The Moscow office of PwC said it had obtained new data about the operation of the bankrupt Russian firm, but the business community still wonders what made a respectful international auditor take such a scandalous decision.
It appears, however, that nothing much has happened, as major international auditors are known to have made similar mistakes. Moreover, the root of the scandal lies in the inherently contradictory actions of auditors.
The so-called Big Five accounting firms - PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young, KPMG and Arthur Andersen performing auditing, tax, and consulting services for large corporations - have had many problems in the past century. But they went unnoticed by the public, because their mistakes, when exposed, were rectified behind closed doors without affecting global business.
The 21st century has introduced a new level of transparency, and auditors have immediately made the front pages.
The first such scandal concerned Enron, a U.S. energy company based in Houston, Texas. It achieved infamy in late 2001, when it was revealed that its reported financial condition was sustained mostly by institutionalized, systematic, and creatively planned accounting fraud. The scandal caused the dissolution of Arthur Andersen, an accounting firm with an unblemished reputation, 88 years of operation, and a huge clients base in 84 countries.
Andersen did more than close its eyes to Enron's financial fraud. Its managers later apologized in Congress, the partner responsible for auditing Enron was fired, and former head of the Federal Reserve System was invited to the company as crisis manager. But on June 15, 2002, Andersen was convicted of obstruction of justice for shredding documents related to its audit of Enron.
The Andersen indictment also put a spotlight on its faulty audits of other companies, most notably Sunbeam and WorldCom. The subsequent bankruptcy of WorldCom, which quickly surpassed Enron as the biggest bankruptcy in history, then led to a domino effect of accounting and other corporate scandals.
Andersen agreed to surrender its licenses and its right to practice before the Securities and Exchange Commission (SEC) on August 31, 2002. This effectively ended the company's operations.
As a result, investors fled the U.S. stock markets en masse, provoking the stagnation of the American economy, the appearance of a new phrase, "book cooking", in the business vocabulary, and mass psychosis among shareholders around the world, who become hysterical at the slightest suspicion of unreliability of financing reports.
After the departure of Andersen, the remaining four of the Big Five lived through a difficult period.
In May 2002, SEC presented complaints to Deloitte, which audited Adelphia Communications, the fifth largest cable company in the U.S. before it filed for bankruptcy in 2002 due to internal corruption. Deloitte paid $50 million to settle SEC's charges in 2005, and $210 million to investors in 2006.
In May 2003, SEC fined PwC $1 million for permitting violations during the audit of SmallTalk TeleServices.
In 2004, Italy's Parmalat went bankrupt, almost pulling along Deloitte because its Italian office looked through its fingers at Parmalat's accounting discrepancies and suspect transactions.
In October 2005, the staff of PwC's Japanese office was charged with falsifying the accounts of cosmetics producer Kanebo. The Japanese financial authorities closed the office for two months.
In December 2006, Fannie Mae filed a suit against KPMG, alleging that the audit firm committed malpractice when it signed off on financial statements that were riddled with errors. In April 2007, KPMG sued its former client Fannie Mae, claiming that the giant mortgage funding company deceived it for years, damaging KPMG's reputation and exposing it to the threat of substantial liability. It now demands $2 billion in compensation for its outlays to rectify the mistakes.
In short, the current PwC scandal in Russia is not a precedent, but a tendency. So far, the auditor has been fending off attacks rather easily. In December 2006, the Russian tax inspectors charged PwC with tax evasion, but demanded only the payment of the sum the auditor had received for its services, which is incomparable with the gravity of the alleged offense.
The arbitration court ruled that PwC should pay $480,000 to the federal budget.
This spring, the Finance Ministry extended PwC's license, although the trial was not over and the financial authorities could easily postpone their decision or refuse to prolong the license. The Finance Ministry is still analyzing the tax agencies' complaints against PwC. As of June 27, no decision on a ministerial inspection of PwC has been made.
No matter how this story ends (PwC's appeal against the court decision on the $480,000 fine is to be heard on July 17), it will not solve the problem, because scandals of this kind are just one more aspect of the auditing business.
Shareholders want their company to post maximum profits, and its managers not to line their pockets with the shareholders' money. So they hire an auditor to tell them that their managers are working professionally and are not breaking the law. But the auditor receives his fee from the managers, who very often pay him to help them deceive the shareholders or the law.
This is a simplified scheme of relations in the shareholder-manager-auditor triangle. But it is a vivid example of the conflict of the shareholders' interests with the interests of their managers. No legally approved standards of the auditing business (there are 31 of them in Russia, each taking many pages) will prevent the possibility of a conflict.
There is little hope that managers will suddenly become angels who do not think about personal enrichment, but respect the letter and spirit of the law and live on their salaries alone.
The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
