Last Wednesday at the Granaries, the legendary Mark Knopfler gave a full two-hour concert accompanied by a band of eight gifted musicians much to the enjoyment of locals and tourists who flocked to the event. They shouted for more when the British guitarist, who has sold over 120 million albums, told them the show was coming to an end. During his time as lead singer and songwriter for Dire Straits, Mark Knopfler was awarded multiple Grammy awards and was famous for a number of songs such as Money for Nothing (among others, not forgetting the Sultans of Swing).
With the lyrics of this song in mind, which talks about squandering money on nothing, I reflected on the many accusations that our political leaders are hurling at each other, innuendoes over the oil scandal and the damning report on Enemalta (the monopoly electricity producer) recently issued by National Audit Office. This covers an investigation from 2008 to 2011 and focuses on the internal management procedures, particularly those employed for the procurement of oil and the use of derivatives to hedge for currency fluctuations of the dollar. This investigation did not come a moment too soon and some may well ask why it was not carried out earlier when remedial action could have been taken to stop the rot.
It comes as a surprise to consumers, who have been paying higher tariffs, that Enemalta’s debts has now reach €835 million and reported a loss of €70 million last year despite the government subsidy. Politicians can be excused for blaming the vagaries of oil prices as the main cause for such losses, but as the 400-page report reveals, there were many shortcomings on the part of the oil procurement committee which if noticed by the external auditors would have sent them back, reaching for the red ink when reporting their audit opinions for the period under review.
Energy Minister Konrad Mizzi said in Parliament that the PN government had also been prepared to raise tariffs after the March general election, as also evidenced in a KPMG report (local consultants to Enemalta). Going over the pages of Enemalta’s chequered history, one sees the announcement in February 2009 that the PN government wanted to raise the tariffs based on a local consultant’s report which aimed to recover all costs and a respectable return on capital employed. At that time consumers were prepared to grin and bear the sad news that the skyrocketing increase in tariffs was the only solution to make Enemalta viable in the medium term. So the battle cry was that consumers should pay for whatever electricity they consumed within the time frames established, failing which they would be subjected to interest payments and penalties.
The basic approach to put Enemalta on an even keel was based on the theory that no tariff in respect of a unit of energy sold would be lower than the respective price of oil required to produce the energy sold. Consultants also worked out the sums to ensure that there was no cross-subsidisation between tariff users and that income from each user group would be roughly in line with the percentage of generated units used by each user group. The tariffs would ensure that, as far as possible, there was no discrimination internally within each user group. Put in simple terms this was the panacea to turn Enemalta into a profitable and healthy organisation.
The news that a scathing report, produced this month by NAO on Enemalta’s fuel procurement committee between 2008 and mid-2011, highlighted deficiencies in management procedures by which the committee operated between 2008 and 2010, including the lack of a policy framework. It is heart breaking how the national energy producer fully supervised by political appointees of the highest business calibre failed to notice that prior to the formulation of a fuel procurement policy in January 2011, Enemalta’s fuel procurement function “was effectively operating in a policy vacuum”. This is one of the many negative observations found in the NAO but there were others such as poor internal quality controls, which went unnoticed by the external auditors even though the latter charged more than double the audit fee for extra services described as non audit work each year, as disclosed in the financial statements.
The NAO report discovered instances of poor record-keeping and corresponding fuel procurement meeting minutes lacked “the most rudimentary level of detail and bore no information relating to meeting discussions and decisions taken”. It continues to make sad reading when it refers to “besides being handwritten and mostly undecipherable, these minutes also lacked a basic record of committee members present”. In other words, this amounts to limitation of scope, which in simple terms means that NAO found it a problem to effectively audit the decision-making process. Energy Minister Konrad Mizzi noted that the NAO said he did not had access to all documents and could not verify all purchases, and if it resulted that more irregularities could have taken place, the ministry would call in the police. But PN apologists may retort that this is all a storm in a teacup since amends were reported by NAO when there was a switch of ministers in 2011.
Even so, during the years when consumers were carrying the burden of higher tariffs ostensibly due to the enormous rise in international price of oil, it was discovered that way back in 2009 when the tariffs were examined by the external consultants there had been hedging losses of $65 million, not to mention that the following year there were further losses of $4 million in view of the ‘very amateurish’ way things were done. No minister resigned and no official was disenfranchised for such appalling mistakes now made more complex due to the oil scandal that erupted following shocking revelations by a whistleblower. He was given a presidential pardon on condition that he revealed covert dealings in the procurement of oil from a well-known international trader.
His evidence under oath pointed to alleged bribery by the former chairman of Enemalta, an ex-chairman of the Malta Chamber of Commerce (among other directorships). It is well to note that responsibility for Enemalta was passed, following a Cabinet reshuffle, to the finance minister in early 2010. When asked for comments, he promptly acknowledged that the poor record-keeping was a serious failure but exculpated himself as this was not a minister’s responsibility but the management’s and the board of directors. He added that at the time, in 2010, no one knew about the oil scandal and it was his project to reform the oil procurement committee making it more transparent. But again, why have so many euros been paid over the years to external auditors, consultants, law firms, board directors and top officials who all professed that their motive was to guide the corporation to achieve viability and start repaying part of its accumulated €835 million debt?
Integrity is the hallmark of a consultancy profession and it must be jealousy guarded because if people lose sight of that simple assertion, an entire profession could collapse. Service providers and advisers must act with integrity and set the example for others to follow because prima facie it looks like it was all “money for nothing”.
There were no chicks for free (borrowing the lyrics by Mark Knopfler) since the tariffs were increased excessively in 2009 and since then industry had to find ways how to remain competitive under the strain of such a heavy overhead cost. Can we draw a parallel here with the sudden demise of Enron in 2001? Enron was a leading energy commodities and service company with revenue of US$101 billion in 2000 employing about 21,000 people. The demise of Enron, the energy producer in Texas, was significant as thousands of people lost their jobs and investments. As a result of its sensational failure in 2002, new laws for US publicly traded companies and auditing firms followed with the introduction of the Sarbanes-Oxley Act. Court proceedings that followed after it declared bankruptcy show that its financial statements were not prepared in accordance with GAAS and did not present Enron’s true financial position.
Andersen had provided Enron, through the years, with external and internal auditing, as well as vast consulting services charging much higher fees for consulting and non-audit fees than the amount charged for the assurance service. The deep involvement of the external auditors for listed companies and Public Interest Companies is now precluded by IFAC rules as these not allowed to engage their own auditors for non-audit work except in exceptional circumstances. In its defence, the Big 5 auditor Andersen, while conceding errors in judgment in its handling of the Enron account, has shielded its work, saying that Enron in some cases didn’t provide Andersen auditors all the information they needed.
To conclude the NAO investigation on Enemalta may have opened a Pandora’s box but one cannot but excuse the ex-finance minister that when he took over in 2010 he did his utmost to improve the system and that he was not aware at any time of the underlying oil scandal that erupted The saga may not end here for Enemalta which is dire straits but Mark Knopfler will continue to entertain us with his beautiful ballads and warn us that nothing comes free.
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The writer is a partner in PKF an audit and business advisory firm.