 |
| Corporate Governance
Investigations and Prosecutions
On this page
* * *
Case Study: Auditing Russian Companies
UPDATE July 12, 2007...The Wall Street Journal reported PricewaterhouseCoopers won a Russian court case in which the auditing firm was accused of owing millions of dollars in back taxes.
PwC WITHDRAWS REPORTS FOR BANKRUPT YUKOS
Reuters reported on June 25, 2007 that PricewaterhouseCoopers' Russian unit confirmed that it had withdrawn its financial reports for bankrupt oil company Yukos for the years 1999-2004. PwC wrote to the official liquidator of Yukos and stated that, “PwC decided to withdraw its audit opinions for Yukos when it became aware of new information which had it been known at the time may have affected Yukos's audit reports."
The major auditing company added that, "PwC's decision to withdraw the reports was influenced by the fact that some former shareholders and management of Yukos are continuing to encourage others to rely on PwC's audit reports."
Yukos was an exceptionally successful and dynamic oil giant that became Russia’s largest oil company. It was run by Mikhail Khodorkovsky, whose prominence triggered a host of criminal charges against him by the Russian public prosecutors. These led to his being sentenced to serve an 8-year sentence in a Siberian prison for fraud and tax evasion, to the bankruptcy of Yukos and to the effective acquisition of many of its assets by Russian state-controlled enterprises. As Reuters noted, “The government's campaign against Yukos was widely viewed as politically motivated.”
Against this background the question arises: why has PwC now taken the extraordinary retrospective action of withdrawing its past financial reports for Yukos?
Reporting from Moscow on June 26, 2007, Catherine Belton of The Financial Times noted that the statement by PwC on Yukos, sent on June 15 to Yukos’s liquidator, came “following months of government pressure on the audit firm.”
The Wall Street Journal pointed out in a story from Moscow on June 25, 2007 that, “The move comes as PwC faces its own challenge from Russian tax authorities regarding Yukos. The accounting firm said its actions yesterday weren't related.”
PwC is currently fighting Russian tax authorities who allege that the auditor knowingly aided Yukos in what authorities charge was a massive tax-evasion scheme. PwC denies those allegations and appealed after it lost the first round in that court battle. The appeal is scheduled to be heard July 18 in Moscow. PwC also faced charges it underpaid taxes; the firm paid $14 million last year to settle those obligations. The Journal stated that, “A PwC official said yesterday the decision to withdraw the audits wasn't related to the court case now under appeal, which PwC still plans to pursue.”
At issue in that litigation is whether PwC knew of illegal activity at the time of the audits, something PwC continues to deny. If PwC were found to have knowingly falsified audits, it could lose its license to operate in Russia, where it is one of the largest auditors.
The Reuters story noted that analysts in Moscow say that the Kremlin is keen to present Yukos’s collapse as an Enron-style tale of corporate corruption. Reuters noted that recently, PwC lost contracts for Russia's pipeline monopoly Transneft and its top carmaker AvtoVAZ, both state-controlled. A Russian court fined PwC about $500,000 in April for producing false reports for Yukos and helping it to evade tax. PwC has been presented with a separate $11 million back-tax claim and Interior Ministry officials searched its offices, taking documents that the firm said went well beyond the tax claim. But, Reuters noted, it survived a threatened withdrawal of its license and has renewed its contract as auditor for gas monopoly Gazprom. Its clients also include top bank Sberbank, former power monopoly UES and Russia's central bank.
Former Officials Challenge PwC
Reuters also reported, however, that a spokeswoman for the former management of the firm said in an emailed statement that the former chief executive Steven Theede and chief financial officer Bruce Misamore believed they had provided PwC with information that was complete and correct. "To the best of their knowledge everything required by PwC was shared with PWC," the statement said. "Furthermore, PwC had full access to the company and its subsidiaries and regularly completed their own due diligence and audited their own work. It is inconceivable that there is any 'new information' that PwC did not have already or had access to because they had full access to everything available to the management of the company."
Good News for the Kremlin
An article in The Economist (June 28, 2007 edition) under the title of “A Settling of Accounts,” starts with the acclamation: “GOOD news for the Kremlin: no longer must it work so hard to justify the destruction of Yukos, a bankrupt oil firm.”
It said the PwC’s statement bolsters the Kremlin’s efforts to portray the Yukos affair as Russia’s Enron. The magazine commented that the “Withdrawal of an audit, let alone a decade's worth of them, is a rarity. Like anybody connected with Yukos, PwC had been under enormous pressure.”
Indeed, The Economist pointed out, that Mike Kubena, PwC’s Central and Eastern Europe Regional Manager was saying just six months ago that “This case challenges the basic role of the auditor, which represents a key element in the development of a normal, functioning economy.” Now, noted the Economist, “He stoutly maintains that PwC revised its opinion not because of the threats, but in the light of new information—although he will not say what that information is, only that it came from Russian prosecutors, who hailed PwC's decision.”
The Economist added that PwC’s action, “Will strengthen the case against Mikhail Khodorkovsky, an ostracized oligarch and former boss of Yukos, who may now stay in prison well beyond his present eight-year sentence.”
The media has reported that Russian prosecutors are pursuing a second case against Mr. Khodorkovsky, accusing him and his colleagues of fraud and money laundering at Yukos.
Posted 6/29/07
Back To Top
* * *
Enron's Last Mystery
A Business Week article raises questions
about the complicity of
Vinson and Elkins, the collapsed energy giant's thus far unscathed law firm.
While all other Enron consultants and external business partners, including the fallen accounting firm Arthur Andersen, a handful of major banks, and JP Morgan Chase and Co., have suffered serious financial damage from the scandal, Enron’s former law firm, Vinson & Elkins (V&E), which provided legal advise and signed off on several major, and highly risky, transactions remains almost untouched. According to an article the June 12, 2006 issue of Business Week, not a single V&E lawyer has been charged with professional misconduct charges by the Texas bar, the firm has paid no damages, Joseph C. Dilg, the partner who directed the Enron account, is now managing partner, and in 2005 the firm became the first Texas law firm to pay its partners an average compensation over $1 million.
According to the article, lawyers are often the most difficult to incriminate in cases of corporate misconduct. As a matter of public policy, lawyers enjoy a great deal of leeway in voicing their qualms about clients without fearing future retaliations for their statements, a protection which has thus far proven critical to V&E’s survival.
However, according to Business Week, Enron’s bankruptcy trustee is working to settle claims with V&E for $30 million. The deal would require the firm to abandon claims for $3.9 million in legal fees it billed the company in its final days (this is a tiny proportion of the $162 million Enron paid the firm from 1997-2001). Meanwhile the Securities and Exchange Commission is examining the advice that V&E gave Enron. Finally, lawyers from a class action suit which went after Enron’s banks, are preparing to unleash a slew of evidence against V&E on June 13, in an attempt to make V&E liable for some of the $40 billion in investor losses created by Enron’s bankruptcy.
So far the firms has maintained it innocence, a claim that has been difficult to verify as very few of V&E records have been made public. Business Week, however reports that several documents, including emails and notes of strong disapproval, allegedly indicate that V&E’s attorneys had reservations about the soundness of Enron’s business practices, or at least knew of the nature of Enron’s now famous “mark-to-market” accounting. Moreover, new evidence has arisen that Dilg himself had questions about a key opinion letter from the firm, which was instrumental in Enron’s completion of a series of suspect transactions.
Back to Top
* * *
The Enron Verdict – Opinions and Analysis
On May 24th, 2004, Jeffrey Skilling, former CEO of the collapsed U.S. energy giant, Enron, and Kenneth Lay, Enron’s former Chairman, were convicted in a Houston court of fraud and conspiracy nearly bringing to end a four-year legal battle against the disgraced executives. The long-awaited verdict is likely to stimulate intense debate and strong opinions about Enron’s collapse and its influence on corporate America. The following is a selection of quotes from the editorials of major newspapers:
The Wall Street Journal
“…Skilling and Lay may have lost their case from the start when they hung their defense on the dubious assertion that Enron was a fundamentally sound company tripped up only because speculators were abetted by critical articles on the front page of this newspaper…..In the end, jurors clearly understood that companies with real assets and sound balance sheets don't just go poof as the result of a little bad press. We appreciate the free advertising, but the Journal isn't that powerful.
…….We think these convictions of individuals -- some 30 in the Enron case alone -- will do more to deter future corporate crime than anything in Sarbanes-Oxley. At the same time, the U.S. economy has snapped back nicely, meaning that assertions of widespread corporate fraud back in 2001 and 2002 were way overblown. The Enron verdicts are proof, if more were needed, that lying to employees, shareholders and the public about corporate finances is a serious crime that will be punished.”
The Washington Post
“The government's prosecutors, who were up against a defense team that cost almost $70 million, deserve credit. The criminals' victims -- investors who lost savings, and workers who lost both their jobs and their savings because their retirement plans were invested in Enron stock -- may now feel some emotional redress. Meanwhile, many plan to sue for financial redress as well.
There is a danger in this verdict, however. In the wake of Enron's bankruptcy, some argued that the problems of corporate America were the work of a few bad apples. That argument lost, for the good reason that fully 250 U.S. public companies had to restate their accounts in 2002, up from 92 five years earlier. Corporate America's problems reflected lax oversight of auditors, conflicts of interest at audit companies, accounting rules with too many inviting loopholes and so on. The Sarbanes-Oxley Act, passed in 2002 to fix these systemic weaknesses, now faces a backlash from firms that complain of stiff compliance costs. Although some tweaks in the way the law is implemented may be justified, the welcome Enron verdict should not color the regulatory question. This decade's business scandals were not just about bad apples, and putting those apples in jail is not going to change that.”
The New York Times
“We as a society have a destructive tendency to think of crimes like holding up a convenience store or selling drugs as very serious and destructive to the social fabric, while looking more tolerantly at corporate malfeasance as simply businessmen being a little overzealous. Just because there isn't a gun doesn't mean there isn't a crime…. At the same time, white-collar criminal cases can be difficult, paper intensive and hard to explain to juries. We expect the verdict in the Enron case to encourage prosecutors to pursue them.”
Houston Chronicle
“What do the sweeping judgments mean? They signal a victory for two key systems in American society: business and justice.
The nature of free enterprise drives business to innovate, both in products and management. It also can lead to excesses that cross the boundaries of legality, such as the fraudulent off-the-books accounting techniques Enron executives used to hide losses and inflate profits. Verdicts such as this one serve as a corrective to such abusive business practices. They also put executives on unmistakable notice that they are responsible for what goes on inside their offices and that protestations of ignorance will provide an unconvincing defense.
Thursday's verdicts also testify to the ability of a judge and jury to sort through a maze of complicated accounting transactions and contradictory testimony to reach a credible judgment that accurately weighs facts but doesn't get lost in overanalysis. As several Enron jurors stated after the verdict was read, they kept their focus throughout the trial on the personal harm done to thousands of people when Enron spiraled into bankruptcy. Several jurors, including a young mother and a school principal, spoke eloquently of the personal hardship they endured over the course of the lengthy trial.
…Had the jury found Lay and Skilling innocent, it would have maintained the accommodating myth that nothing's wrong with the way the corporation did business. Such "creative" accounting might continue to be an option for corporate executives. Instead, they now know such maneuvers can result in an extended stay in federal prison.”
Financial Times
“…even though bosses of these companies perpetrated spectacular financial crimes, they were, in the phrase much-ridiculed by crusaders against corporate fraud at the time, “a few bad apples”. The rest of the barrel had its bruises, of course – poor corporate governance, lack of accountability, lax internal controls, and excessive compensation of imperial chief executives among them. But these flaws were and are best treated not by the blanket enforcement of hastily enacted rules, but by more activism in the boardroom and in shareholder meetings.
…the Sarbanes-Oxley act is not a silver bullet for malfeasance. Manipulation of earnings at HealthSouth, the healthcare company, started before Sarbanes-Oxley and continued afterwards. Refco, the futures trader, collapsed last year as a result of fraud that went unnoticed by those with a mandate to track it down. There will be more such debacles.
It therefore makes sense to use the period following the Enron verdicts to reflect on how to restore a sense of balance to the regulation of companies. That does not mean repealing Sarbanes-Oxley, as some have suggested, or lifting the pressure on US companies to improve corporate governance. First, there should be a more nuanced application of corporate regulation to relieve smaller businesses, in particular, of the weight of bureaucracy imposed by disclosure rules. Second, directors need to continue to develop their power to stand up to overweening chief executives. Third, regulators should address the lack of corporate accountability to investors. Fourth, shareholders themselves should press more actively for change at their companies where needed.
…America’s corporate scandals burst into the open not when the equity bubble was at full stretch but 18 months to two years later. According to that timescale, even though one five-year push against corporate fraud is coming to an end, a new period of vigilance is just beginning.”
Back to Top
* * *
Top Corruption Investigations of 2006
Rarely before has there been as many corruption cases under investigation and/or ready for trial as there is at the outset of 2006. The following are just some of the stories that www.Ethicsworld.com will be following in coming weeks and months:
- U.S.: Former Enron Chairman and CEO Ken Lay goes on trial at the end of January with an increasing number of former senior employees having agreed to testify against him. Recently he declared: “We must create our own wave of truth. I believe the return to sanity has begun.”
- Brazil: This is election year for Brazil and overshadowing much of the political debate will be the major series of investigations into political corruption, that have already forced the resignations from the top offices of several key leaders. Can President Lula stay above the morass?
- Iraq: Expect more revelations of massive corruption - the new Government’s survival may depend on its ability to contain the corruption cancer. A range of investigations are underway by U.S. authorities into corruption related to reconstruction funds for Iraq.
- Nigeria: President Obasanjo is likely to broaden his attacks on domestic corruption in 2006 . If he succeeds he could have a major impact on governance across Africa. Major trials are set.
- China: Authorities are declaring ever more frequently that they are clamping down on corruption. Recently Lu Wanli, former director of the Communications and Transportation Department in the central Chinese province of Guizou, was executed for corruption charges. More arrests and trials are likely.
- Italy: Central Bank Governor Antonio Fazio was forced to resign and investigations are being pursued into “insider trading” and corruption between the central bank and leading banks. This scandal follows others and may have a profound impact in this election year for President Berlusconi.
- Chile: Will there be a trial? Former Chilean President Augusto Pinochet, 90, has been charged with corruption and tax evasion, but his defense lawyers continue to claim that he is too ill to face trial.
- US: Former House Republican Leader Tom DeLay of Texas is one of the major players to lose his position as a vast lobbying scandal rips across the U.S. Congress and the Republican Party. Trials and more investigations are likely in coming months and may well influence the Congressional elections in November. Lobbyist Jack Abramoff, who is at the center of several of the scandals, has agreed to cooperate with prosecutors.
- India: The government faces a rising number of corruption cases. For example, 9 Indian Members of Parliament were suspended in December after having been caught on video receiving payments in return for their asking questions in Parliament. Moreover, investigations are set into former External Affairs Minister K. Natwar Singh, who has been mentioned in alleged bribery in the Volcker Report on the UN’s oil-for-food program in Iraq.
- Canada: A prime issue in the current election campaign is corruption – the legacy of years past is haunting Prime Minister Martin.
- Kenya: Charges and counter-charges of corruption continue to be prominent in and around the Government of Kenya. Resolving some of the most critical issues, ranging from allegations of major bribery in public procurement, to widespread police corruption, will be important for the Government’s survival.
- Peru: Overshadowing Peru’s election this year may be the efforts of former President Alberto Fujimori to return to his country (where he faces a warrant for his arrest on multiple corruption charges). He is currently under arrest in Chile.
- Palestine: Key elections are soon to take place – a major theme is alleged corruption by the “old guard” of colleagues and cronies of Chairman Arafat. For aid donors, both in other Arab countries and beyond, evidence of anti-corruption actions by the authority in Palestine will be important for aid payments.
- U.S.: Libby (not corruption in the strict sense, but certainly likely to add to the ethics image damage of the White House). The trial will get underway of former White House top official Scooter Libby, which may prompt President Bush to order another set of “ethics classes” for all White House staff.
- Germany: Former German Chancellor’s acceptance of a top post at Russia’s Gazprom will continue to add to corruption stories, while several major corporations are being investigated by the authorities on foreign bribery and money-laundering allegations – one or more major cases seem probable.
- U.S.: Vietnam war hero Republican US Congressman Randy Cunningham, 63, will face sentencing in California after admitting he took $2.4 million from contractors. Further revelations likely on corrupt contract awards from the Pentagon that may involve other members of Congress.
- South Africa: President Thabo Mbeki is likely to heighten anti-corruption efforts, with the issue winning a very high profile as actions move ahead against former deputy leader Jacob Zuma, who has been accused of major bribery.
- Russia: President Putin promotes new law to curb civil society and effectively give the State the right to close organizations that it does not like – this could impact disclosures of continuing array of major corruption scandals.
- Serbia: The Government faces a challenge to clean up its judiciary after 40 judges were charged in November with corruption. The clean up is important in part because of the Serbian efforts to develop closer ties to the European Union - EU officials have left no doubt that cleaning out corruption is a critical requirement.
- Israel: Israeli Prime Minister Ariel Sharon's eldest son, Omri Sharon, a member of parliament, awaits sentencing on corruption charges. He pleaded guilty in November to illegal fund-raising charges stemming from his father's 1999 election campaign. The charges carry a maximum of five years in prison.
- France: Investigations into foreign bribery by defense firms is likely to expand – in late December French judges searched the headquarters of Thales SA the defense electronics firm, which has been accused of multi-million dollar bribery.
- Bangladesh: Again ranked last in the Transparency International Corruption Perceptions Index – scandals abound and the media reports fiercely on the issue. Will the country do better in the rankings this year?
- Japan: Authorities will be taking actions following a major scandal where it was disclosed that Hidetsugu Aneha, architect of 21 prominent buildings, may have been involved in pay-offs that enabled his firm to circumvent earthquake security regulations in the construction of a number of these buildings, including seven hotels.
- Romania: Is to move ahead with efforts, assisted by the UK Crown Agents, to root out corruption in its customs authority. This is a requirement set by the European Union as part of Romania’s efforts to move towards eventual membership with the EU.
- Latin America: Elections in Mexico and numerous other countries this year will be dominated, above all, by hot debates about cleaning up corruption.
- Africa: Actions by the international community in 2005 pave the way for major rises in aid (or debt relief) in 2006 – but key will be demonstrations of good governance – a euphemism for anti-corruption actions. Few countries have major credible programs in place at this time.
- World Bank: The Bank faces difficult decisions as evidence mounts that the Chad Government may be subverting an agreement that ensured that revenues from the Chad-Cameroon pipeline (Exxon is the major contractor) go towards supporting anti-poverty programs as was agreed. The Bank has suspended funding, but it needs to make some clear decisions before too long on how to resolve this issue in particular and act on major natural resources’ lending in the future.
- United Nations: From Australia and India to the U.K. and the U.S. (at the United Nations itself) --- there will be follow-up to the disclosures in the final report of the Paul Volcker Commission on the United Nations oil-for-food program. Some 2,253 companies allegedly were involved in bribery deals with Saddam Hussein’s regime. The volume of bribes could well have exceeded $1.7 billion.
|
|
|
