8Ed.sol8.08 - CASE 8.8 OAO GAZPROM Synopsis In 2001 (PwC...

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CASE 8.8 OAO GAZPROM Synopsis In 2001, PricewaterhouseCoopers (PwC) became entangled in what business journalists referred to as “Russia’s Enron.” One of PwC’s largest audit clients at the time was OAO Gazprom, the largest publicly owned company in Russia and the company that had long dominated that country’s natural gas industry. Over the past several years, critics had charged top Gazprom officials with engaging in a wide range of “asset-stripping” practices. Allegedly, these executives funneled billions of dollars of Gazprom’s assets into a network of privately owned companies that they and their family members controlled. Gazprom became an audit client of PwC in 1995. In 2001, Gazprom’s minority shareholders, who were predominantly U.S. investors, sued PwC for deliberate malpractice. The Gazprom lawsuits—multiple lawsuits were actually filed against PwC—were noteworthy because they were the first such lawsuits filed against a major international accounting firm in Russia. The principal allegation in these lawsuits was that PwC failed to take any measures to encourage Gazprom’s management to disclose in the company’s annual financial reports the true nature of its complex and clandestine related party transactions. This case examines the controversy surrounding PwC and its Gazprom audits. Also discussed in the case are several international accounting, auditing, and financial reporting issues that are central to the PwC-Gazprom debacle.
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81 Case 8.8 OAO Gazprom OAO Gazprom—Key Facts 1. Gazprom is a huge Russian company that dominates that nation’s important natural gas industry. 2. Similar to most major Russian companies, Gazprom was a product of Russia’s “privatization programme” of the early 1990s that was intended to convert the country from a communistic to a capitalistic economic system. 3. PwC was selected as Gazprom’s audit firm in 1995 at the first meeting of the company’s stockholders. 4. Viktor Chernomyrdin, who became the Russian prime minister in 1992, and his close friend and protégé, Rem Vyakhirev, are two former Gazprom executives who had a significant impact on the company and its corporate culture over the past few decades. 5. The Russian press accused Chernomyrdin, Vyakhirev, and their colleagues of diverting a huge amount of Gazprom’s assets into related party entities that they or their family members controlled. 6. A reform movement begun by new Russian president Vladimir Putin shortly after he took office in 2000 forced large numbers of so-called “red directors” to resign their positions with large Russian companies. 7. To improve the credibility of Russian corporate financial statements, Putin and other reformers took measures to strengthen Russia’s financial reporting system, including the adoption of Western-style accounting principles and auditing practices. 8.
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8Ed.sol8.08 - CASE 8.8 OAO GAZPROM Synopsis In 2001 (PwC...

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