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. Last Updated: 07/27/2016

From Enron to FIMACO, 'Audits' a Joke

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WASHINGTON -- Time spent in Moscow is excellent preparation for understanding New Moscow, the city of corruption and insider deals rising on the Potomac River.

Anyone following Russian business would know what a self-parody the international accounting business has become. PricewaterhouseCoopers (PwC) and one of its predecessors, Coopers & Lybrand, repeatedly signed off on the books of the Russian Central Bank -- even as auditors knew the bank was funneling billions from its hard-currency reserves through FIMACO, a shell company in the British Channel Islands.

Central Bank chairman Viktor Gerashchenko says all of the money eventually came home, but is silent about any investment profits. The whole arrangement looks like corrupt bureaucrats investing $50 billion of the nation's wealth -- including IMF funds -- and then keeping the dividends for themselves. Minus, of course, the scraps thrown to the auditors as professional fees.

Yet when the FIMACO story finally broke -- fall-out from the August 1998 ruble crash -- Gerashchenko gave his auditor, PwC, some carefully selected documents, PwC wrote a guarded report about what it was handed, and Gerashchenko waved it around as "an audit" and exoneration. Soon "oligarch" Boris Berezovsky was paying PwC for a similar "audit," and by July 2000 The New York Times could report that Berezovsky "received a measure of vindication ... when the auditing firm PricewaterhouseCoopers exonerated one of his companies in a long-running investigation into embezzlement."

Everyone was so pleased with this stamp of Western approval that in 2000 Gerashchenko tried to stop the Duma from replacing PwC with Deloitte & Touche, by lying on the floor of parliament, suggesting Deloitte did not use international accounting standards (whatever that may mean today) and that its work was confined to France and "French-speaking Africa." But he needn't have worried: the "Big Five" accounting firms -- PwC, Deloitte Touche Tohmatsu, Ernst & Young, KPMG and Arthur Andersen -- are pretty much peas in a pod.

Andersen is now "the black sheep", after its auditors winked while Enron hid multimillion-dollar losses, and then destroyed documents as a criminal investigation closes in.

But though this is the first week Americans woke to find the Enron story dominating newspaper front pages, the Big Five's moral bankruptcy is an old story. The U.S. government two years ago filed a fraud suit against Lucent Technologies, the enormous AT&T spin-off, for misreporting profits by the millions; PwC is Lucent's auditor. In May, the government sued "Chainsaw Al," the CEO who embraced a nickname meant as an insult (it referred to his enthusiasm for firing people by the thousands, a passion he celebrated in best-selling books) for misreporting his company's profits by the millions. Andersen also audited those books.

Many auditors also offer "consulting" services, i.e. advice that costs millions, to the same companies they audit. That's an obvious conflict. But when Clinton-era regulators tried to ban it, lobbying and political contributions from Andersen, KPMG and Deloitte blocked them. Now comes George Bush's new commissioner for securities, Harvey Pitt -- a lawyer who has defended every one of the Big Five from government fraud suits, and also, for good measure, the notorious insider trader Ivan Boesky. Pitt says Enron came about because there's too much regulation -- the Big Five need more freedom and fewer rules.

Congress is holding hearings on Enron, but the Democrats are no strangers to campaign contributions either. Expect "exoneration" of the accountants -- for the usual professional fees, of course.

Matt Bivens, a former editor of The Moscow Times, is a Washington-based fellow of The Nation Institute [www.thenation.com].