PricewaterhouseCoopers investigated by Russian police

PwC logoThe Moscow offices of PricewaterhouseCoopers, the largest of the Big Four global accounting firms, were searched by Russian tax police yesterday.

PwC are accused of failing to pay 243 million rubles (about $9.3 million) in back taxes:

Russian tax authorities are accusing PwC’s Moscow branch of deliberately underestimating profit tax on sums it allegedly paid to offshore PricewaterhouseCoopers Resourses B.V., which was supposed to provide financial consultations to clients in Russia. Tax officials said the consultations were provided by the Moscow branch of the company instead.

A separate investigation of PwC is also ongoing. The auditors are suspected of assisting Yukos – for whom PwC were auditors – to cover up “illegal financial schemes” and of drawing up two different audit reports for the now bankrupt energy giant.

The tax service is seeking to invalidate Yukos-PwC contracts for 2002-2004 and to charge $480,000 from PwC. Tax authorities said Yukos failed to correct violations discovered in 2002 in the following two years.

This is an interesting development, not only because it demonstrates once again that Russia is unafraid of taking on even the biggest foreign firms operating in Russia today, but because it may well have the effect of scaring away a major auditor from the Russian market.

Which, in a market that should be crying out for the transparency and respectability that professional audit can bring, is most definitely not a positive development.

[Full disclosure: I have worked for PwC in the past, although was not in any way connected to their Russian operations].

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21 Responses

  1. Andy, what do you mean “Russia is unafraid of taking on even the biggest foreign firms operating in Russia today.” Do you mean to imply that Russia is brave because PWC is so dangerous and other governments would be afraid of it, or that Russia is stupid because Russia is alienating the entire world and looking like a crude thug?

  2. Tim Newman says:

    This is an interesting development. PWC have a branch here in Yuzhno-Sakhalinsk, and they work as our auditors. In fact, I even met with one of their auditors from the Moscow office.

    It is interesting because they are not in trouble for having given clients unsound advice, but for tax evasion. For a tax auditor, this is somewhat ironic.

  3. Enbi says:

    I think the question is whether PwC did any wrongdoing or not. If they did involve in illegal activities, this investigation will actually enhance “transparency and respectability that professional audit can bring.” But it seems like you are assuming that PwC is not guilty. Why? If Arthur & Anderson can be a fraud, then hwy PwC cannot? Have you taken a look at the evidences?

  4. Andy says:

    True – if PwC are actually doing wrong, they should be investigated and punished, and this would be a boost for transparency.

    They might be doing wrong – but, purely on balance of probablities, I suspect not. The number of investigations of companies which could be classified as politically motivated are so many, in my opinion, as to suggest that they are part of a concerted campaign to intimidate businesses that refuse to toe the Kremlin line.

    I suspect neither you or I will ever get to see any of the evidence – hence the over-reliance on balance of probability.

  5. ENBI:

    You’re mistaken, that’s not the main issue.

    The main issue is whether the Russian justice system is capable of fairly adjudicating claims against PWC. If they’re not, then PWC’s guilt is totally irrelevant.

    Do you have any evidence that the Russian justice system can fairly adjudicate this matter?

  6. Zhe Zhe says:

    i would encourgare anyone commenting thus far to do some research on PWC. they have paid much, much, much more money, more times to the IRS and SEC for “tax schemes” and other frauds.

    if anyone was aware of those facts, which are all similar to the yukos/russia issue, where was (or is) the outrage when it is the US government and not the Russian government taking these actions?

  7. Zhe Zhe says:

    ps. look into PWC and gazprom while youre at it.

  8. ZheZhe’s comment is quite breathtaking. It calls for research, yet doesn’t provide ONE SINGLE LINK to information about PWC paying money to the IRS and SEC. That’s just plain psychopathic.

    What’s more, I’m sure Mikhail Khodorkhovsky would have been DELIGHTED to just pay money. Instead, he’s in prison in Siberia. Has the American government sent the chief of PWC to its equivalent of Siberia? Is it suing any individual at PWC for $25 billion? Is there a documented history of legal violations in the course of an American prosecution of a PWC officer? I’m certainly not aware of any, and I’m quite sure that if it happened there would be public outrage. Frankly, I think that the notion that the U.S. government comes in for less international criticism than Russia is hallucinatory (or simply dishonest propaganda) and so ridiculous that it disqualifies the commnenter from being taken seriously. A recent poll showed the world has a higher opinion of Russia than it does of America.

    http://www.robertamsterdam.com/2007/03/israel_united_states_more_unpo.htm

    And again, the main question isn’t even whether PWC violated the law, it’s whether the Russian government can give them a fair trial. In America, when it’s determined an accused didn’t get a fair trial, he goes free no matter how guilty he might be. That’s concept utterly foreign to the Russian “justice” system.

    It’s also worth asking whether the Russian government is cutting off its nose to spite its face, alienating the entire world for illusory purposes related to arrogance and pride.

  9. Enbi says:

    Russian justice system is certainly far more imperfect and corrupt than USA or EU. But you cannot say that it is always wrong, always bad-intentioned. I am sure that sometimes it works pretty well given the level of economic development(it is a mid-income country in par with Argentina, Mexico and Turkey).

  10. Andy says:

    Absolutely – the Russian justice system has its successes, and it has its failures.

    I’d agree that it is more or less on a par with that of other mid-income countries. In common with the rest of Russia, I think the judiciary’s biggest problem is that of corruption, which means its is difficult to be sure that a verdict is not tainted.

  11. Tim Newman says:

    Another serious problem with the Russian judiciary is that it cannot keep track of the ever-changing laws itself. Half the time it ends up applying laws retrospectively, or applying laws which have since been superseded.

  12. Andy says:

    But at least they don’t have to deal with the legislative maze that props up the European Union…!

  13. GER O'BRIEN says:

    What are you talking about LR

    ”And again, the main question isn’t even whether PWC violated the law, it’s whether the Russian government can give them a fair trial.”

    are you joking? Of course its about whether or not they broke the law. The Russian authorities, as they are fully entitled to, are investigating the operations of a company on Russian soil. Just because you dont like it doesnt mean they shouldnt do it. Russia is as entitled as any other country to collect tax owed if it is indeed owed. One of your biggest failures is that you dont seem to understand that Russia is not in the juristiction of the United States. Russia, believe it or not, is a sovereign state. It is entitled to do as it wishes without needing to check with you or your hopeless government first.

    AGAIN, I REITERATE

    RUSSIA DOES NOT BELONG TO THE USA. IT IS NOT ANSWERABLE TO THE USA.

    As for your comment about about the US being less popular than Russia, doesnt that tell you anything?) Does it totally go over your head like everything else? Irony lost eh?)

  14. ANDY: You wrote:

    Absolutely – the Russian justice system has its successes, and it has its failures. I’d agree that it is more or less on a par with that of other mid-income countries. In common with the rest of Russia, I think the judiciary’s biggest problem is that of corruption, which means its is difficult to be sure that a verdict is not tainted.

    Do you have any data to support your claim? Or are you just speculating based on your feelings?

  15. Andy says:

    I must confess that, for the purposes of writing this little comment, I didn’t do any in-depth research.

    Broadly speaking, by successes I’m taking about cases where the judiciary applied the law as it stands, and made a judgement without external interference. A failure would be when the opposite applies.

    There are, however, plenty of stories in the media about Russian court cases, some of which have been what I would call successes for the judiciary, and some of which I would call failures. The cases relating to Yukos, for example, have seen both successes and failures (although more of the latter, in my opinion).

    As for ranking the Russian justice system among other mid-income countries, that’s a judgement based primarily on instinct. “Mid-income countries” is, of course, a very broad generalisation, and it should be taken in the context of attempting to draw a simple comparison. Having said that, I think that, generally, it is fair to say that if one were to attempt to draw comparisons between the wealth of a country and the independence of its judiciary, the results (with the exception of some anomalies) would broadly show that the richer the country the freer the judiciary.

  16. GER O'BRIEN says:

    LR you said
    ”Do you have any data to support your claim? Or are you just speculating based on your feelings?”

    Let me ask you, do YOU have any proper evidence or references to support YOUR argument that Russian judicial process is unfair? And I mean proper evidence, published, non-controversial data (thats what we use in science, you cant reference something that has any uncertainty to it). Do you have any solid, proven evidence for example that Yukos did not engage in massive fraud and tax evasion? If so, please provide evidence to support. And again, i reiterate, proper evidence, not links to blogs like Publius Pundit or other websites. These are not scientifically acceptable references. You wouldnt be published in the science community. Which has the highest standards for publishing. Are you familiar with the Russian tax code? How do you actually KNOW that Yukos or Khodorkovsky didnt get a fair trial?

    ps quotes from State Department officials etc do not count as references. These are opinions, not solid, non-controversial published evidence.

  17. ANDY:

    Why do you ask me for evidence when I rely on instinct, yet feel no obligation to rely on mere instict yourself?

    Another question of great interest to me is: Why is Russia “just a normal mid-income country” when it comes to issues of corruption, violence and lack of democracy, but a “superpower” when it comes to membership on the G-8 and UN Security Council and being treated like an equal in dialogue with Europe and America? Isn’t this the same type of psychotic hypocrisy that utterly destroyed the USSR?

  18. I meant “feel no obligation to avoid relying on mere instinct yourself” of course.

  19. GER O'BRIEN says:

    Again LR, do you have any evidence as I asked above proving wrongdoing on the part of the Russian authorities in the Yukos case? No. I didnt think you had. You continuously ask for evidince from other people to back up their points – but have none yourself. You are a total fraud.

    Russia is a superpower. Like it or lump it, its got a lot of missiles sitting in silos waiting for the button to be pushed. Its also enormous. It’s also entirely foreign debt free and has massive energy reserves.

    The US has those same missiles as Russia. It’s in debt up to its neck. Its mired in a bloodbath of its own making in Iraq. It is energy hungry and hasnt enough.

    Spot the difference? On what precise grounds LR is the US a superpower and Russia not? And dont give us this usual bullshit line about the USA being one big Disneyland and Russia mired in poverty. The US has massive social problems too and you know it. Take a trip to Mississippi sometime, or Louisiana. Laissez Le Bon Temps Roule my arse. More like let the poor starving and homeless, like your own useless incompetent government did after Katriona. And they were in atrocious poverty before Katriona.

    And lastly -dont fool yourself cos you arent fooling anyone remotely sentinent. Hypocrisy did not collapse the USSR. Low oil prices and Chernobyl did. I honestly dont understand how you cant cop that.

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