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. Last Updated: 07/27/2016

PwC Slip Derails $500M Eurobond

Sloppy auditing by Pricewaterhouse-Coopers, already under fire for its work in Russia, has foiled Tyumen Oil Co.'s landmark attempt to raise $500 million on international markets.

Tyumen, or TNK, said Wednesday that PwC had withdrawn its "unqualified opinion" from TNK International's 2000 and 2001 financials audited to Western accounting principles, which are required for a Eurobond placement. In 2001, TNK International was formed to combine the assets of TNK and the Onako oil company.

This is the first time in recent memory that a Eurobond has been recalled because of an auditing error, analysts said.

TNK's Eurobond placement, with its high value and five-year tenure, was to have been a milestone for Russian corporate debt. Russia's fourth-largest oil company, TNK has worked hard to change its image -- that of a renegade Russian company -- to one investors would love. In short, a successful issue would have meant that the oil company had finally arrived in the eyes of international investors, but a last-minute accounting change robbed TNK managers of that satisfaction.

Alan Bigman, TNK's head of corporate finance, was at a loss to explain why PwC decided to rethink its audit of TNK's financials after the auditing firm already signed off on them April 29.

"We waited for that clearance before pricing the Eurobond," said Bigman, adding that he was taken aback by the news.

While no money changed hands, the bond was priced on May 15, and Bigman said demand for the bond far exceeded supply. Receipts from the bond were earmarked for the refinancing of existing debt.

PwC partner Donn Kingsley said that such a double-check is "standard procedure in reviewing the offering documents."

A source close to the PwC team that worked on the issue said PwC improperly assessed TNK's fixed assets. Once the firm realized that their valuation -- which was described in the Eurobond prospectus -- wouldn't pass the scrutiny of European securities officials, they erased their signature from the financials.

"It was an obvious mistake that any professional auditor should have caught," the source said. "When Russian companies decide to make the jump to Western accounting, an appraisal committee is supposed to be sent in to reassess fixed assets. PwC didn't do this."

This slip-up comes at an inopportune time for PwC, still reeling from sharp criticism on the way it handled an audit of gas monopoly Gazprom's relationship with a Florida-registered gas trader. As a result of this audit -- which investors called sloppy -- PwC has been slapped with a series of lawsuits, and the Finance Ministry earlier this month began investigating the firm in connection with a complaint filed by investors asking the ministry to revoke the auditor's license.

PwC has assured TNK that its 2000 and 2001 financials can be amended within a couple of weeks, Bigman said. After that, the process can restart, and management is aiming for a June placement. Credit Suisse First Boston, Merrill Lynch and Salomon Schroeder Smith Barney are the agents.

With the Enron scandal continuing to reverberate around global markets, auditing firms have become very sensitive to all aspects of their role in corporate finance, said Stephen O'Sullivan, head of research at United Financial Group.

In a May 21 letter to TNK, PwC assured CFO Iosif Bakaleinik that the financials had to be restated as a result of a technical accounting matter.

"It is not a consequence of, for instance, a revenue recognition issue of an off-balance sheet transaction," the letter said. "There is no question of any intentional misstatement of the financial statements."

Another analyst, who wished to remain anonymous, said PwC overreacted and should have defended its original asset valuations, which were based on historical Soviet data.

"I was surprised that a mistake of this magnitude was made," O'Sullivan said. "They were protecting themselves. If something had gone wrong six months from now, PwC would have had to take the blame."

He said he sees no reason why TNK couldn't come back to the bond markets with a strong showing in June, given Russia's popularity among investors.

"It won't affect TNK's operations but it certainly affects their reputation," O'Sullivan said. "It's unfortunate that TNK was caught in the crossfire."

TNK should have no problem attracting the same investors the second time around, Bigman said. He added they seemed to sympathize with the company's plight.

And as far as the oil company's future relationship with PwC is concerned, "it all depends on how fast they solve this problem," he said.