RUSSIA ENERGY: PRICEWATERHOUSECOOPERS' TAX CASE

UNCLAS MOSCOW 000081

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/RUS, EB/ESC/IEC, EB/CBA
FRANKFURT FOR SUSAN STANLEY, BILL COTTER
TREASURY FOR BAKER/GAERTNER
NSC FOR TOM GRAHAM AND TRACY MCKIBBEN
USDOC FOR 4231/IEP/EUR/JBROUGHER
DOE FOR HARBERT/EKIMOFF/PISCITELLI

E.O. 12958: N/A
TAGS: EFIN ECON EINV RS
SUBJECT: RUSSIA ENERGY: PRICEWATERHOUSECOOPERS' TAX CASE
UPDATE

REF: (05) MOSCOW 13123

This message is sensitive but unclassified, and not for
internet distribution.


1. (SBU) The Moscow Arbitration Court judge in the
PriceWaterhouseCoopers (PWC) Yukos case reftel has twice in
two days delayed a ruling on PWC's request for extension. At
a January 10 hearing, the judge postponed by one day a
decision on the extension, as well as a request for
arbitration by PWC. Today, January 11, the judge delayed
both decisions again, this time until January 17. The
upcoming hearing will examine charges levied December 11 by
the Federal Tax Service (FTS) that PWC falsified its 2002
audits of former oil giant Yukos.


3. (SBU) PWC contacts report that on January 10, the FTS
filed a second, related set of charges against PWC for
improperly issuing "clean" opinions on Yukos' financial
standing in 2003 and 2004. According to the tax firm, PWC
fulfilled its legal requirements as an auditor for each of
the tax years in question, including warning the client of
increasingly risky behavior. In its 2002 audit of Yukos, PWC
issued a "qualified opinion" to Yukos' management that raised
questions about apparent "close partner" relationships with
some of the firm's business partners.


4. (SBU) The 2003 audit reiterated PWC's qualified opinion,
upping the ante by noting that PWC retained "ongoing
concerns" about Yukos' business partner relationships. It
was explained to us that the phrase "ongoing concerns" in tax
accounting parlance reflects the auditor's serious doubts
regarding the audited firm's business practices. In its 2004
audit, PWC issued an "adverse opinion" (the most stringent
form of censure by an auditor) stating bluntly that Yukos'
financial statements did not accurately reflect the financial
state of the firm.


5. (SBU) According to PWC, FTS prosecutors are pressing for
the 2002 case to go to court quickly. PWC wants to see
evidence of "due process," including what should be a fairly
routine granting of a 30 day extension in the case.


6. (SBU) Comment. PWC representatives remain confident the
merits of their position will win the day. They are not
seeking USG assistance in either of the Yukos charges that
the FTS has filed and continue to be interested in
maintaining a low profile regarding their situation. That
the judge is defacto delaying consideration of the case,
while not actually ruling for an extension, is not a bad
first step. End Comment.
RUSSELL