JSC GAZPROM ENXHI NALLBANI
SABINA KALDYBEKOVA
Overview of Russia
In 1991 Soviet Union collapsed and it started a massive reorganization of Russia’s political, social
and economic infrastructure
During 1992-1999 the Russian government implemented a “privatization programme” (75% of
Russian companies were handed over to private sector)
This was quickly converting Russia from a controlled economy to a free market economy
The flaws
• Were allowed thousands of the individuals ( Red
Directors) who had been part of the Communist
Party and overseen the formerly state-owned
businesses to acquire top management positions
in the newly organized companies
• The old mentality “cling to the view that the
enterprise is an engine to generate wealth for
themselves”
• The Russian accounting standards were poorly
suited to market economics
• The legal system was undeveloped, leaving room
for manipulation and theft
Introduction
• Gazprom is a huge Russian company
operating in the gas industry
• It was the prime example of the “rogue
capitalism in Russia
• It was created by officials of Soviet
Union to control the country’s natural
gas industry
• 15% of Gazprom stocks was given to
employees
• 28% of stocks—owned by customers
• 40% ownership interest was retained
by federal government
• The rest of stocks was sold to foreign
investors
During 1990’s GAZPROM was the largest and the most
important Russian company
Gazprom accounted for
• nearly 10% of Russia’s gross domestic product
• 20% of its exports and tax revenues
• Had 400’000 employees
• Provided directly or indirectly a livelihood for more than
6mln Russians
• Supplied more than one-half of natural gas used in
Europe
• Controlled one-third of the world ‘s natural gas reserves
In 1995- Gazprom’s initial stockholders’
meeting was held
PwC (a British accounting and audit firm) was selected by The
Board of Directors as the company’s audit firm
Rem Vyakhirev was Gazprom’s top executive
and the closest partner of Victor
Chernomyrdin
Victor Chernomyrdin was the chief executive of
Gazprom company in the first era and then he was
elected as the Prime Minister of Russia
After being resigned by V.V.Putin, in 2001 Forbes reported that the two former Russian peasants were among the 500 richest individuals in
the world. Forbes pegged Vyakhirev’s personal wealth at $1.5 billion, while Chernomyrdin’s more modest fortune was estimated at $1.1
billion.
Wildest Dream or Worst Nightmare?
1. Gazprom sold a large volume of natural gas to Itera for $2 per cubic meter, which
Itera then resold to European customers for more than $40 per cubic meter
2. Gazprom sold its 32 percent ownership interest in a gas-producing subsidiary, Purgas,
to Itera for $1,200, while the market price was $400 million
3. Itera became the world’s seventh largest natural gas company in a span of only seven
years during the 1990s.
• Each of related company’s members had family ties with the executives of Gazprom.
• In 2001, Boris Fedorov, a former head of the Ministry of Finance, was appointed to
Board of Directors and in his 5-week investigation he uncovered evidence that
Gazprom assets had been systematically transferred to the managers.
• loss of $2 billion to $3 billion each year due to “corruption, fraud and simple theft.
Investigations
William Browder, Hermitage’s chairman, a former partner in the Wall Street, and a minority
interest stakeholder, investigated that the company was “giving away” its natural gas reserves
each year to Itera and other privately owned companies controlled by Gazprom executives.
After the “special audit”
PwC did not identify any “deals in which Itera benefited at the expense of Gazprom
The reports indicated that PwC’s investigation had been severely hamstrung by a lack of cooperation
on the part of both Itera and Gazprom officials
Itera’s management had refused to provide documents requested by PwC auditors, while 19
executives and former executives of Gazprom, including Rem Vyakhirev, had refused to answer
questions posed to them by the auditors
William Browder suggested that in the future the company report in its income statements, “Profit
after Stealing and Subsidies” and “Profit If Stealing and Subsidies Are Eliminated”
1. List the challenges that a major accounting firm faces when it establishes its first practice
office in a foreign country. Identify the key factors that accounting firms should consider when
deciding whether to establish a practice office in a new market.
• Political stability, legal and government
regulations
• Accounting standards and practices applied
in the country, its tax guidelines and
employment law
Political
• Tax rates, interest and exchange rates,
economic growth and unemployment rate
• Future costs of the company (e.g. research
and training related costs)
Economic
• Ethical standards or applied normal
behavior
• Cultural limitations
Social or
cultural
• Significant investment in travel costs
• Time zone differences
Distance
and Time
• High competition
• Local vs. international audit companies
Reliable
Partners or
Clients
Rejection
of an audit
by an
auditor.
Objectivity
Violation
of ethical
obligations
Integrity
Non-
compliance
with an
American
code of ethics
Break of
American
law
2. Suppose that a U.S.-based accounting firm has a major audit client in a foreign country that
routinely engages in business practices that are considered legal in that country but that would
qualify as both illegal and unethical in the United States. What specific moral or ethical
obligations, if any, would these circumstances impose on this accounting firm? Explain.
2. An auditor:
1. shall not knowingly be a party to
any illegal activity, or engage in acts
that are discreditable to the
profession of internal auditing or to
the organization
2. Shall respect and contribute to the
legitimate and ethical objectives of
the organization.
3. An auditor:
1. Shall not accept anything that may
impair or be presumed to impair their
professional judgment
2. Shall disclose all material facts known
to them that, if not disclosed, may
distort the reporting of activities
under review.
1. A US based accounting firm has to
be firstly in compliance with its general
American Code of ethics, where legal
and ethical requirements have to be
met by a company even if it operates
overseas.
Acceptance of a client operating
illegally and unethically basically
means to break the law.
Minority investor is an equity holder of a firm who does not have the voting control of the firm.
Many transactions with related parties were not disclosed and there was a lack of transparency of PWC to the minority investors
(violation of AU316.40)
Credibility
Disclosure
Independence
Related transactions with Itera and other companies.
3. What responsibilities, if any, do you believe PwC had to Gazprom’s minority investors?
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4. In your opinion, should PwC have agreed to perform the “special audit” of the Itera
transactions? Defend your answer. In your answer, identify the specific ethical issues or
challenges that the engagement posed for PwC.
In our opinion, PwC should not have
agreed to perform the audit of Itera’s
transactions. It was against their
accounting ethics because they were
the firm auditing GazProm for a long
time before all the Itera’s transactions
got disguised. This would be for Pwc like
they were auditing itself so it wasn’t
credible at all, and it is a threat of selfreview.
The main problem is also that
PwC should have disclosed Itera as a
related party in the footnotes to the
company’s financial statements, so it
leads that the audit wasn't done
properly with due care. Basically, the
company lost its integrity, objectivity
and independence
self-review
self-independence
objectivity
credibility lost
familiarity
PwC
Threats—
Auditing Interpretations of Section AU sec. 334, Related Parties; and AU sec. 9334, Related Parties
5. In the United States, what responsibility do auditors have to determine whether or not
“related parties” exist for a given audit client? Explain.
•to adopt a questioning
approach
•Investigation with a
certain standard of care.
• To disclose related party
relationships, transactions
or balances!
•To collect evidence and
prepare auditor opinion
•To identify, assess and respond
to the risks of material
misstatement
Audit
performance Disclosure
Professional
skepticism
Due
diligence
6 Explain how the British “true and fair” audit approach or strategy differs from the audit
philosophy applied in the United States. In your opinion, which of the two audit approaches is
better or, at least, more defensible?
• A part of English law and central to accounting and auditing practice in the UK, the European Union,
Singapore, Australia, and New Zealand
• Closely identified with judgement
• True -- financial statements are correct and have been prepared according to IFRS and they do not contain
any material misstatements that may mislead the users.
• Fairness implies that the financial statements present the information faithfully without any element of
bias and they reflect the economic substance
• Law requires the auditors to expressly state in their audit report whether in their opinion the financial
statements present a true and fair view.
‘true and fair’ concept
• A financial concept in conformity with GAAP, United States
• Tends to be more rule based
• The auditor sees financial statements as fairly presented only if they are in accordance with GAAP
• a very broad definition of fairness (relative and objective viewpoint)
• Relative viewpoints recognizes truth in relation to individual circumstances, viewpoints or frameworks.
• Objective viewpoints focuses on discovering of needed facts, an impossibility in the socially constructed
sciences of accounting.
• The auditor should look to the requirements of the Securities and Exchange Commission for the company
under audit with respect to the accounting principles applicable to that company.
‘present fairly in conformity with generally accepted accounting principles GAAP’
7. In recent years, there has been an ongoing debate in the accounting profession focusing on the quality of the accounting
standards issued by the International Accounting Standards Board versus those issued by the Financial Accounting
Standards Board. Research and briefly explain the key philosophical difference between those two important rule-making
bodies that significantly affects the nature of the accounting standards promulgated by each.
GOALS of FASB and IASB is the highest relevance, representational fairthfulness, transparency and
comparability of accounting information.
1. IASB is funded by market participants and
regulatory authorities
2. Aim is to establish a common global
language for company accounting affairs
3. principles-based
4. objective-oriented
5.Emphasis on professional judgements
6. LIFO is not allowed method for inventory
measurement
7. IFRS does not consider comprehensive
income to be a major element of
performance and does not include it.
8. Intangible assets are recognized only if the
asset will have a future economic benefit and
has been measured reliably.
9.A simplified version of GAAP (3000 pages)
IASB-
IFRS
1. FASB is funded from fees paid by issuers
2. rules-based
3.procedure-oriented
4. Emphasis on best practise
5. Both, LIFO and FIFO are practices for
inventories
6. Requires financial statements to include a
statement of comprehensive income.
7. Acquired intangible assets under U.S. GAAP
are recognized at fair value
8. Too complicated and expensive for
application (app 25000pages)
FASB-
GAAP
Reference
1. Case study Gazprom
2. Public Company Accounting Oversight Board, AS 2815: The Meaning of "Present Fairly in Conformity
with Generally Accepted Accounting Principles“. Available on:
https://pcaobus.org/Standards/Auditing/Pages/AS2815.aspx
3. The Institute of Auditors, Code of Ethics. Available on: https://na.theiia.org/standards-
guidance/mandatory-guidance/Pages/Code-of-Ethics.aspx