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