Recently, during one of the morning live broadcasts, MPs Owen Bonnici and Jason Azzopardi were discussing the Public Accounts Committee (PAC) grilling of the National Audit Office’s (NAO) report in connection with the Enemalta oil procurement scandal.
At one stage, they were debating whether the Auditor General’s report is tantamount to an audit or to an investigation. Both MPs belong to the legal profession. As discovered by empirical research carried out a few years ago by one of the accountancy department’s undergraduate students, it is evident that would-be accountants have direct exposure to legal issues whereas would-be lawyers do not have exposure to the world of accountancy. Though that discrepancy is now somewhat changing, it is evident from the debate that the two learned MPs got mixed up in what each of the terms represent in the context of the accountancy profession.
Why do we need an audit? Well the answer to that can best be explained in the context of listed companies. It is evident that a group of people called shareholders have to ensure that the board of directors entrusted with the day-to-day managing of the business have been good stewards. So, once a year, shareholders attending an annual general meeting (AGM) appoint an auditor or a firm of auditors to carry out an audit and report back to them the following year. Hence, the need for an audit increases as the gap between ownership and management widens.
What is the scope of an audit? The primary scope of an audit is to express an opinion on the truth and fairness of the financial statements submitted by the directors, they being solely responsible for their preparation. Given that the auditor is unable to carry out a 100 per cent check on all the transactions entered into by the business entity under review, no mention of the word ‘certify’ appears in an auditor’s report but rather ‘in our opinion…’. The discovery of fraud is a secondary objective. Indeed, if in the course of performing an audit, the auditor discovers elements of fraud, then there is evidently every duty to report it to shareholders.
So how does all this reflect on the current state of affairs with Enemalta? Well Enemalta was passed by an Act of Parliament and even though it is not a listed entity it is, definitely, a public interest entity. The government, which has full control, appoints a board of directors headed by a chairman to run the corporation on its behalf. They automatically become the stewards of government and are responsible for the preparation of the financial statements and for adopting all those accounting policies they deem fit.
The present government commissioned the Auditor General, who reports directly to Parliament, to carry out an audit on Enemalta’s procurement procedures, looking particularly into the procurement of oil. The realisation that no proper minutes were taken do point out that the persons responsible at the time were not good stewards. It is a great misfortune that such people have indeed betrayed public trust.
What would be interesting to examine is whether the external auditors, namely PWC, highlighted this issue in the management letter they are obliged to prepare every year after they conclude an audit. A management letter pinpoints the lack of or weak measures of internal control, which the board and management should install so as to minimise the risk of fraud. Indeed, any form of fraud will at some stage reflect on material misstatements in the annual report.
The Auditor General has carried out a specific exercise to look into oil procurement at Enemalta and, presumably, he did read through the external auditor’s management letter. Hopefully there was an indication to the effect that no proper internal controls existed at Enemalta. However, what would be more disturbing is the possible revelation that the internal auditor did not pick this up anywhere.
The ambit of the Auditor General is, therefore, to review whether the established procedures were followed or not. He could also highlight what improvements need to be implemented so that there is greater internal control, which leads to greater transparency in the procurement of oil. At no time is he investigating.
Similar to commercial audits, the Auditor General may place more emphasis on a particular area in the course of his business but not investigate. The term investigation is more applicable to the scenario where someone is identified as being guilty of wrongdoing and is effectively accused of that wrongdoing. Indeed, it is the competence of some other public officer, eg a police inspector from the economic crime unit, who would then be approached and, using the technicalities of forensic accounting, all evidence is gathered and presented in a court of law as part of the prosecution. If that results from the PAC proceedings, then it is absolutely important that proper documentation of the facts is gathered. Such documentation will, eventually, assist the law enforcement personnel in the course of their work within the courts of law as the accused is/are proved guilty or not.
As things stand, certain individuals have already been accused of having committed a financial crime in respect of the commissions scam related to the procurement of oil. In that context, proceedings are still sub judice and representatives from the economic crime unit have to ensure that the evidence gathered is sufficiently sound to pursue the case further. Possibly, the PAC proceedings can shed further light in that aspect. Definitely, the PAC proceedings are not an investigation but an elaborate study of the NAO’s report.
All in all, the conjectural behaviour by Maltese society at large reviewing the current proceedings at the PAC based on what is reported in the media does once again raise the issue that there exists an expectations gap in Malta. Unfortunately, there is this misconception that auditors are more of bloodhounds rather than watchdogs. Surely the local profession will have to engage in addressing this issue by, possibly, embarking on an educational campaign.
Ivan Grixti is a Labour Party candidate in the European Parliament elections