Report of the Auditor General 2009 Part IV on the Accounts of Public Authorities and Statutory Bodies and Government Owned Companies
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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
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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 ……………………………………………………………………………………………………….
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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 …………………………………………………………………………………………………..
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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
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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
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…………………………………………………………………………………………………………… 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
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…………………………………………………………………………………………………. 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
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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.
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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.
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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
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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
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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
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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
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– – 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;
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. 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
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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
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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
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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
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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
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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;
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. 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:
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. 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.
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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;
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(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.
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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
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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
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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.
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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
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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
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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
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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.
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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
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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
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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
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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.
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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
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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
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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
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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
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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.
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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 t