Wall Street Journal and Financial Times Expose Serious Allegations of PwC Wrongdoing in Auditor’s Reversal on Yukos

7 Sep 2010
Khodorkovsky and Lebedev Communications Center

 

Following in-depth investigations carried out by The Wall Street Journal and The Financial Times, revelations have emerged linking an unprecedented level of coercion by Russian authorities against PricewaterhouseCoopers (PwC) to alleged wrongdoing by the firm in its June 2007 decision to turn against Yukos. PwC withdrew a decade's worth of Yukos consolidated audited financial reporting that, among other overwhelming evidence, could have exonerated former Yukos chief Mikhail Khodorkovsky and his business partner Platon Lebedev, who now stand co-accused in a new trial brought by prosecutors intent on preventing their scheduled release from prison in 2011.

The allegations surround PwC's unusual and unconventional decision to withdraw its Yukos financial reports for the years 1994-2004. That decision, which came almost four years after Russian authorities launched their attacks on Khodorkovsky and Yukos in 2003, was viewed as a victory for the Kremlin as the accounts were considered by many as the "silver bullet" in proving both Khodorkovsky's and Lebedev's innocence. At the time, PwC cited allegedly "new" information they received from Russian prosecutors related to the Yukos accounts which, they argued, compromised their prior accounting methods.

Yet as reported in major features published in today's Wall Street Journal and The Financial Times following separate investigations conducted by both newspapers, PwC appears to have succumbed to a woefully illegal war of intimidation waged against them by Russian authorities who sought to cast doubt on the reliability of the Yukos audits. PwC was subject to police raids, partners were threatened with imprisonment for their work on Yukos, and legal proceedings unrelated to Yukos were lodged by prosecutors against the firm. These problems all disappeared after PwC withdrew its Yukos reporting. A persistent threat echoed by authorities as PwC adamantly defended its Yukos reporting - that the firm's Russian license could be revoked - has not been raised again since PwC backed down, and Yukos-related investigations into PwC appear to have ceased. The allegedly "new" information received by PwC was not only supplied by the prosecution, but also never independently verified before PwC withdrew their audits.

PwC served as Yukos's advisers and auditors for years and were placed under preliminary criminal investigation for alleged tax evasion in 2007 - just as Russian prosecutors brought a second set of charges against Khodorkovsky. According to a June 4, 2007 transcript of the prosecution's questioning of Douglas Miller, lead PwC partner on Yukos, the prosecution walked him through the reasoning behind the audits withdrawal just ten days before PwC's decision to pull the reports. On June 14, 2007, the lead investigator in the Khodorkovsky-Lebedev case, Salavat Karimov, personally requested of Michael Kubena, the head of PwC's Moscow office, that PwC withdraw the audits that were being widely used by Yukos-related applicants in foreign extradition proceedings. On June 15, 2007, PwC sent Yukos a letter informing it of its decision to withdraw the audits. On June 25, 2007, just one day after PwC's public announcement of its decision, Karimov sent a letter to PwC Russia announcing that the criminal probe into PwC had been withdrawn. Today's revelations demonstrate the lengths to which the Russian prosecutors were willing to go to bring charges against Khodorkovsky and Lebedev that they knew to be false, and that could not have been sustained had PwC's audits of Yukos not been disqualified as evidence. The California Board of Accountancy is currently reviewing the conduct of PwC partner Miller, who left Russia after this debacle. Additional investigations of PwC US's role in the withdrawal decision by the US Public Accounting Oversight Board may follow. According to the June 4, 2007 transcript of Miller's interrogation, PwC's decision to rescind the Yukos audits was not contained to PwC Russia. He stated: "I believe these issues are being examined not so much by the company's Russian Office Managers, but by executives at PriceWaterhouseCoopers' global, world level."

These revelations arrive at a crucial moment as the current Khodorkovsky-Lebedev trial, which opened in March 2009, draws to a close. This week, Lebedev is delivering testimony exposing the absurdity of the prosecution's claims and factually deconstructing the illogical charges he and Khodorkovsky are facing. On Thursday, September 9, 2010, Lebedev will discuss PwC's decision to withdraw its audits, and the repercussions of this decision.

While the defendants have continued to undermine the prosecution's claims, they have been relentlessly disrupted by the prosecution and the court's steadfast refusal to acknowledge critical information and evidence of central relevance to the trial, including financial statements of the companies at the centre of the dispute. This also includes the rejection and intimidation of expert witnesses, most recently in the case of tax specialist Stephen Wilson, who faced significant intimidation from the prosecution, and the accounting and financial expert Laura Russell Hardin, whose testimony was disqualified by Judge Viktor Danilkin on technical grounds.

The reports in today's Wall Street Journal and The Financial Times once again expose the vindictive and absurd nature of the trial against Khodorkovsky and Lebedev and reinforce doubts about judicial independence in the face of coercion from Russian authorities. These reports expose a dark underside of this trial and what PwC's withdrawal under intense and illegitimate pressure from the Russian prosecutors says about the rule of law in Russia and the independence of the courts under which both individuals and corporations live.

The reports also raise serious questions about the global implications of PwC's acquiescence to pressure from the Russian authorities. As stated by The Financial Times, "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."