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The Failure of PwC

Way back when PricewaterhouseCoopers withdrew ten years of audits of the Yukos accounts following several government raids on their offices and an implicit threat to revoke their business license, anybody with half a brain could smell something rotten.  It looked like the new way of legalizing the state’s expropriation of companies had come to involve pressure on third parties such as auditors, setting a very damaging precedent.  This week, the pressure turns up on the auditor’s reputation to prove that they were not pressured into withdrawing the audits. 

From Catherine Belton in the Financial Times:

With Mr Lebedev due to take the stand on Tuesday, his testimony is expected to centre on whether or not the retraction by PwC of 10 years of audits it had conducted for Yukos came under pressure from the Kremlin. That withdrawal three years ago helped prosecutors build their case. The defence team contends that PwC caved in as a prosecutors’ raid, criminal investigations and a slew of court cases threatened to undermine its ability to operate in the fast-growing Russian market.

PwC dismisses that notion, saying it had no choice but to withdraw theaudits after it became clear to the firm that the businessmen had liedabout a number of key transactions. “If PwC had reason to doubt itsability to rely on Yukos management’s past representations, it was quiteappropriate to withdraw the audits,” says one person familiar with thematter.

Regardless of where the truth lies, what is emerging is a situationwhere global audit firms operating in Russia may all be vulnerable tothe double jeopardy of auditing the books of notoriously opaquecompanies, while being regulated by a government able to launcharbitrary attacks. This lose-lose situation could call into question thevalue of audits that have been hotly sought as a western seal ofapproval ever since Russian companies began to access internationalfinancial markets.