KIEV, July 20, 2017

Ukraine's central bank said on Thursday it had withdrawn the right to formally audit the country's banks from the Ukrainian unit of the international accounting firm PwC.

PwC Ukraine had audited the largest Ukrainian bank, PrivatBank, which Ukraine took over in December after risky lending practices left it with a capital shortfall of more than $5.5 billion.

PwC said it would examine all options for reversing the central bank's decision, which it said was unjustified.

PrivatBank's nationalisation was the culmination of a swingeing clean-up of Ukraine's financial system, backed by the International Monetary Fund. Dozens of lenders have closed since a pro-Western government took office in 2014.

"The audit report issued by PricewaterhouseCoopers Audit LLC failed to highlight the credit risk exposure faced by PrivatBank, which led to the bank being declared insolvent and nationalised, with substantial recapitalisation costs borne by the state," the central bank said in a statement.

PwC Ukraine said in a statement: "We do not believe that the reasons given by the (central bank) justify its decision."

"The 2016 financial statements also show that the events which took place after we signed the 2015 accounts may have had a significant impact on PrivatBank’s financial status," it said.

PwC's local unit can apply for the right to once again formally audit banks after a period of three years, a spokeswoman for the central bank said.

In the meantime, the subsidiary can perform auditing services but lenders can only submit financial reports that have been audited by firms on the central bank's register, she said.

The central bank estimated that 97 percent of PrivatBank's corporate loans had gone to companies linked to its shareholders, who include the tycoon Ihor Kolomoisky, Ukraine's second-richest man.

Ukraine earlier in July started legal action to recover the loans made by PrivatBank, while Ukraine's National Anti-Corruption Bureau has also launched a probe.

PrivatBank's nationalisation has so far cost taxpayers $4.3 billion, but an Ernst and Young audit of the lender's 2016 annual report showed additional funds worth $1.5 billion were needed to meet capital adequacy requirements.

That would be a further burden on Ukraine's already strained public finances and would mean more has been spent on recapitalising PrivatBank since December than the annual defence budget amid a long-running conflict with Russia-backed rebels.

[Reuters]