founded 22 years ago that would be dragged under. Some 13 months later, the company, with a new controlling shareholder, Tech Mahindra, is back on an even keel but the shockwaves are still ripping through its auditor: PricewaterhouseCoopers.

The bean-counter, commonly also called PwC, is being probed by India's apex body of accountants, saw its role (or the lack of it) in the Satyam scam panned in media editorials, faced commentator ire on the blogosphere, stood by helpless as two of its partners were arrested, and, even today, is the target of class-action litigation by owners of Satyam's GDRs, or global depository receipts, in the US. The introspecting 160-year-old global firm (138 years in India) is far from getting to a solution to the mess but there are signs that the reins are getting tighter.

PwC in India, today, has new faces running it. People at the helm now are not the owners of the firm's units in the country but expats representing the international parent body. Some 10 per cent of the firm's partners (out of 170) in India have walked out and scores of staffers are likely to be lured after them. Lure is the word as a switch-over purse of Rs 65 crore has been created by at least one rival firm—KPMG—to offer joining bonuses to exiting PwC staff. The local offices of New York-headquartered PwC are fighting back and, in an economy just coming out of a slowdown, has offered retention bonuses equivalent to almost one year's salary—on an average Rs 14-20 lakh each.

Such fire-fighting may be a direct consequence of the Satyam scandal, but the firm, or the network as PwC prefers to call itself, has been through the wringer for longer—with different parts wanting to move in different directions. Satyam, say at least two PwC insiders and others close to the firm that BT interviewed, was a fresh trigger but the plot had its genesis in 2007 or even earlier. The firm denies a struggle but that an election to find its chairman in May 2007 ended in a tie, with its 98 partners split down the middle, is a giveaway. More details later, but suffice it to say that N. Ramesh Rajan, then Deputy Leader Audit, came to the fore as PwC India's Chairman for a period of four years in May 2007 in a repoll that saw some members change their minds and others, who did not participate earlier, also vote.

Then, less than a year after Raju spilt the beans, Rajan gave up his office, making room for Gautam Banerjee, the head of PwC Singapore as the India Chairman. Banerjee, born in Kolkata and schooled in Mumbai, is the head of the PwC Asia network and seen a fast-tracker, who will likely stay put in Singapore. He was a nominated member of the Singapore Parliament till recently. PwC also brought in Peter Harvey, PwC's global leader for Consumer, Industrial Products and Services Industry Groups as the Deputy Chairman in India, a new post created for him. Harvey is going to stay in India—spending time in Mumbai and Delhi. He will be on the ground in India for PwC, Jairaj Purandare, the firm's Executive Director, told BT. To understand why all this is unusual, read on.

Battles of History
First, the PwC structure in India. PwC has a number of member firms under the names of Price Waterhouse, Lovelock and Lewes, RSM and Eicher as a part of its network in the country. It also has a limited liability company PricewaterhouseCoopers Pvt Ltd, which handles its consulting and taxation business. The head of this company is traditionally the head of the network in India. All the firms and the limited company are owned by the senior Indian employees who hold ranks of partners or executive directors depending on whether they are chartered accountants or not.

All the firms are members of the PwC Global network led by PwC International in New York. It's a model that all the Big Four audit firms (PwC, Ernst and Young, Deloitte and KPMG), which also take on consultancy assignments, follow.

For a long time, the PwC network in India was dominated by what insiders call the Kolkata lobby—in reference to the firm's origins in the first capital city of British India. Some deny any such lobby but a listing of PwC's leadership says it all. P. K. Choksi and K. P. Bhargav lived in Kolkata when they headed the firm. They were followed by S.D. Ghosh, a Bengali from Mumbai, Amal Ganguli from Delhi, and Rathin Datta from Kolkata.

That changed in early 2007, when Datta was Chairman and Roopen Roy was the Managing Director of PwC India. Battles with the global organisation were taking their toll—headquarters wanted its men to head key businesses and bring about a culture change in the Indian unit—and both Datta and Roy quit their leadership positions on the same day in February that year. It was less than a week after PwC had bought the taxation arm—Ambit RSM—of Ambit Capital, a deal that brought clients such as Indian units of General Electric, Microsoft, Sony, British Airways, Visa and Dell Computer, besides Indian companies such as Tata Group firms.

PwC International, insiders recall, had designated Eugene Donnelly, then global leader for the advisory business, as the man in charge of India. An insider said: "The country in-charge at PwC International would typically have their nose in the country unit's business but keep their fingers out. This man had both his nose and his fingers in." The RSM merger was his brainchild as it brought in 21 new partners (read votes). PwC International wanted its own men in charge of operations too. Donnelly, who spent a lot of his time in India at the time, installed Deepak Kapoor, as interim CEO of PwC after the Datta-Roy resignations and a new code of governance was drawn up for choosing the leader through polls.

The subsequent elections, however, crashlanded all plans when Kapoor and Rajan both drew 49 votes leading to a tie breaker and Rajan's subsequent victory. Like Christian missionary colleges, where principals go back to teaching when they quit being a principal, in Big Four firms the CEO does not leave the organisation when his or her term ends but often takes on other roles. So too, Kapoor. In fact, Rajan made him Managing Director for a short while in 2007. Kapoor now is Executive Director at the firm and looks after the back office operations.

Rajan consolidated his position, bought Eicher Consulting, saw Donnelly return home to the US. He also joined the UK cluster of PwC (they have three, USA, UK and China) to curtail the influence of the New York headquarters and was batting on a strong wicket when Satyam's Raju rained on the auditors with his confessional.

2009: The Year of Change
To understand how bad an event like the Satyam fraud would affect the audit fraternity, we quizzed Sunil Chandiramani, Partner at Ernst and Young India, on its relationship with the global body. He says: "A reputation for high-quality services is the most significant asset of any professional services firm and any blip on the radar can therefore make the entire global organisation concerned.

There is then a constant, and perhaps single-minded focus on setting things right as the impact of failure in a single country can be potentially far-reaching." Arthur Andersen, Enron's auditor and caught redhanded destroying what could have been incriminating evidence, was an example of how one errant client can kill a global scale practice.

Sure enough, then, the Satyam fiasco had the global PwC body sit up -and call in the pathologists. A series of changes that culminated in Rajan being replaced by Banerjee and Harvey started in March 2009, when the firm set up an advisory board for India, weeks after the two partners arrested in connection with Satyam audit, S. Gopalakrishnan and Talluri Srinivas, were suspended. Though the board was led by former bureaucrat and diplomat Naresh Chandra, Banerjee was the first person to be appointed on it, ahead of everyone else. PwC International, say people interviewed for this story, was in favour of bringing in global expertise— for it felt a need to be in control.

In the last quarter of 2009, PwC International sent six expat professionals to work in PwC India. By this time, resignations had turned into a flood. Thomas Mathew resigned as the audit head in February 2009 and Sharmila Karve took over. In March, Sharat Bansal took over from Ashwani Puri as head of advisory services. Later in the year, Sanjay Sen quit PwC to join Deloitte, and Nirmalya Gupta replaced him as the head of systems and process audit.

The partner oversight committee, akin to a supervisory board, which was led by Sanjay Hegde is now headed by Jayanta Majumdar. After this overhaul of sorts, Rajan's departure should have been a prominent graffiti on the wall. But he probably decided to hang on for a while knowing that he might still enjoy the support of the majority of the partners of the firm in India.

PwC International, initially, wanted to bring in two managing partners under Rajan. One would be Deepak Kapoor, the man Rajan had defeated in 2007. The other would be Dinesh Kanabar, the man whom Donnelly had brought in with RSM merger in a bid to get more votes on the side of the PwC Internatonal. In November, Kanabar accepted an award from International Tax Review, a respected trade publication on behalf of PwC as the tax firm of the year from India. The change did not go through as PwC International then decided someone from outside India would give it much-needed control.

PwC insiders say that this left Kanabar unhappy and he had many insiders gunning for him too by this time. On December 19, after the changeover (December 8 was when Banerjee took over and Rajan's decision to resign his chairman position was announced), Kanabar quit.

When we called Kanabar on his decision he said that he is still serving his notice period in PwC and won't be able to talk to us. Kanabar and his team are slated to join KPMG on February 1. KPMG, too, refused to discuss this issue or participate in the story. Still, several questions remain. Did PwC International, for instance, also hold out the threat of withdrawing the licence to use the PwC name to the Indian outfit and float an alternative arm in India like it did in Japan (see PwC Can Bite the Bullet, Like It Did In Japan)? It's a theory that Executive Director Purandare, who was the head of the PwC tax practice before Kanabar came on board through the RSM merger, is keen to debunk.

"The Indian firm felt that it was best to have expertise from our global network so we can learn from their knowledge," he says, adding that the partner oversight committee and the governing board of PwC concurred. "I do not want to go too much into the details of the decision, but what we did was within the code of governance that we have for ourselves in PwC... These are temporary measures." So why was an election avoided, if Rajan decided to quit on his own as Purandare suggests? "We felt an election would have been a distraction," he replies. Sources indicate that a ratification of the move by all the partners is a necessity as per the code of governance— something that Purandare declines to discuss.

Way Ahead for PwC
Banerjee, the new PwC India Chairman, responded to questions on email, echoing Purandare's views. "PwC India has worked hard over the last year to reinforce its reputation for audit services in the market place. The recent appointments of a new Chairman and Deputy Chairman for PwC India were made by PwC India in order to strengthen the leadership team at a challenging time. " BT's efforts to talk to Harvey, in India already, came to nought; he did not reply to emails and neither did the representative of PwC in London, Mike Davis.

Banerjee was more effusive on his plans for PwC India — he was working on reinforcing the focus on organic growth for the firm in India "and, where the opportunity arises, (through) selective acquisitions". In this context, he refused to accept that the exit of Kanabar, that also means loss of at least Rs 100 crore worth of business (out of total revenues of around Rs 900 crore), meant the failure of the PwC-Ambit RSM merger.

"It is not correct to say that the RSM integration with PwC did not happen. Many of the people who joined PwC from RSM remain with the firm and PwC remains the leading tax practice in India," Banerjee said.

Elsewhere, others such as Deloitte feel their ambitions to overtake its rival seem closer to reality now. Roy, the PwC India Managing Director until 2007 and who's now heading the consulting business at Deloitte in India, said that Deloitte in India is making large investments and is not afflicted by internal distractions. He stated: "With 12,000 employees we have the largest head count in India and that is the best measure of pecking order as the revenue per employee is similar in the Big Four firms."

Roy declined to comment on his ex-employer but when researching our story, we came across this entry, dated January 20, on his blog (www.roopenroy.com): "In organisations where a Zeus culture predominates, diversity is difficult to celebrate. A single hazardous, "black swan event" causes panic and triggers the infamous Zeus "huddle".

True to its "club culture" Zeus implements a predictable set of actions. It quickly implements a "regime change", brings in trusted "old boys" from the headquarters and it ignores the local talent in choosing the successor." Roy had said a lot without naming PwC. The Zeus culture reference is from Charles Handy's 1985 book Gods of Management where it represents an inner circle management style.

That blog entry may have undertones of an earlier battle, for sure, PwC India has some tough times ahead. The next thing to watch will be if it manages to keep Rajan back at the firm. When we first called him, he said that he is on a vacation and would not be able to speak. We called him a couple of weeks later; though he took our call he didn't say much of consequence. If Rajan leaves with a number of people, that would be a disaster for PwC. If they manage to keep him (he has been there for 30 years), that would be a coup of sorts.

There is no middle ground for PwC on this count. It's a game of high stakes around Rajan now. Again the next storm brewing might not be Rajan but PwC's software development centre in Kolkata. Purandare confirmed to us that there is a plan to create a joint venture for this centre "in order to draw in the expertise of the network". Rajan has opposed this plan of PwC International for over two years now and may still fight it.

They might ignore Roy's blog, but Messrs Banerjee and Harvey may yet find a clue in Handy's tome—the Athena culture that is collaborative and task-focussed—to pull PwC India out of the morass it is in. Their task couldn't be more clear cut.

The Satyam Drag on PwC 

  • PwC's Chief Relationship Partner S. Gopalakrishnan and Engagement Leader Talluri Srinivas —the two auditors who had signed Satyam accounts—remain in a Hyderabad prison.
  • So far their bail pleas have been rejected by Andhra Pradesh High Court. Srinivas' plea comes up before the Supreme Court in the first week of February.
  • The Institute of Chartered Accountants of India, or ICAI, the apex body of accountants in the country, has found the two prima facie guilty. But the trial process has been suspended as the two auditors are in jail.
  • PwC too continues to be probed by ICAI and the Ministry of Corporate Affairs. The Central Bureau of Investigation said in a supplementary chargesheet in November 2009 that the network intentionally failed to apply audit standards at Satyam.
  • Both Gopalakrishnan and Srinivas have been suspended by PwC, pending investigations.
  • Gopalakrishnan has retired from service. However PwC continues to support his family as well as Srinivas and his family.

PwC's Battle Timeline

February 2007
Ambit RSM Merges with PwC. Dinesh Kanabar joins up with 21 partners. The move brings in as many new votes in the 100-member firm, strengthening the global body that is trying to better control the local arm.

February 2007
Roopen Roy (R), Managing Director and Rathin Dutta, Chairman, resign the same day—ending the reign of Kolkata Lobby. Deepak Kapoor is made interim CEO

May 2007
N. Ramesh Rajan gets elected as Chairman of PwC India for four years. The election, first ends in a tie; Rajan wins in a repoll. Kapoor is made managing director.

January 2009
The Satyam scandal breaks and all eyes are on PwC, the auditors of the company. Two partners are arrested in January and later chargesheeted for conspiracy.

March 2009
Firm sets up an advisory board for India, led by former diplomat Naresh Chandra. PwC Asia network head, Gautam Banerjee comes on board.

October 2009
PwC plans to make Kanabar and Kapoor (back to an executive director role) managing partners. Move seen as an effort to hem in Rajan.

November 2009
PwC then decides in favour of an outsider. Kanabar unhappy and feels insiders are gunning for him. Decides to walk.

December 2009
Rajan steps down, urging others to lead the firm. Banerjee (L), leading PwC in Singapore, is appointed head of PwC India. Peter Harvey, one of PwC's Global Leaders, takes over as Deputy Chairman. Jayanta Majumdar to head partner oversight committee in place of Sanjay Hegde.

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