OAO Gazprom

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)

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)

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 as prime minister; Chernomyrdin attempted to replace Yeltsin as President

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

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

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)

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

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

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

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)

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

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

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)

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

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

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

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)

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

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

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