Columns

Petrojam watershed

Bruce
Golding.

Sunday, December 09, 2018

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The revelations by the auditor general of the sorry state of affairs at Petrojam are a manifestation of a chronic failure in management, board direction and ministerial oversight. The crucial question is whether it is a systemic failure that may be plaguing other government agencies on which the searchlight has not yet turned. Our means of knowing that are very limited.

We are fortunate to have had over many years highly competent, erudite and integrity-driven individuals in the position of auditor general. Mrs Pamela Monroe Ellis is part of that tradition. But the auditor general is an investigator, not a watchman. She cannot train her eyes on every government department and agency at the same time. She has an annual budget of around $700 million and 211 assigned posts — far less than either of the two major accounting firms in Jamaica. Almost 50 of those posts remain vacant because of her inability to attract qualified persons at the salaries offered.

 

Auditor general's

Each year, the Auditor General's Department is only able to examine less that 10 per cent of Government's financial operations. The departments and agencies selected for examination may be chosen because of the nature of their functions. They may be chosen randomly or based on the number of years that may have elapsed since they were last examined. Their selection may also be driven by intelligence gathered from any of a variety of sources which suggests that an examination should be undertaken. These sources include whistleblowers, media reports, deliberations of parliamentary oversight committees, etc.

In the Petrojam case, the auditor general states explicitly that the audit was carried out because of “public concerns regarding mismanagement at Petrojam”. The question we are then forced to ask is: What may well be happening in the other 90-plus per cent of Government's operations?

Government is big business. The annual budget for the central government is over $600 billion. The budget for other public bodies such as Petrojam that are outside of the national budget is approximately $300 billion. They control vast assets of more than $1 trillion and employ almost 14,000 people. They are required to provide financial statements certified by independent external auditors and included in their annual reports to the relevant minister which must be laid in Parliament. According to a report from the Cabinet Office, as at March 2018, several of them had not submitted annual reports for three years or more, so we have nothing before us to even query.

 

Role of independent

These public bodies were not always subject to inspection by the auditor general. It was only in 1992 after similar scandals had erupted that the law was amended to empower the auditor general to examine their accounts and operations. That, itself, raises an important issue. These public bodies spend an enormous amount of money to engage independent auditing firms. For some agencies, such as the UDC, it can be in excess of $20 million each year.

In the case of Petrojam, it is more than $10 million. Yet, hardly — if ever — do these audits reveal the kind of malfeasance that has been found at Petrojam. It is the auditor general who, over the years, has uncovered instances of irregularities and corruption taking place in some of these agencies. The litany of scandals is compelling. The question we are entitled to ask is: What then is the purpose of these annual audits conducted by independent auditors and are we getting value for money?

Professional auditors will argue that fraud detection is not their responsibility and that their job is simply to express an opinion, backed up by random tests, on the accuracy of the financial statements that are presented to them by the management. They will point out that it is the responsibility of the management and the board to establish and monitor the internal control systems to detect and prevent fraud and other irregularities.

But the independent auditor cannot escape responsibility for evaluating those internal control systems, identifying weaknesses and loopholes and hoisting a red flag when evidence is found that they are being abused. In the most recently published audit report for Petrojam (2015/2016), the auditors state that the procedures adopted included “the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error”.

However, they go on to absolve themselves by declaring that “in making those risk assessments, the auditor considers internal control relevant to the entity's preparation of financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances BUT NOT FOR THE PURPOSE OF EXPRESSING AN OPINION ON THE EFFECTIVENESS OF THE ENTITY'S INTERNAL CONTROL” (my emphasis). Of what real value is such an audit for which so much is paid? I cannot recall an instance in which any of these independent audit reports has hoisted a red flag or even suggested that a forensic audit needs to be carried out.

 

Redefining the scope of external audits

The Government must engage discussions with the independent audit firms to review the design of these audits. It should not accept the argument that is likely to be offered that they are conducted in accordance with international accounting standards.

The auditor general went into Petrojam “in response to public concerns about allegations of malpractice”. These concerns had to do with questionable expenditures and hiring practices. Yet her investigation was agile enough to pinpoint unaccountable oil losses of more than $5 billion, among other irregularities that have been taking place.

There is an ongoing debate globally as to whether the scope of independent financial audits should be broadened to include detection of fraud and to have the instruments to do so. The Government cannot afford to await closure of that debate that has been going on for several decades. The audits of Enron Corporation in the United States were ostensibly in keeping with international practices when it became embroiled in a major accounting scandal in 2001 which led to the Sarbanes–Oxley Act that set new standards and requirements for corporate accounting and reporting.

The extent to which the problems at Petrojam may be systemic brings into sharp focus the culture of management and oversight of public entities. Culture alone cannot be relied on to do the job. It has to be underpinned by rules designed to secure efficiency and accountability. That is the easy part. We are not short of rules.

The Public Bodies Management and Accountability Act was enacted in 2001. The Corporate Governance Framework for Public Bodies was established in 2011. New guidelines for the nomination, selection and appointment of board members to public bodies were announced earlier this year. Upholding and enforcing these rules are where we so often fall down and, apart from throwing the book at the persons responsible for the Petrojam débâcle, that ought to be the focus of the Government's response to this latest scandal.

 

Role of internal auditor and audit committee

The Petrojam issue raises another important question: Where were its internal auditors and the audit committee that it is required by law to have in place? Both the independent external auditors and the auditor general are, in a sense, pathologists. They come in after the horse has bolted. The internal auditors are in-house, real-time functionaries who are in a position to detect breaches and irregularities as they are occurring. The audit committee is supposed to oversee the work of the internal auditors, receive regular reports and communicate its concerns, if any, to the board.

We have not paid sufficient attention to these internal mechanisms. In practice, the internal auditors are largely under the control of the management whose activities they are required to review and report on, inevitably compromising their effectiveness. In a recent address I gave at a conference of the Audit Commission, I suggested that a critical decision needs to be made as to whether internal audit is a management tool or an oversight function as this will determine its level of independence and reporting relationships.

In tackling the systemic issues, critical attention must be paid to the means of enforcing the rules and guidelines with appropriate sanctions for non-compliance. The scope of independent external audits must be reconfigured to identify internal control weaknesses and pinpoint areas that require further or forensic investigation.

The Auditor General's Department must be strengthened so that it can conduct more investigative audits. Serious consideration should be given to offering financial rewards to whistleblowers. In the United States, for example, whistleblowers who report tax fraud are paid between 15 and 30 per cent of the unpaid taxes, fines and interest collected. Canada has similar arrangements.

The prime minister has described the Petrojam report as a “watershed moment for transparency and accountability in Jamaica”. It can, indeed, lead to a culture change in how public bodies operate, are managed and held accountable, but the response must be firm, carefully planned and resolutely executed.

 

— Bruce Golding is a former Prime Minister of Jamaica

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