Angry Indian investors are demanding to know how PricewaterhouseCoopers (PwC), the auditor, missed a systematic £1 billion fraud at Satyam, the IT outsourcing group, for as long as seven years, while Merrill Lynch, the US bank, became aware of the deception in ten days.

PwC's role in “India's Enron” comes under the spotlight amid allegations that large Indian companies regularly use misleading accounting techniques and bully analysts, accountants and auditors into staying quiet.

B. Ramalinga Raju, the chairman of Satyam, shocked corporate India on Wednesday when he admitted inflating the company's profitability, which led to the presence of more than £1 billion in fictitious cash and other assets on the books. Of that total, the $1 billion cash pile investors had been told Satyam possessed was, in fact, only $78 million, Mr Raju disclosed in a letter to the board — a straightforward falsehood that the auditors might have detected had they run a rudimentary check of the group's bank accounts, according to experts.

As Dennis Beresford, a former chairman of the Financial Accounting Standards Board, the US accounting watchdog, said: “It's hard to miss $1 billion of cash.”

Satyam's bogus accounts had been audited by Price Waterhouse, the Indian auditor that has been a member firm of PricewaterhouseCoooper International since 2000-01. The company balance sheet as at March 31, 2008 was signed off by Srinivas Talluri, a partner of Price Waterhouse in Hyderabad, the southern Indian city where Satyam was based.

Merrill Lynch, meanwhile, had been retained by Satyam ten days before Mr Raju's confession, to explore merger opportunities for the outsourcing giant, which was already struggling with corporate governance issues. Hours before Mr Raju admitted to the fraud, the investment bank severed its ties with the company. “We came to understand that there were material accounting irregularities, which prompted our decision,” a spokesman for Merrill said. PwC and Price Waterhouse would not comment yesterday, citing client confidentiality, although Price Waterhouse added that it would co-operate with the regulators.

Analysts said that the Satyam case illustrated the need for reform of corporate governance in India. Saurabh Mukherjea, of Noble, the London-based investment bank, said: “We have run into listed companies where the advisory arms of the audit firm earn consultancy fees for help with M&A, new entity structuring and tax minimisation.” In most Western countries rules limit such activities, which could trigger conflicts of interest for auditors.

Mr Mukherjea suggested that the Satyam fraud should not come as a shock. He said: “Many firms have become so convinced of their own invincibility that they do not even bother denying irregularities when confronted with the evidence. They simply threaten you.”

Analysts say that creative accounting techniques, such as recording revenue ahead of time, booking fictitious sales, manipulating expenses and the disbursal of cash to outside companies in which a group's directors have an interest are commonplace in India.

PwC's role in the Satyam scandal will be investigated by the Securities and Exchange Board of India, the markets watchdog, and the Indian Government's anti-corruption office.

The Institute of Chartered Accountants of India is also investigating and has the power to bar Price Waterhouse from working in the country indefinitely, a spokesman for the body said. Satyam was also listed on the New York Stock Exchange and faces a class action lawsuit in the US.

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