PricewaterhouseCoopers Blamed in Yukos Tax Affair
Yesterday a Moscow court sided with accusations from Moscow city tax officials that the company PricewaterhouseCoopers aided Yukos in perpetrating tax evasion. Accordingly, the court found that audit agreements between Yukos and PricewaterhouseCoopers Audit for the years 2002-2004 were invalid. Now the company faces having its license yanked, and its employees may face criminal charges.
The hearings in the case featured statements from lawyers for PricewaterhouseCooper (PwC) regarding the role of an audit company in honest accounting practices, followed by lengthy appearances from senior Federal Tax Service officials Elena Alexandrova and Vsevolod Kurkov. In her statement before the court, Ms. Alexandrova asserted that the tax code grants the government the right to challenge deals and investigate any income resulting from them, before launching into a description of Yukos' accounting structures and the companies acting as middlemen through domestic offshore accounts that allowed Yukos to avoid paying taxes. In the opinion of the tax officials, PwC's stamp of approval on Yukos' account books misled the oil company's shareholders and, in essence, "provided a service by creating the impression that the client (Yukos) was acting in accordance with the law."
In its decision, the court ruled entirely in favor of the Moscow tax office and found that audit agreements between PwC and Yukos for 2002-2004 were invalid because they constituted illegal and unethical deals according to the Civil Code of the Russian Federation. The court awarded the government 16.8 million rubles ($480,000) in restitution.
Afterwards, the tax officials pronounced themselves satisfied with the decision, while PwC Public Relations Managing Director Mike Davis told Kommersant that the company "regrets that things turned out this way and believes that a lack of understanding of audit procedures may have had something to do with the decision." Mr. Davis said that PwC intends to appeal the decision. Meanwhile, the press service of the Russian office of PwC released a statement saying, "We will continue to work as normal, and we hope that this decision will not have any substantial effect on our activities in Russia."
Independent experts differed in their reactions to the decision. TNK-BP Management Legal Department Director Vladimir Kuznetsov expressed certainty that "it probably will not have any effect on the relationship between clients and auditors and the level of trust between them, since a court ruling cannot change a law of economics." However, Vadim Vinogradov, who teaches at the Russian Academy of Law attached to the Ministry of Justice, considers it possible that "the continuation [of the matter] will be claims against the company's management and individual auditors that could turn into criminal proceedings for collaboration with Yukos in tax evasion and the misuse of their position as auditors."
Mr. Vinogradov's opinion is supported by statements made yesterday by tax officials during the hearing, in which they referred to the seventh point of a finding by the Russian Supreme Court from December 28, 2006 that lays responsibility for tax evasion not only on a company's director and head accountant but also on "persons complicit in the commission of a crime by advice, instructions, etc." The tax officials also brought up the fact that a Moscow court ruled in favor of tax claims against PwC for a total sum of 290 million rubles in 2002.
Reactions among PwC's clients were muted. Yesterday Gazprom told Kommersant on the record that "a decision to change auditors is taken at a shareholders meeting after a recommendation from the board of directors that is made according to the results of a competitive bid. The bidding has already been opened." Deputy Chairman of the State Duma Credit Institutions and Financial Markets Committee Anatoly Aksakov, who is also a member of the National Banking Council, which appoints an auditor to check the Bank of Russia's accounts, told Kommersant that PwC cannot be replaced at the moment as the Central Bank's auditor because an audit is already ongoing. However, he did say that "according to a practice adopted recently, one company cannot do the audits for the Central Bank for more than three years in a row, so we will need to find a new auditor for next year."
Russian State Duma Property Committee Chairman Viktor Pleskachevsky believes that the serious charges upheld by the court may lead to PwC's license being revoked. "An appeal can buy some time, and an auditor in this situation should follow through with audits for its clients and attempt to regain trust from players in the market and the government," he said. PwC representatives confirmed yesterday that the company will appeal the decision.
Under the law, PwC has a month to appeal, and the appeal will be under review for at least another month. Thus, yesterday's decision cannot have any effect until al least two months from now, and then only if PwC loses the appeal.
Olga Pleshanova, Igor Moiseev, and Natalia Grib
All the Article in Russian as of Mar. 21, 2007
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