Ukraine just revoked its license to audit banks

By Geoffrey Smith
July 21, 2017

Accounting firm PwC has had a 2017 to forget—but it just got even worse.

First there was the embarrassing gaffe at this year’s Oscar’s ceremony, which led to the wrong winner being announced for the Best Picture award, the climax of the evening.

But in business and reputation terms, much worse has followed that. In March, it settled with the administrators of collapsed investment firm MF Global, which had been suing PwC for $3 billion in damages from what it claimed was poor accounting.

Then in June, the U.K.’s Financial Reporting Council started an investigation into its audits of telecom company’s BT plc’s operations in Italy. BT has taken a charge of nearly $700 million against the unit, which was raided in May by Italian police on suspicion of fraud.

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Now, it’s being tarred and feathered by Ukraine due to its auditing of the country’s second-largest bank, PrivatBank, which collapsed last year. The collapse necessitated a multi-billion dollar bailout, indirectly funded by the International Monetary Fund.

The National Bank of Ukraine, the country’s central bank, said late Thursday it had revoked the license of PwC to audit local banks, saying that it had verified “misrepresented financial information in the financial statements” of Privat.

PwC, which had audited the bank for over a decade, said it was “very disappointed” by the decision.

“We do not believe that the reasons given by the NBU justify its decision,” the firm said in an e-mailed statement, adding that it will “examine all options for reversing this decision.”

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The NBU’s action catches PwC squarely in the middle of a battle for control of the country and its economy, one that has been fought out between various governments and an often shadowy business elite over a quarter of a century.

Last month, the Ukrainian government had said it could need up to another $1.5 billion to fill the holes in Privat’s balance sheet, created by bad loans made to its owners and their associates. That’s on top of a $4.2 billion capital shortfall disclosed in the bank’s 2016 report.

Any losses that can’t be recovered from the bank’s borrowers will have to be covered, ultimately, out of a $17.5 billion IMF loan package, to be repaid, ultimately, by taxpayers.

Ukraine’s bailout was agreed to in haste after Russia’s invasion of Crimea and eastern Ukraine in 2014 finally exposed the fragility of an economy and financial system run through with corruption. Its currency, the hryvnia, has lost over two-thirds of its value against the dollar since 2014, further exacerbating poverty in what was already one of the poorest countries in Europe.

The IMF had insisted on an exhaustive clean-up of the banking system as a condition for the loan. Many had doubted it would enforce those conditions thoroughly, given that the U.S. and EU, whose governments effectively control IMF policy, wanted to stop the country being broken up by Vladimir Putin’s Russia. But the NBU took to the task with relish, closing over 80 institutions that—in reality—were little more than piggy-banks for their owners.

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The NBU taking Privat into special administration at the end of 2016 was widely seen as the strongest proof to date of its seriousness. Privat was not only the biggest locally-owned bank, with over 20% of all retail deposits in the country and processing more than 60% of its electronic transfers. It was also backed by the man widely seen as the most powerful of all the oligarchs in the anti-Russian west of the country, Ihor Kolomoysky.

Kolomoysky had been politically untouchable for years, and it was he who bankrolled the militias that stopped the advance of Russian-backed rebels through eastern Ukraine in 2014. But the IMF’s pressure meant that President Petro Poroshenko was forced to sacrifice a relationship that had previously worked to his advantage. That led to him firing Kolomoysky from his position as a regional governor and ejecting his managers from notionally state-controlled companies like pipeline operator Ukrtransnafta.

Kolomoysky and his partner Hennady Boholyubov have repeatedly denied the NBU’s claims. More recently, they have sued the government and the NBU in a Kiev court to have themselves reinstated as owners of the bank, claiming that the NBU’s seizure was unnecessary and unlawful. Their case was somewhat weakened when the government, in reaction, leaked a letter to Prime Minister Volodymyr Groysman, at the end of 2016, admitting that the bank could not carry on operating without state support, urging the government to take it over and promising not to interfere with its future management.

Kateryna Rozhkova, the NBU deputy governor who has presided over the crackdown, isn’t letting things rest yet. In a statement on the Privat case e-mailed to Fortune, she said that: “There will also be a thorough investigation whether criminal offenses have been committed. If they have, those responsible must be brought to justice.”

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