Jailed Russian Oil Execs Point Finger at PwC

A pair of former executives standing trial for embezzling from the Russian oil company Yukos are claiming that PricewaterhouseCoopers withdrew its certified audits under pressure from the Kremlin.

Attorneys for the pair claim that PwC withdrew a decade’s worth of consolidated audited financial reporting on Yukos that could have helped exonerate former Yukos chief Mikhail Khodorkovsky and his business partner, Platon Lebedev. The two executives now stand co-accused in a new trial brought by Russian prosecutors, who hope to prevent their scheduled release from prison in 2011. A PwC spokesman in the U.S. declined to comment on the case.

The allegations surround PwC’s decision in 2007 to withdraw its Yukos financial reports for the years 1994-2004. That decision, which came almost four years after Russian authorities launched their investigation of Khodorkovsky and Yukos in 2003, was viewed as a victory for the Kremlin, as the accounts could have helped prove both Khodorkovsky’s and Lebedev’s innocence, according to their attorneys. At the time, PwC cited “new” information the firm received from Russian prosecutors related to the Yukos accounts which, they argued, compromised their prior accounting methods.

Russian authorities sought to cast doubt on the reliability of the Yukos audits and subjected PwC to police raids (see Drama Continues for PwC in Russia). Partners were threatened with imprisonment for their work on Yukos, legal proceedings unrelated to Yukos were lodged by prosecutors against the firm, and authorities threatened to revoke PwC’s Russian license. PwC served as Yukos’ advisors and auditors and was placed under preliminary criminal investigation for alleged tax evasion in 2007 – just as Russian prosecutors brought a second set of charges against Khodorkovsky. The problems mostly disappeared after PwC withdrew its Yukos reporting.

Attorneys for Khodorkovsky and Yukos claim that the information received by PwC was supplied by the prosecution, and never independently verified before PwC withdrew its audits. According to a June 4, 2007, transcript of the prosecution’s questioning of Douglas Miller, the lead PwC partner on Yukos, the prosecution walked him through the reasoning behind the audit withdrawal just 10 days before PwC’s decision to pull the reports.

On June 14, 2007, the lead investigator in the Khodorkovsky-Lebedev case, Salavat Karimov, personally requested of Michael Kubena, the head of PwC’s Moscow office, that PwC withdraw the audits that were being widely used by Yukos-related applicants in foreign extradition proceedings. On June 15, 2007, PwC sent Yukos a letter informing the company of its decision to withdraw the audits. On June 25, 2007, just one day after PwC’s public announcement of its decision, Karimov sent a letter to PwC Russia announcing that the criminal probe into PwC had been withdrawn.

The California Board of Accountancy is currently reviewing the conduct of Miller, who left Russia after the firm withdrew its audits. Additional investigations of PwC US’s role in the withdrawal decision by the Public Accounting Oversight Board may follow. According to the June 4, 2007, transcript of Miller’s interrogation, PwC’s decision to rescind the Yukos audits was not contained to PwC Russia. He stated, “I believe these issues are being examined not so much by the company’s Russian office managers, but by executives at PricewaterhouseCoopers’ global, world level.”

The Khodorkovsky-Lebedev trial, which opened in March 2009, is drawing to a close. This week, Lebedev is testifying to rebut the prosecution’s claims, and on Thursday, his attorneys say he will be discussing PwC’s decision to withdraw its audits, and the repercussions of the decision.