Report of the Auditor General 2009 Part IV on the Accounts of Public Authorities and Statutory Bodies and Government Owned Companies

Mentions of people and company names in this document

The information these results are derived from was last updated in June 2022

Name References in this document Mentions in other documents

It is not suggested or implied that simply because a person, company or other entity is mentioned in the documents in the database that they have broken the law or otherwise acted improperly. Read our full disclaimer

  • About

    Report on Public Bodies and their subsidiaries, National Government owned Companies and National Government Shareholdings in Other Companies.

Document content

  • Report of the Auditor-General – 2009

    on the Accounts of Public Authorities and Statutory Bodies established under the Act of Parliament and Government Owned Companies established under the Companies Act

    Part IV

    . Public Bodies and their Subsidiaries

    . National Government Owned Companies

    . National Government Shareholdings in Other Companies

    10 October, 2010

    The Honourable Jeffery Nape, MP The Speaker of National Parliament Parliament House WAIGANI National Capital District

    Dear Sir,

    In accordance with the provisions of Section 214 of the Constitution of the Independent State of Papua New Guinea, I forward herewith a copy of my report signed on 10 October, 2010 upon the inspection and audit of the financial statements of the Public Bodies and their subsidiaries and National Government owned companies for tabling in the National Parliament. This Report (Part IV) also contains information on companies in which the Government does not hold majority interest. Section D of this Part of the Report contains information on the status of certain entities which have ceased operations and those entities audits of which have been in arrears.

    Yours sincerely,

    GEORGE W. SULLIMANN Auditor-General

  • Page 2 of 286

  • REPORT OF THE AUDITOR-GENERAL – 2009

    PART IV

    TABLE OF CONTENTS

    PARA SUBJECT PAGE NO. NO.

    1 General …………………………………………………………………………………………………………………………….. v 1.1 Foreword ……………………………………………………………………………………………………………….. v 1.2 Authority of Audit ……………………………………………………………………………………………………… v 1.3 Audit of Public Bodies ……………………………………………………………………………………………… vii 1.4 Appointment and use of Authorised Auditors ………………………………………………………………. vii 1.5 Executive Summary ……………………………………………………………………………………………….. viii

    SECTION A PUBLIC BODIES AND THEIR SUBSIDIARIES

    PARA SUBJECT PAGE NO. NO. 1A. Foreword …………………………………………………………………………………………………………………………… 1 2. Bank of Papua New Guinea …………………………………………………………………………………………………. 3 3. Border Development Authority ………………………………………………………………………………………………. 8

    4. Civil Aviation Safety Authority of Papua New Guinea ……………………………………………………………… 10

    5. Cocoa Board of Papua New Guinea ……………………………………………………………………………………. 14

    5A. Cocoa Stabilization Fund ………………………………………………………………………………………… 21 6. Cocoa Coconut Institute of Papua New Guinea ………………………………………………………………………. 23 7. Coffee Industry Corporation Fund ……………………………………………………………………………………….. .28 7A. Patana No. 61 ……………………………………………………………………………………………………….

  • Page 3 of 286

  • 29 7B. Coffee Industry Fund ……………………………………………………………………………………………… 30

    8. Government Printing Office ………………………………………………………………………………………………….. 31 9. Independence Fellowship Trust …………………………………………………………………………………………. .. 34 10. Independent Consumer and Competition Commission …………………………………………………………….. 37 11 Independent Public Business Corporation …………………………………………………………………………….. 38

    11A. General Business Trust …………………………………………………………………………………………… 44 11B. Aquarius 21 Limited ……………………………………………………………………………………………….. 49 11C. Port Moresby Private Hospital Limited ………………………………………………………………………. 50 11D. Privatisation (Gardens Hills) Limited …………………………………………………………………………. 51 11E. PNG Dams Limited ………………………………………………………………………………………………… 52 11F. Kroton No. 2 Limited ………………………………………………………………………………………………. 53

    PARA SUBJECT PAGE NO. NO.

    12. Industrial Centres Development Corporation ………………………………………………………………………….. 55 13. Investment Promotion Authority …………………………………………………………………………………………… 58 14. Kokonas Indastri Koporesen and its Subsidiaries ……………………………………………………………………. 61

    14A. PNG Coconut Extension Fund …………………………………………………………………………………. 63 14B. PNG Coconut Industry Fund ……………………………………………………………………………………. 65 14C. PNG Coconut Research Fund………………………………………………………………………………….. 67

    15. Legal Training Institute ………………………………………………………………………………………………………… 69 16. Mineral Resources Authority ……………………………………………………………………………………………….. 70 17. Motu Koitabu Council and its Subsidiary ………………………………………………………………………………… 72

    17A. Tabudubu Limited …………………………………………………………………………………………………..

  • Page 4 of 286

  • 74

    18. National Agriculture Quarantine and Inspection Authority …………………………………………………………. 75 19. National Agriculture Research Institute ………………………………………………………………………………….. 80 20. National Aids Council ………………………………………………………………………………………………………….. 83 21. National Airports Corporation Limited…………………………………………………………………………………….. 84

    21A PNG Air Services Limited………………………………………………………………………………………… 85

    22. National Broadcasting Corporation ……………………………………………………………………………………….. 87 23. National Capital District Commission and its Subsidiaries ………………………………………………………… 91

    23A National Capital District Botanical Enterprises Limited ……………………………………………….. 100

    23B. Port Moresby City Development Enterprises Limited …………………………………………………. 101

    24. National Cultural Commission …………………………………………………………………………………………….. 102 25. National Economic and Fiscal Commission ………………………………………………………………………….. 103 26. National Fisheries Authority ……………………………………………………………………………………………….. 105 27. National Gaming Control Board ………………………………………………………………………………………….. 109 28. National Housing Corporation …………………………………………………………………………………………….. 112 29. National Maritime Safety Authority ………………………………………………………………………………………. 119 30. National Museum and Art Gallery ……………………………………………………………………………………….. 123 31. National Narcotics Bureau ………………………………………………………………………………………………….. 124 32. National Research Institute ……………………………………………………………………………………………….. 125 33. National Road Safety Council …………………………………………………………………………………………….. 127 34. National Roads Authority ……………………………………………………………………………………………………. 130 35. National Training Council ………………………………………………………………………………………………….. 133 36. National Volunteer Service …………………………………………………………………………………………………. 134 37. National Youth Commission ……………………………………………………………………………………………….. 135 38. Oil Palm Industry Corporation ……………………………………………………………………………………………. 139

  • Page 5 of 286

  • 39. Ombudsman Commission of Papua New Guinea ………………………………………………………………….. 142 40. PANGTEL ……………………………………………………………………………………………………………………….. 144 41. Parliamentary Members Retirement Benefits Fund ………………………………………………………………… 148 42. PNG Forest Authority ………………………………………………………………………………………………………… 150 43. PNG Institute of Medical Research ……………………………………………………………………………………… 159 44. PNG Institute of Public Administration………………………………………………………………………………….. 160 45. PNG Maritime College ……………………………………………………………………………………………………….. 161 PARA SUBJECT PAGE NO. NO.

    46. PNG National Institute of Standards and Industrial Technology ……………………………………………….. 162 47. PNG Sports Commission ………………………………………………………………………………………………….. 165 48. PNG University of Technology and its Subsidiary ………………………………………………………………….. 170

    48A. Unitech Development and Consultancy Company Limited …………………………………………. 171

    49. PNG Waterboard ………………………………………………………………………………………………………………. 174 50. Public Curator of Papua New Guinea…………………………………………………………………………………… 176 51. Small Business Development Corporation ……………………………………………………………………………. 181 52. Security Industries Authority ………………………………………………………………………………………………. 184 53. Tourism Promotion Authority ……………………………………………………………………………………………… 186 54. University of Papua New Guinea and its Subsidiary ……………………………………………………………… 187 54A. Unisearch PNG Limited …………………………………………………………………………………………. 188 54B Univentures Limited …………………………………………………………………………………………….. 189

    55. University of Goroka ………………………………………………………………………………………………………….. 190

    55A. Unigor Consultancy Limited ………………………………………………………………………………….. 195

    56. University of Vudal

  • Page 6 of 286

  • …………………………………………………………………………………………………………… 196

    SECTION B – NATIONAL GOVERNMENT OWNED COMPANIES PARA SUBJECT PAGE NO. NO. 57. Foreword …………………………………………………………………………………………………………………………. 203 58. Air Niugini Limited …………………………………………………………………………………………………………….. 205 59. Livestock Development Corporation Limited …………………………………………………………………………. 209 60. Mineral Resources Development Company Limited ………………………………………………………………. 214 61. Motor Vehicles Insurance Limited ……………………………………………………………………………………….. 229 62 NCD Water & Sewerage Limited (Eda Ranu) ………………………………………………………………………… 230 63. Niugini Insurance Corporation Limited …………………………………………………………………………………. 233 64. North Fly Highway Development Company Limited ……………………………………………………………….. 234 65. PNG Ports Corporation Limited …………………………………………………………………………………………… 235 66. PNG Power Limited …………………………………………………………………………………………………………… 236 67. Post PNG Limited …………………………………………………………………………………………………………….. 238 68. Telikom PNG Limited and its Subsidiaries ……………………………………………………………………………. 242

    68A. Kalang Advertising Limited …………………………………………………………………………………….. 247 68B. PNG Directories Limited ………………………………………………………………………………………… 250

    SECTION C – NATIONAL GOVERNMENT SHAREHOLDINGS IN OTHER COMPANIES

    PARA SUBJECT PAGE NO. NO.

    69. Foreword …………………………………………………………………………………………………………………………. 253 70. Bougainville Copper Limited ……………………………………………………………………………………………….. 255 71. Gogol Reforestation Company Limited…………………………………………………………………………………. 258 72. Ok Tedi Mining Limited ………………………………………………………………………………………………………. 259 73 Pacific Forum Line Limited

  • Page 7 of 286

  • …………………………………………………………………………………………………. 260 74. CTP (PNG) Limited …………………………………………………………………………………………………………… 261 75 PNG Sustainable Development Program Limited ………………………………………………………………….. 262

    SECTION D – PROBLEM AUDITS

    PARA SUBJECT PAGE NO. NO. 76. Foreword ………………………………………………………………………………………………………………………… 267

    76.1 Dormant Entities …………………………………………………………………………………………………… 267 76.2 Exclusion of Entities from Future Reports ………………………………………………………………… 267

    77. Audits in Arrears ……………………………………………………………………………………………………………… 268

    77.1 General ……………………………………………………………………………………………………………… 268 77.2 Responsibility for preparation of Financial Statements ……………………………………………… 268

    77.3 Legislative Requirements …………………………………………………………………………………….. 269

    77.4 Current Year Audits (2009 Audits) …………………………………………………………………………. 269 77.5 Status of Current Year Audits ……………………………………………………………………………….. 271

    77.6 Audits in Arrears (2008 and prior years) …………………………………………………………………. 273 77.7 Long Outstanding Financial Statements …………………………………………………………………. 276

    Acknowledgements ………………………………………………………………………………………………………….. 281

    Schedule A – Current Year Audits ………………………………………………………………………………………. 282

    Schedule B – Status of Audits in Arrears ……………………………………………………………………………… 285

    Schedule C – Long Outstanding Financial Statements ………………………………………………………….. 288

    Schedule D – Non-Operational Entities and Others ………………………………………………………………. 290

    Schedule E – 2007 Audits completed during 2009/2010 ………………………………………………………… 291

  • Page 8 of 286

  • Schedule F – Status of Audits during the year 2009/2010 ………………………………………………………. 294

    Schedule G – Types of Audit Opinions Issued during 2009/2010 …………………………………………….. 295 GENERAL 1.1 FOREWORD

    My Annual Report to the National Parliament for the 2009 financial year is presented in four Parts. Part I deals with the Public Accounts of Papua New Guinea. Part II deals with National Government Departments and the Provincial Treasury Offices, whilst Part III deals with the audit of the Provincial Governments and Local-Level Governments.

    Part IV (this Part) of my Report deals with Public Bodies and their Subsidiaries, Government Owned Companies and National Government.s shareholdings in Other Companies. This Report is divided into four sections. Section A deals with Public Bodies and their subsidiaries, Section B deals with National Government owned companies and Section C deals with Companies in which the National Government has shareholdings. Section D is an additional section which provides details of entities that have ceased operating and those other entities the audits of which have been in arrears due to non-submission of financial statements.

    The audit findings contained in Sections A and B of this Report have been reported to the Management of the respective entities and to the responsible Ministers.

    1.2 AUTHORITY TO AUDIT 1.2.1 Constitution Under Section 214(2) of the Constitution of the Independent State of Papua New Guinea, I am required to inspect and audit all bodies set up by Acts of the Parliament, or by Executive or Administrative Act of the National Executive for governmental or official purposes unless other provisions are made by law in respect of their inspection and audit.

    I am also empowered under Section 214(3), if I consider it proper to do so, to inspect and audit and report to the Parliament on any accounts, finances or property of a body, insofar as they relate to, or consist of, or are derived from public moneys or property of Papua New Guinea.

    1.2.2 Audit Act

    By virtue of Section 214(4) of the Constitution, the Audit Act, 1989, which became effective from 1 May, 1989, provides more details of my functions under Sub-sections (1), (2) and (3) of the National Constitution. The Audit Act that was derived from the Constitution elaborates the functions and the duties of the Auditor-General. This Act was amended in 1995, and the relevant provisions of the amended Act are explained below.

    1.2.2(a) Auditing and Reporting Requirements In Section 8, Sub-sections 2 and 4 of the Act were amended to include provisions governing the auditing and the reporting requirements of public bodies including government owned companies incorporated under the Companies Act.

  • Page 9 of 286

  • 1.2.2(b) Matters of Significant Importance

    Under Section 8(2) of the Act, I am required to inspect and audit the accounts and records of financial transactions and the records relating to the assets and liabilities of these public bodies and their subsidiaries, and to report to the Minister vested with the responsibility for the public body and the Minister in charge of Finance any irregularities found during the inspection and audit.

    1.2.2(c) Audit Opinion on Financial Statements

    Section 8(4) of the Act requires me to audit the financial statements of the public bodies and to report an opinion to the aforementioned Ministers on:

    (i) whether the financial statements are based on proper accounts and records;

    (ii) whether the financial statements are in agreement with those accounts and records; and

    (iii) whether they show fairly the financial operations for the period which they cover and the state of affairs at the end of that period.

    1.2.3 Public Finances (Management) Act, 1995

    The submission of the financial statements of the public bodies for audit is required under Section 63(4) of the Public Finances (Management) Act, 1995.

    The section requires each public body to prepare and furnish to its Minister before 30 June each year, a report on its operations for the year ended on 31 December preceding, together with financial statements in respect of that year duly audited by me.

    The Minister is then required to table the report on the operations and the financial statements, together with my report on the financial statements, at the first meeting of the Parliament after receiving them.

    1.2.4 Companies Act, 1997

    I am required to audit National Government owned companies and subsidiary companies under the provisions of the Companies Act, 1997.

    Though these companies are registered under the Companies Act, my responsibility to audit them is by virtue of Sections 48 and 63 of the Public Finances (Management) Act and Section 3 of the Audit Act.

    1.3 AUDIT OF PUBLIC BODIES

    1.3.1 Scope of Audit

    Presently, the limited resources available to my Office are directed primarily towards financial attestation and compliance or regularity audit of Public Bodies. Due to resource constraints, I have not been able to venture into the audits of information systems and performance audits.

  • Page 10 of 286

  • The full scope of my audit responsibility in respect of Public Bodies covers the Statutory Bodies and their subsidiaries, National Government owned companies and their subsidiaries, and the companies in which the government has minority interest.

    1.3.2 Audit Objectives

    Under the Companies Act, I am required to ascertain whether proper accounting records have been kept; whether the financial statements comply with generally accepted accounting practice; and whether those financial statements give a true and fair view of the matters to which they relate. The Act also requires the auditor to report the instances of non-compliance with these requirements. More details on the audit responsibilities under the Companies Act are provided in paragraph 69 which covers the National Government owned companies.

    1.3.3 Reporting Framework

    My audits are conducted in accordance with International Standards on Auditing to provide reasonable assurance that the financial statements are free of material misstatements. The audit procedures include examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial statements, evaluation of accounting policies and significant accounting estimates, and ensuring that the financial statements are presented fairly and in accordance with International Accounting Standards and the Statutory requirements.

    1.4 APPOINTMENT AND USE OF AUTHORISED AUDITORS

    Section 8(5) of the Audit Act, 1989 (as amended), empowers me to employ registered company auditors to assist me in undertaking my constitutional duties, where such assistance is required.

    During the period covered in the Report, I engaged a number of registered Company Auditors to perform audits of numerous Statutory Bodies and National Government owned companies.

    2009 AUDITOR-GENERAL.S REPORT – PART IV

    1.5 EXECUTIVE SUMMARY

    1.5A Report Coverage

    1.5A.1 This Report covers the audit reports issued by my Office on the audits of Public Bodies and their Subsidiaries, Government Owned Companies and National Government.s shareholdings in Other Companies during the period July 2009 to June 2010 (2009/2010 Audit Cycle). The Report covers the audits of these entities. financial statements for a number of years, and not just of 2009.

    In 2009 there were 881 public entities subject to audit by my Office, consisting of 75 Public Bodies and their Subsidiaries and 13 National Government Owned Companies. 1In 2009, the Auditor-General became responsible for four additional public bodies – Kronton No.2 Ltd, PNG Dams Ltd, National Airports Corporation and Unigor Consultancy Services. Of 88 audits conducted in 2009, the 2006 audits of two (2) entities – Motu Koitabu Council and Tabudubu Ltd – were still in progress. The results of these audits will be reported in my Part IV Report in 2011 for the last time. My future audit reports on these entities will be covered in Part III Report. A further two entities – Privatisation (Garden Hills) Ltd and Unisearch (PNG) Ltd – were

  • Page 11 of 286

  • deregistered in 2008 and 2006 respectively. The audit of Privatisation (Garden Hills) Ltd 2007 was still in progress, and will be reported for the last time in 2011. The audit report for 2006 audit for Unisearch (PNG) Ltd, is my last report to Parliament.

    I am also responsible for reporting on the audits of 6 Companies, in which the National Government has a minority shareholding, that are audited by the private sector. These are reported under Section C of this Report.

    1.5A.2 Consistency in audit findings over a number of years

    The Report.s findings are consistent with those in my previous years. reports that have highlighted my concerns over the number of entities that do not submit current year financial statements for audit, and the poor state of the financial management structure in most public entities whose statements are subject to my audit and inspection.

    1.5A.3 Submission of current year Financial Statements

    Section 63(2) (a)of the Public Finances (Management) Act, 1995 requires a „…public body to prepare and furnish to its Minister before 30 June each year, a performance and management report of its operations for the year ended 31 December preceding, together with financial statements to enable the Minister to present such report and statements to the Parliament …. Before submitting the financial statements to the Minister, Section 63 (4) requires a public body to submit the financial statements to the Auditor-General and for the Auditor-General to report to the Minister in accordance with Part II of the Audit Act, 1989 (as amended).

    Despite these legislative requirements, 48 entities had not submitted their 2009 financial statements to be audited and overall some 106 financial statements for 2009 and prior years had not been submitted for audit (see Table 1 and Schedule „F.).

    The details of the audits in arrears and those entities whose financial statements have been outstanding for a number of years are shown in Schedule „B..

    Table 1

    STATUS OF AUDITS AS AT 30 JUNE 2010 (END OF 2009/10 CYCLE)

    Year Audits Completed Audits substantially Completed Audits in Progress Audits to Commence Shortly Financial Statements not Submitted Total T2009/2010 Total 2008/2009

    2009

  • Page 12 of 286

  • 11 10 7 8 48 84 82

    2008 25 14 5 8 22 74 72

    2007 18 11 9 3 10 51 41

    2006 16 1 3 2 7 29 24

    2005 5 – 4 2 6 17 16

    2004 2 – 5 1 5 13

  • Page 13 of 286

  • 10

    2003 – – 3 1 5 9 7

    2002 1 – 2 1 2 6 4

    2001 – – 1 – 1 2 3

    2000 – – 1 – – 1 2

    1999 – – 1 – – 1 1

    1998 – – 1

  • Page 14 of 286

  • – – 1 0

    Total 78 36 42 26 106 288 262

    Table 1 shows that 156 audits were completed, substantially completed or still in progress as at 30 June, 2010. Table 1 also shows that of the 78 audits completed, only 11 were of the current year (2009), with 17 current year.s audits substantially completed or in progress. A further 8 audits were to commence shortly. The list of entities is at Schedule „A. (i), (ii), (iii) and (iv).

    1.5A.4 Type of Audit Opinions Issued2 2 The types of audit opinions are: Unqualified Opinion – A Company’s financial statements are presented fairly, in all material respects in conformity with generally accepted accounting principles. Qualified Opinion – The financial statements “except for” certain issues fairly present the financial position and operating results of the firm. The except for opinion relates to inability of the auditor to obtain sufficient objective and verifiable evidence in support of business transaction of the Company being audited. Disclaimer – When insufficient competent evidential matter exist to form an audit opinion due to scope limitation or uncertainties Disclaimer of Opinions issued. Adverse – The Company’s financial statements do not present fairly the financial position, results of operation, or changes in financial position or are not in conformity with General Accepted Accounting principles.

    In the period covered by the audit, seventy-eight (78) audit opinions were issued. Of the seventy- eight (78) audit opinions issued, thirty-one (31) were unqualified, twenty- two (22) were qualified, and twenty-five (25) were Disclaimer Opinions. Of the thirty-one (31) unqualified opinions issued, twenty-one (21) related to prior years and only ten (10) were for 2009 as follows:

    . Bank of Papua New Guinea;

    . Post (PNG) Limited;

    . Independent Consumer and Competition Commission;

    . Tourism Promotion Authority;

    . Security Industries Authority;

  • Page 15 of 286

  • . PNG Institute of Public Administration;

    . General Business Trust;

    . Kroton No. 2 Limited;

    . National Agriculture Research Institute; and

    . Ombudsman Commission.

    All of the 22 qualified opinions were for prior years. The number of Disclaimer Audit Opinions issued are reflection of the poor state of accounting and record keeping in a number of public bodies.

    The list of entities and the type of audit opinions issued during the period July 2009 to June 2010 are provided in Schedule „G..

    1.5B Key Findings

    The key findings from the audits centred around on the non submission of the financial statements, non compliance with the SCMC regulatory mechanisms for salaries and wages, lack of basic accounting records and ineffective internal control systems. These issues are highlighted in the paragraphs below:

    1.5B.1 Non-Submission of Financial Statements

    The Public Finances (Management) Act, 1995, requires each public body to prepare and furnish to its Minister before 30 June each year, a report on its operations for the year ended 31 December preceding together with financial statements in respect of that year duly audited by me for tabling in Parliament. This legislative requirement has not been strictly adhered to by respective public entities. managements. To comply with this requirement, the financial statements are required to be submitted to my Office well before 30 June each year for my audit and inspection. Consequently, out of 84 public entities (excluding those whose audits are done by private auditors) only 36 entities submitted their financial statements for 2009 for my audit and inspection up to the time of preparing this Report. Forty-eight (48) entities failed to comply with these provisions. Paragraph 77.5 of this Report provides the details.

    As I have stated in previous years. reports, the failure of public entities to comply with this legislative requirement results in:

    . My Office may not be able to report adequately on the accountability of the use of public resources in a timely manner;

    . A build up of audits in arrears; and

    . The non-tabling of Annual Reports on performance and management by public entities in the

  • Page 16 of 286

  • Parliament.

    Responsibility for Submission of Financial Statements

    An entity.s management is responsible for preparing and presenting financial statements for my audit and inspection. It is also the responsibility of management to ensure that an adequate and effective internal control system is maintained to ensure that complete and accurate financial statements are produced on a timely basis.

    My Office recommends:

    . A vigorous enforcement of the provisions of Section 63 of the Public Finances (Management) Act; and

    . A legislative requirement to make the renewal of contracts of Chief Executive Officers subject to submission of current financial statements and prudent financial management.

    These recommendations are to help achieve accountability and good governance in the public sector.

    Details of audits that have gone into arrears due to non submission of financial statements are given below in Table 2 and Schedule „C..

    Table 2

    Financial Statements not Submitted

    No.

    Section Para No.

    Entity Year in Arrears Audits in Arrears 2008 & Prior Years

    1 B 64 North Fly Highway Development Company Limited 8 2001-2008

    2

  • Page 17 of 286

  • A 31 National Narcotic Bureau 6 2003-2008

    3 A 47 Papua New Guinea Sports Commission 6 2003-2008

    4 A 50 Public Curator of Papua New Guinea 5 2004-2008

    5 A 11E Papua New Guinea Dams Limited 4 2002-2003, 2007-2008

    6 A 17A Tabudubu Limited 4 2003-2006

    7 A 55A Unigor Consultancy Limited 4 2005-2008

    8 A 23B Port Moresby City Development Enterprises Limited 3 2006-2008

    9 A 22

  • Page 18 of 286

  • National Broadcasting Corporation 2 2007-2008

    10 A 25 National Economic and Fiscal Commission 2 2007-2008

    11 A 36 National Volunteer Service 2 2007-2008

    12 A 8 Government Printing Office 1 2008

    13 A 11B Aquarius No. 21 Limited 1 2008

    14 A 11C Port Moresby Private Hospital Limited 1 2008

    15 A 20 National Aids Council 1 2008

    16 A 21 National Airports Corporation Limited

  • Page 19 of 286

  • 1 2008

    17 A 24 National Cultural Commission 1 2008

    18 A 27 National Gaming Control Board 1 2008

    19 A 28 National Housing Corporation 1 2008

    20 A 38 Oil Palm Industry Corporation 1 2008

    21 A 42 Papua New Guinea Forest Authority 1 2008

    22 A 48A Unitech Development and Consultancy Company Ltd 1 2008

    23 B 68A Kalang Advertising Limited 1 2008

  • Page 20 of 286

  • My Arrears Reduction Strategies

    During the last Cycle, I have taken steps as in the past to remind various entities of their responsibilities to submit the financial statements on a timely basis. These steps include but are not limited to the following:

    (i) Forwarding reminder letters to entities on a regular basis until the submission of the financial statements.

    (ii) Copies of these reminder letters were forwarded to the Public Accounts Committee and to the Secretary for Finance for their necessary action.

    (iii) My officers have visited various entities and had meetings with the Chief Executive Officers about the non-submission of the financial statements and drew their attention to their responsibilities under the Public Finances (Management) Act and resultant breach of the Public Finances (Management) Act.

    1.5B.2 Non-Compliance with the Salaries and Conditions Monitoring Committee Act (SCMC), 1998

    The Salaries and Conditions Monitoring Committee (SCMC) was establishes the regulatory mechanism for salaries and wages in the public sector. Sadly, some public bodies do not comply with the provisions of this Act because of legislative changes in their constituent Acts. As a result, these bodies pay salaries and allowances without any monitoring from this Committee. Consequently, they have contravened Section (3) of the Salaries and Conditions Monitoring Committee Act, (SCMC) 1998 which stipulates:

    “(1) The provisions of this Act apply notwithstanding anything in any other relating to the determination of salaries and conditions or employment of employees of a public authority; and

    (2) Whereby or under any law, power is given to a public authority, to determine or vary the salaries and conditions of employment of employees of the public authority, that power shall be exercised subject to this Act.”

    1.5B.3 Lack of Basic Accounting Records and Inadequate Control Systems

    As reported in previous years, I noted serious deficiencies in accounting and record keeping and maintenance of internal controls during the course of audits. These deficiencies, which contributed to the limitation on the scope of my audit procedures, included:

    . bank reconciliation statements not being prepared in a timely way or not being prepared at all;

  • Page 21 of 286

  • . transactions not having supporting documentation;

    . fixed assets. registers not being properly kept or maintained;

    . no consistent and proper valuation of assets;

    . physical asset stock-takes not being carried out;

    . property being acquired or disposed of without proper procedures being followed;

    . failure to comply with International Financial Reporting Standards in the preparation of the financial statements;

    . travel and other allowances not being fully acquitted;

    . internal Revenue Commissions regulations on payment of taxes not being followed;

    . entities paying housing allowances and Board members allowances without tax but allowing officers to pay the tax;

    . accounting, administrative and procedural manuals not being available;

    . public Servants serving on Statutory Board receiving Board allowances contrary to regulations;

    . ineffective internal audit functions; and

    . ineffective budget controls.

    The above factors contributed to the limitations on the scope of my audits which resulted in the issuance of Disclaimer Audit Opinions in respect of many of the reports issued during the year, as shown in Schedule „G..

    1.5B.4 Poor Financial Management

    Over a number of years, I have expressed my concern about public bodies. poor accounting records, weaknesses in internal controls and management information systems, and non- compliance with legislative requirements and International Financial Reporting Standards.

    I also consider that a large number of Chief Executive Officers do not pay sufficient attention to the financial management in their entities. In my view, the concept of effective, prudent and efficient finance management is yet to be absorbed by many Chief Executive Officers.

    1.5B.5 Recommendations for Improvement

    Consistent with comments in previous years. Reports, I will report to the Parliament in future that proper accounting records and adequate internal control systems exist in all public entities subject to my audit. For that to be achieved, I believe that Chief Executive Officers are required to exercise proper leadership that provides an environment where there is:

  • Page 22 of 286

  • . Timely submission of financial statements;

    . Improved record keeping and documentation;

    . Provision of quality information;

    . Effective implementation of internal control systems; and

    . Entity financial management that is carried out by qualified and experienced accountants3.

    3 In my view, policies be reviewed to ensure that the Chief Finance Officers of Government are qualified accountants and members of CPA PNG. Although this may take some time to achieve, Government should consider this as one way of improving financial management in the Public Sector.

    1.5B.6 Improvement Strategies

    In my view, for improvement to occur:

    . Chief Executive Officers must employ trained accounting staff to manage the financial affairs of the organization;

    . Chief Executive Officers must understand the value of and how to implement a strong governance framework; and

    . Parliament must increase its reviews of the management of public entities and their accountability.

    1.5B.7 Structure of the Report

    This Report is structured as follows:

    Section A – Public Bodies and Their Subsidiaries; Section B – National Government Owned Companies; Section C – National Government Shareholdings in Other Companies; and Section D – Problem Audits.

  • Page 23 of 286

  • SECTION A

    PUBLIC BODIES AND THEIR SUBSIDIARIES 1A FOREWORD

    This Section of my Report deals with the audit of public bodies and their subsidiaries.

    The auditing and reporting requirements of the public bodies and their subsidiaries are stipulated in Section 8 of the Audit Act, 1989 (as amended). My responsibilities in that regard are detailed in paragraph 1.2 of this part of my Report.

    2. BANK OF PAPUA NEW GUINEA 2.1 INTRODUCTION 2.1.1 Legislation and Objectives of the Bank The Bank of Papua New Guinea was established under the Central Banking Act (Chapter 138). This Act was in operation until 16 June, 2000 when it was repealed and replaced by the Central Banking Act, 2000. The main objectives of the Bank of Papua New Guinea as stipulated in the new Act are: (a) to formulate and implement the monetary policy with a view to achieving and maintaining price stability; (b) to formulate financial regulation and prudential standards to ensure stability of the financial system in Papua New Guinea; (c) to promote an efficient national and international payments system; and (d) subject to the above, to promote macro-economic stability and economic growth in Papua New Guinea. 2.1.2 Functions of the Bank The primary functions of the Bank are to:

    (a) issue currency;

    (b) act as banker and agent of the Government;

    (c) regulate banking, credit and other financial services as empowered by the Act or by any other law of the Independent State of Papua New Guinea;

    (d) manage the gold, foreign exchange and other international reserves of Papua New Guinea;

    (e) perform any function conferred on it by or under international agreement to which Papua New Guinea is a party;

  • Page 24 of 286

  • (f) perform any other functions conferred on it by or under any other law of Papua New Guinea; and

    (g) advise the Minister as soon as practicable where the Bank considers that a body regulated by the Central Bank is in financial difficulty.

    2.1.3 Structural Reforms at the Bank In addition to the Central Banking Act which was enacted in June 2000, three (3) other Acts were legislated in 2000 which gave enormous responsibilities to the Bank. These other Acts are: (a) The Banks and Financial Institutions Act, 2000,

    (b) The new Superannuation Act, 2000, and

    (c) The new Life Insurance Act, 2000.

    Each of these Acts provides additional responsibilities to the Bank. 2.2 AUDIT OBSERVATIONS AND RECOMMENDATIONS 2.2.1 Comments on Financial Statements My report to the Minister under Section 8(4) of the Audit Act, 1989 (as amended), on the financial statements of the Bank for the year ended 31 December, 2009 was issued on 18 June, 2010. The report did not contain any qualification. 2.2.2 Audit Observations Reported to the Minister My report to the Minister under Section 8(2) of the Audit Act, 1989 (as amended),on the inspection and audit of the accounts and records of the Bank for the year ended 31 December, 2009 was issued on 19 July, 2010. The report contained the following comments: 1. Internal Control Reports for External Fund Managers Internal Control reports (commonly referred to as SAS 70 reports) on two of the Fund Managers. operations were not made available to me. It was unacceptable when such reports were not provided on the operations of outsourced service providers, especially when providing services to such an institution as the Bank of Papua New Guinea. Given the magnitude of the investments managed by these Fund Managers on behalf of the Bank and the level of reliance placed by the Bank on the information generated by these Fund Managers, there is a potential risk that weak internal controls in the fund managers may result in material misstatements in the information generated by them and consequently in the Bank.s financial records. Internal control assurance over the operations of external service providers, particularly where the information provided by such a service provider forms a significant input in the Bank.s financial information is an important aspect of the Bank.s overall control environment. I strongly recommended the Bank to take this matter up with the Fund Managers concerned and arrangements to be put in place to ensure that such internal control assurance reports were provided to the Bank. This will enhance the reliability of the information provided by the Fund Managers. Management responded that: There was an understanding between the Bank and the EFM to ensure compliance with their respective internal governance policies and the charter in the Investment Management Agreement (IMA). The Bank noted the audit concerns and agreed to make amends in the next EFM review of the Fund Managers. operations.

  • Page 25 of 286

  • 2. Significant build up of Notes and Coins As a standard policy, the Bank was expected to reorder approximately five (5) years. supply of currency, with a reorder point occurring when the currency on hand falls below one year supply projection. However, the Bank currently holds in stock certain denominations of notes and coins in excess of fifteen (15) years. supply. As a result of bulk ordering, the Bank did not only incurred significant notes production cost, but also faces major storage issues and associated risks. As a matter of priority, I urged the Bank to resolve the storage issues in the most secured manner. It was important that the Bank reviews the current policy in relation to the reordering level. Also, the associated issues such as storage capacity and the costs involved be considered prior to commitments being made. Management concurred with my comments and added that corrective measures will be taken. Further, the Bank sought assistance from the Reserve Bank of Australia (RBA) to draft the currency policy in relation to stock level management, risks, quality standard and other currency issues. 3. Information Technology Related Issues . Monitoring of the effectiveness of internal controls

    I acknowledged that Bank Management established formal mechanisms for reporting over the effectiveness of IT General Controls. Nevertheless, I noted that there was still lack of effective monitoring to ensure remedial action is taken in a timely manner. Several IT issues were repetitively identified along the years, including some noted in this audit. The lack of formality in monitoring the progress and remedial action of IT issues, introduced the risk that: . IT issues may be overlooked or left unmonitored; and

    . Inappropriate assignment of responsibility over remedial actions and timeframes.

    I recommended the Management of the Bank to establish formal procedures for defining a timeframe, assigning overall responsibility for remedial actions and follow up in relation to IT issues raised regarding the effectiveness of IT General controls. I also requested the Management of the Bank to consider producing a formal periodic report or minute for the Board and relevant business line management detailing all issues requiring corrective action and the resolution timeframes. Management responded to my comments as follows; “Our planned corrective action was not carried out. ITD Management will readjust work in the next three weeks to define an overall IT process monitoring procedure for adoption by Operations Unit. The Department has acquired the international standards for IT Process Management, ITIL, to help fill the gaps in our current procedures”. . Logical Access to Applications

    After a high level review of logical user access in Oracle Financials, there were instances of access by users without access rights, as well as business areas managers accessing using administrator access rights. Administrative or privileged access rights were to be limited only to system administrators in the IT group. Administrator access provides unauthorized users with full access privileges. Any task in any module in the system could be undertaken without restriction, as a result of such uncontrolled access thereby bypassing the normal segregation of duties. Additionally, with such access, user accounts could be created, modified or removed. As system

  • Page 26 of 286

  • administrators had the highest level of access, such access should be reserved only for those users who are qualified and authorized as administrators. Where possible, I recommended system administration procedures to be carried out centrally by the IT Department and to ensure privileged access rights such as system administrator be restricted only to those who require this high level access for administration purposes. Enabling audit logs were recommended to allow monitoring and tracking of tasks performed by these privileged users. Management responded to my comments as follows: “This issue will be addressed through improvement to the User Accounts Administration process”. . Lack of Segregation of Duties within IT Functions

    It was noted that a developer had Database Administrator (DBA) access rights in Oracle. The risk was even higher considering that audit trial was not enabled in the Oracle Database to allow monitoring of tasks performed by privileged users, such as Database Administrator (DBA). Unauthorised changes to the database or the systems functionality could be made without following Bank of Papua New Guinea.s policies and procedures. I recommended sensitive IT functions such as systems security and database administration and configuration, development and deployment to production to be segregated. When resource constraints prevent the segregation of such functions, I strongly recommended audit logs (or other compensating controls) to be enabled and to be periodically monitored by an independent individual. Management responded as follows: “Staff shortage contributed to this problem when Development Unit Staff have also been used to support their own products when migrated to the production environment. This is something we cannot avoid but ITD believes once we adopt proper programming standards, controls can be put in place to better coordinate development work and porting of completed work to production environment”. . Logging and Monitoring of Privileged Access to Operating Systems, Applications and Database

    Audit trail and logging were not enabled in operating systems, applications and at the database levels. These include Oracle Financials, Alesco, CLS, SWIFT, GTS, RMS, Oracle Databases and BPNG computer network. Uncontrolled privileged user access pose potentially higher risk for the Bank. I recommended management to enable the audit logs over privileged accounts at operating systems, applications and more importantly at Oracle Database, including the monitoring of security activities in order to identify, escalate and report security violations or abnormal behavior to senior management. Management responded as follows: “Audit trail for all privileged users has not been done as planned. We are now embarking on this task as a matter of priority. A four weeks effort is required to configure and test”.

    3. BORDER DEVELOPMENT AUTHORITY 3.1 INTRODUCTION

    3.1.1 Legislation The Border Development Authority was established under the Border Development Authority Act, 2008. This Act came into operation on 7 October, 2008. 3.1.2 The Objectives of the Authority

  • Page 27 of 286

  • The objectives of the Authority are to manage and fund development activities in the Border Provinces of Papua New Guinea and to make provision for the functions and powers of the Authority and for related purposes. 3.1.3 Functions of the Authority The functions of the Authority generally are to consult with relevant agencies and to supervise and co-ordinate all development activities in each of the border provinces and, without prejudice to the generality of the foregoing, are:- (a) the co-ordination of the planning, and implementation of capital works, infrastructure and socio-economic programs in respect to:- (i) education, health care, road network, communication, transport system, electricity, water, sewerage and all activities relevant to the improvement of basic living standards in the border provinces; (ii) liaison with public bodies, non-government organisations and private enterprise in identifying and negotiating sources of funding for short to medium term activities; (iii) the co-ordination of the development of specifications for contracts for all capital and infrastructure works and the advertising, evaluation and awarding of such contracts; (iv) the supervision and monitoring of the implementation of all contracts relating to such capital and infrastructure works; (v) the transformation of border provinces into agro financial sector by developing their respective natural resources; and (vi) the promotion of investors both foreign and local into the border provinces and to encourage and facilitate international cross border and inter border trade. (b) the establishment of programs and regulatory framework for immigration including the monitoring of immigrants and immigrant activity along the border with respect to:- (i) establishment of proper state of the art offices, and facilities for relevant government agencies including customs, immigration, quarantine, police, defence force such as security monitoring systems, communication, transport, electricity, water, sewerage, staff accommodation, computers and all other facilities that would be relevant to the administration of border activities; (ii) establishment of dialogue and co-operation with the respective cross border authority or government for the prevention of diseases, drug trafficking, human smuggling, money laundering and other illicit activities; and (iii) the development of long term activities for the establishment of infrastructure and other facilities. (c) such other functions as are likely to assist in the border administration activities.

    3.2 AUDIT OBSERVATIONS AND RECOMMENDATIONS

    3.2.1 Comments on Financial Statements My report to the Ministers under Section 8(4) of the Audit Act, 1989 (as amended), on the Authority.s financial statements for the two (2) months period ended 31 December, 2008 was issued on 29 January, 2010. The report did not contain any qualification. 3.2.2 Audit Observations Reported to the Ministers My report to the Ministers under Section 8(2) of the Audit Act, 1989 (as amended), on the audit and inspection of the accounts and records of the Authority for the two (2) months period ended 31 December, 2008 was issued on 29 January, 2010. The report contained the following observation: Accounting Systems, Personnel and Statutory Records The Border Development Authority (BDA) was established by an Act of Parliament in October, 2008 and commenced its operations in November, 2008. Since the Authority was in operation for only two (2) months as at 31 December, 2008, a properly established Office with adequate management and staff were not in place. As such, a lone officer (Executive Chairman) was involved in setting up the Office and involved in the day to day operation of the Authority.

  • Page 28 of 286

  • I recommended the Authority to establish proper procedures in relation to accounting, administration and work process, and employ properly skilled staff with sufficient knowledge and expertise to perform key functions and tasks of the Authority.

    3.3 STATUS OF FINANCIAL STATEMENTS At the time of preparing this Report, the financial statements of the Authority for the year ended 31 December, 2009 had not been submitted for my inspection and audit.

    4. CIVIL AVIATION SAFETY AUTHORITY OF PAPUA NEW GUINEA

    4.1 INTRODUCTION

    4.1.1 Legislation

    The Civil Aviation Authority of Papua New Guinea was established in November, 2000 by the enactment of the Civil Aviation Act, 2000. 4.1.2 Functions of the Authority

    The principal functions of the Authority are to undertake activities that promote safety in civil aviation at a reasonable cost; ensure the provision of air traffic services, aeronautical communications services and aeronautical navigation services; ensure the provision of meteorological services and science; and to own, operate, manage and maintain airports.

    4.2 AUDIT OBSERVATIONS AND RECOMMENDATIONS

    4.2.1 Comments on Financial Statements

    My report to the Ministers under Section 8(4) of the Audit Act, 1989 (as amended), on the Authority.s financial statements for the year ended 31 December, 2006 was issued on 26 October, 2009. The report was a disclaimer of opinion.

    “BASIS FOR DISCLAIMER OF OPINION

    Limitation of Scope regarding Opening Balances

    My report on the financial statements of the Authority for the year ended 31 December, 2005 was disclaimed on the basis of limitation of scope due to lack of information and adequate supporting evidence. Consequently, I was unable to determine the accuracy of the opening financial position of the Authority as at 1 January, 2006 because the results for the year ended 31 December, 2005 enter into the determination of the opening balances as at 1 January, 2006 and therefore the financial performance for the year ended 31 December, 2006. Due to the size and fundamental nature of the matters referred to, I was unable to determine whether the results of the Authority for the year and the net assets at year end are fairly stated.

    Transfer of State Assets and Liabilities

    As explained in Note 1(a) to the financial statements, the Civil Aviation Authority, in conjunction with the State, is currently determining the most appropriate process by which to transfer the State.s assets and liabilities to the Authority.

    Consequently, it is not yet in compliance with Sections 328 to 333 of the Civil Aviation Authority

  • Page 29 of 286

  • Act, 2000 which stipulate that State assets and liabilities should be transferred to the state aviation enterprise. The financial statements therefore, do not include substantial assets owned by the State. Trade Creditors and Other Creditors – K7.1m

    Trade creditor.s balance includes K2.6m in trade payables and K4.5m in other creditors. However, the other creditors and accruals balance of K4.5m could not be supported by any form of reconciliations and my attempts to carry out unrecorded liabilities tests to confirm the possible understatements was not made possible. Hence, I was unable to confirm the correctness of other creditors balance.

    Employee Provisions – K3.4m

    Annual leave provisions of K1m and Long Service leave provisions of K2.4m included in the financial statements were properly supported by employee provisions listings. However, further information requested to carry out detailed work to confirm the calculations, existence, completeness and accuracy of the listings was not provided. I was therefore, unable to confirm if the employee provisions included in the financial statements were fairly stated.

    Trade Debtors & Other Debtors – K14.2m

    Trade and other debtors balance of K14.2m includes K8m of trade debtors, K2.1m in other debtors and prepayments and K4.1m in GST receivables. I was only provided with information on the trade debtor.s balance of K8m but the other debtors and prepayments and the GST receivable balances could not be supported by any reconciliations and GST returns. Therefore, I was unable to confirm the completeness, accuracy and existence of these balances.

    Revenue – K59m

    I was not provided any supporting documents to support the significant components of the total revenue of Air Navigational Support revenue of K17.6m, Government Grants and Subsidies of K20.6m and Community Service Obligation income of K6.5m. Therefore, I was unable to confirm the completeness and accuracy of these significant revenue amounts and the total revenue of K59m recorded for the year.

    Payroll & Personnel Costs – K27.7m

    Payroll and personal costs of K27.7m included in the profit and loss statement were not supported by supporting documents. Further, information requested to carry out normal audit procedures to verify the payroll and personal costs were also not provided. Accordingly, I was unable to confirm the completeness and accuracy of this amount.

    DISCLAIMER OF AUDIT OPINION

    Due to the limitation in my audit procedures referred to in the preceding paragraphs, I was unable to express an opinion as to whether the financial statements present fairly, and in accordance with the Civil Aviation Authority Act, 2000, International Financial Reporting Standards and other Generally Accepted Accounting Practices in Papua New Guinea, the financial position of the Civil Aviation Authority as at 31 December, 2006 and its performance for the year ended on that date.

    4.2.2 Audit Observations Reported to the Ministers

  • Page 30 of 286

  • My report to the Ministers under Section 8(2) of the Audit Act, 1989 (as amended), on the inspection and audit of the accounts and records of the Authority for the year ended 31 December, 2006 was issued on 26 October, 2009. The report contained the following observations.

    1. PNG Air Traffic Services Limited

    The Civil Aviation Authority Act, 2000, gave authority for the incorporation of the PNG Air Traffic Services Limited as a subsidiary of the Authority. However, the Authority was unable to produce any financial records in respect of this company and is unaware of its existence. I recommended Management to review the requirements of the Act in respect of this subsidiary and to take the necessary action to comply with the provisions of the Act. The Management has advised as follows:

    “The CAA has subsequently incorporated a company called Papua New Guinea Air Services Limited and the company has commenced operations on 1 January, 2008.” 2. Goods and Services Tax (GST)

    The Authority did not prepare and submit GST returns to the Internal Revenue Commission (IRC) for the year under review. The failure to comply with the GST provisions may result in late payment and non-lodgement penalties being levied by the IRC against the Civil Aviation Authority. I drew Management.s attention to this and I was advised by Management that it was aware of this issue and was in negotiations with the IRC to rectify the situation.

    3. Internal Audit

    The Internal Audit Division of the Authority did not appear to be functioning effectively as was evidenced by the lack of internal audit work performed during the year under audit. Management advised me that CAA has been in the process of developing and strengthening the Internal Audit function and have now recruited qualified personnel who started leading the team in the 2008 financial year.

    4.3 STATUS OF FINANCIAL STATEMENTS At the time of preparing this Report, the inspection and audit of the accounts and records and the examination of the financial statements of the Authority for the year ended 31 December, 2007 and a Special Investigation as directed by the Public Accounts Committee were in progress.

    The financial statements of the Authority for the year ended 31 December, 2008 had been submitted. The fieldwork associated with the inspection and audit of the accounts and records and the examination of the financial statements of the Authority will commence shortly.

    The financial statements of the Authority for the year ended 31 December, 2009 was not submitted for my inspection and audit.

    5. COCOA BOARD OF PAPUA NEW GUINEA 5.1 INTRODUCTION 5.1.1 Legislation The Cocoa Board of Papua New Guinea was established under the provisions of the Cocoa Act, 1981.

    5.1.2 Subsidiary

  • Page 31 of 286

  • Cocoa Coconut Institute Limited of PNG (formerly PNG Cocoa and Coconut Research Institute) was amalgamated with PNG Cocoa and Coconut Extension Agency Ltd in 2003. The Institute is owned equally by the Cocoa Board and the Kokonas Indastri Koporesen of Papua New Guinea. Comments in relation to the PNG Cocoa Coconut Institute Limited are contained in paragraph 6 of this Report (Part IV).

    5.1.3 Functions of the Board

    The principal functions of the Board are: to control and regulate the growing, processing, marketing and export of cocoa and cocoa beans and the equalisation and stock holding arrangements within the cocoa industry; to promote research and development programmes for the benefit of the cocoa industry; and to promote the consumption of Papua New Guinea cocoa beans and cocoa products.

    5.2 AUDIT OBSERVATIONS AND RECOMMENDATIONS

    5.2.1 Comments on Financial Statements

    My reports to the Ministers under Section 8(4) of the Audit Act, 1989 (as amended), on the financial statements of the Board for the years ended 30 September, 2006 and 2005 were issued on 18 June, and 29 January, 2010 respectively. The 2005 and 2006 reports contained similar Qualified Audit Opinions hence, only the 2006 report is reproduced as follows:

    “BASIS FOR QUALIFIED AUDIT OPINION

    1. Debtors and Prepayments

    Included in the total debtors and prepayments of K205,662 reported in the financial statements, are amounts totalling K68,067 which consist of fraudulent payments made to former employees who had left the employ of the company. As a result, I was unable to satisfy myself as to the recoverability of these amounts and whether the closing Debtors and Prepayments balance was complete since no documentary evidence was provided for my review.

    2. Investments

    The financial statements disclosed investments of K280,006 at year end representing shares held in PNG Cocoa Coconut Institute Limited (Formerly PNG Cocoa and Coconut Research Institute & PNG Cocoa Coconut Extension Agency). However, PNG Cocoa Coconut Institute Limited disclosed only K266,003 as 50% investment from Cocoa Board in its financial statements. Since no share certificates were made available for my verification, I was unable to verify the accuracy of the investment balance as stated at year end.

    3. Fixed Assets

    The Board.s total Fixed Assets amounted to K1,674,171 for the year ended 30 September, 2006. Included in this account balance are land and buildings with a carrying value of K86,264 and K779,054 respectively. I was not provided the registered title deeds in relation to these land and buildings. Further, the Board did not carry out any physical stock-take to ascertain the assets owned by the Board and its physical condition. As a result, I was unable to state the propriety and the ownership of these buildings as disclosed by the Board at 30 September, 2006.

  • Page 32 of 286

  • 4. Going Concern

    The Board has prepared its financial statements on a going concern basis. However, the National Court in its ruling of 19 March, 2010 awarded Agmark Pacific Limited K4,885,260 plus 8% interest and costs. This was subsequent to an earlier decision on 27 July, 2007 whereby an award of K6,292,441 was made against Cocoa Board. These rulings resulted from legal proceedings against Cocoa Board allegedly for collections of Stabilisation Bounty illegally without the Minister.s approval.

    Further, should the appeal made in 2010 fail, the Board will not be able to pay the K4,885,260 within its current financial position unless an agreement is reached with Agmark Pacific Limited to pay the award over a period of time, or the State agrees to bail out the Board by paying the award, otherwise the Board may be considered as insolvent and may be placed under receivership.

    QUALIFIED AUDIT OPINION

    In my opinion, except for the effects of the matters described in the Basis for Qualified Audit Opinion paragraphs, the financial statements of the Cocoa Board for the year ended 30 September, 2006:

    (a) give a true and fair view of the financial position and the results of its operations for the year then ended; and

    (b) with exception of instances of non compliance described under Other Matters, the financial statements have been prepared in accordance with the Public Finances (Management) Act, 1995 and generally accepted accounting practice.

    OTHER MATTERS

    In accordance with the Audit Act, 1989 (as amended), I have duty to report on significant matters arising out of the financial statements to which the report relates. I draw attention to the following issues:

    1. Differences in the Opening Balances of the General Ledger

    Differences were noted in the opening balances of the general ledger in relation to PNG Cocoa Coconut Institute Limited (K1,374,600), Trade Creditors (K130,035), Group Taxes (K259,055), Staff Advances (K36,587) and Rental Bonds (K2,367). Adjusting journal entries were passed to correct the opening balances on the general ledger to agree to the audited financial statements of 30 September, 2005. However, I was not provided the relevant journals and supporting documentation in relation to the adjustments, which I consider as immaterial on aggregate to further qualify the financial statements for the year ended 30 September, 2006.

    2. Report under Public Finances (Management) Act, 1995

    The Board is required to submit an annual report on performance and management and a

  • Page 33 of 286

  • quarterly report on all investment decisions, a detailed report on investments, performance and returns for each year and a five year investment plan (up-dated each year) setting out investment policies, strategies and administrative systems to be pursued and providing forecasts of investment flows and returns. However, I noted that the management did not submit its relevant reports as required under Section 63 (2) of the Public Finances (Management) Act, 1995 to the Minister for the year ended 30 September, 2006.”

    5.2.2 Audit Observations Reported to the Ministers

    My reports to the Ministers under Section 8(2) of the Audit Act, 1989 (as amended), on the inspection and audit of the accounts and records of the Board for the years ended 30 September, 2006 and 2005 were issued on 18 June, and 29 January, 2010 respectively. My reports contained the following observations:

    2006 Report:

    OTHER MATTERS

    1. Board of Directors

    The Cocoa Board of Papua New Guinea was operating without a Board for the Cocoa season ending 30 September, 2008 and 30 September, 2009. As there was no Board, executive and strategic decisions may have been made without the Board.s consent. I noted that the corporate governance structure of the Board was weak and lacked executive direction and control.

    The management responded that it had made several submissions regarding the appointment of Board members to the Minister and to date no appointments were made. Further, I was also informed that decisions requiring the Board.s deliberation and approval in those periods were referred to the Secretary of the Department of Agriculture and Livestock as stipulated by the Cocoa Act, 1981.

    2. Accounting, Administration and Procedural Manual

    The Board did not have an Accounting, Administration and Procedural Manual in place for its daily operations. In the absence of the documentation in relation to systems and controls, I had no basis to measure the standards of operations in existence. I also noted that the Board was not aware of the requirements of the General Orders or the Public Finances (Management) Act, 1995.

    In response to my recommendation for the Board to adopt an Accounting, Administration and Procedural Manual in line with the General Orders of the Public Services and the Public Finances (Management) Act, 1995 the Board informed me that a manual would be drafted for formal adoption by the Board.

    3. Review of Board.s Salary and Wages

    In my review of the staff positions and the pay structure, I noted that there were no reviews conducted by the Board on a periodic basis. In the absence of a salary review and a restructure of the Board positions, staff and job marketability of the Board positions were deemed to have been non competitive and had affected staff morale for staff performing comparable job classifications

  • Page 34 of 286

  • as those in the market.

    I recommended the Board to review the salary structure, the staff and organizational requirements and restructure to cater for CPI adjustments and comparable job marketability. The Board concurred with my observations and advised that a review was done by a consultant but was not implemented.

    4. Staff Advances – K60,832

    Note 14 to the financial statements shows that advances granted to the staff members had increased by K24,245 (2005: K36,587) in the year ended 30 September, 2006. The Public Finances (Management) Act, 1995 requires outstanding advances to be recouped in the year of the advance. However, I noted that the Board did not comply with the requirements of advance acquittal and recoveries.

    I recommended management to take heed of the requirements of the Public Finances (Management) Act, 1995 and was informed that the Board had since ceased paying such advances. However, that had not been the case as was evidenced by additional advances of K24,245 during the year.

    5. Amount of K4,885,260 awarded by National Court against the Board

    Note 8 to the financial statements refers to events after balance date whereby the National Court in its ruling of 27 July, 2007 awarded K6,292,441 to Cocoa Board. On 19 March, 2010 the Court changed the award to K4,885,260 to Agmark Pacific Limited. The latter Court Order, ordered the Board and the State to pay with 8% interest within 21 days and to meet the costs of the proceedings. Agmark Pacific Limited had sued the Board for illegal collection of Stabilisation Bounty since the Minister had not gazetted the bounty collection as required under the Cocoa Act, 1981 and thereby deeming as illegal the bounty collected and used by the Board between January, 1997 and October, 1999.

    In my view this case was not defended adequately and the Board had appealed against the verdict. I brought this to the attention of Management and have since been advised that the Board had engaged a private lawyer to take the matter further and an appeal was lodged at the Supreme Court of Papua New Guinea in 2010.

    6. Fixed Assets

    The Board did not provide registered title deeds and documentary evidence for all the buildings that were stated as owned by the Board. I was unable to determine the propriety and the validity of the ownership of those land and buildings totalling K86,264 and K779,054 respectively as the title deeds provided of the mentioned properties were not registered in the name of the Board. I was promised by the Board that the title deeds for the property mentioned as Section 34, Allotment 11 would be provided in due course. Further, the Board had not carried out any physical stock-take to ascertain the assets owned by the Board and its physical condition.

    In response to my observations the Board informed me that a staff had been recruited to perform the stock-take of all fixed assets and a new software program was adopted to cater for the Board.s assets in the future.

    7. Differences in Opening Balances

  • Page 35 of 286

  • Differences were noted in the opening balance of the general ledger in relation to PNG Cocoa Coconut Institute Limited (K1,374,600), Trade Creditors (K130,035), Group Taxes (K259,055), Staff Advances (K36,587) and Rental Bonds (K2,367). I noted that adjusting journal entries were passed to correct the opening balances on the general ledger to agree to the audited financial statements of 30 September, 2005. However, I was not provided the relevant journals and supporting documentation in relation to these adjustments.

    In response to my queries, the management informed that the variances came about due to the incorrect opening balances that were inherited from the previous years. Due to the backlog of outstanding financial statements, the accounts were rolled over without closing the accounts in the MYOB Accounting System and as a result, incorrect balances were reported as opening balances in the subsequent accounting period.

    2005 Report:

    OTHER MATTERS

    1. Report under Public Finances (Management) Act, 1995

    The Board is required to submit an annual report on performance and management and a quarterly report on all investment decisions, a detailed report on investments, performance and returns for each year and a five year investment plan (up-dated each year) setting out investment policies, strategies and administrative systems to be pursued and providing forecasts of investment flows and returns. However, I noted that the management had not submitted its relevant reports as required under Section 63 (2) of the Public Finances (Management) Act, 1995 to the Minister for the year ended 30 September, 2005.

    2. Goods and Services Tax – K88,030

    Note 14 to the financial statements disclosed Goods and Services Tax as K88,030. However, in my review of the account I noted that remittance of the GST Returns were not periodically remitted to the Internal Revenue Commission as stipulated by the Goods and Services Tax Act, 2003.

    I recommended management to lodge the GST returns periodically as stipulated by the Act and the management concurred to pursue the recommendation.

    3. Staff Advances – K36,548

    Also in Note 14 to the financial statement, advances granted to the staff members had increased by K29,803 (2004: K6,745) in the year ended 30 September, 2005. In compliance with the Public Finances (Management) Act, 1995 outstanding advances were to have been recouped in the year of the advance, however, I noted that the Board had not complied with the recovery and acquittal of advances.

    I recommended management to take heed of the requirements of the Public Finances (Management) Act, 1995 and was informed that the Board had since ceased paying such advances.

  • Page 36 of 286

  • 4. Amount of K6,292,441 awarded by National Court against the Board

    Note 8 to the financial statements refers to events after balance date whereby the National Court in its ruling of 27 July, 2007 awarded K6,292,441 to Agmark Pacific Limited. This Company had sued the Board for illegal collection of Stabilisation Bounty since the Minister had not gazetted the bounty collection as required under the Cocoa Act, 1981 and thereby deeming as illegal the bounty collected and used by the Board between January, 1997 and October, 1999.

    It appeared that this case was not defended adequately and the Board had appealed against the verdict. I brought this to the attention of Management and have since been advised that the Board had engaged a private lawyer to take the matter further and an appeal was lodged at the Supreme Court of Papua New Guinea in 2008.

    5. Going Concern

    The Board had prepared its financial statements on a going concern basis. However, should the appeal made in 2008 fail, the Board will not be able to pay the K6,292,441 within its current financial position unless an agreement is reached with Agmark Pacific Limited to pay the award over a period of time, or the State agrees to bail out the Board by paying the award, otherwise the Board may be considered as insolvent and may be placed under receivership.

    5.3 STATUS OF FINANCIAL STATEMENTS

    At the time of preparing this Report, the inspection and audit of the accounts and records, and the examination of the financial statements of the Board for the years ended 30 September, 2007 and 2008 were completed and the results were being evaluated.

    The Board did not submit its financial statements for the year ended 30 September, 2009 for my inspection and audit. 5A. COCOA STABILISATION FUND

    5A.1 INTRODUCTION

    5A.1.1 Legislation

    The Cocoa Stabilisation Fund was established under Section 18 of the Cocoa Act, 1981. The Fund is administered by the Cocoa Board of Papua New Guinea with the objective of establishing price stabilisation, price equalisation and stockholding arrangements within the cocoa industry.

    5A.2 AUDIT OBSERVATIONS AND RECOMMENDATIONS

    5A.2.1 Comments on Financial Statements

    My report to the Ministers under Section 8(4) of the Audit Act, 1989 (as amended), on the financial statements of the Fund for the year ended 30 September, 2005 was issued on 29 January, 2010. The report was a Disclaimer of Opinion.

    “BASIS FOR DISCLAIMER OF OPINION

    1. I audited the Statement of Receipts and Payments of Cocoa Stabilisation Fund for the year ended

  • Page 37 of 286

  • 30 September, 2004 and issued a disclaimer of opinion on them. Consequently, I was unable to quantify the effects of any material misstatement on the opening balances that might have a bearing on the balances reported for the year ended 30 September, 2005. Therefore, I was unable to perform sufficient audit procedures to satisfy myself as to the accuracy or completeness of the opening balances that would have consequential effect on the Statement of Receipts and Payments for the year ended 30 September, 2005, and the comparative amounts presented.

    2. The Cocoa Board is responsible for the administration of the Cocoa Stabilisation Fund. The Cocoa Stabilisation Fund had a net deficit of K22,835,965 (2004: K22,063,320), which represents borrowed funds. The ability of the Cocoa Stabilisation Fund to repay the borrowed funds totalling K26,219,934 (2004: K26,219,934) depends on the Government.s preparedness to inject more funds, guarantee additional loans for the operations of the Fund or substantial increases in cocoa prices above the trigger price to occur to be able to collect bounty to be used for the repayment of the Loan.

    As mentioned in Note 1 to the Statement of Receipts and Payments, the Government has committed K26,219,934 (2004: K26,219,934) as a loan to the Cocoa Board of Papua New Guinea to assist the Cocoa Support Scheme as detailed below:

    2.1 Total loan balance as at 30 September, 2005 stood at K26,219,934. I was unable to satisfy myself as to the completeness and accuracy of the loan balance as I was not provided a confirmation from the bank. 2.2 Total outstanding levies/bounties were disclosed as K626,205 as there were no movements during the year. I was not provided with confirmations from the exporters to substantiate the outstanding amount. Consequently, I was unable to conclude on the accuracy of this figure. 2.3 The Cocoa Stabilisation Fund.s Statement of Receipts and Payments disclosed bank balance as K3,383,969. The bank balance included debit adjustments totalling K821,594 and credit adjustments totalling K232,614 of which details were not provided for my verification. DISCLAIMER OF OPINION In my opinion, because of the significance of the matters discussed in the preceding paragraphs, I am not in a position to and do not express an opinion as to whether the accompanying statement gives a true and fair view of the revenue collected and loan repayments by the Cocoa Stabilisation Fund during the year ended 30 September, 2005 in accordance with the receipts and disbursements basis as described in Note 1 (IV).”

    5A.2.2 Audit Observations Reported to the Ministers

    My report to the Ministers under Section 8(2) of the Audit Act, 1989 (as amended), on the inspection and audit of the accounts and records of the Fund for the year ended 30 September, 2005 was issued on 29 January, 2010. This report revealed generally satisfactory results.

    5A.3 STATUS OF FINANCIAL STATEMENTS

    At the time of preparing this Report, the field work associated with the inspection and audit of the accounts and records and the examination of the financial statements of the Fund for the years ended 30 September, 2006, 2007 and 2008 were completed and the results were being evaluated.

    The Fund had not submitted its financial statements for the year ended 30 September, 2009 for my inspection and audit.

    6. COCOA COCONUT INSTITUTE LIMITED OF PAPUA NEW GUINEA (FORMERLY PNG COCOA AND

  • Page 38 of 286

  • COCONUT RESEARCH COMPANY LIMITED)

    6.1 INTRODUCTION 6.1.1 Legislation Cocoa Coconut Institute Limited of PNG (formerly PNG Cocoa and Coconut Research Company Ltd) was amalgamated with PNG Cocoa and Coconut Extension Agency Ltd in 2003. The Company is owned equally between the PNG Cocoa Board and the Kokonas Indastri Koporesen of Papua New Guinea.

    6.1.2 Functions of the Company

    The principal functions of the Company are: to conduct research into all aspects of Cocoa and Coconut growing and production and all aspects of the Cocoa and Coconut industries; to promote research and beneficial programs for these industries; to provide assistance to all persons and bodies engaged in any aspect of the Cocoa and Coconut industries; to produce planting materials for the Cocoa and Coconut industries; and to provide consultancy services.

    6.2 AUDIT OBSERVATIONS AND RECOMMENDATIONS

    6.2.1 Comments on Financial Statements

    My report to the Ministers under Section 8(4) of the Audit Act, 1989 (as amended), on the Company.s financial statements for the year ended 31 December, 2006 was issued on 31 May, 2010. The report contained a disclaimer of opinion.

    “BASIS FOR DISCLAIMER OF OPINION

    Accounting Records

    The general ledger and trial balance for the year 2006 were very unreliable. The opening balances of assets, liabilities and equity accounts did not agree to the 2005 audited financial statements and most closing balances as per the 2006 trial balance were not supported by appropriate schedules or reconciliations. Consequently, I was unable to utilise the general ledger to confirm the accuracy of the amounts disclosed in the financial statements as at 31 December, 2006.

    Financial Statements

    The financial statements for the year ended 31 December, 2006 is unreliable as a result of anomalies indentified in the disclosures therein. The Balance Sheet has an unexplained difference of K1,595,401 between the Net Assets amount of K9,718,566 with total Share Capital and Reserves amount to K8,123,166. No explanation was provided for these discrepancies. As a result, I was unable to rely on the accuracy and completeness of the financial statements balances as at balance date.

    Fixed Assets

    The carrying value of fixed assets at 31 December, 2006 was K8,456,450. The depreciation schedule for the year 2006 was not provided to me for audit review and a difference of K273,157 existed between the fixed assets value recorded in the financial statements and the balances as per the general ledger. An amount of K346,088 recorded as works in progress in the assets listing comprises of fixed assets additions are yet to be allocated to the respective asset.s categories and

  • Page 39 of 286

  • depreciated accordingly. Consequently, I was unable to determine the completeness, existence, accuracy and valuation of the fixed assets balance and the impact of these factors on the financial statements as at 31 December, 2006.

    Closing Stock

    The Company has recorded stock as K726,575 in the financial statements as at 31 December, 2006. I observed that the Company did not undertake any physical stock-take at the year end and due to the nature of inadequate stock records, I was unable to satisfy myself as to the quantities and valuation of the materials and supplies. As a result, it was not practical to extend my audit procedures to satisfy myself as to the existence and valuation of the stock on hand at the balance date.

    Trade Debtors

    No reconciliation and supporting documents for debtors were available. No provision for doubtful debts were made despite some debtors balances remaining unchanged from previous years. As a result of the above, I was not able to confirm the completeness and accuracy of the debtors balance of K1,052,508 disclosed in the financial statements as at 31 December, 2006.

    Cash and Bank

    Bank reconciliation for twenty five (25) out of a total fifty-six (56) bank accounts maintained were not available for my audit verification. A difference of K381,111 also existed between the cash at bank disclosed in the financial statements and the general ledger. No details of this difference were available. Further, a difference of K466,845 exists between the cash at bank balance and cash flow statement balance in the financial statements. As a result, I was unable to confirm the accuracy of K4,203,926 disclosed as bank balance in the financial statements as at 31 December, 2006.

    Trade Creditors and Accruals

    Trade creditors and accruals were recorded as K3,342,488 in the financial statements. No reconciliations and supporting documentation were available to verify the balances recorded in the financial statements. Consequently, I was not able to perform the necessary tests to satisfy myself as to the accuracy and completeness of the creditors and accrual balances taken up in the financial statements at 31 December, 2006.

    Provisions

    The Company was unable to provide satisfactory records in respect of Cocoa and Coconut Extension Agency Limited staff provisions of K299,552 transferred to the Company after the Extension Agency merged with the Company. An under provision of K661,009 exists between the Attaché Payroll System leave liability report of K1,421,054 and financial statements gross balance of K760,045. Further, the staff net provision of K346,163 included a debit balance of K413,883 as staff leave fares which was not appropriate in a provision account. As a result, I was unable to satisfy myself as to the accuracy of the provisions included in the financial statements.

    Inter-company Account Balance

  • Page 40 of 286

  • The amount of K205,146 disclosed as Inter-company account in the financial statements was incorrect. This comprised transfer of funds from one (1) bank account to another within PNGCCI Limited itself. This account should have a zero balance at balance date. As a result of this inconsistency, I was unable to satisfy myself as to the accuracy of this balance.

    Issued Share Capital

    The records currently held at the Investment Promotion Authority office disclosed the issued share capital to be 100,000 ordinary shares of K1.00 each and not 100,000 ordinary shares valued at K532,006 as recorded in the financial statements as at 31 December, 2006. As a result, I was unable to confirm as true and correct the amount disclosed in the financial statements as at 31 December, 2006.

    Unspent Grants

    Unspent Grants (liability) balance of K543,201 disclosed in the financial statements include INCO Beetle Grant account with a debit balance of K67,529 but no explanation was provided. Therefore, I was unable to confirm the accuracy of the unspent grants balance of K543,201 as at 31 December, 2006.

    DISCLAIMER OF OPINION

    Because of the significance of the matters described in the Basis for Disclaimer of Opinion, I have not been able to obtain sufficient appropriate audit evidence and accordingly, I am unable to express an opinion on the financial statements of the PNG Cocoa Coconut Company Limited for the year ended 31 December, 2006.”

    6.2.2 Audit Observations Reported to the Ministers

    My report to the Ministers under Section 8(2) of the Audit Act, 1989 (as amended), on the inspection and audit of the accounts and records of the Company for the year ended 31 December, 2008 was issued on 31 May, 2010. The report contained the following observations.

    Control over Assets

    A proper fixed assets register was not maintained to record and monitor the location, custody, usage and condition of all assets controlled by PNGCCI and further, management had not undertaken any physical inspection of the assets. In addition, the depreciation schedule for 2006 was not made available for my inspection and material differences were noted between the general ledger and the financial statements. As a result, it was not practical to satisfy myself as to the existence and control over these assets.

    Trade Creditors and Accruals

    The incurrence of liabilities is a major concern with total trade creditors and accruals standing at K3,342,488 for 2006. There was an apparent weakness in the management.s ability to take measures to manage the escalating costs.

  • Page 41 of 286

  • Collection of Debtors

    Total receivables of K1,052,508 recorded as at 31 December, 2006 must be confirmed and aggressively pursued and collected. These are significant funds needed by the Company but tied up. The management was advised to take measures to realize these debts to enable the settling of its liabilities.

    Company Statutory Records

    Serious differences were noted between the statutory records maintained by the Company and those records held by the Investment Promotion Authority (IPA). I advised management to identify the outstanding issues with IPA to avoid deregistration as well as to confirm the validity of the Company.s issued share capital and appointment of Company.s Secretary and Directors.

    Expenditure Control

    Analytical reviews done on expenses indicated substantial increases in operational costs incurred, and management was advised to apply cost control measures to create savings to offset the existing liabilities.

    Plantation Productivity

    Site inspections and interviews indicated that management of plantations was poor and that the full potential of these plantations were not fully utilized thus leading to under production. Management was advised to improve management practice and seek funding to increase its capacity to generate internal revenue.

    6.3 STATUS OF FINANCIAL STATEMENTS

    At the time of preparing this Report, the field work associated with the inspection and audit of the accounts and records for the year ended 31 December, 2007 was completed and the results were being evaluated.

    The financial statements for the years ended 31 December, 2008 and 2009 had been submitted for my inspection and audit and arrangements are being made to commence the field work shortly.

    7. COFFEE INDUSTRY CORPORATION LIMITED AND ITS SUBSIDIARIES

    7.1 INTRODUCTION 7.1.1 Legislation The Coffee Industry Corporation Limited was incorporated under the Companies Act, as a company limited by guarantee, and was conferred with statutory powers relating to the control and regulation of the production, processing, marketing and export of coffee by the Coffee Industry Corporation (Statutory Functions and Powers) Act, 1991. Under this Act, the undertakings of the Coffee Industry Board, the Coffee Development Agency and the Coffee Research Institute were, on 1 October, 1991, transferred to and vested in the Coffee Industry Corporation Limited. The members of the Corporation, according to the Articles of Association are from the Growers Associations, the Coffee Exporters Association, the Plantation Processors Association, the Block Development Association, the Secretary – Department of Agriculture and Livestock, the Secretary – Department of Finance and the Secretary – Department of Trade and Industry. The liability of each

  • Page 42 of 286

  • member is limited to an amount not exceeding one hundred kina. 7.1.2 Functions of the Corporation The principal functions of the Corporation are: to engage in research, extension, promotion, marketing, administration, management and control of the coffee industry in Papua New Guinea; to act in the best interests of coffee producers; and to promote development of the coffee industry in Papua New Guinea. 7.1.3 Subsidiary of the Corporation The Corporation has a subsidiary company, Patana No. 61 Limited and Coffee Industry Fund. Comments in relation to the subsidiary and the Fund are contained in paragraphs 7A and 7B, respectively, of this Report (Part IV).

    7.2 STATUS OF FINANCIAL STATEMENTS

    At the time of preparing this Report, the field work associated with the inspection and audit of the accounts and records and the examination of the financial statements of the Corporation for the year ended 31 December, 2009 was substantially completed and the results were being evaluated.

    7A. PATANA NO. 61 LIMITED (A SUBSIDIARY OF COFFEE INDUSTRY CORPORATION LIMITED)

    7A.1 INTRODUCTION

    Patana No. 61 Limited was incorporated under the Companies Act. The Company with a total issued capital of two (2) ordinary shares of K1.00 each, was acquired by the Coffee Industry Corporation Limited on 10 February, 1994. The Company is wholly owned by the Coffee Industry Corporation Limited. The principal activity of the Company is to invest in property.

    7A.2 STATUS OF FINANCIAL STATEMENTS

    At the time of preparing this Report, the field work associated with the inspection and audit of the accounts and records and the examination of the financial statements of the Company for the year ended 31 December, 2009 was substantially completed and the results were being evaluated.

    7B. COFFEE INDUSTRY FUND

    7B.1 INTRODUCTION

    The Coffee Industry Corporation (Statutory Functions and Powers) Act, 1991 provided for the establishment of the Coffee Industry Fund (CIF). The main purpose of the Coffee Industry Fund is to stabilize the Coffee Industry by giving the Coffee Industry Corporation the financial ability to implement schemes relating to stabilization and equalization of coffee prices and stock holding of coffee.

    7B.2 STATUS OF FINANCIAL STATEMENTS At the time of preparing this Report, the field work associated with the inspection and audit of the accounts and records and the examination of the financial statements of the Fund for the year ended 31 December, 2009 was substantially completed and the results were being evaluated.

    8. GOVERNMENT PRINTING OFFICE

  • Page 43 of 286

  • 8.1 INTRODUCTION

    The Government Printing Office was established by the British Colonial Administration in 1888. The functions of the Printing Office is empowered by Section 252 of the Constitution, Interpretation Act (Chapter 2) and Printing of the Laws. 8.1.2 Objective of the Government Printing Office The main objective of the Printing Office is to provide efficient and quality printing services to the executive arm of the government, judicial arm of the government, government departments and various statutory bodies at affordable cost.

    8.2 AUDIT OBSERVATIONS AND RECOMMENDATIONS

    8.2.1 Comments on the Financial Statements My report to the Ministers under Section 8(4) of the Audit Act, 1989 (as amended), on the financial statements of the Printing Office for the year ended 31 December, 2007 was issued on 7 January, 2010. The report contained a disclaimer of opinion. “BASIS FOR DISCLAIMER OF OPINION 1. Limitation on the Scope of my Audit

    Due to the disclaimer of opinion issued in respect of the year ended 31 December, 2006, I was unable to satisfy myself as to the opening balances. I was also unable to quantify the effects of misstatements, if any, which might have a bearing on the results of the operations of the Office. The general ledger and trial balance generated by the present system did not agree with the financial statements by an aggregate amount of K202,079. I was not provided with any valid explanation for the differences. As a result, I was unable to form an opinion regarding the accuracy of the financial records maintained by the Office and the closing balances stated in the financial statements. 2. Trade Debtors

    The trade debtors balance was stated as K7,090,428 at the year end. I was unable to independently verify the existence, valuation and completeness of the debtors balance due to the absence of proper debtors ledger and lack of supporting documentations. 3. Inventory

    I was unable to independently verify and conclude on the accuracy, valuation and existence of the inventory balance of K559,774 stated in the financial statements as I was not able to physically verify the inventory held at the year end and due to lack of supporting documents.

    4. Trade Creditors

    Due to lack of supporting documentation, I was unable to independently verify the existence, valuation and completeness of the creditors balance of K39,835 as stated in the financial statements. 5. Other Creditors

    I was unable to conclude on the accuracy and completeness of other creditors balance of K60,000

  • Page 44 of 286

  • due to the unavailability of supporting documentation. 6. Group Tax and Goods & Services Tax

    The financial statements disclosed Group Tax as K87,148 and Goods and Services Tax as K747,474. I was unable to independently verify the group tax balance and GST balance due to lack of supporting documentation. The permanent staff salary cost and other entitlements had not been incorporated into the financial statements to reflect the true cost of the Office. Further, the Government Printer.s report on page 2 of the financial statements disclosed that permanent staff salaries and benefits of approximately K500,000 were paid directly by the State. I was unable to verify the correctness of this balance in the absence of any supporting documentation. DISCLAIMER OF OPINION Because of the significance of the matters referred to in the preceding paragraphs, I had not obtained sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, I did not express an opinion on the financial statements of the Government Printing Office for the year ended 31 December, 2007.” 8.2.2 Audit Observations Reported to the Ministers My report to the Ministers under Section 8(2) of the Audit Act, 1989 (as amended), on the inspection and audit of the accounts and records of the Office for the year ended 31 December, 2007 was issued on 7 January, 2010. The report contained the following observations: 1. Property, Plant and Equipment

    The Printing Office disclosed fixed assets as K4,205,569 in the financial statements. However, it was noted that the Office did not maintain a proper fixed assets register to record details of purchases made, disposals done and those assets written off during the year. As a result, the ledgers for depreciation expense and assets written off did not agree with the financial statement figures by an aggregate amount of K104,049.

    2. Revenue

    The Government of Papua New Guinea through the Department of Prime Minister provides salaries for permanent staff only of the Printing Office. I noted that the principal activity of the Office is to provide printing services to the government and its arms which was fully funded from the internally generated revenue from the printing services. From my review of the revenue process, it was revealed that there was no clearly documented work process in place for the staff with fine lines of responsibility to follow from receiving of orders right through to collecting of monies and dispatching of the printed materials. As a result, the following weaknesses were noted: . The quotations were done by anyone within the sales section and they were not attached to the final invoices for validation which are filed at the sales sections;

    . The delivery dockets were not pre-printed and numbered with book fast copies in the dockets, instead photocopied dockets were used resulting in mismatches between orders and deliveries during reconciliation; and

  • Page 45 of 286

  • . Collection and receipting of cash and cheques had been a function within the Finance Section. I noted that the publication section, along with its own functions was performing the role of collecting cash and cheques. No segregation of duties were noted which may contribute to ineffective internal control, and may encourage fraud.

    3. Cash at Bank My review of the Bank reconciliations revealed that there were no monthly bank reconciliations done for January, July and August, 2007. Since the bank reconciliation is a basic control function of the cash collection I recommended that it must be performed on a regular basis and checked by a senior staff member. 4. Non-Acquittal of Travel Advances

    My review of the travelling advances revealed that travel advances totalling K41,646 were not acquitted on a timely basis and were still outstanding as at 31 December, 2007.

    I recommended that the advances be acquitted after return within seven (7) days.

    5. Financial Operations

    My review of the financial operations and the systems of the Office revealed the following;

    a) The Office does not have a financial manual or procedural manual;

    b) Documented segregation of duties with delegated financial limits was absent; and

    c) There were casual employees working with the Office for prolonged periods.

    8.3 STATUS OF FINANCIAL STATEMENTS At the time of preparing this Report, the financial statements of the Office for the years ended 31 December, 2008 and 2009 had not been submitted for my inspection and audit.

    9. INDEPENDENCE FELLOWSHIP TRUST 9.1 INTRODUCTION 9.1.1 Legislation The Independence Fellowship Trust was established under the Independence Fellowship Trust Act (Chapter 1040). The object of the Trust is to benefit village development by making annual awards to selected citizens for the purposes of broadening their knowledge and experience, as well as implementing and encouraging that development. 9.1.2 Functions of the Trust The functions of the Trust are: . to make selections of candidates to receive the awards of fellowships;

    . to determine the number and value of awards; and

  • Page 46 of 286

  • . to invest the funds of the Trust.

    9.2 AUDIT OBSERVATIONS AND RECOMMENDATIONS 9.2.1 Comments on Financial Statements My report to the Ministers under Section 8(4) of the Audit Act, 1989 (as amended), on the financial statements of the Trust for the year ended 31 December, 2009 was issued on 25 May, 2010. The report contained the following disclaimer of opinion: “BASIS OF DISCLAIMER OF OPINION 1. Limitation of Scope with respect to Receipts

    The Trust reported receipts as K26,375 in the financial statements as at 31 December, 2009. This amount was taken from the transactions shown in the bank statements. In addition, this amount did not agree with the receipts register total of K20,220. There was no reconciliation and supporting documents available for my verification. As a result, I was unable to confirm the authenticity and completeness of the receipts disclosed in the financial statements. 2. Limitation of Scope in regards to Payments The Trust disclosed its total payments/withdrawals as K24,902 in the financial statements. A difference of K7,212 existed between the payment vouchers file and the financial statements. No additional supporting documents were made available for me to verify the completeness of payments. As a result, I was unable to satisfy myself as to the accuracy and correctness of the payments as reported in the financial statements. 3. IFT Recurrent Budget

    Personnel emoluments, and procurement of goods and services and assets paid by the Department of Labour and Industrial Relations on behalf of the Trust during the year and were not reported in the Trust.s financial statements as at 31 December, 2009. As a result, the Trust.s financial position and operation were not fairly presented in the financial statements. DISCLAIMER OF OPINION Because of the significance of the matters described in the Basis for Disclaimer of Opinion, I do not express an opinion as to whether the financial statements of the Independence Fellowship Trust are drawn up so as to give a true and fair view of the Trust’s financial position as at 31 December, 2009 and the results of its operations for the year then ended.” 9.2.2 Audit Observations reported to the Ministers My report to the Ministers under Section 8(2) of the Audit Act, 1989 (as amended), on the inspection and audit of the accounts and records of the Trust for the year ended 31 December, 2009 was issued on 25 May, 2010. The report contained the following comments. 1. Passbook Bank Account

    I noted that the Trust funds were kept in a passbook account instead of a cheque account. In this system, there was no audit trail while making payments as the passbook system cannot provide copy of the withdrawal slip. I brought this matter to the management and it responded as follows:

    “The idea of passbook account came about when there was no money to operate in 2002 to 2007. Payment records are there but during the transfer to AON Haus from Pacific Place the files were misplaced. We have already under taken the responsibility to establish a cheque book account at

  • Page 47 of 286

  • Bank of South Pacific.”

    2. Receipts – K26,319

    The Trust has no proper system in place to account for monies received during the year. The receipts reported in the financial statements were extracted from the bank statements and not from the original receipts and/or from a receipts register. In addition, there was no audit trail to confirm that receipts collected were subsequently banked. I brought this matter to the management and it responded as follows:

    “We do have a system to keep account of all receipts, however during the transfer of office the files were lost or misplaced.”

    3. Payments – K24,902

    I noted that payments reported in the financial statements were taken from the bank statements instead of actual source documents. It was further noted that many payments were not supported by required documents. I brought this matter to management and it responded as follows:

    “The Independent Fellowship Trust Secretariat has undertaken the necessary measures to maintain a proper cashbook to facilitate the receipts and payments. We have already undertaken to open up the cheque account for payment in the near future.”

    4. Other Internal Control Weaknesses

    Other weaknesses noted were:

    . Bank reconciliation was not done on a periodic basis.

    . Fixed Assets Register and records of liabilities were not maintained.

    I drew management.s attention to these weaknesses and it responded as follows:

    “The bank reconciliations were not done on a periodic basis due to capacity problem the Independent Fellowship Trust Secretariat is encountering. As recommended, to strengthen its finance and accounting, we have already put in place a proposed organization structure which will be submitted to the Corporate Services of the Department of Labour and Industrial Relations for its endorsement and approval. The Department of Labour and Industrial Relation is responsible for all Independent Fellowship Trust fixed assets and liabilities. Therefore, all copies of the fixed assets are maintained at the Account section of the Department and not with Independent Fellowship Scheme.”

    10. INDEPENDENT CONSUMER AND COMPETITION COMMISSION 10.1 INTRODUCTION

    10.1.1 Legislation

  • Page 48 of 286

  • The Independent Consumer and Competition Commission was established by the Independent Consumer and Competition Commission Act, 2002. The Act came into operation in January 2003.

    10.1.2 Functions of the Commission The main functions of the Commission are: to formulate and submit to the Minister, policies in the interest of consumers; consider and examine and, where necessary, advise the Minister on the consolidation or updating of legislation providing protection to the consumer; liaise with Departments and other agencies of Government on matters relating to consumer protection legislation; receive and consider complaints from consumers on matters relating to the supply of goods and services; investigate any complaint received; make available to consumers general information affecting the interests of consumers; liaise with business, commercial and professional bodies and associations in order to establish codes of practice to regulate the activities of their members in their dealings with consumers; advise consumers of their rights and responsibilities under laws relating to consumers protection; promote and participate in consumer education activities; establish appropriate systems whereby consumer claims can be considered and redressed; liaise with consumer organisations, consumer affairs authorities and consumer protection groups overseas and to exchange information on consumer issues with those bodies; arrange for the representation of consumers in court proceedings relating to consumer matters; and to do all other things relating to consumer affairs.

    10.2 AUDIT OBSERVATIONS AND RECOMMENDATIONS 10.2.1 Comments on the Financial Statements My report to the Ministers under Section 8(4) of the Audit Act, 1989 (as amended), on the financial statements for the year ended 31 December, 2008 and 2009 were issued on 28 September, 2009 and 4 May, 2010 respectively. The 2008 and 2009 reports did not contain any qualifications. 10.2.2 Audit Observations Reported to the Ministers My report to the Ministers under Section 8(2) of the Audit Act, 1989 (as amended), on the audit and inspection of the accounts and records of the Commission for the year ended 31 December, 2008 and 2009 were issued on 28 September, 2009 and 4 May, 2010 respectively. The reports revealed generally satisfactory results.

    10.3 STATUS OF FINANCIAL STATEMENTS At the time of preparing this Report, the financial statements of the Commission for the year ended 31 December, 2010 will be submitted to my Office by 31 March, 2011. 11. INDEPENDENT PUBLIC BUSINESS CORPORATION

    11.1 INTRODUCTION The Independent Public Business Corporation was established under the Independent Public Business Corporation of Papua New Guinea Act, 2002 (as amended) which came into operation on 27 March, 2002. The above Act was amended through the Independent Public Business Corporation of Papua New Guinea (Amendment) Act, 2007 and the objectives and functions of the Corporation were changed. A major impact of the amendments made in the amended Act was that the Corporation, the Trusts, the State Owned Enterprises or any other enterprises in which the Corporation, the Trusts or a State Owned Enterprises holds any interest shall not be subject to the Public Finances (Management) Act, 1995. The amended Act also excludes the Corporation from the application of the Public Services (Management) Act, 1995 and the Salaries and Conditions Monitoring Committee Act, 1988. These amendments came into operation on 08 June, 2007.

    11.1.1 The objectives of the Corporation shall be:-

  • Page 49 of 286

  • (a) to act as trustee of the Trust and hold assets and liabilities that have been vested in or acquired by it, on behalf of the State;

    (b) to act as a financial institution for the benefit of and the provision of financial resources and services to State Owned Enterprises and the State, where this is approved by the National Executive Council;

    (c) to enhance the financial position of the State or State Owned Enterprises; and

    (d) to enter into and perform financial and other arrangements that in the opinion of the Corporation have as their objective either:-

    (i) the advancement of the financial interests of the State or State Owned Enterprises; or

    (ii) the development of the State or any part thereof.

    11.1.2 Functions of the Corporation

    (1) The Corporation shall administer the Trusts and monitor the performance of the assets of the Trusts in such manner as provided under this Act and shall perform such other functions as are required under this Act.

    (2) Without limiting the generality of Subsections (1) but subject to the provisions of this Act, the Corporation:

    (a) may undertake the function of holding and monitoring corporation for State owned assets and Majority State Owned Enterprises;

    (b) may undertake the function of planning, coordinating and managing State assets, infrastructure and projects; and

    (c) may determine policies regarding:

    (i) the conduct of its affairs and the affairs of any of the Trusts;

    (ii) the administration, management and control of the Corporation and any of the Trusts; and

    (d) may borrow, raise or otherwise obtain financial accommodation in Papua New Guinea;

    (e) may advance money or otherwise make financial accommodation available to the State or State Owned Enterprises;

    (f) may act as a central borrowing and capital raising authority for State Owned Enterprises;

    (g) may act as agent for State Owned Enterprises in negotiating, entering into and performing financial arrangements;

  • Page 50 of 286

  • (h) may provide a medium for the investment of funds of State Owned Enterprises;

    (i) may manage or cause to be managed the Corporation.s financial rights and

    obligations; and

    (j) has such other functions and duties as are prescribed by the Act or any other Act.

    11.2 AUDIT OBSERVATIONS AND RECOMMENDATIONS

    11.2.1 Comments on Financial Statements

    My reports to the Ministers under Section 8(4) of the Audit Act, 1989 (as amended), on the Corporation.s financial statements for the years ended 31 December, 2008 and 2007 were issued on 9 December, 2009 and 19 November, 2009 respectively. These reports contained similar qualified audit opinions, hence only the 2008 report is reproduced as follows:

    “BASIS OF QUALIFIED AUDIT OPINION 1. Non Compliance with International Accounting Standards

    The carrying value of certain Fixed Assets Held for Sale (Office Furniture and Fixtures) at 31 December, 2008 was K707,723. These assets were bought in 2000 for the 13th floor Deloitte Tower office, but this decision was later abandoned. The initial cost of these assets was K1,210,842 but was depreciated since 2003 up to 2006. The Corporation stopped providing depreciation in 2007. The net balance of K707,723 then has been shown as Assets Held for Sale. However, there was no consistency in applying the policy on depreciation on the assets which are held for sale, no respective adjustments on depreciation charged and no program of sale was evident. As a result, International Financial Reporting Standards (IFRS-5) – Non-current Assets Held for Sale and Discontinued Operations, (IAS-8)- Accounting Policies, Changes in Accounting Estimates and Errors, (IAS-16) – Property, Plant and Equipment were not complied with. Accordingly, I was unable to satisfy myself on the accuracy of the balance of the Assets Held for Sale shown as K707,723 and the fixed assets balance of K738,168 respectively disclosed in the financial statements. 2. Related Party Balances

    The financial statements disclosed K11,889,011 as receivables due from related parties under non-current assets. However, the components of this total had the following anomalies and incorrect accounting treatments;

    2.1 An amount of K2,212,439 was disclosed as receivable from Port Moresby Private Hospital Limited (POMPH). However, K117,500, K300,000 and another K300,000 received as rental income from the Hospital for the years 2006, 2007 and 2008 respectively were not adjusted from the K2,212,439, thus overstating this balance by a total of K717,500;

  • Page 51 of 286

  • 2.2 The above rental income were shown as payable in the books of General Business Trust (GBT) as at 31 December, 2008. The showing of rental income from the Hospital in the GBT accounts as payable and the expenses in the IPBC accounts as receivable was not based on an approved arrangement;

    2.3 Receivables from Investment Corporation of Papua New Guinea (ICPNG) were disclosed as K325,159. However, the accounts of the Investment Corporation of PNG (ICPNG) were not audited since 2002. Therefore, the exact status of its financial position could not be determined to ensure whether the receivable was infact payable in the books of ICPNG;

    2.4 Receivables from Aquarius No. 21 Limited were disclosed as K53,997. The only asset claimed as owned by Aquarius No. 21 Limited in its financial statements was a vacant land at Portion 1570 Granville, National Capital District.

    However, the lease of the land expired in 2000 which indicates that the land was not legally owned by the Company. As such, there was no asset owned by the Company to extinguish its liability owed to the parent entity; and

    2.5 Receivables from the Ministry of Public Enterprises and the Ministry of Communication and Information were disclosed as K2,319,521 and K6,977,895 respectively. These amounts were spent from the General Business Trust operational funds. The operational fund was allocated by the Trust to Independent Public Business Corporation for its own normal operations as Trustee. However, the above ministerial expenses were also paid out of this and shown as related party balances which were not appropriate. In addition, no operational/consultancy expenses during 2007 and 2008 and the specified time limits to refund was available.

    The above accounting treatments were not based on appropriate accounting practice or policy on fair presentation of the financial statements in compliance with International Financial Reporting Standards (IAS-1) -Presentation of Financial Statements.

    Consequently, I was unable to ascertain the correctness and validity of showing K11,889,895 as related party balances under Non-Current Assets in the financial statements for the year ended 31 December, 2008. In addition, the Corporation did not have a policy setting out the conditions in respect of expenses incurred on behalf of other government entities and accounting them in its books.

    QUALIFIED AUDIT OPINION

    In my opinion, except for the effects of the matters referred to in the qualification paragraphs, the financial statements of the Independent Public Business Corporation comply with generally accepted accounting practice, and give a true and fair view of the Corporation.s affairs as at 31 December, 2008 and of the results and cash flows for the year then ended.

    OTHER MATTER

    Without further qualifying my opinion, I wish to draw your attention to the following matter which I consider significant.

    Non-Applicability of Public Finances (Management) Act, 1995, Public Service (Management) Act, 1995 and the Salaries and Conditions Monitoring Committee (SCMC) Act, 1988.

  • Page 52 of 286

  • In 2007, through the Independent Public Business Corporation (amendment) Act, 2007, amendments were made to the Independent Public Business Corporation Act, 2002 (as amended) which specifically excluded the applicability of the Public Finances (Management) Act, 1995, Public Services (Management) Act, 1995 and the Salaries and Conditions Monitoring Committee Act, 1988 to IPBC, its Trusts and State Owned Enterprises (SOE.s). However, these Acts were enacted by the Parliament as standard policies and procedures to be adopted for the public bodies and organizations owned by the State of Papua New Guinea. The Acts were the basis to ensure public funds are managed properly by the organizations and further to ensure that corporate governance is initiated for all the organizations owned by the State. I was concerned that removing the applicability of these Acts may not be in the spirit of the legislative framework.

    Further, I have noted that some Board members of the previous board have raised their concerns against the amendments. I have enquired whether appropriate corporate governance policies were in place before this legislation was enacted. Management responded that corporate governance policies and procedures will be developed in due course. At the time of preparing this report, it has been two (2) years since the enactment of the new legislation and no policy and procedures have yet been developed.”

    11.2.2 Audit Observations Reported to the Ministers

    My reports to the Ministers under Section 8(2) of the Audit Act, 1989 (as amended), on the inspection and audit of the accounts and records of the Corporation for the years ended 31 December, 2008 and 2007 were issued on 9 December, 2009 and 19 November, 2009 respectively. These reports contained similar observations and as such, only the comments in the 2008 report are reproduced as follows:

    1. Business Travel Advance

    Internal controls over business travel advances were not adequate. Most of the overseas travel advances were not acquitted as per the Corporations travel advance policy of 2004. I brought this to the attention of management and it responded that “we have written to the officers concerned to acquit the travel advances. In respect of the internal control system over business travel advances, we will review the current system during 2009/2010 and put in place additional control procedures wherever necessary.”

    2. Managing Director.s Remuneration

    The Managing Director.s position was confirmed by National Executive Council (NEC) on 07 July, 2008 for a period of four (4) years. The Board in its meeting held on 13 March, 2009 has approved the Contract of Employment of the Managing Director and recommended to the Salaries and Conditions Monitoring Committee (SCMC) for its final approval of the remuneration package. However, I was not provided the copy of the SCMC approval. The Management advised that “the Managing Director.s annual remuneration has been approved by the IPBC Board and is currently with the SCMC for endorsement. We will provide a copy of the signed contract when we receive it from the SCMC.”

  • Page 53 of 286

  • 3. Exemption of Allowances from Income Tax without Internal Revenue Commission (IRC) Approval

    The Managing Director was entitled to various non taxable allowances amounting to K70,990 per annum. These allowances were exempted from income tax under Section 29(1) of Income Tax Act, 1959, provided that the Corporation obtained prior approval from the Internal Revenue Commission for the exemption. However, these allowances were excluded from tax without prior approval from the IRC thereby contravening the requirements of the Act.

    I advised the management to seek the exemption approval from the IRC and it responded that “we do not consider it necessary to seek a separate exemption from the IRC for the present Managing Director.s allowances as the position is the same.” 4. Non-Compliance with Contract

    An expatriate officer.s contract of employment clearly stipulates that he is entitled to six (6) weeks annual leave or thirty (30) working days. However, forty five (45) working days has been claimed as annual recreation leave and provision made which is not appropriate. I brought this matter to management for correction and I was advised by the management that “we will amend the contract of the Senior Manager (Finance & Administration) in respect of his annual leave days from 45 to 30, then make the necessary changes to the employee annual leave provision for any annual leave accrued as at 31 December, 2009.”

    5. Dependent.s Leave Fares

    The Corporation had not developed a policy in respect of leave fares paid to dependents of the officers. In 2008, contract officers claimed leave fares to their dependents who were aged over eighteen (18) years. I brought this to the attention of management for their appropriate action and it advised that “the Corporation.s policies are currently being drafted. Therefore, at present we do not have any policy in respect of the payment of leave fares of dependents. However, with respect to the airfares for dependents, the payments have been made with reference to each individual staff.s contract of employment.”

    11.3 STATUS OF FINANCIAL STATEMENTS

    At the time of preparing this Report, the inspection and audit of the accounts and records and the examination of the financial statements of the Corporation for the year ended 31 December, 2009 was completed and the results were being evaluated.

    11A. GENERAL BUSINESS TRUST (TRUST UNDER INDEPENDENT PUBLIC BUSINESS CORPORATION)

    11A.1 INTRODUCTION The General Business Trust was established under Section 31 of the Independent Public Business Corporation of Papua New Guinea Act, 2002 which came into operation on 20 June, 2002.

    11A.1.1 Objectives of the Trust

    . The Independent Public Business Corporation of Papua New Guinea (IPBC) was appointed as Trustee of the Trust and all moneys belonging to the Trust shall be invested or dealt with by IPBC in accordance with the Act.

  • Page 54 of 286

  • . At anytime before or after the commencement date of the Act, the Minister responsible for privatization matters may vest certain assets and liabilities in the IPBC as Trustee of the Trust.

    . All the State Owned Enterprises and other investments owned by the State of Papua New Guinea are vested in the Trust by the Minister responsible for privatisation as approved by National Executive Council from time to time.

    11A.2 AUDIT OBSERVATIONS AND RECOMMENDATIONS

    11A.2.1 Comments on the Financial Statements

    My reports to the Ministers under Section 8(4) of the Audit Act, 1989 (as amended) on the financial statements for the years ended 31 December, 2009, 2008 and 2007 were issued on 18 June, 2010, 24 November, 2009 and 15 October, 2009 respectively. The 2009 report did not contain any qualification but the other matters reported are reproduced. The 2007 and 2008 reports contained similar qualified audit opinions, hence only the 2008 report is reproduced.

    2009 Report:

    Investments in PNG Series II and PNG Series III Notes

    Note 7 to the financial statements disclosed a loss of K430,836 from the investment in PNG Notes Series III in Lehman Brothers. In 2008, PNG Series II and Series III Notes have incurred losses of K9.432 million and K2.954 million respectively in investing with Lehman Brothers. According to a valuation done by Structured Credit Research & Advisory Pty Limited, if one or two of the borrowers default on large credits supplied by Lehman Brothers the value of the investment in PNG Notes Series III may also be wiped out.

    I was concerned that the Trustee had not done proper evaluations and failed to obtain the Board.s approval before the investments were made. In my view, investments in overseas financial/money markets are not the core purpose of the establishment of the Trust. Further, I still believe that the funds vested with the Trust and managed by the Trustee (IPBC) are owned by the State although the amendments made to the Independent Public Business Corporation Act, 2002 (as amended) specifically excluded the compliance of Public Finances (Management) Act, 1995. Accordingly, the management still needs to seek the necessary approval from the Board before making investment decisions in overseas money markets and the sale of assets vested with the Trust. Therefore, the Board needs to bring in an adequate and appropriate corporate governance regime in the management and affairs of the Trust which I believe was lacking.

    Foreign Exchange Loss on the issue of Exchange Bonds

    I draw your attention to the exchange difference loss of K1,232,024,814 disclosed in the Statement of Trust Operations in respect of foreign currency transactions and foreign currency balances held in the Quarantined Accounts. This foreign exchange loss on translating foreign currencies to the functional currency was incurred as a result of issuing the Exchange Bonds of AUD$ 1.681 billion (K3.183 billion) for funding towards the investment in the PNG LNG Project.

  • Page 55 of 286

  • The above amount was additional to the value of the Oil Search shares required by IPBC if the Bonds were redeemed or exchanged as per Bond Deed Poll of the Exchange Bonds agreement as at 31 December, 2009.

    2008 Report:

    “QUALIFICATION

    Value of Non-Current Investments

    The value placed on most of the investments as disclosed in Note 9 of the financial statements were based on the most recent financial statements derived from the books of the investee entities without an independent valuation. Accordingly, the value of these investments may not bear any relation to the amounts that could be exchanged between knowledgeable willing parties in an arms length transaction. As a result, I was unable to conclude as to whether the carrying value of non- current investments of K5,485,192,429 at 31 December, 2008 was appropriate. QUALIFIED AUDIT OPINION

    In my opinion, except for the effects on the financial statements of the matter referred to in the qualification paragraph:

    (a) the financial statements are based on proper accounts and records; and

    (b) the financial statements are in agreement with those accounts and records, and show fairly the state of affairs of the General Business Trust as at 31 December, 2008 and the results of its financial operations and its cash flows for the year then ended.

    EMPHASIS OF MATTERS

    Without further qualifying my opinion, I wish to draw your attention to the following matters which I consider significant.

    Loss on Investments in PNG Series II and III Notes

    Note No.7 (2) to the financial statements disclosed that a loss of K12.4million was incurred in the investments in PNG Series II and III Notes. The manager of the Trust, Independent Public Business Corporation (IPBC), invested K15.0 million (AUD$ 5,920,500) in PNG Series II on 01 June, 2007 and further invested K16.0 million (AUD$ 6,250,000) in PNG Series III Notes on 21 September, 2007 in Lehman Brothers through BSP Capital Limited. Both investments totaling K31 million were made without proper evaluations on the overseas money market and without the Board’s consent. The losses occurred in September, 2008 when Lehman Brothers filed for Bankruptcy in the United States as a result of the global financial crunch.

    I was concerned that the Trustee had not done a proper evaluation and failed to obtain the Board.s approval before the investments were made. Further, I still believe that the funds vested with the Trust and managed by the Trustee (IPBC) are owned by the State and although amendments made to the Independent Public Business Corporation Act, 2002 (as amended) specifically excluded the compliance of the Public Finances (Management) Act, 1995, the management still needed to seek necessary approval from the Board before making investment decisions in overseas money markets and also for the sale of assets vested with the Trust.

  • Page 56 of 286

  • Foreign Exchange Loss on Investments (AUD$ IBD, PNG Series II and III Notes)

    I draw your attention to the Note No. 7 disclosure of a foreign exchange net loss of K17,312,647 for the financial year. The Trustee made an investment of K39,192,418 (AUD$15.0 million) in Australian Dollar IBDs with the Bank of South Pacific Limited in 2007. At 31 December, 2008 the value of the investments had reduced to K29,142,471 as a result of foreign currency fluctuations and the investments suffered a foreign exchange loss of K9,629,287 (2007: foreign exchange loss of K3,034,670). Similarly, the investments made in the PNG Series II and III Notes have also incurred foreign exchange losses of K3,368,452 and K3,555,920 respectively for the year ended 31 December, 2008 as a result of foreign currency fluctuations.

    I was gravely concerned over these overseas currency investments (IBD.s and Notes) in a period of unstable and volatile financial markets.

    In my view, investment in overseas financial/money markets is not the core purpose of the establishment of the Trust. Since the exclusion of the Public Finances (Management) Act, 1995 in the amendments through the Independent Public Business Corporation Act, 2007 the Board needs to bring in an adequate and appropriate corporate governance regime in the management and the affairs of the Trust which I believe is lacking at present.

    Loss on the Investment in New Britain Palm Oil Limited (NBPOL) Shares

    I also draw your attention to the Note No. 7(1) disclosure that Ramu Agri Industries Shares of 5,954,480 (28.41%) were exchanged for New Britain Palm Oil Limited (NBPOL) shares of 1,349,682 (0.93%) at a value of K40,490,464 at a price of K30 per share. Of the 1,349,682 NBPOL shares, 1,000,000 shares were purchased from the London Stock Exchange whereas the balance was obtained from the Port Moresby Stock Exchange as advised by their Consultant. However, at 31 December, 2008 the NBPOL stock value at the London Stock Exchange fell to £1.5825 (K5.769)/share resulting in a loss of K24,230,000. The POM Stock Exchange share values also dropped to K12 at year end resulting in a loss of K6,294,276. The total loss experienced at year end was K30,525,276.

    The NBPOL shares were valued at K30.00/share at the time of exchange whereas the value of the shares quoted at the Port Moresby Stock Exchange was K20.00/share. I have not sighted any valid reason explaining why the NBPOL shares were purchased at a higher price at an overseas stock exchange when s