Cash Starved Audit Office Ploughs on in Rotten Fields

The Auditor General’s Office is a critical organ in the national fight against corruption. A well funded and active audit office has the capacity to proactively identify state bodies where illegal activities are taking place. It can also warn government where there is a significant risk illegal activities are taking place due to non compliance with financial procedures and laws.

In its last published Annual Report the Auditor General warned his agency was being starved of essential fiscal support, which is curtailing his office’s ability to serve its essential role in the democratic system, where checks and balances are essential to good governance.

The Auditor General observes: ‘Despite my budget submission of K32 million, the National Parliament appropriated a total of K17.6 million in 2018 to the AGO through the 2018 Budget Process. This was inadequate to fund my operational requirements considering the increase in audit portfolios. As a result, the conduct of audits was mainly restricted to government entities and agencies based in the National Capital; and the audits in other provinces could not be carried out because of the limited financial resources’.

In other words a large part of the nation’s public agencies are entirely off the radar. While we do not know exactly what is happening in these government bodies that are off the accountability grid, we can surmise based off those government bodies which the Audit Office is able to inspect that things are far from good (and most likely all the worse, due to their current immunity from audit).

The Auditor General’s Office aims to issue four volumes annually, looking at different parts of the public sector. Most of these volumes are behind schedule, at least in part due to the significant challenges faced in obtaining even basic documentation from public agencies, and in part due to the above mentioned financial constraints.

Last year the Audit Office released its 2019 report for public bodies, nationally owned companies, and other companies with government shareholdings. It is the most up to date report of the four volumes meant to be issued annually.

While for the most part, the Auditor General’s Office faced the litany of usual barriers, no documentation, partial documentation, or inaccurate documentation, it was possible for it to give some insight into the state of public bodies and nationally owned companies.

Lets take a look, in no particular order.

The National Roads Authority’s audit has some commentary of note.

The Auditor General observes ‘my review of the Staff Rental Accommodation revealed certain instances where rentals paid to personal companies or companies owned by spouses and related parties of the Authority’s Staff’. The audit puts the value of this rental at K1 million.

Besides being a clear red flag for potential corruption, the auditor adds ‘contract officers are deemed to be evading tax despite my recommendations to abstain from this practice in my prior year audits’. In other words rental being paid to personal companies, spouses or other family members, by their public employer is a benefit of employment – even if improperly procured –  which ought to be the subject of income tax.

‘As per the Income Tax Act 1959, this practice may be considered as tax evasion’, the Auditor General notes.

Then there is a rather unusual case. It centres on an ‘expatriate’ employed by the Accident Investigation Commission as an Aircraft Operations Investigation Manager, for an annual salary of K1,250,000. According to the Auditor General the Australian High Commission had agreed to defray the expatriate’s salary: ‘Per the standing agreement between AHC [Australian High Commission] and PNGAIC [PNG Accident Investigation Commission], salary of the expatriate employee was to be shared in the ratio 4:1 (80% by AHC and 20% by PNGAIC) for the first year, 7:3 (70% by AHC and 30% by PNGAIC) for the second year and 3:2 (60% by AHC and 40% by PNGAIC) for the third year’.

According to the Auditor General in year one ‘100% of the expatriate’s salary was paid for by the PNGAIC which was beyond its budget and commitment. Subsequently, K1,040,863 was invoiced to AHC being 80% share of the expatriate’s total salary costs met by the PNGAIC in 2017. However, AHC refunded only K751,828 which resulted in underpayment of K289,035’.

The Auditor also noted that ‘the expatriate was entitled to rent-free accommodation during his engagement per the contract. However, in addition to the rent free accommodation he was also paid K1,500 every fortnight totalling K78,000 in 2017 and 2018’. This raised the concern of potential double dipping.

Moving on to Kumul Consolidated Holdings which manages the government’s non-petroleum and non-mining assets. According to the Auditor General ‘on 26 July 2016, the Board of Kumul Consolidated Holdings approved the transfer of the Company’s investment property at a book value of K81 million in exchange for shares in Pacific International Hospital (PIH) without any proper due diligence’.

According to the audit ‘the share investment in PIH was then recorded at K9.5 million in the Company’s books and statement of financial position as at 31 December 2016. As a result, a loss of K71.6 million was recorded for the financial year ended 31 December 2016’.

In short it is asserted that Kumul Consolidated gave away a property to PIH worth near k100 million for shares initially pegged at 1/9 of the value of the property.

Turning now to the vexed question of travel budgets. The Civil Aviation Authority, according to the Auditor, has been misusing its travel budgets for political rather than agency purposes. The audit report notes:

A total of K531,309 was spent under Minister’s travel allowances account during the year. The payments from this account were mostly related to electoral business and not related to CASA’s normal operational business. I advised that costs incurred by the Minister for Non CASA sanctioned business related activities imposed additional financial burden on CASA’s resources. Therefore, I recommended that the Minister’s Office be notified of the stance going forward and that no further unsanctioned Non CASA Business travel or associated costs be allowed to be met by CASA.

Expense irregularities were also uncovered at the National Aids Council Secretariat:

Physical inspections conducted on vehicles owned by the Secretariat revealed that the vehicles were not registered with “Z” plates, breaching the Motor Traffic Regulation 1967 Chapter 243 section 19A(e)(i) … My review of the personnel and motor vehicle benefits of the Secretariat revealed breakdowns and malpractices. We noted that five (5) senior officers of the Secretariat were each provided vehicles for twenty-four (24) hours use with fuel. In addition, these officers were also paid vehicle allowances. This practice is a form of double dipping of benefits by the employees and should be discontinued.

Similarly, at the National Maritime Safety Authority, the Auditor General discovered some premium automobile purchasing:

During my review, I noted that the Authority purchased two executive support vehicles for the Ministry of Transport and Infrastructure totalling K410,585. The vehicles had been disclosed in the Fixed Assets Register of the Authority, however, I was unable to verify the existence and legal ownership of the vehicles as I was not provided vehicle registration details and had no access for physical inspection. As a result, I was unable to verify the existence and legal ownership of the two (2) vehicles.

Shifting now to some big ticket items. The Auditor General also raised concerns over contract management at the PNG Ports Corporation over the design, construction and commercialisation of the Western Side of the Lae Tidal Basin into Industrial Real Estate.

My review of the Company’s payments during the year revealed an invoice valued at K58,157,498 and paid to a contractor without any support of proper documentary evidences of the work done. This amount was a second payment whilst first payment of K75 million had been made in 2017. As a result, cumulative payments made to that particular contractor up to 31 December 2018 totalled K133.3 million

The audit also raised concerns over subsidiary agreements made by the contractor:

The Company engaged various security companies during the year under review. My review of the payments made to the security companies revealed that amounts of K3,523,376 and K1,945,511 were paid to Ranger Protection Limited and Wasman Security Services Limited respectively. However, I was not provided with the contract agreements and all relevant supporting documentations to validate the payments made

One of the worst performers was the Mineral Resource Development Company which was noted in a previous PNGi article. Table 1 summarises some of the key concerns raised by the Auditor General’s Office.

Body Amount Issue
Mineral Resources Development Company K7.42 million K7.42 million (Group and Company) relates to investment in Pacific International Hospital. The investment has been classified under assets available for sale and in accordance with the Company’s accounting policy, this should be carried at fair value, however, a valuation of the investment at 31 December 2016 was not performed and the investment has been recorded at cost in the financial statements. As a result, I was unable to determine whether adjustments to the financial statements might be necessary in respect of fair value gain or loss on investment in PIH for the year reported in the statements of comprehensive income and the investment balance reported in the financial position.
Mineral Resource Development Company  K1.83 million During my review, I noted that the directors’ fees has increased by K1,056,334 (136%) to K1,833,840 from K777,505 in 2015. I further noted that the Company discontinue to disclose the total stipends paid to its Directors and the remuneration and allowances paid to the management staff whose total salary exceeds K100,000 per annum as required under Section 212 (f) and (g) of the Companies Act. However, I was not provided with the details of stipends paid to the seven (7) Non-Executive directors of which two (2) were Government Departmental Heads or the shareholders resolution made available for my determination at the time of this report. As a result, I was unable to verify and conclude on the appropriateness and validity of the stipends paid and whether the Company has complied with the Companies Act.
 Mineral Resource Development Company K2.2 million In 2016, the Company’s business travel expense amounted to K2,217,210 compared to K303,652 in 2015, a substantial increase of K1,913,557. During my review, I was not provided with the listing of all the overseas travels to determine the validity and purpose.
Mineral Resource Development Company K1.9 million In 2016, K1,965,000 was paid as insurance premium by the Company. That was K1,700,000 more than the insurance premium paid for 2015 at a value of K265,000.
Mineral Resource Development Company K19.3 million Note 12(c)(ii) to the financial statements disclosed investments made by the Mineral Resources Development Company in Taumeasina Resort (Samoa) for 25% share worth K19.347 million in 2016. The current value of this investment was nil after loss on acquisition of K1.460 million, impairment loss of K15.488 million and loss for the current year amounting to K2.399 million were considered. In summary, the Company has made two overseas investments in the past few years and most of these investments so far has not produced any benefit to the Company or State but incurring losses due to impairments of assets caused by the reduction in the value of the investment. This is a concern the management and Board of Directors has to review and act in the best interest of the stakeholder

The enumerated examples above are only a small window into the issues identified in the audit.

In section E.5 the Auditor General provides a snapshot of the wider range of headlines.

Despite the gravity of these findings, and the serious corruption risks they imply, it should not be anticipated the Auditor General’s Office will receive a wealth of resources any time soon. Turkey’s don’t vote for Christmas, as the saying goes.