WallStreetJournalandFinancialTimesonseriousallegationsof PwCwrongdoinginauditorsreversalonYukos Q&A OnSeptember7,2010,theWallStreetJournalandFinancialTimesbothpublishedmajorreportsonPwCs decisioninJune2007towithdrawadecadeofYukosaudits.Whydidthesestoriesappearnow? WithnewchargeshavingbeenbroughtagainstKhodorkovskyandLebedevin2007topreventtheirscheduled releasefromprisonin2011,itwascleartoprosecutorsthatPwCsstampofapprovalontheYukosauditswas raisingseriousquestionsworldwideaboutthecredibilityofthecase.

case.SinceJune2007,whenPwCwithdrewits Yukosauditopinionsforthe10yearsfrom1995to2004,theKhodorkovskyLebedevdefenseteamhasbeen asserting that this unusual and unconventional reversal was made in response to coercion and threats from Russian authorities. In the three years since then, the defense team has documented its assertions and initiatedlegalactionsinordertoprovethatPwClegallyshouldhavestoodbyitsaudits,andthattheexcuses PwC gave for its decision are factually incorrect and meant to cover up the truth. Neither the Wall Street Journal nor the Financial Times would have run their major features on September 7, 2010 had they not recentlyobtainedproofofthetruthandcredibilityoftheassertionsbeingmadeagainstPwC.Thereportsare alsotimelybecausethetrialagainstKhodorkovskyandLebedevisnowcomingtoaclose,andthedefendants continuetobeblockedfromsubmittingevidencetothecourtthatwouldhelptoprovetheirinnocence.This establishesanunbrokenpatternofprosecutorialcoercionbroughttobearonthecasefromtheintroductionof chargesinFebruary2007throughtotheconclusionofthetrial.TheWallStreetJournalandFinancialTimes stories also raise troubling questions about the reputation and reliability of PwC in Russia, given the firms national predominance. In todays challenging financial environment, the value of PwC audits that can be pulledessentiallyonordersfromcorruptofficialsaltersthecalculusofriskintheRussianeconomy. WhatkindofcoercionandthreatsledPwCtowithdrawitsYukosaudits? UntilJune2007,PwCpubliclystoodbyitsdecadeofYukosaudits.WhentheRussianauthoritiesattackedPwC overtheauditsincourtinDecember2006,PwCstated:Wewillvigorouslydefendourpositionandreputation both in court and in dialogue with government authorities which are empowered to regulate [the] auditing profession. In January 2007, PwC insisted that its Yukos reports were properly prepared to present, in all material respects, the companys financial position and financial results in accordance with the relevant RussianaccountingstandardsandthatPwCconcludedtheseauditsaccordingtothehighestprofessionaland ethical standards strictly in compliance with Russian [law] and best [auditing] practices. PwCs audits were considered by many foreign observers to be the linchpin of the defense case proving Khodorkovskys and Lebedevsinnocenceonnewchargesbeingpreparedbyprosecutors.Thosesameprosecutorsthensubjected PwC to police raids, threatened partners with imprisonment for their work on Yukos, and brought legal proceedingsunrelatedtoYukosagainstthefirm.WhenPwCsuddenlyreverseditselfandwithdrewawhole ten years of audits in June 2007, the firms aforementioned problems evaporatedeven those problems ostensibly unrelated to Yukos. A broadlycited threat hanging over PwC as it adamantly defended its Yukos reportingthatthefirmsRussianlicensecouldberevokedhasnotbeenraisedagainbyofficialssincePwC backeddown,andYukosrelatedinvestigationsintothefirmappeartohaveceased. PwCsaysthatYukosliedtothemdoesntthatjustifytheirdecisiontopulltheiraudits? PwC asserts that the audits were pulled due to new information on Yukos that they received from prosecutors.However,documentsandwitnessstatementsprovethattheinformationprovidedbyprosecutors wasnotnewtoPwC,andthatinanycasetheissuesraiseddidnotaffecttheoverallvalidityoftheaudits.The Wall Street Journal and Financial Times both obtained documents disproving PwCs assertion about new informationjustifyingthewithdrawaloftheaudits,andtheevidenceissostrongthatbothnewspapershadthe confidencetopublishtheirSeptember7,2010reports.AsPwCisconfrontedwiththisevidence,theirposition on this matter will become so patently untenable that itwill be impossible for themto maintain itwith any credibility.
1 /2

AreKhodorkovskyandLebedevwagingavendettaagainstPwC? No. Khodorkovsky and Lebedev want to set the record straight. They understand that PwC was under pressure,buttheycannotacceptthefabricatedaccusationsofdishonestyleveledagainstthembythefirm.Of course,KhodorkovskyandLebedevunderstandtherisksofchallengingcorruptofficialsinRussia.Theyhaveon theirmindstheirformerYukoscolleagueswhohavebeenforcedtofleeRussia,orwhohavebeenimproperly detained,jailedandtorturedwhileterminallyill.Theyalsohaveontheirmindsthewidelyreporteddeathsof 37yearoldlawyerSergeiMagnitskyinNovember2009and53yearoldentrepreneurVeraTrifonovainApril 2010; both detainees were denied medical treatment after refusing to cooperate with corrupt officials. In 2007, prosecutors were raiding PwCs offices and threatening to arrest and imprison PwC partners. Publicly assertingthattherewereparallelsbetweenYukosandEnron,theKremlinsmessagetoPwCwasthatitcould be the next Arthur Andersen. Khodorkovsky and Lebedev are among the bestplaced people in Russia to understandwhatcanhappentothosewhobecometargetsofrecklessandcorruptofficialsincontroloflaw enforcement and judicial authorities. Yet PwCs accusations of dishonesty, as a means of selfpreservation, were unnecessary, unlawful and unethical. In making known the truth about PwC, Khodorkovskys and Lebedevsmaingoalsaretoprove,first,thattheywereinfactnotdishonestintheirdealingswithPwC;second, thatprosecutorsareguiltyofgravemisconductintheirhandlingofthecase;andthird,thatthechargesagainst themarebogusandimproperlymotivated. IsthisaproblemjustforPwCRussia,orisitaproblemforPwCintherestoftheworldaswell? ThisisaproblemforPwCinternationally.Inanattempttocontainreputationaldamageandlegalrisks,PwC hasassertedthatthedecisiontopulltheYukosauditswasamatterdecidedbyPwCRussia.Butthisassertion wascontradictedbyDouglasMiller,leadPwCpartneronYukos,whoisquotedinaprosecutioninterrogation transcript saying: I believe these issues are being examined not so much by the companys Russian Office Managers, but by executives at PricewaterhouseCoopers global, world level. The California Board of Accountancy is currently reviewing the conduct of PwC partner Miller, who left Russia after this debacle. Additional investigations of PwC USs role in the withdrawal decision by the US Public Accounting Oversight Board may follow. PwC, which prides itself on its global network, is going to have a hard time containing negativepublicityandresponsibilityforthewithdrawaldecisiontoPwCRussia. What are the implications of the PwCYukos story for foreign investment and economic development in Russia? AsstatedbytheFinancialTimesinitsSeptember7,2010report,whatisemergingisasituationwhereglobal audit firms operating in Russia may all be vulnerable to the double jeopardy of auditing the books of notoriouslyopaquecompanies,whilebeingregulatedbyagovernmentabletolauncharbitraryattacks.This loselosesituationcouldcallintoquestionthevalueofauditsthathavebeenhotlysoughtasawesternsealof approval ever since Russian companies began to access international financial markets. Khodorkovsky had understoodtheimportanceoftransformingYukosfromopacitytotransparency,andwithPwCshelphewas onthevanguardofacorporaterenewalthatservedasanexamplefortherestofRussia.PwCsaboutfaceon Yukoswasanaffronttothisexample.ThelessoninvestorslearnfromPwCsreversalisthatanauditinRussia doesnothavethesamevalueandreliabilityasanauditintheUSorEurope.Thismeanshigherrisk,which meanslowerinvestmentandstuntedeconomicdevelopment. DonttheRussianauthoritiesseethattheirattackonPwCdidnothelpRussia? Russian authorities may see it, including President Medvedev, but they do not appear motivated or empoweredtodoanythingtoremedythesituation.Itisasmallbutinfluentialgroupofcorruptofficialsthat hastriumphedinimposingtheirpoliticalandmercantileinterestsuponRussiaslawenforcementandjudicial bodiesorderingoremboldeningthemtotakedownPwCifthefirmdidnotrelentonYukos.Intheprocess they set an example for others to follow, and exposed the true fragility of the rule of law and economic prospectsinthiscountrythataspiresyetcontinuallyfailstomodernize.

2 /2