Ukraine’s central bank took away big-four auditor PwC’s right to audit banks late yesterday, citing the firm’s failure to record a $5.6 billion hole in nationalized bank PrivatBank’s balance sheet.
PwC had been PrivatBank’s auditor since the mid-1990s, but has recently come under attack from National Bank of Ukraine (NBU) officials for allegedly misrepresenting the value of collateral for the bank’s loan portfolio.
The Ukrainian government nationalized the lender in December 2016 amid pressure from the International Monetary Fund, saying that systemic insider lending at the bank had turned it into a systemic risk to the country’s financial system.
PwC denied any wrongdoing in a statement.
“We do not believe that the reasons given by the NBU justify its decision,” it said, adding that it would “examine all options” to reverse the decision while a spokeswoman declined to say whether the auditor would file a formal appeal.
Specifically, the NBU accused PwC of failing to properly verify the bank’s loan portfolio. Former owners Igor Kolomoisky and Gennadiy Bogolyubov allegedly loaned billions of dollars from the bank to companies affiliated with themselves, without proper collateral. The two oligarchs deny the allegations.
“The audit report issued by PricewaterhouseCoopers Audit LLC failed to highlight the credit risk exposure faced by PRIVATBANK PJSC, which led to the bank being declared insolvent and nationalized, with substantial recapitalization costs borne by the state,” the central bank wrote in a press release.
The NBU does not mention that it knew the extent of the supposed problems at PrivatBank for at least one year before it was nationalized, or that rumors of insider loan rates at the bank had been on the market for years before the government takeover.
A forensic audit to investigate alleged fraud at the bank is underway, with the report expected to be completed by September.
EY completed an audit of the bank last month, showing an Hr 176 billion ($6.7 billion) loss immediately after the bank was nationalized. Its report only identified Hr 9.9 billion ($380 million) in insider loans at the bank, as NBU officials scrambled to argue that the forensic audit would identify further related party lending.
Big three
The NBU’s decision leaves Ukraine with three main auditors.
PwC restructured its Ukraine office in March, removing its former managing partner Oleg Tymkiv by “promoting” him to a position that does not directly involve managing Ukrainian clients.
For companies that were using PwC’s services, the decision presents an interesting problem.
“The NBU’s move casts a shadow on other firms that have been audited by PwC, including Oschadbank, Ukreximbank, DTEK and Metinvest,” wrote Concorde Capital analyst Oleksandr Paraschiy in a research note. “Moreover, the banks will have to change their auditor (according to information from the NBU’s deputy head, Ukreximbank already hired another auditing firm for 2017).”
The move to remove PwC’s auditing license comes in the wake of a July 1 deadline that saw PrivatBank’s former owners fail to restructure their purported debts before the bank.
That missed deadline led to speculation of a confrontation between PrivatBank’s oligarch former owners and the government, with the Ministry of Finance issuing a statement saying that “there has been no significant progress made in restructuring.”
“Instead, we are observing a coordinated legal and media campaign against the interests of the state,” the ministry wrote in a July 3 press release.
Since nationalization, the government has pumped Hr 155.3 billion ($5.9 billion) into the bank. The Finance Ministry’s long-term plan is to stabilize the bank and then sell it to a private investor.
