OAO Gazprom

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Russian Revolution - 1917

1917

Victor Chernomyrdin Born - 1927

1927

Parents were peasants working on Russian collective farm; became skilled craftsman (machinist); natural gas industry, controlled by Ministry of Gas Industry, rapidly developed after WWII (gazzoviki - Soviet Union citizens in this industry with relatively stable and lucrative jobs)

International Accounting Firms Spread Worldwide - 1990s

1990 - 1999

Statutory Audits - early 1990s

1990 - 1993

International firms performed statutory or compliance audits in early 1990s as independent audits unnecessary as the Soviet Union government controlled all economic resources

Gazprom - Largest & Most Important Company - 1990s

1990 - 1999

10% of Russian GDP, 20% of its exports and tax revenue, 400,000 employees, provided directly and indirectly for over 6M Russians, supplied more than 1/2 natural gas in Europe, controlled 1/3 world's natural gas reserves

Soviet Union Disintegrated - 1991

1991

Former Soviet Union suddenly disintegrated, causing the major accounting firms to be the first foreign firms to establish operations in Russia (but underestimated risks in "competitive rush"); massive reorganization caused chaos, resulting in "privatization" program to convert to capitalism

Boris Yeltsin - 1st President - 1992

1992

Yeltsin chose Chernomyrdin as nation's prime minister, the 2nd highest ranking position in the government

Regulation on Accounting and Reporting in the Russian Federation - 1992

1992

Government approved the "Regulation on Accounting and Reporting in the Russian Federation," an administrative decree as blueprint for radical change with the Ministry of Finance responsible for implementation

Privatization - 1992-1999

1992 - 1999

More than 75% of businesses handed over to private sector with privatization vouchers, but federal government maintained sizable minority in largest and most important companies; more than 1/2 newly created companies were insolvent, needing subsidies and other fed government support; rampant inflation over 2000% annually

Hermitage Capital - mid 1990s

1995

William Bowder, HC charim and former partner with Wall Street investment banker Salomon Brothers, began acquiring large minority in Gazprom stock in mid-1990s for Hermitage Capital

Initial Stockholder Meeting - 1995

1995

Gazprom ("gas industry") became one of the first privately owned firms under the privatization (28% to customers, 15% to employees, 40% to federal government, and remaining to foreign investors); BOD endorsed PwC as audit firm at initial stockholder meeting (Rem Vyakhirev, Gazprom's top executive, reported that the world's largest audit firm had been chosen to enhance credibility of financial statements and disclosures)

Criticized for Related Party Tx - late 1990s

1997 - 1999

Major media outlets charged Gazprom's executives of siphing off assets to related parties in late 1990s, such as selling natural gas at nominal price ($2 per cubic meter) to Itera, privately owned company based in the Netherlands with major operating units in Russia and US, who then resold it to European customers for over $40 per cubic meter; sold 32% ownership in gas-producing subsidiary, Purgas, to Itera for $1,200 when valued at $400M (Itera grew to 7th largest natural gas company in 7 years from these transactions)

Financial Times Interview - July 1997

July 1997

Reported from London-based Financial Times interviewed Bruce Edwards, PwC audit partner, just after completing the first audit of Gazprom and said Gazprom was the "wildest dream or worst nightmare" (providing credibility for PwC in Russian audit market with $12M annual fee but required 70 PwC personnel to travel throughout Russia to inspect more than 1,000 operating units unrelated to main business including slaughterhouses, media outlets, hospitals, yacht clubs, etc.)

Yeltsin Forced Chernomyrdin to Resign - 1998

1998

Yeltsin forced Chernomyrdin to resign as prime minister; Chernomyrdin attempted to replace Yeltsin as President

Approved International Accounting Standards - 1999

1999

Ministry of Finance approved either method: Russian Accounting Standards or International Accounting Standards (IFRS phrase adopted in 2001)

Institute of Professional Accountants of Russia - 1999

1999

IPAR, comparable to the AICPA, applied for admission to NY-based International Federation of Accountants (IFAC), national professional accountancy organization representing accountants in public practice, business, industry, public sector, and education with more than 150 organizations as members; IFAC develops International Standards of Auditing (ISA) readily applicable to developing countries with broad conceptual guidelines consistent with free market economics as in GB and the US

Yeltsin Resigned - 2000

2000

Yeltsin resigned; former KGB intelligence agent Vladimir Putin elected President; Chernomyrdin returned to Gazprom as chairman of the BOD

IPAR Member of IFAC - 2000

2000

PwC Statutory Report Issued - April 28, 2000

April 28, 2000

PwC issued statutory report on the Join Stock Commercial Savings Bank of the Russian Federation, one of PwC's largest Russian clients (significantly different than International Accounting Standards on valuation of assets and capital, recognition of revenues, expenses, liabilities, and disclosures)

1st Russian Translation of ISA - Fall 2000

August 2000

Big Five encouraged clients to obtain ISA-based audits and lobbied government officials

Vyakhirev & Chernomyrdin Resigned - 2001

2001

Putin, reform candidate, forced Vyakhirev and Chernomyrdin to resign from Gazprom and later appointed Chernomyrdin as Russia's ambassador to Ukraine

Forbes Richest Men - 2001

2001

Forbes reported both Vyakhirev and Chernomyrdin among 500 richest in the world (Vyakhirev's personal wealth = $1.5B; Chernomyrdin's personal wealth = $1.1B)

Required Conversion to IFRS - 2001

2001

Ministry of Finance, supported by Putin, announced that public companies must adopt IFRS (conversion still in progress in 2011)

William Browder Overestimates Stock Price - 2001

2001

Browder reported Gazprom's stock price would be 132x higher if valued on same basis as Exxon Mobil (due to Gazprom giving away natural gas reserves)

Itera "Special Audit" - Jan 2001

January 2001

Hired PwC to audit "itself"; Fedorov solely voted to retain another accounting firm and appointed D&T to perform parallel investigation (but blocked by BOD)

Boris Fedorov Appointed to BOD - 2001

2001

Boris Fedorov, previously head of Ministry of Finance, was appointed to Gazprom's BOD; told Moscow times that Gazprom was losing $2-3B each year due to corruption, nepotism, and simple theft; 5-week investigation by Moscow Times uncovered that Gazprom assets were systematically handed over to Vyakhirev, Vyacheslav Sheremet (Vyakhirev's deputy), and Chernomyrdin

PwC Report on Itera - Summer 2001

July 2001

PwC completed 4-month investigation with 67-page confidential report that leaked within days to the press

Contest to Win Gazprom Audit - early 2002

January 2002

BOD announced contest to retain accounting firm for fiscal year June 30, 2002 audit; Russian Securities Commission recommended to change auditors periodically

Business Week Examined Financial Scandal - Feb 2002

February 2002

Including OAO Gazprom, Russia's largest energy producer, and PwC (not Enron, which collapsed in Dec 2001)

Lawsuits Dismissed - Late Spring and Summer 2002

April 2002 - July 2002

Russian courts dismissed lawsuits as only audited client could sue under existing Russian law (invalid lawsuits as Gazprom's BOD and stockholders refused to side with Hermitage Capital); Ministry of Finance denied to rescind PwC's license

HC Filed Lawsuits - April 2002

April 2002

Hermitage Capital filed civil lawsuits against PwC for performing deliberately false audits and requested Ministry of Finance to suspend their license in Russia(first lawsuits filed against major international accounting firm in Russia)

Press Release - PwC Auditor - May 2002

May 2002

Press release indicated PwC remained auditor of 29 firms that submitted bids

Mandated ISA Adoption - 2008

2008

Federal law mandated ISAs be adopted in Russia (transition still in progress in 2011)