There have been two events in recent days which triggered me to write post on this subject. First, last week The Economist published the article about auditing in China. Second, the recent decision of European Court of Human Rights (ECHR) regarding the Yukos vs. Russia
The article in The Economist considers the issue which happened between Deloitte and Longtop, a Chinese company once listed in NYSE. Here is remarkable abstract:
“… After signing off Longtop’s financial statements for several years, the firm smelled trouble during its audit for the financial year that ended in March. Its subsequent questions did not go down well at Longtop, which seized some of Deloitte’s papers and threatened to keep Deloitte staff from leaving company premises. Deloitte quit as auditor, and Longtop’s shares ended up being delisted from the New York
Subsequently, SEC issued subpoena for Deloitte’s audit working papers in relation to Longtop. After Deloiite’s refusal to cooperate the PCAOB threatened to decertify its Chinese division.
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| Medvedev and Putin |
Several features of the above case look like Yukos-PwC affair which I would like analyse in several following articles. Yukos-PwC matter is perfect case for audit, accounting, tax and business ethics studies. It is rather complicated and requires accurate consideration of all facts. I am going to cover audit related professional and ethical issues. In this post I will give brief overview of the issue.
Essence of Issue
Yukos was one of the largest Russian oil companies with successful growth strategy and was listed on the LSE. However the company eventually had to file for bankruptcy (2006) after the Russian Ministry of Taxation proved in court (in 2003) that Yukos’ tax evasion amounted around $28 billion. The hypotheses standing behind this case are as follows:
1. Tax evasion. This is obvious: company tried to pay less taxes using illegal schemes;
2. Politically motivated expropriation of the company. The major shareholders and top-managers of Yukos, Mr. Khodorkovsky and Mr. Lebedev, were arrested in 2003 with criminal charges including tax evasion, fraud, forgery and embezzlement of assets. Meanwhile it is believed that Khodorkovsky and Lebedev had political ambitions and tried to influence state parliament by financing both left-wing and right-wing parties. Eventually, Mr. Putin being the president of Russia
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| Khodorkovsky and Lebedev |
The issue is that both hypotheses might be truthful partially. The fact is that similar tax evasion models were used at those time (and now used also) by almost all oil and gas companies in Russia
Involvement of the Russian PwC firm
Unfortunately, PwC was an auditor of Yukos, acted as advisor on tax strategy, worked closely with Kodorkovsky on financial and accounting issues. After years of cooperation with client, PwC decided to withdraw its audit opinions in 2007 issued in respect of Yukos consolidated financial statements for 10 years from 1995 to 2004!
The Russian PwC office claimed that during tax investigation the prosecutors revealed new facts, which managers of Yukos misrepresented during previous audits. So what facts were revealed? The level of cooperation with client on tax issues was so close that there are significant doubts about this?
The other peculiar matter is that PwC-Cyprus has not withdrawn its audit opinions in respect of Yukos Cuprus subsidiaries.
Third, there are beliefs that Russian PwC was a coerced into opinion revocation by the Russian authorities.
Questions
Finally, based on the above overview I would like to raise following questions in my further blog posts:
· What were the audit evidences, which had dramatic impact on PwC’s opinion?
· Could Yukos case raise the same concerns of PCAOB about reliability of the Russian PwC audit working papers as in case Deloitte-Longtop affair?
· Might the significant share of audit fees incoming from state owned giant company, Gazprom, somehow impact PwC’s decision?
· What are ethical stances behind PwC deed?
The specialists, blogers who would like to contribute to the discussion of this issue and probably post their own article in “Audit is Cool” blog are welcomed (please send me message) or you can just leave your comment.
PS: Funny Reality
Here is the real phrase from Russian court ruling on the second case against Khodorkovsky and Lebedev (p. 613):
“… Khodorkovsky and Lebedev kept two sets of financial accounts (reporting per Russian Accounting Principles and US GAAP) and concealed from shareholders consolidated financial reports, by publishing them only in English language…”
This funny words were noticed by my friend in Livejournal, tema57 J
Sources:
Khodorkovky and Lebedev Communication Center
Q&A from the defense team on the PwC investigation - A Q&A with the defense team inrelation to PwC's withdrawal of 10 years of its YUKOS audits
Hello Farid,
ReplyDeletethank you for this interesting post!
I'm very pleased to discover your blog!
I'm currently working on the question of perceived audit quality, do you have any information regarding whether the Yukos case had any impacts on PWC's reputation in Russia?
I'll be waiting for your next posts!
And if you need any help, probably i'll be able to help, as i speak russian :)
Hello Aleksandra,
ReplyDeletethank for your interest. Generally, Russian business tries to keep away from political issues, especially after Yukos case. So PwC reputation was hardly damaged. People in specialist circles might know about this case, but their perception of an issue that PwC actually had no options.
I am going to continue this topic, I'll try to consider general auditing issues in the context of Yukos case.
It would be nice to contact, I have account in LinkedIn you can email me there.
Hey Farid, I'd love to talk to you about this post. Please contact me on davidgrabham@outlook.com Thanks!
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