07MOSCOW3343, RUSSIA: PRICEWATERHOUSECOOPERS WITHDRAWS AUDITS OF

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Reference ID Created Released Classification Origin
07MOSCOW3343 2007-07-09 12:32 2011-08-30 01:44 CONFIDENTIAL Embassy Moscow

VZCZCXYZ0019
PP RUEHWEB

DE RUEHMO #3343/01 1901232
ZNY CCCCC ZZH
P 091232Z JUL 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 1918
INFO RUEHFT/AMCONSUL FRANKFURT PRIORITY 3463
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY

C O N F I D E N T I A L MOSCOW 003343 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/RUS, EEB/IFD 
TREASURY FOR MEYER, CETINA 
FRANKFURT FOR COTTER 
NSC FOR MCKIBBEN 
 
E.O. 12958: DECL: 07/06/2017 
TAGS: EFIN EINV ECON RS
SUBJECT: RUSSIA: PRICEWATERHOUSECOOPERS WITHDRAWS AUDITS OF 
YUKOS 
 
REF: A. MOSCOW 1997 
 
     B. MOSCOW 466 
 
Classified By: Acting ECON M/C Laura Lochman, Reasons 1.4 (b/d). 
 
1.  (C) Summary: PricewaterhouseCoopers Russia (PwC) Managing 
Partner Peter Gerendasi confirmed press reports from the week 
of June 25 that the auditing firm had withdrawn its 1995-2004 
audits for former oil giant Yukos.  Gerendasi volunteered few 
details about the circumstances under which PwC's senior 
management became aware of the information about Yukos that 
prompted the decision to withdraw.  He mentioned only that 
"investigators" presented documents reflecting Yukos internal 
structures and contractual relationships that had not been 
available for PwC to assess and investigate during the course 
of its audits for Yukos.  Gerendasi explained that PwC made 
its decision to withdraw in consultation with company 
headquarters in the U.S., and only after a thorough internal 
review that compared its audit records with the 
recently-presented information. 
 
2.  (C) Turning to other issues affecting PwC, Gerendasi said 
that the Federal Tax Service (FTS) had filed a request for 
the Finance Ministry to conduct a review of PwC's audit 
practices (Ref A).  The review, which is set to begin July 9, 
will assemble government officials as well as subject matter 
experts to evaluate PwC's policies, organizational 
structures, and methodology.  On July 10, proceedings begin 
for PwC's appeal of the March 20 Federal Arbitration Court 
(FAC) decision that from 2002-2004 Yukos and PwC colluded to 
defraud the GOR.  On July 17, the Supreme Arbitration Court 
will begin hearing PwC's appeal of the FAC decision which 
found that in 2002 PwC had improperly accounted for 
expatriate salaries and, consequently, owed the Russian 
government USD 14 million.  As a result of the latter FAC 
decision, the Ministry of Interior began a criminal 
investigation in early February that has not led to any 
charges to date (Ref B).  End Summary. 
 
Withdrawal of 1995-2004 Yukos Audits 
------------------------------------ 
 
3.  (C) PricewaterhouseCoopers Russia (PwC) Managing Partner 
Peter Gerendasi told Econoff July 3 that press reports from 
the week of June 25 regarding PwC's decision to withdraw its 
1995-2004 audits of former oil giant Yukos were accurate.  He 
said that PwC had become aware of information about Yukos 
that the former oil giant's management had not made available 
during the course of the audits.  (Note: He did not specify 
when PwC became aware of this information.  End Note.)  He 
mentioned only that "investigators" had presented documents 
that outlined Yukos operational and administrative 
structures, contractual relationships with suppliers and 
distributors, and various holdings which Yukos management had 
not made available to PwC auditors.  (Note: It is possible 
that the Prosecutor General's office obtained this 
information in the course of the tax evasion and money 
laundering investigations against Mikhail Khodorkovsky and 
Platon Lebedev.  Under such a scenario, the Prosecutor 
General's office may have made a determination that PwC was a 
victim of Khodorkovsky's fraud, which means that disclosing 
such information obtained in the course of a criminal 
investigation would not have been improper.  End Note.) 
Gerendasi commented that any auditing firm would have 
investigated information of this nature to determine the 
accuracy of any and all associated transactions as well as to 
assess the relationship between the firm being audited and 
its business partners.  He explained that the "new" 
information was carefully reviewed and ultimately deemed 
credible.  He said that the senior management of 
PricewaterhouseCoopers Russia-CIS consulted closely with the 
company's U.S. headquarters and concluded that, since Yukos 
was no longer a going concern, the only viable option was to 
withdraw its audits.  On June 15, PricewaterhouseCoopers 
Russia-CIS General Director Mike Kubena informed Yukos board 
chairman Viktor Gerashchenko and Yukos receivership manager 
Eduard Rebgun that PwC had withdrawn its audits of Yukos in 
accordance with international auditing standards and Russian 
law.  On June 22, PwC issued a public statement to this 
effect. 
 
Finance Ministry Audit Review 
----------------------------- 
 
4.  (C) In April, the Federal Tax Service (FTS) filed a 
 
request that the Finance Ministry initiate a review of PwC's 
auditing practices (Ref A).  PwC provided the Finance 
Ministry a comprehensive report that describes the 
organizational structure as well as management policies and 
auditing standards and practices.  The review is scheduled to 
begin the week of July 9.  The FTS request stemmed from 
recent court decisions against PwC.  Specifically, in 
November 2006, PwC lost its second appeal of a Federal 
Arbitration Court decision that the auditor had improperly 
accounted for expatriate salary expenses in 2002 and, 

consequently, owed USD 14 million in back taxes.  As a result 
of the FAC decision, the Ministry of Interior (MVD) launched 
a criminal investigation, which included confiscating PwC 
documents in a raid on March 9.  Moreover, FTS began another 
investigation of PwC's expatriate salary accounting 
practices, this time looking at the period 2003-2005.  The 
other court case underlying the FTS request was the FAC 
decision on March 20 that underlying contracts for PwC's 
2002-2004 audits of Yukos were invalid because they were 
premised on an unlawful purpose.  The FAC supported the tax 
authorities' argument that PwC colluded with Yukos to defraud 
the government and had, therefore, falsified its audits. 
 
Pending Appeals 
--------------- 
 
5.  (C) Gerendasi said that on July 10 the Supreme 
Arbitration Court would begin hearings of PwC's appeal 
regarding the 2002 expatriate salary case.  He expressed 
"quiet optimism" that PwC would prevail since "the referring 
judge deemed our case to have merit."  Nevertheless, he 
observed that the MVD had not yet closed its related criminal 
investigation.  He noted that MVD officials had interviewed 
approximately 50 members of PwC's staff and would interview 
another 150 before the criminal investigation ended. 
According to Gerendasi, unless the authorities uncover 
credible evidence of criminal intent by mid-August, they 
would be forced to close the investigation, which began 
February 1. 
 
6.  (C) Gerendasi also noted that the appeal of the March 20 
FAC decision regarding the 2002-2004 Yukos audits would begin 
on July 17.  He said that PwC's legal counsel was uncertain 
what effect PwC's decision to withdraw its Yukos audits would 
have on the outcome. 
 
Comment 
------- 
 
7.  (C) Gerendasi appeared unwilling, and in any case may 
have been legally unable, to discuss details on the source 
and circumstances under which PwC became aware of this new 
information about Yukos.  He was also unequivocal that the 
withdrawal, although he characterized it as PwC's only viable 
option, was nonetheless a difficult call.  He suggested that 
the withdrawal would not have an adverse effect on the 
Finance Ministry's review of PwC's auditing practices.  We 
maintain our outlook that the relative lack of progress in 
the MVD's criminal investigation is a good sign that no one 
from PwC will be facing criminal charges any time soon.  End 
Comment. 
BURNS

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