Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

PwC Under Audit Chamber Spotlight

Inspired by the global accounting scandal that emerged from the collapse of U.S. energy giant Enron, the Audit Chamber on Tuesday said it would take the unprecedented step of scrutinizing the way Gazprom has been scrutinized by its auditors, namely PricewaterhouseCoopers.

The chamber, the State Duma's budgetary watchdog, wants to analyze auditors' reports of Gazprom's financial transactions, the gas behemoth's assignments to its auditors and the way those auditors were chosen, Mikhail Beskhmelnitsyn, the chamber's auditor, said Tuesday.

"No auditors should work with companies as big as Gazprom or other monopolists for longer than three years... so they don't get used to each other," Beskhmelnitsyn said. "[Gazprom's] shareholders should have that in mind. Then, what has just happened with one very well-known company would simply not happen," he added, referring to Enron.

Enron, once America's seventh-largest company, became the biggest bankruptcy in U.S. history late last year, taking the life savings of thousands of employees and other shareholders down with it. Enron's relationship with Andersen, which like PwC is one of the so-called Big Five global auditing firms, has led to congressional hearings and dozens of criminal investigations.

Beskhmelnitsyn said that until now the chamber did not question the findings of auditors, considering their reports just "another source of information."

PwC's Moscow office, while aware of the chamber's announcement, did not respond to questions it asked be sent by e-mail Tuesday.

Beskhmelnitsyn's announcement came a day after an outspoken minority shareholder of Gazprom delivered a scathing report on PwC's accounting practices to Economic Development and Trade Minister German Gref.

In the report, a copy of which was obtained by The Moscow Times, William Browder, managing director of Hermitage Capital Management, alleges that PwC auditors gave their seal of approval to a slew of deals that siphoned off up to tens of billions of dollars worth of assets from the company.

Especially troubling to Browder is the gas monopoly's relationship with Itera, a Florida-registered company that grew from an obscure gas trader into the world's fourth-largest gas company in just a few years -- mainly on the back of former Gazprom assets.

In one instance, Hermitage concluded that thanks to the covered-up dealing with Itera, Gazprom paid a $341 million tax bill with $5.5 billion worth of gas.

"I have a 5-year-old son, and even he can see that PricewaterhouseCoopers whitewashed the audit of Gazprom and Itera," Browder, who is running for a seat on Gazprom's board this year on a "fire PwC" platform, said last week.

Ironically, last July Beskhmelnitsyn said that an Audit Chamber investigation of the relationship between the two gas companies was one of "unrelated legal entities."

"We are 100 percent sure of this," Beskhmelnitsyn said at the time.

Nonetheless, Browder praised the news that the chamber would probe PwC's work, calling it "a precedent-setting move."

"This is just the beginning of the problems that PwC is going to have regarding the results of the work they've done at Gazprom," Browder said.

Beskhmelnitsyn said the decision to check up on the auditors of the so-called natural monopolies -- Gazprom, the Railways Ministry and Unified Energy Systems -- was taken "because there is no work more important than issues related to the activities of the monopolies."

The state owns 38 percent of Gazprom but holds a majority on its board.

Beskhmelnitsyn said the chamber's findings would not necessarily result in replacing PwC or other companies.

He added, however, that representatives of the state on monopolies' boards of directors would vote on the issue according to the chamber's recommendations. The chamber and the government have reached the necessary level of understanding to ensure that recommendations are heard and taken into account, he said.

Dmitry Vasilyev, a former chairman of the Federal Securities Commission who now heads the Institute of Corporate Law and Governance, said the chamber could provide an invaluable opportunity to introduce major changes in the regulations and practices of auditors' involvement in business.

One of the major problems, Vasilyev said, is that currently auditors are hired and directed by management, rather than shareholders. Also, shareholders do not have access to auditors' reports, apart from very brief and often insufficient summaries.

"It would be good if at least board members had access to full reports," he said.

Vasilyev said there are at least two laws that grant the chamber the right to investigate private auditing firms, although he said he could not recall it ever exercising this right.

A law passed in December that regulates the auditing business even provides a clause that allows for the criminal prosecution of auditors for deliberate malpractice.

Market players also welcomed the news, though for slightly different reasons.

Gennady Krasovsky, oil and gas analyst at NIKoil, said that while negative or scandalous information about any company usually hurts its performance on the market, Gazprom might be different. The company has suffered from lack of any transparency for so long that any attempt to clarify things would be beneficial, he said.

"When too much is unknown, there is a lot of room for guessing. But guessing often turns out to be about bad things rather than good things," he said. "So in Gazprom's case, if there is a choice of leaving things as they are now or having a thorough inspection, the latter is obviously better."

Beskhmelnitsyn said the chamber also plans to look into the financial and economic activities of several regional subsidiaries of UES, as well as three major subsidiaries of the Railways Ministry. All inspections, including Gazprom, will be completed by the end of the year, he added.

He also said that by April 15, the chamber will have completed its investigation of the complex scheme involving UES and an obscure Czech company, Falkon Capital, that reduced Moscow's debt to Prague by $2.5 billion to $1.1 billion late last year.