PwC's Withdrawal of YUKOS Audits in the Dock in Khodorkovsky-Lebedev Trial
In a series of in-depth articles, The Financial Times' Moscow correspondent, Catherine Belton, and The Wall Street Journal's Gregory L. White probe PwC's withdrawal of its 10 years of YUKOS audits, seen as being crucial to the prosecution's case.
In Mikhail Khodorkovsky and Platon Lebedev's 18-month trial, one critics contend is politically motivated, the reputation of PwC, one of the world's biggest audit firms, will also be in the dock.
The trial, Belton notes, is a saga that many see as having become incongruous with the liberal agenda being promoted by President Dmitry Medvedev as he presses for the modernization of the Russian economy. She quotes one senior western lawyer, who said: "You can't talk about making Moscow a haven for investment and simultaneously have this trial. They are irreconcilable."
Belton comments that the PwC audit withdrawal affair underlines how all who operate in Russian finance - from global audit firms to oligarchs to pension fund investors - may still be vulnerable as the legacy of the chaotic era of Boris Yeltsin and the ensuing Putin clampdown lingers on.
Defense lawyers for Khodorkovsky and Lebedev say PwC became ensnared in a political attack on Khodorkovsky as the Russian state pursued fresh charges that would keep him in jail and add legitimacy to the take-over of YUKOS. The contention is that the firm's withdrawal of the audits allowed the prosecutors to build their case alleging the tycoon and his partners had stolen 350 million tons of crude between 1998 and 2003 - an amount they say is equivalent to all the oil YUKOS produced during that time.
The paper trail central to understanding whether or not the Russian government leaned on PwC to withdraw 10 years of YUKOS audits is long and tangled (for a detailed history read Belton's second article PwC and YUKOS: Claim and counterclaim). PwC says it was forced to withdraw the audits in 2007 because prosecutors provided information that proved management had lied to it on four key issues, a claim being contested in court by lawyers for Khodorkovsky.
Without the audits being withdrawn, the prosecutors would have had difficulty pursuing the charges, even in a Russian court, since all the oil flows the investigators claimed were embezzled had been accounted for and consolidated into the YUKOS oil group by PwC under US accounting principles.
The defense team is also taking their case to international courts, having also filed a subpoena in the southern district court of New York in July seeking documents that might shed light on any role PwC's headquarters in Manhattan played in the decision to withdraw the audits.
Whatever PwC may have known or not known about disputed transactions, many auditors believe there is no doubt that the broader embezzlement case against Khodorkovsky and Lebedev is political. But Belton reminds that few have dared to testify at the trial. Only one former PwC tax director, Stephen Wilson, who later took a full-time post at Yukos, took the witness stand to counter prosecutors' assertions that Khodorkovsky had stolen YUKOS' oil. But after being presented with a summons by prosecutors to appear for questioning, he fled Russia.
Meanwhile, today, Platon Lebedev is expected to testify that PwC withdrew 10 years of YUKOS audits from 1996 to 2006 under pressure from the Kremlin.
In an environment such as that, defense lawyers say, it is little wonder PwC withdrew the audits. As one person close to the defense team puts it: "We don't hold anything against them: they had a gun to their heads."
The Wall Street Journal's Gregory White, after conducting his own research into PwC's audit withdrawal, notes that Khodorkovsky's legal team contends that PwC withdrew its audit opinions in order to protect its own business interests in Russia and to shield its partners from possible jail time-not because of any real questions about the reliability of YUKOS' books. He cites industry observers who say that the entanglement in the legal travails of Khodorkovsky highlights the ethical and legal dilemmas that can face auditors in emerging markets where corporate governance and judicial systems are weak.
White notes that the defense lawyers are eager to cast doubt on PwC's motivation for pulling its audit opinions, a move that robbed the defense of critical evidence for their client's assertion that he is innocent of financial wrongdoing at YUKOS. They say PwC reversed course under pressure from a Russian government pursuing a politically driven prosecution. Bruce Misamore, former YUKOS CFO, commented: "PwC was just looking for an excuse to revoke the audits to take the pressure off themselves. All the reasons they gave for revoking the audit opinions was all information that they had previous knowledge of."
Now, California regulators say they are reviewing the complaint filed by the defense team against Douglas Miller, the main PwC partner on the YUKOS account, and will decide later whether to open a formal investigation. Miller left Russia as the pressure rose. But in April 2007, he returned to Moscow to speak to investigators at the behest of PwC. Case records show he was questioned as a witness at the Moscow offices of the Prosecutor General five times over 10 days in early May 2007, but was not charged with any crime.
The prosecution's transcripts of the interview indicate that prosecutors were seeking evidence to support the embezzlement case that they had brought against Khodorkovsky and Lebedev, in early 2007. In the state newspaper Rossiiskaya Gazeta, Russia's prosecutor general hailed the move as a success for his office and proof the world had recognized Khodorkovsky's guilt. Within days, prosecutors closed the criminal probe into PwC, without bringing charges. Courts took about 18 months to reverse earlier rulings against the auditors in civil cases.
Speaking to The Wall Street Journal, Jacques Kosciusko, a veteran French banker and former chairman of the audit committee of the YUKOS board of directors, concluded: "I do not blame [PWC] for doing what they did in June 2007. I don't approve of it, but I understand it, especially after I saw what happened to YUKOS."