Khodorkovsky & Lebedev Communications Center

In what was probably one of the most sensational moments in this current second trial against Mikhail Khodorkovsky and Platon Lebedev, this week defense lawyers have put the spotlight on the suspicious conduct of the Big-Four accounting group PricewaterhouseCoopers, arguing that they had acted improperly in their decision to suddenly withdrawal a decade of audits on YUKOS.

In two much discussed news articles published in The Wall Street Journal and The Financial Times, it was revealed that testimony from Lebedev would directly articulate a widely held allegation: that PWC threw the defendants under the bus due to pressure from the Kremlin, rather than any problem with the legitimacy of YUKOS bookkeeping.

"PWC was just looking for an excuse to revoke the audits to take the pressure off themselves," former CFO Bruce Misamore told The Wall Street Journal. "All the reasons they gave for revoking the audit opinions was all information that they had previous knowledge of."

What happened to this accounting firm - from office raids to interrogations and the opening of frivolous criminal cases - is not that different than from the treatment received by so many other third parties surrounding the defendants. From the beginning of the Kremlin's campaign of persecution against the defendants, any and all related parties were targeted with ruthless pressure in order to create an isolation effect. The state's strategy was simple - make it clear to everyone who had worked for YUKOS, worked with YUKOS, or anyone who could somehow assist them in their defense, that there were clear punitive consequences.

Look at what they did to Vasily Alexanyan - who was jailed for years with no trial and medically blackmailed after contracting HIV and tuberculosis. Even Svetlana Bakhmina was not released from her unlawful detention to give birth, and only released once a critical mass of public disgust had become too embarrassing. Other members of the legal team have been chased from the country, faced disbarment proceedings, and had their offices raided repeatedly while prosecutors seized confidential documents. As for witnesses who might be called to testify in their defense, nobody would even pretend to ignore the gravity of the threats that they face. What they tried to do to Steve Wilson is only one example.

If anything, in terms of the human suffering inflicted upon so many other innocent third parties which even remotely happened to have landed within the orbit of the YUKOS case, PWC got off free and easy. What was threatened was not their lives and physical integrity, but their ability to retain a license to continue doing business in one of the world's premier emerging markets.

It all started back in the summer of 2006, when the Russian authorities first showed an interest in questioning PWC over its audits of YUKOS - which, it should be known, were extraordinarily airtight according to most observers, given the company's negotiations for a sale or merger with another major oil company (if the tax evasion and/or embezzlement that the state claims were true, there is no way that the negotiations would have come so close to closure).

Then in March of 2007, the authorities stepped up the pressure, raiding the offices of PWC in Russia and opening up a probe, and promptly getting a civil court to issue a ruling that the accounting firm was guilty of aiding YUKOS in tax evasion. Only a few months later, prosecutors and PWC partner Douglas Miller exchanged letters regarding the "accuracy" of 10-years-worth of audits, which opened the window for PWC to withdraw. Low and behold, only days after handing over their client to a thieving regime, an appeals court reverses the earlier back-tax finding, leaving the big-four group happy and in the clear.

Funny how nicely things work out when you work so closely with the prosecutors, and follow their instructions so obediently.

The state of play from here going forward will be Miller's claim that YUKOS executives withheld critical information from PWC that disqualified their backing of the audits. However, the defense team for Khodorkovsky and Lebedev appear to possess a number of documents that they say prove that the auditors were fully informed of the related trading entities. It appears to be a very tight corner for the bean counters to wriggle out of.

The outcome of this struggle poses important ramifications for the Russian investment environment. If indeed we are facing a situation in which even the largest and most well known and respected accounting firms are willing to sacrifice their clients at the behest of political motives and pressure, than their services are in fact worthless. This is a huge blow to corporate governance in a country which needs it more than anyone else.

Writing in The Financial Times, Catherine Belton notes, "Regardless of where the truth lies, what is emerging is a situation where global audit firms operating in Russia may all be vulnerable to the double jeopardy of auditing the books of notoriously opaque companies, while being regulated by a government able to launch arbitrary attacks. This lose-lose situation could call into question the value of audits that have been hotly sought as a western seal of approval ever since Russian companies began to access international financial markets."

This scandal of withdrawn audits may soon become obscured by the disputed grey areas which are common to any auditing process of such a large company, but in fact the general question overlooks the more important point.

Why would the prosecutors raid the auditors' offices if they had a real case? Why is there this persistent need to manufacture evidence and destroy exculpatory testimony through the bluntly abused powers of the state? For anybody still out there harboring doubts about how this case is being handled, or thinking about whether or not the defendants are icons of opposition or unsavory businessmen - just consider how weak and how false the state's case must be if these are the techniques they need to use in order to build it.

By James Kimer, Guest Commentator to the Khodorkovsky and Lebedev Communications Center