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• Part 3
  Report of the Auditor-General
  2016

  on the Accounts of Provincial and Local-level Governments and
  associated entities
  __________________________________________________________
   Provincial Governments
   Local-level Governments
   Hospital Boards and Provincial Health Authorities
   Business Arms and Subsidiary Corporations
   Provincial Authorities
   Other Audits

  Auditor-General’s Office of Papua New Guinea

• Page 2 of 226

• Part 3
  Report of the Auditor-General
  2016

  on the Accounts of Provincial and Local-level Governments and
  associated entities
  __________________________________________________________
   Provincial Governments
   Local-level Governments
   Hospital Boards and Provincial Health Authorities
   Business Arms and Subsidiary Corporations
   Provincial Authorities
   Other Audits

  Auditor-General’s Office of Papua New Guinea

• Page 3 of 226

• Page 4 of 226

• Phone: (+675) 3012200 Fax: (+675) 325 2872 Email: [email protected] Website: www.ago.gov.pg

  29 September 2017

  The Honourable Job Pomat, MP
  Speaker of the National Parliament
  Parliament House
  WAIGANI
  National Capital District

  Dear Mr. Speaker

  In accordance with the provisions of Section 214 of the Constitution of the Independent State of
  Papua New Guinea, I have the honour to present to the National Parliament Part III of my
  Report.

  The Part III 2016 Report covers the financial years ending 2016. This Report embodies the
  results of audits of each of the Accounts of Provincial Governments, Local-level Governments,
  their Business Arms and Statutory Corporations, Provincial Authorities, Trust Funds and
  Hospital Boards and Provincial Health Authorities.

  Level 6
  TISA Investment Haus
  Kumul Avenue, NCD
  P.O. Box 423, WAIGANI, NCD
  Papua New Guinea

• Page 5 of 226

• Table of Contents

  FOREWORD……………………………………………………………………………………………………………. 1
  1. ROLE OF THE AUDITOR-GENERAL AND AUDIT MANDATE …………………. 3
  1.1 Role of the Auditor-General………………………………………………………………………………. 3
  1.2 Mandate of the Auditor-General ………………………………………………………………………… 4
  2. AUDIT AND DELIVERY OF GOVERNMENT PROGRAMS ………………………… 6
  3. SCOPE OF AUDIT ………………………………………………………………………………………… 7
  3.1 Introduction …………………………………………………………………………………………………….. 7
  3.2 Appointment of an Agent Auditor ……………………………………………………………………… 7
  3.3 Dispensation of Audits ……………………………………………………………………………………… 8
  4. RESULTS OF THE AUDITS OF FINANCIAL STATEMENTS ……………………… 9
  4.1 Audit Opinion …………………………………………………………………………………………………. 9
  4.2 Financial Statements of Provincial and Local-level Governments ………………………… 10
  4.3 Financial Statements of Hospital Boards and Provincial Health Authorities …….. 15
  4.4 Financial Statements of Business Arms and Subsidiary Corporations ……………… 17
  4.5 Financial Statements of Provincial Authorities ………………………………………………. 17
  4.6 The Role of the Treasury Offices ……………………………………………………………………. 18
  4.7 Other Audits …………………………………………………………………………………………………. 17
  4.8 Audit Fees …………………………………………………………………………………………………….. 19
  5. CONTROL ENVIRONMENT………………………………………………………………………. 20
  5.1 Introduction …………………………………………………………………………………………………… 20
  5.2 Responsibilities of Management ………………………………………………………………………. 20
  5.3 Responsibility of the Auditor-General ………………………………………………………………. 21
  5.4 Details of Control Issues …………………………………………………………………………………. 21
  5.5 Conclusion ……………………………………………………………………………………………………. 26
  6.0 RESULTS OF AUDITS PER PROVINCE ……………………………………………………. 28
  6.1 AUTONOMOUS REGION OF BOUGAINVILLE …………………………………………………… 28
  6.2 CENTRAL PROVINCE …………………………………………………………………………………….. 30
  6.3 EAST NEW BRITAIN PROVINCE …………………………………………………………………….. 40
  6.4 EAST SEPIK PROVINCE………………………………………………………………………………. 57
  6.5 EASTERN HIGHLANDS PROVINCE ……………………………………………………………. 73
  6.6 ENGA PROVINCE ………………………………………………………………………………………… 80
  6.7 WESTERN PROVINCE …………………………………………………………………………………. 86
  6.8 GULF PROVINCE ………………………………………………………………………………………. 102
  6.9 HELA PROVINCE ………………………………………………………………………………………. 106

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• 6.10 JIWAKA PROVINCE ………………………………………………………………………………….. 107
  6.11 MADANG PROVINCE ………………………………………………………………………………… 108
  6.12 MANUS PROVINCE …………………………………………………………………………………… 114
  6.13 MILNE BAY PROVINCE…………………………………………………………………………….. 116
  6.14 MOROBE PROVINCE ………………………………………………………………………………… 122
  6.15 NEW IRELAND PROVINCE ……………………………………………………………………….. 129
  6.16 ORO PROVINCE ………………………………………………………………………………………… 164
  6.17 SANDAUN PROVINCE ………………………………………………………………………………. 173
  6.18 SIMBU PROVINCE …………………………………………………………………………………….. 187
  6.19 SOUTHERN HIGHLANDS PROVINCE ……………………………………………………….. 192
  6.20 WEST NEW BRITAIN PROVINCE………………………………………………………………. 198
  6.21 WESTERN HIGHLANDS PROVINCE …………………………………………………………. 204
  7. LEGAL FRAMEWORKS …………………………………………………………………………… 211
  7.1 Organic Law on Provincial Governments and Local-level Governments …………….. 211
  7.2 Provincial Governments and Local-level Governments …………………………………….. 211
  7.3 Hospital Boards and Provincial Health Authorities …………………………………………… 212
  7.4 Business Arms and Subsidiary Corporations ……………………………………………………. 212
  7.5 Provincial Authorities …………………………………………………………………………………… 212
  7.6 Other Audits ………………………………………………………………………………………………… 213
  7.7 Dispensation of Audits ………………………………………………………………………………….. 213
  8. STATUS OF FINANCIAL STATEMENTS…………………………………………………. 215
  8.1 Provincial Government …………………………………………………………………………………. 215
  8.2 Local-level Government………………………………………………………………………………… 216
  8.3 Hospital Boards/Health Authorities ………………………………………………………………… 217
  8.4 Business Arms & Subsidiary Companies ………………………………………………………… 218
  8.5 Provincial Authorities …………………………………………………………………………………… 219
  8.6 Trusts and Funds ………………………………………………………………………………………….. 220

• Page 7 of 226

• Foreword

  FOREWORD

  My Report to the National Parliament is being presented in four parts as follows:

   Part I of my Report deals with the Public Accounts of Papua New Guinea;

   Part II of the Report deals with National Government Departments;

   Part III (this Part) of my 2016 Report deals with audits of the Provincial Governments, their Public
  Bodies and Subsidiary Corporations, Local-level Governments, Provincial Authorities, Provincial
  Health Authorities (Hospital Boards) and Trust Funds. With effect from 1996 an audit opinion on
  the financial statements of each Provincial Government and Urban Local-level Government is
  being issued in accordance with the requirements of the Organic Law on Provincial Governments
  and Local-level Governments; and

   Finally, Public Bodies and Subsidiaries, National Government-owned Companies and National
  Government’s shareholdings in Other Companies are covered in Part IV of my Report.

  Part III Report

  Readers of this Report should note that my Part III Report covers the financial years ending
  2016 and some previous years’ financial statements submitted subsequently. The Report covers
  the audit of Provincial Governments, Urban Local-level Governments, Hospitals/Provincial
  Health Authorities, Business Arms, Authorities and Trust Funds.

  The scope of audits included reviews of governance arrangements and examinations of internal
  controls in place at the time the audits were conducted. All audit findings have been reported to entity
  management for their comments.

  The Report provides a summary of significant internal control weaknesses identified, and types of
  audit opinions expressed. Major financial and accounting issues which required remedial actions to be
  taken by the agencies concerned have been summarized in this part of my Report. These issues have
  been communicated to the respective Provincial Administrators or Executive Management through
  the Management Letters.

  As required, and in addition to the Management Letters, audited financial statements together with the
  audit opinions where applicable, were also provided to the relevant Minister(s) and to the Department
  of Provincial and Local-level Government Affairs.

  Making this Report publicly available

  This Report will be made available to the public through the AGO website (www.ago.gov.pg) once it
  has been tabled in the Parliament.

  Part III 2016 Report Page 1

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• Part III 2016 Report Page 2

• Page 9 of 226

• Role of the Auditor-General and Audit Mandate

  1. ROLE OF THE AUDITOR-GENERAL AND AUDIT MANDATE

  1.1 Role of the Auditor-General

  Section 214 of the Constitution of the Independent State of Papua New Guinea (Constitution)
  prescribes that the primary functions of the Auditor-General are to inspect, audit and report to
  the National Parliament on the Public Accounts of Papua New Guinea (PNG) and on the
  control of and on transactions with or concerning the public moneys and property of PNG.
  The Organic Law on Provincial Governments and Local-level Governments (Organic Law)
  extends these provisions to cover Provincial Governments and Local-level Governments.

  Section 113 of the Organic Law requires the Auditor-General to establish a Provincial Audit
  Service and appoint a Provincial Auditor and additional officers in each Province. At the time
  of this Report, no such Provincial Audit Services have been established in any of the
  Provinces due to budgetary limitations confronted by the PNG Auditor-General’s Office
  (AGO). These constraints greatly affect my resources and capability to service audit clients
  based in the regions. The Office however, had established Regional Audit Offices in Port
  Moresby (Southern), Kokopo (NGI), Mount Hagen and Goroka (Highlands) and Lae
  (Momase).

  My Office is currently moving to strengthen the regional offices with adequate staff and
  logistics in order to effectively perform my mandated audit functions and responsibilities at
  the sub-national level of Governments and other Government entities.

  Section 213 of the Constitution provides for the independence of the Auditor-General in the
  performance of his constitutional duties in that the Auditor-General is not subject to the
  control or direction of any person or authority. This provision connotes an atmosphere of
  complete objectivity and impartiality in the discharge of the audit responsibilities.

  Other than staff and administrative control of the AGO, neither the Constitution nor the
  Organic Law provides for any executive or directive powers by the Auditor-General over the
  organizations subject to audit. Although the evaluations and investigations conducted under
  the direction of the Auditor-General assist management in detecting control and procedural
  weaknesses, the Auditor-General has no executive responsibility in relation to the
  formulation of accounting systems and policies or the setting of standards for administrative
  and accounting purposes as this may impede the independence and objectivity requirements
  of the Auditor-General in the execution of his primary audit function.

  However, it has been the policy of this Office to enter into discussions with Provincial and
  Local-level Governments on matters relating to accounting systems, internal controls and
  administrative procedures in general, and to provide related documentation where possible. In
  providing such advice or information it is understood that the responsibility for executive
  decision making remains with the auditee organizations.

  Part III 2016 Report Page 3

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• Role of the Auditor-General and Audit Mandate

  1.2 Mandate of the Auditor-General

  Section 7 of the Audit Act 1989 (as amended) provides for the Auditor-General to report to
  the Parliament on the results of audits undertaken. The Act specifically requires the Auditor
  General to specify
   Whether the financial statements, to which the report relates, are based on proper
  accounts and records;
   Whether the financial statements are in agreement with the accounts and records and
  whether they show fairly the financial operations for the period;
   Whether the receipt and payment and investment of moneys and the acquisition and
  disposal of assets during the year have been in accordance with the Public Finances
  (Management) Act 1995(PFMA); and
   Such other matters arising out of the financial statements, to which the report relates, as
  the Auditor-General considers should be reported.

  To meet these requirements I perform financial attest and regularity or compliance audits.
  The main objective of the attest audit is to express an opinion on the fairness of the financial
  statements, including compliance to disclosure requirements such as the format of the
  financial statements issued under Finance Instructions. Regularity audits are conducted with
  the main objective of ascertaining whether or not the expenditure had been applied for the
  purposes for which they had been authorized and that the expenditure conformed to the
  authority which governs it.

  In compliance with Part V of the Audit Act, my Office is performing both attest and regularity
  audits concurrently and is responsible for 373 audits of different entities as shown in the table
  below:
  ENTITY No Table Pages
  Provincial Governments 21 1
  Local-level Governments 322 2
  Provincial Health Authorities 21
  Business Arms 4 5
  Provincial Authorities 3 7
  Trusts and Funds 2 9
  TOTAL 373

  Provisions under the Organic Law as well as the Audit Act require that I furnish before 30
  April of the following year, audit reports on the accounts of Provincial Governments and
  Local-level Governments to the Minister for Inter-Government Relations, the Minister
  responsible for Finance matters, Provincial and Local-level Governments concerned and the
  National Economic and Fiscal Commission.

  I have endeavored to undertake audits to current status where possible within the resources
  available to me resulting in this 2016 Part 3 Report. However, there have been considerable
  difficulties in carrying out timely audits due to a number of factors including:
   Long delays and/or inaccurate presentation and disclosure of information in the
  financial statements by entities;

  Part III 2016 Report Page 4

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• Role of the Auditor-General and Audit Mandate

   Lack of experience, competency and cooperation of some Provincial Treasury,
  accounting personnel and the provincial administrative officers in the provinces;
   Administrative difficulties where the Provincial Treasurer does not report to the
  Provincial Administrator but to the Secretary for Finance;
   Delays in responding to issues raised in our Management Letters;
   Absence of proper and adequate accounting and subsidiary records on fixed assets and
  investments in the Business Arms of Provincial Governments; and
   Significant resource constraints of my Office, especially in regard to the conduct of the
  audits of Provincial Governments and their entities.

  My Office endeavors to improve on the past performance, thus catching up on the backlog of
  audits and strives to constantly deliver quality output.

  Part III 2016 Report Page 5

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• Audit and Delivery of Government Programs

  2. AUDIT AND DELIVERY OF GOVERNMENT PROGRAMS

  I have carried out audits of Provincial Governments and Local-level Governments, Hospital
  Boards, Business Arms, Provincial Authorities and Other audits as mandated. These
  government entities are tasked to deliver government services to the people of Papua New
  Guinea.

  Although my Report provides opinions on the financial affairs of these entities, other audit
  procedures performed by my Office give a picture of effectiveness of the delivery, by the
  public sector, of government policies and programs particularly their contribution to National
  Building through recovery, development and service delivery objectives of the Medium Term
  Development Strategies (MTDS) including:

   Welfare
   Health
   Economic Development and Growth
   Contribution to Nation Building
   Good Governance
   Rural Development
   Poverty Reduction
   Employment
   Strengthening Public Expenditure
   Management System including:
  o Fiscal Sustainability
  o Prioritisation of Resources, and
  o Cost effective implementation of programs.

  In addition, my audit findings that have been repeatedly highlighted had shown a slow
  progress in making improvements to governance structures and public accountability
  mechanisms in relation to expending Public Finances. Without strong governance procedures
  in the public sector, effective and efficient service delivery as envisaged by the National
  Government will be difficult to achieve.
  Besides the audit of financial statements, I have extended my audit programs into the audit of
  service delivery, performance audit and major public works projects to enhance my Office’s
  ability to deliver reports to Parliament on how well and effective the government programs
  are being delivered.

  Part III 2016 Report Page 6

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• Scope of Audit

  3. SCOPE OF AUDIT

  3.1 Introduction

  In performance of the statutory audit responsibilities, the resources of this Office were
  directed primarily to the evaluation of internal controls, together with such other
  examinations as were considered necessary to examine the performance of financial
  operations with a view to assessing the reliability and integrity of financial data and to
  determine the extent of compliance with applicable laws, regulations and directives. The audit
  procedures applied were intended to reveal systemic weaknesses which would result in losses
  or errors, frauds and/or mismanagement of public funds.

  The examination on a sample basis included review of corporate governance, the work of
  internal audit, appropriations management, revenue and payments, human resource
  management processes, cash management, asset management, advance management and trust
  account management.

  All audits were planned and performed in accordance with the International Standards of
  Supreme Audit Institutions (ISSAI) as promulgated by the International Organization of
  Supreme Audit Institutions (INTOSAI) to obtain reasonable assurance whether the financial
  statements are free of material misstatement. The audit involved performing procedures to
  obtain audit evidence about the amounts and disclosures in the financial statements.

  The nature of an audit is influenced by factors such as the use of professional judgment,
  including the assessment of the risks of material misstatements of the financial statements,
  whether due to fraud or error. The audit is not required to search specifically for fraud and
  therefore, the audit cannot be relied upon to disclose all such matters. However, all audits
  were planned and executed so that I can have a reasonable expectation of detecting material
  misstatements resulting from irregularities, including fraud.

  Compliance with relevant legislation is of paramount importance in safeguarding the State’s
  assets. My audits included reviews and tests to ascertain whether key provisions of the PFMA
  and various Finance Instructions have been adhered to.

  The audit covers provincial governments, local-level governments, hospital boards
  (provincial health authorities), business arms and subsidiary corporations, provincial
  authorities, trust funds and other audits as directed by me.

  3.2 Appointment of an Agent Auditor

  The provisions of the Audit Act allow the Auditor-General to appoint a Registered Company
  Auditor as agent to assist in discharging audit responsibilities as and when considered
  necessary. Contrary to these requirements, Provincial Governments and the management of
  their business arms have been engaging private auditing firms without my knowledge to carry
  out the audits of their businesses. Section 8(5A) of the Audit Act states clearly that “A body
  which is liable to audit by the Auditor-General shall not appoint a Registered Company
  Auditor to carry out the functions and powers of the Auditor-General under the Constitution
  and this Act.”
  Part III 2016 Report Page 7

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• Scope of Audit

  3.3 Dispensation of Audits

  As mentioned in previous reports, this Office has continued to experience considerable
  difficulties in carrying out timely audits of entities in the Provinces for a number of years.
  The factors include long delays and/or submission of incomplete financial statements due to
  high turnover of accounting staff and/or lack of suitably qualified personnel in most, if not, all
  government agencies including provincial governments, local-level governments and hospital
  boards. Of particular concern was non-preparation of financial statements by a large number
  of Local-level Governments. These problems were further aggravated by limited manpower
  and financial constraints which continued to affect my Office, making it practically
  impossible to be able to carry out audits of number of entities. In view of the above
  circumstances number of audits had to be dispensed with consistent with Audit Act that
  allows me to dispense the audits. Details of audits dispensed are presented in Section 7.7 of
  this Report.

  Part III 2016 Report Page 8

• Page 15 of 226

• Results of the Audits of Financial Statements

  4. RESULTS OF THE AUDITS OF FINANCIAL STATEMENTS

  4.1 Audit Opinion

  Financial statements audits are an independent examination of the financial accounting and
  reporting of Provincial Governments, Local-level Governments, Hospitals Boards and
  Provincial Health Authorities, Business Arms of Provincial Governments and other entities.
  The results of the examination are presented in this audit report, which expresses the auditor’s
  opinion on whether the financial statements as a whole and the information contained therein,
  fairly reflect the results of each entity’s operation and financial position. The disclosures and
  management representations made in the financial statements by the entity are assessed
  against relevant Finance Instructions and accounting standards, and legislative and other
  reporting requirements.

  It is generally accepted that a good indicator of the effectiveness of financial management
  processes is the timely finalization of the financial statements, accompanied by an unqualified
  audit opinion.

  Every year, the entities enter into thousands of transactions in millions of Kina. As such,
  errors are inevitable and may go undetected. It is therefore, important to appreciate that in
  expressing my opinion, the absolute accuracy of the financial statements may not be
  guaranteed. However, in conducting the audits of the entity’s financial statements, I seek to
  ensure that there is a reasonable assurance that the financial statements are free of material
  errors and misstatements.

  In determining the audit of the entity’s financial statements, two main factors are considered
  to determine the nature and extent of the work required. The first of these is the “materiality”
  level of the Kina amounts. This represents a threshold; if total errors fall below this threshold,
  the financial statements present information fairly; if they exceed this threshold and are not
  corrected, I refer to them as qualifications in my opinion. The second factor relates to “audit
  assurance”. This represents the level of certainty and confidence that my audit will reveal
  total errors that will be equal to or exceed the materiality threshold.

  At the conclusion of the audit, I determine whether the effect of undetected errors in the
  financial statements would mislead those who use the financial statements. If the effect is
  such that the financial statements are misleading, I include a qualification in my audit
  opinion.

  An inability to form an opinion – commonly referred to as a “Disclaimer” – is expressed when
  a scope limitation exists and sufficient appropriate audit evidence to resolve the uncertainty
  resulting from the limitation cannot be reasonably obtained; and the possible effects of the
  adjustments that might have been required, had the uncertainty been resolved, are of such a
  magnitude, or so pervasive that I am unable to express an opinion on the financial report
  taken as a whole.

  As reported in the past, only a handful of exceptional cases where Provincial Governments,
  Provincial Health Authorities and Business Arms of Provincial Governments were issued
  with audit opinions other than a disclaimer. The audit opinion reports issued to majority of

  Part III 2016 Report Page 9

• Page 16 of 226

• Results of the Audits of Financial Statements

  the entities during the current audit cycle however, were disclaimed. The reasons and the
  problems encountered are detailed in the paragraphs below.

  4.2 Financial Statements of Provincial and Local-level Governments

  I have concluded and reported that I was unable to form an opinion on virtually all Provincial
  and Local-level Government’s financial statements. Whilst in the majority of cases the
  financial statements had been prepared in the format required by the Finance Instructions
  issued under the PFMA, I concluded that material errors, uncertainties and lack of adequate
  records resulted in the overall financial position and results of operations that were not
  reliable. As a result, I continue to report that I am unable to form an opinion.

  The failure of the Provincial and District Administrators to promote measures and
  responsibilities for transparent and compliant spending of budget allocations continued to be
  a major factor that has contributed to ineffective financial management processes. However,
  whilst top management is tasked with effective management, control and accounting, the
  Parliament has the right to demand answers on accountability and governance issues.

  Other factors affecting the poor level of financial management include:
   Lack of experience and the competency of Provincial Treasury and accounting
  personnel in the provinces;
   Considerable abuse and diversion of government money for a long period of time
  without consequential disciplinary proceedings.
   Absence of regular monitoring and review by the Department of Finance on the work
  of the Provincial/District Treasury, together with timely corrective action;
   Lack of coordination and communication, for example Provincial/District Treasurers
  not advising the Administrators on matters relating to the financial status of the
  Province; and
   A reduced incentive for efficient management of funding due to the Provincial/District
  Treasury being in control of processing but the Administrator being responsible for the
  outcome.

  During this audit cycle my Office finalized and issued 15 audit reports to the Provincial
  Governments and 18 to Urban Local-level Governments. Details of these are presented in
  Section 8.1, Table 1 and Section 8.2, Table 3 respectively, Pages 216 – 218.

  There are currently 321 Local-level Governments around the country (excluding the Local-
  level Governments of the Autonomous Region of Bougainville) as shown in Table 2 of
  Section 8.2, Page 217. Of these, there are 290 Rural Local-level Governments and 31 Urban
  Local-level Governments in existence.

  As reported in my previous years reports, I was not able to carry out any audits of the Rural
  Local-level Governments accounts and records as required by the Organic Law due to
  financial and human resources constraints affecting my Office. I have satisfied myself that the
  revenue and expenditure of the Provincial Governments are largely grants, salaries and
  wages. No significant expenditures were incurred on major works and projects by the Rural
  Local-level Governments.

  Part III 2016 Report Page 10

• Page 17 of 226

• Results of the Audits of Financial Statements

  I have been able to carry out the audits of some of the major Urban Local–level Governments
  as they are located in the main headquarters of the Provinces. Audits of some Urban Local-
  level Governments were conducted for two to three years due to a backlog of audit in arrears.
  The results of controls testing are reported under Chapter 5 of this report under the respective
  Province headings.

  The financial statements of both Provincial and Urban Local-level Government comprise a
  number of Statements and Appendices. Statements ‘A’, ‘B’, ‘C’, ‘E’, ‘J’ and ‘K’ are
  maintained by the entities’ accounting system. Statements ‘D’, ‘F’, ‘G’, ‘H’ and ‘I’ are
  memorandum statements that are drawn from the accounting system, but are nevertheless
  financial statements in their own right that convey financial information to users and the
  public.

  There are certain accounts, records and registers and procedures that also relate to the
  financial statements through Appendices 1 to 6.

  4.2.1 Statement ‘A’ – Government’s Account Balances

  This is a statement of cash position for the Provincial or Local-level Government at year-end
  which should be supported by bank reconciliations. Statement ‘A’ is intended to show the
  Public Account comprising the Revenue Fund and the Trust Fund as represented by the year-
  end cashbook balances and other cash resources available to the Provincial or Local-level
  Governments.

  Common problems associated with the audit of this Statement include the following:
   Bank confirmations for the bank accounts and Interest Bearing Deposit (IBD)
  Certificates were usually not provided to confirm the closing bank and investment
  balances;
   Cash books and ledgers were often not updated before preparing the bank
  reconciliations and therefore the completed bank reconciliations were cumbersome and
  difficult to audit to ascertain the correct cash balance;
   Opening balances could not be confirmed as correct as these balances did not agree to
  the corresponding closing balances from the previous year; and
   There were adjustments made to opening or closing balances without any supporting
  documents provided.

  Under these circumstances, I was unable to express an opinion on the accuracy of Statement
  ‘A’ and consequently on the financial position of the Governments as at year-end.

  4.2.2 Statement ‘B’- Summary of Receipts and Payments

  This statement is an Operating Account and comparable to a Profit and Loss account in
  commercial practice. Statement ‘B’ is intended to show the summary of actual receipts in
  Statement ‘J’ and actual expenditure incurred in Statement ‘K’.

  Tracing figures from Statements ‘J’ and ‘K’ to this statement in almost all audits showed
  material difference relating to either expenses or revenue. Another frequent error was an
  omission of revenue and expenditure related to Staffing Grant and Teacher Salaries and

  Part III 2016 Report Page 11

• Page 18 of 226

• Results of the Audits of Financial Statements

  Allowances. This occurred as a result of these salaries and allowances being controlled and
  processed by the Department of Finance. Nevertheless, revenue and expenses arising from
  Staffing Grant and Teacher Salaries and Allowances should have been accounted for by the
  Provincial Government’s system.

  As a result of these omissions, I have qualified this statement due to the net surplus or loss
  disclosed being materially inaccurate and unreliable.

  4.2.3 Statement ‘C’- Receipts and Payments of Trust Funds

  This statement shows trust funds actual revenues and actual expenditure. The most common
  error that frequently resulted in material overstatement was the inclusion of the National
  Government Agencies’ trust accounts. These trust accounts are not related to the Provincial
  Government and should have been excluded from this statement. Consequently, the closing
  balances shown in the statement could not be relied upon. In addition, breaches of the Public
  Finance Management Act (PFMA) were likely to have occurred due to payments made from
  the trust accounts or revenue collected not being in accordance with the Trust Instruments.

  4.2.4 Statement ’D’- Sources and Application of Funds

  This is a summary cash flow statement showing sources of revenue and where these funds
  were applied. The statement also shows reconciliation of changes in bank balances to the net
  movement of the cash flow statement. In all instances this Statement could not be confirmed
  as correct and complete due to audit observations regarding materially incorrect Statements
  ‘B’, ‘J’ and ‘K’.

  4.2.5 Statement ‘E’- Financial Investments

  This statement details term deposits, treasury notes, debentures and similar instruments held
  by the Government. Provincial and Local-level Governments did not maintain investment
  registers to record details of investments. There were instances where records of revenue
  arising from either interest or disposal of these investments, were not made available for audit
  examination. Consequently, I could not verify the accuracy of this statement.

  4.2.6 Statement ‘F’- Statement of Direct Investments, Capital Contributions,
  Equity, Options and Rights

  The purpose of this statement is to show the Government’s investments and ownership in
  companies and statutory authorities that are long-term investments. All assets including
  investments acquired are charged to expenditure in the year the payment is made. However,
  investments are required to be recorded in the accounting system.

  Not maintaining investment registers or other records (i.e. share certificates) was a wide-
  spread problem. According to previous year’s financial statements or other relevant
  information obtained during the audit, the majority of Provincial Governments held
  investments in the form of shareholdings and/or made capital contributions in a number of
  companies. The non-disclosure of the Provincial Governments’ investments in this Statement
  as well as the income derived from such investments is misleading to stakeholders and users
  of the statements.

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  This issue is of a particular concern. Firstly, millions of Kina could be lost due to the lack of
  proper feasibility studies into the financial background and viability of companies in which
  the Government invests. The Provincial Government should ensure that the viability and the
  financial and statutory requirements relating to establishment of companies are properly
  reviewed and analysed prior to investing large sums of public monies in such companies.

  In addition, some of these companies are being audited through private arrangements and not
  by the Government auditors. In my reports, I have advised the Provincial Governments to
  liaise with my Office on assessing whether an audit of those financial statements should be
  undertaken by this Office. This assessment would be based on whether the Provincial
  Government is a major shareholder and has a controlling interest in the company.

  My other concern is that due to inadequate maintenance of records, these investments could
  be lost or misappropriated resulting in significant loss of public funds.

  4.2.7 Statement ‘G’- Statement of Lending

  This is a schedule of all funds lent by the Government, including on-lent loans funds. In
  absence of proper records or registers maintained by the Provincial Governments in relation
  to these matters, I was unable to confirm the accuracy of this statement.

  4.2.8 Statement ‘H’- Statement of Borrowings

  This is a schedule of all funds borrowed or loaned. Liabilities or financial obligations to
  outside organizations outstanding at the end of the financial year are not brought into account;
  however, they are required to be recorded in this statement. In the absence of proper records
  or registers maintained by the Provincial Governments in relation to these matters, I was
  unable to confirm the accuracy of this statement.

  4.2.9 Statement ‘I’- Statement of Loans Guaranteed by Government

  This statement shows the value of commitment of the Government to lenders of monies for
  loan recovery in the event of re-payment defaulted by borrowers. In the absence of proper
  records or registers maintained by the Provincial Governments in relation to these matters, I
  was unable to confirm the accuracy of this statement.

  4.2.10 Statement ‘J’- Receipts Classified under Heads of Revenue Estimates

  In accordance with the budget appropriation classification, this schedule discloses revenue
  received. The total from this statement has to reconcile with Statement ‘B’ as revenue and
  receipts. Revenue consists of all receipts being external (appropriations) or internally
  generated such as collection of fees and fines. In the majority of audits there were significant
  and unexplained discrepancies between the total of this statement and Statement ‘B’.

  The common error was an omission of the actual receipts pertaining to estimated Public
  Servants and Teaching Services Commission Salaries and Allowances, which are retained

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  and administered by the Department of Finance on behalf of the Provincial Government,
  which were (usually) not obtained and posted to the revenue ledgers.

  4.2.11 Statement ‘K’- Expenditure Classified under Heads of Appropriation

  In accordance with the budget appropriation classification, this schedule discloses
  expenditure actually paid. The total from this statement has to reconcile with Statement ‘B’.
  Expenditure consists of all charges for goods and services received and paid for before the
  end of the calendar year and refunds of revenue collected in previous years.

  A common error was an omission of the actual expenditure relating to the Teaching Services
  Commission Salaries and Allowances. Furthermore, reconciling items, such as bank charges,
  fees and other items relating to expenditure which were not adjusted in the cashbook and
  posted to the respective expenditure ledgers were also not shown in this statement.

  4.2.12 Appendix 1

  Appendix 1 reports outstanding commitments as at year end. Provincial and Local-level
  Government’s generally failed to report on the amount of committed fund.

  4.2.13 Appendix 2

  Appendix 2 reports on the outstanding debtors at year end. The majority of Governments did
  not report any debtors. In addition, there were no proper debtors’ ledger or other records such
  as invoices or debit notes maintained which could provide details of debtors at year end. In
  cases where the Government reported outstanding debtors, this balance included outstanding
  debtors from the previous years where no action appeared to have been taken to recover the
  debts.

  4.2.14 Appendix 3

  Appendix 3 shows the value of inventories at year end. In absence of various registers and
  related records, I was unable to verify the accuracy of this appendix.

  4.2.15 Appendix 4

  Appendix 4 is intended to give details of assets of the Provincial and Local-level
  Government. The majority of Provincial Governments did not report any assets, despite
  assets being purchased during the year. Those entities that reported some assets lacked
  necessary details in order for me to verify the existence, condition, location, custodianship
  and value of those assets.

  4.2.16 Appendix 5

  Losses and deficiencies of public monies and property are reported to the Inspection Branch
  of the Department of Treasury and are listed in this appendix. In absence of losses and
  deficiencies register and related records, I was unable to verify the accuracy of this appendix.

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  4.2.17 Appendix 6

  Appendix 6 reports on unacquitted advances at year end. The widespread mismanagement
  and abuse of this entitlement continues to be of concern to me. Provincial and Local-level
  Government failed to completely and accurately account for these advances. Many were
  outstanding for several years with no action taken to recover the advances. My Officers
  observed that in some Provincial Government, revenue collections were illegally loaned to
  officers. There was also no evidence of management taking action to improve on monitoring
  the management of advances.

  4.2.18 Other Issues

  Submission of Financial Statements

  It is mandatory for the Provincial Governments and the Local-level Governments to prepare
  annual financial statements and submit them to the Auditor-General for audit by 30 April in
  the year following. The Auditor-General then, after the completion of the audit, is required to
  report to the Minister for Finance, the Minister responsible for Provincial and Local-level
  Government matters, the National Economic and Fiscal Commission and the Provincial
  Governor.

  At the time of this Report there were 25 financial statements relating to 2014, 2015 and 2016
  financial years yet to be submitted by the Provincial Governments for audit as summarized in
  Table 1 of Section 8.1, Pages 207 – 208.

  Presentation of Financial Statements

  In addition to the annual financial statements, comprising Statements ‘A’ to ‘K’ and
  Appendices 1 to 6, the accounts are accompanied by the Chief Accountable Officer’s
  Statement and the Council Executive Officer’s Statement on the financial operation of the
  Provincial Government or the Local-level Government for the fiscal year ended.

  The financial statements of a number of Provincial Governments did not contain the
  Provincial Administrator’s Statement for the year ended and consequently were not presented
  in the format required by the Finance Instructions. This statement is a written representation
  by the management in which management acknowledges its’ responsibility for the fair
  presentation of the financial statements, and it also represents a means of approving the
  financial statements. Since management had not provided the necessary representations, this
  constituted a scope limitation and affected every statement presented by management.

  Another common error was a presentation error that resulted in material misstatement. In a
  number of financial statements presented by the Provincial Governments, incorrect amounts
  in Statements from ‘A’ to ‘K’ were presented.

  4.3 Financial Statements of Hospital Boards and Provincial Health Authorities

  During the last audit cycle I have issued 16 audit reports to Hospital Boards and Health
  Authorities and 33 financial statements outstanding for submission for audit including ones

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  the audit reports are under preparations, Table 4 of Section 8.3 details the status of the audit
  reports as at 30 September, 2017.

  Some Hospital Boards although financial statements were not submitted for audit, my Office
  undertook controls testing. Results of the controls testing are reported under Chapter 6 of this
  report under the respective Provincial Governments headings.

  I am pleased to report that a number of Hospital Boards and Health Authorities received
  qualified audit opinions compared to past years due to notable improvements in the areas of
  corporate governance, budgetary controls and payments of wages and salaries. Hospital
  management is significantly improving each year because of implementation of audit
  recommendations.

  Nevertheless the majority of the audit reports that I have issued in this audit cycle contained
  Disclaimer Audit Opinions as a result of significant control breakdowns, absence of financial
  records and financial statements qualifications.

  In general, all public hospitals are experiencing problems in preparing and submitting the
  financial statements for audit within the legislative requirement. Namely, Section 63 of the
  PFMA requires a public body (hospital) to submit and the Auditor-General to finalize the
  audit of prior year financial statements by 30 June each year. The same Act states that where
  a public body does not meet this deadline, the Minister may withhold half of the grants
  appropriated to that body for the following fiscal year. Although the public hospitals
  continuously fail to meet the requirement for timely reporting, the sanctions of the Act have
  never been imposed.

  Hospitals are required to prepare their financial statements in accordance with the Finance
  Instructions 2/2004 – Financial Statement Format for Non-Trading Public Bodies. The
  accounts are prepared under the cash basis of accounting with the financial statements
  consisting of: Statement of Revenue and Expenditure, Statement of Changes in Net Cash
  Asset, Schedule of Capital Assets and Liabilities and Accounting Policies.

  Common problems with the hospitals’ financial statements were:
   The records of medical supplies, accounts receivables and payables, capital
  commitments and contingent liabilities, were either non-existent or inadequate;
   Accounting records or asset registers were not maintained to record the details of the
  assets. Consequently, I was not able to verify the completeness, existence, accuracy and
  valuation of the fixed assets at year-end;
   Opening balances of cash at bank could not be confirmed as correct as these balances
  did not agree to the corresponding closing balances from the previous year;
   No advance registers were maintained. Travel advances and subsistence were
  frequently not acquitted. Therefore, this constituted a limitation of scope as I could not
  ascertain the value of the advances and also whether advances were actually utilized for
  the intended purposes;
   In several cases, there was no appointment of financial delegates to approve
  expenditure;

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   In several Hospitals the Board members were not duly appointed and sworn in, in
  accordance with Section 6 of the Public Hospital Act 1994;
   Payment of gratuities in the absence of employment contracts; and
   Overtime payments to employees without approval from the Chief Executive Officer or
  appropriate authorities.

  4.4 Financial Statements of Business Arms and Subsidiary Corporations

  All Provincial Governments had established business arms and have direct or indirect
  investments in subsidiary corporations and companies. At the time of preparing this Report
  in September 2017 there were approximately 5 known entities to be audited as detailed in
  Table 5 of Section 8.4. However, as reported in my previous reports, the full extent of the
  Provincial Governments’ investments therein, or the exact details of these business arms and
  their subsidiary corporations and companies, could not be fully established due to the lack of
  adequate information forthcoming from the Provincial Governments or the failure to maintain
  proper investment records and registers. My Office was unable to determine whether some
  entities were still in operation, defunct, or liquidated. For many years I have been
  unsuccessfully pursuing this information with the respective Provincial Governments, their
  business arms and relevant authorities.

  As reported in my previous reports, the entities have failed to submit their financial
  statements on a timely basis. Financial statements and audit fees have remained outstanding
  for many years in some cases. Consequently, audit of such financial statements could not be
  conducted despite my repeated requests.

  4.5 Financial Statements of Provincial Authorities

  Provincial Authorities are created by an Act of Parliament. The purpose of establishing these
  authorities is to develop infrastructure and to stimulate business activity in the respective
  provinces. Some of these authorities are directly involved in commercial activities as well.

  The audits of the Provincial Authorities are undertaken when the financial statements are
  received and when audit fees are remitted to my Office.

  As at the time of preparing this Report in September, 2017 the status of audits relating to the
  Provincial Authorities were as summarized in Section 8.5, Table 7 doable audits.

  4.6 Other Audits

  Trusts and Funds

  My audit responsibilities also include the audits of Special Purpose Funds and Trusts
  established by Provincial Governments. The audit of these Funds and Trusts is organized in a
  similar manner as the audit of business arms.

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  The audits of the Trust Funds (Trustee Limited) are undertaken when the financial statements
  are received and when audit fees are remitted to my Office.

  As at the time of preparing this Report in September, 2017 the status of audits relating to the
  Provincial Authorities were as summarized in Section 8.6, Table 9 doable audits.

  4.7 The Role of the Treasury Offices

  Provincial and Local–level Governments are independent legal entities with authority for
  managing their financial affairs. In recognizing these fiscal responsibilities, Sections 102 and
  103 of the Organic Law require Provincial and Local-level Governments (P&LLGs) to keep
  their accounting records proper and have sound internal control systems. The P&LLGs are
  required to manage their financial affairs in accordance with provisions of the PFMA.

  The Department responsible for financial management (i.e. the Department of Finance) has
  been tasked to establish, develop and commission Provincial/District Treasury Offices to
  provide accounting, financial management and support services to assist P&LLGs in
  providing community services. The administrative and accounting procedures have been
  specifically designed through the Finance Management Manual to provide these financial
  support services.

  A Provincial/District Treasury is an accounting organization established under Section 112 of
  the Organic Law located at the province area. The Provincial/District Treasurers’ functions
  are to ensure that all financial transactions undertaken by the P&LLGs out of public moneys
  are managed properly. These moneys are to be released strictly in accordance with law and
  contribute to the effective delivery of services to the community. Treasurers from time to time
  may also oversight functions such as banking, postal, and other services. The Secretary of
  Finance is tasked to oversee the affairs of these Treasury Offices.

  I have the responsibility to examine the financial statements and the accounts and records of
  the P&LLGs. For the last several years I have reported and concluded that material errors,
  uncertainties and lack of adequate records existed in Provincial/District Treasuries that
  resulted in the overall financial position and results of operations that were not reliable. As a
  result, I continued to report an inability to form an opinion on the P&LLG’s financial
  statements. The situation has not improved much in 2016 as well.

  The Provincial/District Treasury Offices did not adequately address their responsibilities
  through:
   Providing or ensuring experienced and competent Treasury Office personnel are
  employed;
   Providing adequate risk assessment, planning, manpower or funding to undertake
  internal audits by the Internal Audit Units within the Provincial Government; and
   A lack of coordination and communication between the Treasury Office personnel and
  P&LLGs on financial matters.

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  It is crucial that the Provincial/District Treasury Offices provide necessary support and ensure
  proper accountability and prudent financial management practices are followed when
  maintaining the accounts and records of the P&LLGs.

  The AGO recommends that the Department of Finance and the Department of Treasury have
  immediately to commence proper monitoring and support of their Offices so that P&LLG
  finances and records are properly maintained.

  4.8 Audit Fees

  The Government of PNG does not provide funding for audits of business arms of Provincial
  and Local-level Governments, authorities and trusts. In order to undertake audits on these
  entities I have to recover these costs through raising audit fees. These fees are based on the
  estimated minimal audit work required to enable me to form an opinion on their financial
  statements. Consequently, non-payment of audit fees by these entities results in audit work
  not being undertaken either by my Office or the contractor engaged by me. Based on my
  experience, a significant number of business entities take advantage of the situation and
  remain unaudited for considerable lengths of time. During that time, funds invested by the
  Provincial or Local-level Governments are depleted either due to the inability to effectively
  manage the business or due to misappropriation. As an end result, there is almost no return on
  the Government’s investments and the misappropriation is never identified and reported to
  the Parliament and the public.

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  5. CONTROL ENVIRONMENT

  5.1 Introduction

  The control environment includes the governance and management functions and sets out the
  foundation for effective control activities and monitoring. Control activities are policies and
  procedures that help ensure management directives are carried out and organizational
  objectives are achieved. Control activities, whether within computerized or manual systems,
  have various objectives and are applied at various organizational and functional levels.

  Monitoring of controls is a process to assess the quality of internal control’s performance
  over time. Monitoring is done to ensure that controls are designed appropriately and continue
  to operate effectively. Management monitoring of controls includes considering whether they
  are operating as intended and whether they are modified as appropriate for changes in
  conditions.

  This interim phase of my audit program was designed to assess the reliance that can be placed
  on control structures to produce complete, accurate and valid information for financial
  reporting purposes by the Provincial and Local-level Governments, Hospital Boards and other
  entities that come under my audit mandate.

  In performing the statutory audit responsibilities, I focused primarily on evaluation of internal
  controls, together with such other examinations considered necessary to assess the
  performance of financial operations of the entities, with a view to assessing the reliability and
  integrity of financial data and determining the extent of compliance with applicable laws,
  regulations and directives.

  The audits are not required to search specifically for fraud and therefore, cannot be entirely
  relied upon to disclose all such matters. However, the audits were planned and executed so
  that I can have a reasonable expectation of detecting material misstatements resulting from
  irregularities, including fraud.

  5.2 Responsibilities of Management

  The primary responsibility for the prevention and detection of fraud rests with those charged
  with governance. For example, the Provincial Administrator is the Chief Executive Officer
  and the Administrative Head at the Provincial Government level; the District Administrator at
  the Local-level Government and the Chief Executive Officer at the Hospital or Business Arm
  of Government. The Administrator/Chief Executive Officer is responsible for the preparation
  and presentation of the financial statements and the information contained therein in
  accordance with the Finance Instructions issued under Section 117 of the PFMA and the
  Organic Law.

  The Administrator/Chief Executive Officer is responsible for the efficient management of
  administrative services and is also responsible for keeping proper accounting records, for
  safeguarding the assets of the Provincial Government/Hospital or Business Arms of
  Government and for taking reasonable steps for the prevention and detection of fraud and
  other irregularities.

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  5.3 Responsibility of the Auditor-General

  My audits are performed in accordance with the International Standards of Supreme Audit
  Institutions (ISSAI) as promulgated by the International Organization of Supreme Audit
  Institutions (INTOSAI)and are designed to provide reasonable assurance that a financial
  report taken as a whole is free from material misstatement. Reasonable assurance is a concept
  relating to the accumulation of the audit evidence necessary for the auditor to conclude that
  there are no material misstatements in the financial report taken as a whole. Reasonable
  assurance relates to the whole audit process.

  5.4 Details of Control Issues

  A broad range of internal control issues were raised as part of the interim audit phase. In
  general, the results of the testing of controls at different entities indicated that overall, there
  continue to be significant weaknesses in the control environment. Control activities, such as
  delegations, authorizations, reconciliations, and data processing were not sufficiently robust
  to prevent, detect or correct error or fraud.

  As part of the interim audits, my reviewed processes and their related control activities in the
  following areas:
   Corporate governance;
   The work of the internal audit;
   Appropriation and budget management;
   Revenue and receivables;
   Purchases and payments;
   Human resource management processes;
   Cash management;
   Asset management; and
   Trust account management.

  5.4.1 Corporate Governance

  During the interim audits I assessed whether an agency’s control environment included
  measures that contribute positively to sound corporate governance. These measures should
  support key elements of a control environment designed to provide a sound basis for effective
  financial management.

  The results of the audits identified:
   Lack of Corporate Plans and operational plans. This was particularly evident in the audit
  of the Hospital Boards. This could lead to inability to set targets and performance
  indicators to monitor achievements and to take corrective action. It could also lead to
  inefficient and ineffective service delivery in that stakeholders and communities needs
  are not met;
   The requirement for a minimum of four meetings of a Provincial Assembly during the
  year was not met. In addition, minutes were either not taken or on occasions not certified

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  by the Chairman. These instances increase the risk that important decisions made may be
  nullified and may not hold legal basis in the event if challenged in court; and
   Audit Committees were now established in some Provincial Governments. Audit
  Committees have an important role to play in reviewing and advising on important
  components of corporate governance.

  5.4.2 Internal Audit

  Internal audit is a key source of independent and objective assurance advice on an agency’s
  internal control and risk framework. Depending on the role and mandate of an agency’s
  internal audit function, it can play an important role in assessing the adequacy of processes
  that underpin an agency’s financial statements.

  From my perspective, internal audit is an important component of the system of internal
  controls. Because of similarities in the nature and scope of activities performed by internal
  and external auditors, especially in the public sector, there are significant efficiencies to be
  achieved if external auditors are able to rely on the work of internal auditors. An effective
  internal audit program should facilitate external audit to place greater reliance on the work of
  internal audit, thereby making better use of overall audit resources.

  In that respect, it was disappointing to find that the majority of Provincial Government’s
  Internal Audit Units did not have Audit Charter and Audit Plan to set out the mandate and
  scope of audit coverage. In the majority of cases the Provincial Governments did not provide
  sufficient funds for Internal Audit Units to perform their duties during the year.

  5.4.3 Appropriation and Budget Management

  Appropriations represent the primary source of revenue for most Provincial and Local-level
  Governments and Hospital Boards and Health Authorities. One of the key audit tests was to
  ensure that the expenditures were within the appropriation limit so that expenditure for each
  agency accurately reflects anticipated final budget outcomes in the National budget system.

  The audit of the agencies revealed that controls relating to the management of appropriations
  were generally inadequate. Weaknesses noted related to:
   Incorrectly charged expenditures to Vote items for which funds were not appropriated;
   Erroneously increasing the appropriation without revised budget being approved;
   The Appropriation Acts were sometimes not signed and certified. The non-certification
  of the Appropriation Acts indicates gross negligence of duties by the Chairman and the
  Clerk of the Provincial Assembly; and
   The Provincial Governments on several occasions did not exercise compliance to
  financial instructions with regard to management and utilization of unspent funds at year
  end. Unspent funds were on occasions transferred to Trust Accounts. The unspent funds
  from the operating account are required to be paid out and receipted into the
  Government’s operating account for budget re-allocation in the following year.

  The above mentioned practices expose the Provincial Governments to the risk that the
  unspent funds may be utilized on expenditure not provided for in the Appropriation Act. In

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  addition, money could be spent in excess of the appropriation limit, which will result in
  breaches of the Appropriation Act, the PFMA and the Constitution.

  5.4.4 Revenue and Receivables

  In addition to the appropriation revenue, the Provincial Government collects internal revenue
  from other sources, i.e. motor vehicle registration and renewal, issue and renewal of driver’s
  licenses, and liquor licensing. Hospitals collect revenue through patient fees. I found that the
  relevant Registers were either non-existent or were not updated on a regular basis. As a result,
  total fees collected by either the Provincial Governments or the Hospitals could not be
  ascertained.

  In all Provincial Governments and according to the revenue ledgers, the Government has
  recorded significant shortfall in revenues in respect of the majority of internal revenue
  sources. This indicates the inability of the Provincial Governments to carry out sound and
  prudent revenue forecasting and also the lack of co-ordination and co-operation being
  exercised by the Revenue Unit and other line economic divisions of the Provincial
  Government to effectively plan and direct their efforts to ensure that all internal revenues
  estimated for the year are collected and accounted for.

  In a similar manner, General Hospitals collect income from patient fees and gifts and
  donations. Over the last several years, management of hospitals has not ensured that revenues
  were collected promptly and that the rates of fees, charges, and imposts were reviewed
  annually. In addition, there was no compliance to procedures pertaining to compiling of
  collector statements, thereby undermining the integrity of the revenue collections.

  Other common problems across all entities were:

   Daily collections were frequently not banked nor receiver statements raised and posted to
  the revenue ledger;
   Delays in banking of collections were frequent and on occasions in excess of 30 days;
   There was no segregation of duties maintained between receipting and payment
  processing; and
   There was no register of debtors maintained.

  5.4.5 Purchases and Payments

  Strong controls over purchases and payments will help ensure that the quality of goods or
  services is acceptable and that goods are actually received in good order. Controls including
  reconciliation processes, segregation of duties, appropriate delegations and access controls
  provide an effective means of ensuring that payments are valid and accurately recorded, and
  that funds are not mismanaged or subject to material fraud.

  It was noted that in most cases there was an extremely high rate of non-compliance with
  procurement and payment procedures. The instrument of appointment of Provincial Supply
  and Tenders Board, minutes of Board’s meetings and the Register of Tenders and Quotations
  were generally not made available for audit review. It was also noted that there was a

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  significant use of legal firms and consultants that was not supported by proper
  documentation.
  Other significant issues were:
   Payment vouchers were not examined for completeness and accuracy of claims prior to
  processing the payments;
   Payment vouchers were not certified to confirm the legitimacy of claims prior to
  processing the payments;
   In some cases delegates had approved expenditures in excess of their delegated financial
  limits;
   Written quotations were not obtained to ensure value for money; and
   Reimbursements were made to individuals and organizations for payments made on
  behalf of the Provincial Government using personal money.

  The significant lack of controls over procurement and payments expose the State to the risk
  of:
   Unauthorized purchases;
   Over-commitment of funds without recourse to cash flows;
   Uneconomical purchasing;
   Fraud (kickbacks/secret commissions);
   Staff use purchase orders to purchase personal items;
   Purchasing of inferior or expensive goods and services; and
   Consultancies being engaged at no benefit to the Government.

  5.4.6 Human Resource Management

  Human resource management processes encompass the day to day management and
  administration of employee entitlements and payroll functions. The salaries and wages costs
  within the Provincial and Local-level Governments and Public Hospitals represent one of the
  single largest items of expenditure in their accounts. This represents a significant area of risk
  and management should ensure that these costs are carefully controlled and monitored and
  that those responsible for payroll functions have the necessary skills and knowledge to
  effectively execute their functions.

  Given the significance of employee expenses, and the fact that by their nature some employee
  entitlement calculations can be inherently prone to human error, entities need to have
  adequate control mechanisms in place to capture and process employee data and related
  payments. In addition, key controls should include appropriate approval and review
  processes.

  I observed a number of instances where salaries files of Provincial Government members and
  staff requested for audit were not made available. Consequently, I was unable to verify any
  deficiencies in the salaries and allowances paid to Provincial Government members and staff.

  Common problem identified with Public Hospitals was that acting appointees on contract
  positions were incorrectly claiming gratuity payments. Also, recreational leave fare payments
  to officers and their families had no birth and student concession certificates attached for their

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  legal dependents for legitimacy and validity. Instances were also noted of leave tickets being
  refunded through a travel agent after withholding commission plus processing fee.

  5.4.7 Cash Management

  The cash management process covers the management of bank accounts. Each entity is
  required to ensure it has the necessary liquidity to meet its commitments as they fall due and
  to maintain proper controls over its official bank accounts. In this environment, it is essential
  that adequate management processes are in place to track fund transfers and to safeguard
  assets.

  Bank reconciliation represents an independent verification by management to ensure that
  cashbook transactions reconcile to the bank statements. Performing bank reconciliations
  periodically (monthly) ensures that receipts and payments are accurately processed, cashbook
  or bank errors are identified, and misappropriation or fraud is detected timely. Bank account
  reconciliations are a key control in assisting management to identify anomalies or errors in
  the payment and receipting processes and assist the management to discharge its
  accountability requirements. They need to be prepared within a reasonable period to ensure
  anomalies or errors have been identified and appropriate action undertaken.

  Weaknesses identified related to timely completion of bank reconciliations, including the
  clearance of reconciling items. In almost all audits of the Provincial Governments, the bank
  reconciliations were either not done or were not done in a timely manner.

  5.4.8 Assets Management

  Provincial Governments, Local-level Governments and Hospitals pay significant amounts of
  money on asset purchases, especially on computers and accessories. It is the responsibility of
  the Departmental Head to account for and safeguard the State’s assets.

  The maintenance of a reliable asset register that includes adequate information about assets
  acquired and disposed of, depreciation and asset reconciliations with periodical stock takes is
  a prerequisite to effective asset management. Regular reconciliations of the asset register with
  the entity’s financial systems will help ensure the timely and accurate recognition of asset
  items and facilitate their physical control.

  From the audits of the Provincial Government, Local-level Governments and Hospitals it was
  evident that asset registers were either non-existent or they were not maintained properly.
  This exposes the entity to the risk that assets may not be utilized effectively, may not be
  protected from physical deterioration or maintained properly. Further, periodic stock takes
  were not being conducted to determine the accuracy of assets on hand. This increases the risk
  of loss, theft or fraud.

  5.4.9 Trust Accounts Management

  Provincial Governments are responsible for maintenance of a number of trust accounts. To
  ensure proper accountability of trust money, Part 3 of the PFMA requires maintenance of
  adequate records, that collection of receipts and payments from trust accounts is in
  accordance with the Trust Instruments and for submission of periodic reports to Department
  of Finance including a requirement to submit monthly bank reconciliations.

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  Consistent with the findings from previous years, the Provincial Government could not
  provide formal Trust Instruments, and I was unable to ensure that the collection of receipts
  and the payments of trust money were valid. On a number of occasions the cashbook revealed
  an overdrawn balance.

  5.5 Conclusion

  Properly functioning internal controls are fundamental for entities in meeting their respective
  strategic, operational and financial responsibilities. The results of the current testing of
  controls continue to reveal weaknesses of such magnitude that material error could have been
  processed or misappropriation and fraud could have occurred.

  It is disappointing to report that there has been no change to the situation reported in previous
  years. Almost all the Provincial Governments, Urban Local-level Governments and Hospitals
  have been issued with Disclaimer Audit Opinions and some hospitals with qualified opinions
  signifying that there is still a long way to go in terms of improving their internal control
  issues and financial management issues. With a lot of Government interventions such as
  Government Advisors in state agencies and the establishment of Audit Committees, audit
  issues reported should have been captured and appropriate remedial action taken to address
  them. In this connection, I urge the Provincial Governments, Urban Local-level Governments
  and Hospitals to strictly follow my recommendations and implement them in subsequent
  years.

  The Disclaimer Audit Opinion means there is a lack of reliable audit evidence (non-existent
  or inadequate books and records) and/or reluctance by entity management to provide
  representation that financial accounts and records have been kept in accordance with
  acceptable financial management and accounting policies and procedures. A Disclaimer
  Audit Opinion is the worst audit report that an entity can receive.

  A commitment to strong financial management and accountability continues to be particularly
  challenging but it is also essential to drive improvement in governance within public sector
  entities and thus help ensure delivery of essential services to the citizens of this country.
  Having sound financial management and reporting in the public sector is an important
  contributor in achieving greater transparency, accountability, fiscal responsibility and, hence,
  improved governance.

  However, without robust, transparent, and accountable arrangements for financial reporting
  and financial management, it is not possible to reliably assess whether decision making by
  entities has been in the best public interest. Fundamentally, good governance arrangements
  are essential for an agency to be able to demonstrate to stakeholders that it can be trusted to
  do what it is established to do. Such arrangements assist stakeholders to have confidence that
  agencies not only have the competence and expertise required, but that they have also
  established robust administrative arrangements that enable them to do so efficiently,
  effectively and ethically. These critically important arrangements currently do not exist.

  Weakness in financial management and corrupt practices legitimize bad governance and
  diverts funding and energy away from development plans and achievement of national goals.

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  Poor financial management, coupled with misuse of public money, has contributed to decline
  in service delivery to the public.

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  6.0 RESULTS OF AUDITS PER PROVINCE
  6.1 AUTONOMOUS REGION OF BOUGAINVILLE
  6.1.1 Introduction

  The Autonomous Bougainville Government, Buka Urban Local-Level Government and
  Buka General Hospital are audited annually with or without the financial statements. The
  annual audits of other Local-Level Governments and the Business Arms of the
  Bougainville Government could not be audited due to manpower and financial constraints
  faced by my Office and the lack of records and logistical support from the respective
  Local-level Governments and Business Arms.

  6.1.2 Autonomous Bougainville Government

  The Autonomous Bougainville Government had not submitted its financial statements for
  the financial years ending 31 December, 2014, 2015 and 2016. Fieldwork associated with
  audit of the internal control environment for 2014 financial year had been completed. The
  audit working papers together with the draft Management Letter however, could not be
  located nor the Management Letter reviewed and issued due to the critical health
  condition of the officer responsible for the audit and consequently, the audit working
  papers and draft Management Letter were lost or misplaced in the process. I had
  considered redoing the audit along with the 2015 and 2016 accounts and records to be
  reported in my 2017 Part 3 Report to the Parliament.

  6.1.2.1 Status of Financial Statements

  At the time of preparing this Report in September 2017, the Autonomous Bougainville
  Government had not submitted its financial statements for the years ended 31 December,
  2014, 2015 and 2016 for my inspection and audit.

  6.1.3 Buka Urban Local-level Government

  6.1.3.1 Status of Financial Statements

  At the time of preparing this Report in September 2017, the Buka Urban Local-Level
  Government (BULLG) had not submitted its financial statements for the financial years
  ending 31 December 2012, 2013, 2014, 2015 and 2016 for my inspection and audit.
  However, field work associated with audits of the internal control environment for these
  years could not be conducted due to manpower and financial constraints faced by my
  Office.

  6.1.4. Buka General Hospital Board

  The Buka General Hospital Board submitted its financial statements for the years ended
  31 December, 2013, 2014 and 2015 in February, 2017 after the completion of the audit of
  the internal control environment and the issuance of the Management Letters for the two
  former years in July 2016. Issues identified with the control environment were reported in

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  my 2015 Part 3 Report to the Parliament. The review of the financial statements for 2013
  and 2014 and the audit of the accounts and records for 2015 however, could not be
  conducted due to financial constraints as well as the uncertainties associated with the
  2017 National General Elections.

  6.1.4.1 Status of Financial Statements

  The Buka General Hospital Board had submitted its financial statements for the years
  ended 31 December, 2013, 2014 and 2015, though late, in February 2017 for my
  inspection and audit. At the time of preparing this Report in September 2017, the
  financial statements for the year ended 31 December, 2016 however, was awaited.

  6.1.5 Business Arms

  The Autonomous Bougainville Government had a number of business arms as reported in
  my previous year reports. The status of these business arms however, remained
  unchanged as at the time of preparation of this Report in September 2017 as re-stated
  below:

  6.1.5.1 South Bougainville Engineering

  At the time of preparing this Report in September 2017, the entity had not submitted its
  annual financial statements for the twelve years ended 31 December, 2016 for my review.
  Consequently, audit of the financial statements and the accounts and records for these
  years could not be conducted and therefore, I am unable to report on the affairs, including
  financial position of the entity.

  6.1.5.2 North Solomon Marine Corporation

  At the time of preparing this Report in September 2017, the entity had not submitted its
  annual financial statements for the last twenty four years since 1993 including financial
  year ended 31 December, 2016 for my review. Consequently, audit of the financial
  statements and the accounts and records for these years could not be conducted and
  therefore, I am unable to report on the affairs, including financial position of the entity.

  6.1.5.3 Bougainville Restoration and Development Authority

  The entity had never submitted any financial statements since its inception.
  Consequently, audit of the financial statements and the accounts and records could
  not be conducted and therefore, I am unable to report on the affairs, including
  financial position of the entity.

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  6.2 CENTRAL PROVINCE

  6.2.1 Introduction

  The Central Provincial Government, the Motu Koita Assembly, the Port Moresby
  General Hospital Board, and Central Province Transport Authority (CPTA) are audited
  every year, with or without financial statements. Other LLGs and the Business Arms of
  the Provincial Government could not be fully audited due to manpower and financial
  constraints faced by my Office and the lack of records and logistical support from the
  respective LLGs and Business Arms.

  6.2.2 Central Provincial Government

  The Central Provincial Government had submitted its financial statements for the years
  ended 31 December 2013, 2014 and 2015. Field work associated with audit of the
  accounts and records and the examination of the financial statements for 2013, 2014 and
  2015 financial years were completed and the Management Letters issued were not
  responded by the Central Provincial Administration. The audit reports of 2013 and 2014
  were issued and the 2015 was in progress when this report was prepared in September
  2017.

  6.2.2.1 Comments on Financial Statements – 2013 and 2014

  My reports to the Ministers concerned and other relevant bodies under the Organic Law
  and Audit Act on the Central Provincial Government’s financial statements for the years
  ended 31 December, 2013 and 2014 were issued on the 8 August 2016 and 19 April 2017
  respectively. The reports contained similar Disclaimer Audit Opinions hence, only the
  2014 report is reproduced as follows:

  Basis for Disclaimer Audit Opinion

  Financial Statements

  Presentation Errors

  Finance Instruction 4/2000 issued under Section 117 of the Public Finances
  (Management) Act, 1995 prescribes the format for the preparation and presentation of
  the financial statements for Provincial Governments. The financial statements of
  Central Provincial Government for the year ended 31 December, 2014 did not fully
  comply with the above Finance Instruction.

  The required disclosures by the Governor and the Administrator on the Provincial
  Budget Performance and the financial performance were not included in the Financial
  Statements. Further, the financial statements were not duly signed and certified by the
  Provincial Administrator and the Provincial Treasurer as required to authenticate its
  presentation and disclosures. Consequently, I am unable to ascertain the completeness

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  and the accuracy of the disclosures in the financial statements of Central Provincial
  Government for the year ended 31 December, 2014.

  Opening Balances

  Because of the disclaimer of opinion issued in respect of the year ended 31 December,
  2013 and because of other limitations on the scope of my audit as noted below, I was
  not able to satisfy myself as to the completeness and accuracy of the opening bank
  balances. Since these opening balances would affect the determination of the financial
  position and the cash flows of the Central Provincial Government in the current year, I
  was unable to determine whether adjustments to the respective Cashbooks, financial
  position and the cash flows, might have been necessary for the year ended 31
  December, 2014.

  Statement A – Cash Balances

  The Fund balance of was disclosed as negative K714,592 in the financial statements.
  However, the closing balances of the bank accounts for the Operating and the Grant
  accounts including other accounts maintained totaling K14,179,386 had a significant
  discrepancy of K13,464,794. The Bank Reconciliations of the respective Bank
  accounts were not properly and correctly done during the year as reconciling items
  carried forward since 2002 in the Operating account were not cleared. Further,
  Schedule 6 had significant un-reconciled items of K9,358,373 which were not properly
  verified, traced and cleared. I was not provided sufficient and appropriate
  documentation including the required explanations for the discrepancy and the
  reconciling items. Consequently, I was unable to verify and confirm the validity and
  the correctness of the Fund balance as at 31 December, 2014.

  Assets

  In Appendix 4 to the financial statements, Assets in the custody of the Central
  Provincial Government were stated as K5,581,600. However, assets acquired
  amounting to K2,315,786 were not recorded as additions during the year. The Fixed
  Assets Register was not properly maintained and kept. As a result, I am unable to
  verify and confirm the accuracy and validity of the Assets in custody of the Central
  Provincial Government for the year ended 31 December, 2014.

  Advances

  Un-acquitted advances at year end were stated as K3,641,401 in Appendix 6 to the
  financial statements. However, Cash advances totaling K346,038 were not recorded
  during the year. I was unable to confirm and verify the validity and the correctness of
  the Advances register as it was inaccurate and not properly maintained and kept.
  Consequently, I am unable to confirm the veracity of Appendix 6 of the financial
  statements for the year ended 31 December, 2014.”

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  Report On Other Legal and Regulatory Requirements

  In addition to the scope limitation and deficiencies in the accounts and records noted
  above, I also wish to report on the breaches of the Organic Law on Provincial
  Governments and Local-level Governments, the Appropriation Act, 2013, the Public
  Finances (Management) Act, 1995 (as amended) and the Public Service (Management)
  Act, 1995 and other enabling legislations.

  Budgetary Control

  The Provincial Government passed an Appropriation Bill of K160,108,870 for the
  2014 financial year. However, I was not provided the relevant budget papers, the
  authorization and the approvals by the Provincial Executive Council (PEC) and the
  documentation for the respective budget reviews held during the year. Further, I was
  not provided an explanation or the necessary documentation for the significant
  variances culminating to noncompliance with Budgetary Protocols and legislations.

  Corporate Governance

  I was not provided the Corporate Plan (2011 – 2015) and the Meeting minutes of the
  PEC Meetings for the year ended. Consequently, I was unable to ascertain the
  governance culture and the veracity of the implementation of those resolutions if there
  were any during the year ended 31 December, 2014. Further, I observed that the
  Internal Audit Unit was under staffed, underfunded and inadequately supported with
  logistics to effectively carry out its responsibilities.

  Procurement and Payments

  There were significant control weaknesses in the Central Provincial Government’s
  maintenance of the accounting records and processes resulting among others these
  anomalies:

   39 payments totaling K6,654,253 were not verified for their validity and
  correctness as supporting documents were not made available for my
  examination;

   Three (3) payments totaling K397,806 were made without the required three (3)
  written quotations;

   Five (5) payments made to various suppliers for procurement of various goods
  and services and Law firms totaling K401,300 and K174,594 respectively did
  not have proper and adequate supporting documentation;

   A total of K11, 699, 644 was incurred for Major and Minor Capital works and
  maintenance programs during the year. However, relevant documentation and
  records including Contract, Completion reports, Certification reports, Tender
  documents and Status reports for the respective projects were not made available
  for audit examination; and

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   In Vote 143, expenditures totaling K2.5 million were incurred for a 2013 roll
  over. However, I was not provided the necessary explanations or the required
  supporting documentation for these expenditures.

  Disclaimer Opinion

  Because of the significance of the matters described above, I am not able to obtain
  sufficient appropriate audit evidence and accordingly I am unable to express an
  opinion on the financial statements of Central Provincial Government for the year
  ended 31 December, 2014.”

  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.
  The following are matters of significance:

   Central Provincial Government did not maintain proper accounts and records and
  had consequently breached Section 68(1) of the Public Finances (Management)
  Act, 1995; and

   The receipts and payments and investment of moneys and the acquisition and
  disposal of assets during the period covered by the financial statements have not
  been in accordance with the Public Finances (Management) Act, 1995 and
  Organic Law on Provincial Governments and Local-level Governments.”

  6.2.2.2 Management Response

  The management had been given an extended time to respond to my management letters
  queries, however, had not done so at the time of preparation of this Report in September
  2017.

  6.2.2.3 Status of Financial Statements

  The Central Provincial Government had not submitted its financial statements for the year
  ended 31 December, 2016. However, the audit of the internal control environment was in
  progress at the time of preparation of this Report in September 2017.

  6.2.3 Motu Koita Assembly

  The Motu Koita Assembly Act 2007 provided for the establishment of a Local-level
  Government for the Motu Koita people. The purpose of the Act was to enable the Motu
  Koita people to participate actively and meaningfully in the development of the National
  Capital District. Section 113 subsection 4 (c) of the Organic Law require the Assembly to
  submit its financial statements and its accounts and records to be audited by the Auditor-
  General of Papua New Guinea.

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  6.2.3.1 Status of Financial Statements

  The Motu Koita Assembly (MKA) had not prepared its financial statements for the years
  2007 to 2017. I reported in my 2014 Report that audit of the accounts and records and the
  related control environment could not be conducted due to lack of cooperation from the
  officers and non-availability of the necessary records. I had dispensed 2007 to 2012
  financial statements audits under Part V Section 16 (6) of the Audit Act, 1989.

  6.2.4 Port Moresby General Hospital Board

  The Port Moresby General Hospital had submitted its financial statements for the
  financial years ended 31 December 2014, 2015 and 2016. Field work associated with the
  audit of the accounts and records and review of the financial statements for 2014, 2015
  and 2016 had been completed with the Management Letters issued.

  6.2.4.1 Comments on Financial Statements – 2014 to 2016

  My reports for the years ended 31 December, 2014, 2015 and 2016 to the Ministers
  concerned and other relevant bodies under the Public Hospital Act, 1994, Public Finance
  (Management) Act, 1995 and Audit Act, 1989 were all issued in 2017. The reports for the
  three years contained Disclaimer Audit Opinions with similar issues hence; only 2016
  report is reproduced below:

  Basis for Disclaimer Audit Opinion

  Financial Statements

  Presentation Errors

  The financial statements of Port Moresby General Hospital for the year ended 31
  December, 2016 did not comply with the format as prescribed by Finance Instruction
  2/2004 issued under Section 117 of the Public Finances (Management) Act, 1995 (as
  amended). The Hospital did not disclose sufficient explanatory notes to the respective
  items and the non-disclosure of the Schedules for Capital Assets and Outstanding
  Liabilities. As a result, I was unable to express an opinion on the accuracy and
  completeness of the financial statements as the financial statements were not
  submitted as prescribed for its authentication.

  Limitations of Scope of Audit and Disclosure Errors

  I noted the following limitations of scope of audit and disclosure errors which have
  material effect on the accuracy and completeness of the account balances, the financial
  position of Port Moresby General Hospital as at 31 December, 2016 and consequently,
  the reliability of the financial statements.

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  Opening Balances

  Because of the Disclaimer of Audit Opinion issued in respect of the year ended 31
  December, 2015 and because of other limitations on the scope of my audit as noted
  below, I was not able to satisfy myself as to the completeness and accuracy of the
  opening bank balances. Since these opening balances would affect the determination of
  the financial position and the cash flows of the Port Moresby General Hospital in the
  current year. I was unable to determine whether adjustments to the respective Cashbooks,
  financial position and the cash flows, might have been necessary for the year ended 31
  December, 2016.

  Accumulated Fund Balances

  The Accumulated Fund Balance was stated as K11,416,549 in the financial statements.
  Included in the account balances was the Special Projects Account and Operations
  Account balance of K76, 884 and K11,024,370 respectively. The Trust and Special
  Projects Accounts balances of K261,542 and K53 643 respectively included in the fund
  balance did not agree to the respective account summary attached. The MYOB
  Accounting System used was not reconciled to the Excel Spread Sheets records used for
  the population of the financial statements disclosures. As such, I am unable to verify and
  confirm the correctness of the Accumulate Fund Balance for the year ended 31
  December, 2016.

  Receipts and Payments

  The Consolidated Receipts and payments of the Port Moresby General Hospital were
  stated as K54, 283,134 and K46,367,573 respectively in the financial statements. The
  appropriation for personal emoluments from the National Government was stated as K31,
  621,800. The personal emolument balances per the operating account statement stated as
  K12, 638, 868 did not agree to consolidated account summary of K12, 671, 023. With the
  lack of underlying records, periodic salary reconciliations and audit trail, I was unable to
  verify and confirm the account balance as correct for the year ended 31 December, 2016.

  Capital Assets

  Capital assets purchased during the year and the prior year was stated as K1, 786,735 and
  K8, 138,669 respectively in the Consolidated Summary of Receipts and Payments for the
  year ended 31 December, 2016. However, contrary to Note 10 to the financial statements,
  a list of assets and its values were not disclosed in the financial statements. An asset
  register maintained did not include details like date of purchase, purchase price, serial
  numbers and location for ease of reference. As a result, I was unable to confirm and
  verify the total assets valuing more than K9, 925,404 for the year ended.

  Lack of supporting documents in Payments

  Total payments were stated as K46, 367,573 in the consolidated summary of the financial
  statements for the year. However, during my review the supporting documents that could
  not be provided for audit examination was nearly 26% of the total expenditure for the

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  year. Consequently, I am unable to confirm and verify the validity and the correctness of
  the expenditures for the year ended 31 December, 2016.

  Significant Control Weaknesses

  Budgetary Control

  The total expenditure for salaries and wages was K43,373,582 which exceeded the
  appropriated amount of K31,621 800 resulted in an unauthorized over expenditure of
  K11,751,782. Further, the Administrative Consultancy Fees of K2,189,418, Golf day
  Expenses of K89,873, Constructions, Renovation and Improvement expenditure of K4,
  549,430 were not budgeted for and the authority for such expenditures could not be
  sighted. Consequently, I am unable to verify and confirm the validity of these additional
  appropriations as no explanation and documentation were provided for my oversight.

  Payroll/Rental Reimbursements

  The financial statement disclosed K1, 458,814 as monies received from a revenue head
  described as “Payroll/Rental Reimbursements” No underlying records such as sundry
  debtors listing and the related books of accounts were maintained to record the monies
  owed to the Hospital, I was unable to verify and confirm the validity and the correctness
  of the disclosure for the year ended 31 December, 2016.

  A total of K4, 086,895 paid for Short term Contract Officers was not reimbursed and
  remained outstanding as Finance Department had not reimbursed the Hospital.

  Internal Revenue

  Collection and accounting of internal revenues were inadequate as there were no
  collector’s statements, receipts books and deposit books for the internal receipts reported
  in the financial statements. The recording and banking of receipts were not prudent during
  the year.

  Sir Theo’s Foundation had donated K1, 195,276 to the Port Moresby General Hospital
  during the year ended 31 December, 2016. However, this donation was not taken into
  account and reported as such. Consequently, I was unable to confirm the disclosure in
  Receipts as complete and fair.

  Advances

  Advances were made to staff of the Hospital for travel and subsistence and as Salary
  Advances during the year. However, as there were no Advances Register and supporting
  documentation maintained and provided for my review, I was unable to verify and
  confirm the completeness and the validity of the total advances paid and recovered during
  the year.

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  No Service Agreements

  Major Service providers were paid a total of K11, 966,119 during the year. However,
  there was no service Agreements or Contracts entered into by the Hospital for the
  procurement of these services.

  Consultancy Services

  Consultancy and payments to law firms totaling K424, 911 and K746, 847 respectively
  were not proper and lacked disciplined compliant procurement practices.

  Human Resource Records

  Personal files, Employment records and the Staff Establishment Register for employees
  were not properly kept and maintained by the Port Moresby General Hospital during the
  year. Further, there were no salary reconciliations for the salaries paid during the year.

  Inappropriate Employment Contract Allowances

  Contractual allowances paid totaling K164, 500 for nine (9) contract Officers were not
  appropriately approved under the National Doctors Awards 2014 – 2016.

  Corporate Governance

  The governance culture at the Hospital was weak and lacked cohesive direction to
  achieve its corporate goals and mission. Further, the 2011 – 2020 Clinical Services
  Development Plan’s monitoring and evaluation was not conclusively feasible at the board
  level during the year ended 31 December, 2016.

  Internal Audit

  Internal Audits were not conducted by the Hospital or the National Department of Health
  (NDoH) to ensure probity and integrity of the Hospitals systems and processes to safe
  guard against loss, misuse and abuse.

  Disclaimer Audit Opinion

  Because of the significance of the matters described above, I was not able to obtain
  sufficient appropriate audit evidence and accordingly, I am unable to express an opinion
  on the financial statements of the Port Moresby General Hospital for the year ended 31
  December, 2016.

  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. The following
  are matters of significance:

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   Section 19(6) of the Public Hospital Act, 1994 requires minutes of the Board’s
  meetings to be recorded and kept. The Port Moresby General Hospital did not
  adequately and fully maintain minutes of Board meetings during the year ended 31
  December, 2016.

   Section 62(1) of the Public Finances (Management) Act, 1995 requires all public
  bodies to keep proper accounts and records of its transactions and affairs, and to
  develop adequate controls over their assets and liabilities. As discussed in the Basis
  for Disclaimer Audit Opinion paragraphs above, the Port Moresby General
  Hospital had not complied with this requirement.

   Port Moresby General Hospital did not maintain proper books of accounts and
  records and consequently breached Section 68(1) of the Public Finances
  (Management) Act, 1995.”

  6.2.5 Business Arms

  Section 16(2)(f) of the Audit Act 1989 provides for and extends my functions to audit the
  accounts and records of the Provincial Governments and Local Level Governments
  Business Arms and other establishments.

  I am aware of eight business arms of the Central Provincial Government namely, Central
  Province Transport Authority (CPTA); Central Provincial Investments (formerly Central
  Provincial Development Corporation); Central Provincial Travel Agent; Vitis Spices;
  Gokas Construction; Central Air Transport; Baina Agro-Forestry; and Ilimo Farm. CPTA
  had been the only one which had been consistently audited for the years up 2010. None of
  the other entities had submitted their recent financial statements for audit at the time
  preparation of this Report in September 2017.

  6.2.5A Central Province Transport Authority (CPTA)

  The Authority had submitted its financial statements for the year ended 31 December
  2011. The fieldwork associated with audit of the accounts and records and the
  examination of the financial statements had been completed and the Management Letter
  issued to the Managing Director in 2017. The audit report to the Minister and other
  authorities concerned was in progress at the time of the preparation of this Report in
  September 2017.

  6.2.5A.1 Management Response

  The Management had been given an extended time to respond to my Management Letter
  queries however, had not done so at the time of preparation of this Report in September
  2017.

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  6.2.5A.2 Status of Financial Statements

  The Authority had not submitted its financial statements for the years ended 31 December
  2012, 2013, 2014, 2015 and 2016 for my inspection and audit.

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  6.3 EAST NEW BRITAIN PROVINCE

  6.3.1 Introduction

  The East New Britain Provincial Government, Rabaul Urban Local-Level Government,
  Kokopo/Vunamami Urban Local-Level Government, Nonga General Hospital and
  Gazelle Restoration Authority are audited every year, with or without the financial
  statements. Other Rural Local-Level Governments and the Business Arms of the
  Provincial Government could not be fully audited due to manpower and financial
  constraints faced by my Office.

  6.3.2 East New Britain Provincial Government

  The East New Britain Provincial Government had submitted its financial statements for
  the financial year ending 31 December, 2015. Field work associated with examination of
  the financial statements and the audit of the accounts and records were completed with
  the Management Letter issued. Issues highlighted in the Management Letter were
  reported in my 2015 Part 3 Report to the Parliament in July, 2016. The audit opinion
  report was subsequently issued in November, 2016. Issues highlighted in the opinion
  report are as stated below.

  6.3.2.1 Comments on Financial Statements – 2015

  My Report for the year ended 31 December, 2015 to the Ministers concerned and other
  relevant bodies under the Organic Law on Provincial Governments and Local-Level
  Governments and the Audit Act was issued on 30th November, 2016. The report
  contained a Qualified Audit Opinion as reproduced below:

  “Basis for Qualified Audit Opinion

  Presentation

  Finance Instructions 4/2000 issued under Section 117 of the Public Finances
  (Management) Act, 1995 prescribes the format for the preparation and presentation of the
  financial statements for Provincial Governments. The financial statements of East New
  Britain Provincial Government for the year ended 31 December, 2015 fully complied
  with the formats prescribed by Finance Instructions.

  Disclosure Errors

  I noted the following disclosure errors which could have material effect on the accuracy
  and completeness of the East New Britain Provincial Government Account balances and
  consequently, the financial position of the Provincial Government as at 31 December,
  2015:

  Cash Balances

   The East New Britain Provincial Government cash and bank balance of K14,
  548,981 included an old operating account balance of K4, 422,292. The old

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  operating account balance merely represented an un-reconciled cashbook balance at
  the time when the account was closed and was not supported by actual cash balance
  held in bank account as this account was dormant since 2009. I have reported the
  same in the previous reports to which the Provincial Government had commented
  in response to my Management Letter queries for financial year ended 31
  December, 2014 stating that the old Cash Book amount of K4,422,292 was
  rendered on write off on and was approved by the Finance Secretary on the 3rd of
  December 2014 however, The First Assistant Secretary Finance Reporting and
  Compliance Division was yet to make a decision on correct accounting treatment to
  confirm the removal of the old cash Book; and

   The balance of the Provincial Revenue Fund of K15,820,940 could not be
  confirmed as correct due to errors and material misstatements of operating deficit as
  discussed under the paragraphs on Receipts and Payments for the year ended 31
  December, 2015;

  Receipts and Payments

  The East New Britain Provincial Government reported its total revenue and expenditure
  as K39,935,063 and K47,405,168 respectively with an operating deficit of K7,470,105
  (Statement ‘B’). The accuracy of the revenue and expenditure and therefore, the
  correctness of the operating deficit as at 31 December, 2015 could not be confirmed due
  to the following issues:

   The total actual revenue of K39,935,063 included Staffing Grant totaling K272,300
  only while the IFMS 2233 report (from Department of Finance) disclosed total
  warrant authority amounts as K16,967,000 for public servants salaries and
  K42,861,000 for Teachers’ Salaries. These amounts were also not taken up in the
  respective revenue ledgers although provided for in the Annual Appropriation Act;
  and

   The receipts and expenditure relating to Provincial Special Intervention Program
  (PSIP) funds totaling K9,450,000 and K19,430,893 respectively had not been
  disclosed in this Statement as PSIP funds were budgeted for and taken up in the
  National Government Agencies Database and administered through the Provincial
  Treasury Operating Account.

  Investments

  I noted the following observations in relation to the investments held as well as the
  investment transactions of the Provincial Government during the year:

   Statement ‘E’ showed the Provincial Government held short term financial
  investments in Interest Bearing Deposit (IBD) account as K62,531 with interest at
  year end. The balance of the financial investment however, had not been disclosed
  in Statement ‘A’. Further, the Provincial Government had received and accounted
  for dividends totaling K182, 081 from its short term investments in Gazelle
  International Hotel. Though the proceeds were adequately reported in Statement ‘J’

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  the details including principle investment were not disclosed in Statements ‘E’ and
  ‘A’;
   As reported in my previous reports, the East New Britain Provincial Government
  held investments totaling K2, 689,252 represented by 100% shares in East New
  Britain Development Corporation Ltd valued at K2, 159,139 and K530, 113 in
  Barakopo Plantation Development Corporation Ltd. In the absence of audited
  financial statements of the investment companies as well the investment register
  and other related records required to be held by the Provincial Government, I was
  unable to verify the accuracy, completeness, existence and ownership of the above
  reported investments balance at year end; and

   As stated in my previous years audit reports, the Provincial Government paid K5.5
  Million to a Fishery Project Developer, New Britain Resources Development
  Company as initial part payment to acquire its fifty-one percent (51%) shareholding
  with the Company. The National Fisheries Authority was to have issued twenty
  (20) fishing licenses under the project agreement. I observed however, the fishing
  licenses and share certificates have not been obtained due to legal proceedings by
  the National Fisheries Authority against the project developer, the Provincial
  Government and the State. Further, I was not able to ascertain whether the
  Provincial Government’s investment was still viable in view of the legal issues
  surrounding the fishery project.

  Fixed Assets

  The East New Britain Provincial Government had reported its fixed assets as K69, 564,
  553 as at 31 December, 2015 with an opening balance of K46, 579,775, additions of K23,
  680,784 and disposals of K696, 006. Purchases during year under review totaling K451,
  191 however, had not been recorded in the updated fixed asset register. Consequently, I
  am unable to verify the completeness and accuracy of the value of assets owned and
  under the custody of the East New Britain Provincial Government for the year ended 31
  December 2015.

  Un-acquitted Advances

  Appendix 6 to the financial statements disclosed un-acquitted advances relating to the
  payments of travelling allowances and cash advances totaling K413, 605. The reported
  un-acquitted advances did not include the carried forward balance of K393, 571 thereby
  understating the un-acquitted balance at year end to that extent. Further, errors and
  omissions reported in our 2014 report were not taken into account and amended
  accordingly. Consequently, I am unable to rely on the completeness and accuracy of total
  un-acquitted advances disclosed in the Appendix to the financial statements;

  Trust Accounts

  The East New Britain Provincial Government had operated twelve (12) non-bank trust
  accounts with a total overdrawn closing balance of K1, 271,960 as at 31 December 2015.
  I was not provided evidence of Trust Instruments and other related documents to ascertain
  legality, validity and the appropriateness of the transactions effected through trust
  accounts during the year.

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  Significant Control Weaknesses

  The paragraphs below give a summary of significant control weaknesses identified in the
  East New Britain Provincial Government’s records and processes:

   I was unable to ascertain whether the approval for expenditure totaling K99, 500
  was within the designated financial limit of the respective financial delegate. In this
  connection, several Section 32 Officers who approved Requisitions for Expenditure
  (FF3) continued failing to disclose their designations and financial approval limits;

   In thirty-one (31) instances, payment vouchers with relevant supporting documents
  relating to expenditures incurred totaling K3,386,065 could not be easily located
  due to poor maintenance of payment vouchers. Consequently, the validity as well as
  proper authorization of the claims presented for payment could not be ascertained;

   Payments of grants/subsidies and financial assistances in lump sum from various
  expenditure votes/divisions totaling K14,779,163 to non-profit organizations,
  public authorities, churches, health centers/aid posts, schools, business arms,
  small/medium enterprises and individuals seriously lacked evidences of
  accountability reports by the recipients nor were there records to indicate that the
  Provincial Government had sought such reports;

   The Provincial Government had expended over K7.8m on tenderable capital works
  & maintenance contracts during the year. Meeting Minutes of Provincial Supply &
  Tenders Board (PSTB) convened during the year however, were not properly
  maintained hence, couple of Meeting Minutes could not be provided for my review.
  Consequently, I was unable to verify the validity and genuineness as well as proper
  approval of all other minor capital works and maintenances expenditures incurred
  during the year;

   My review of the Provincial Assembly Members Payrolls revealed the Provincial
  Assembly members were taxed on their normal salary only while all their
  allowances were paid on a fortnightly basis – tax free. The Senior Officers of the
  Provincial Administration were also paid monthly vehicle allowances of K4, 000 –
  tax free. Total payments on vehicle and mileage allowances for the year amounted
  to K1, 178,800.

  Similar issues were raised in the 2014 audit Management Letter which the
  Provincial Administration did acknowledge the fact that all allowances are taxable
  under the Income tax Act. Consequently, the ENB Provincial Administration may
  be liable for non-payment of taxes on the salaries & allowances of the Assembly
  Members and vehicle allowances for its Senior Officers; and

   I sighted no evidence to indicate that fortnightly payroll reconciliations were done
  to verify the correctness of the payroll which have resulted in unbudgeted direct
  payments in overtime allowances totaling K57,000, Retrenchment Benefits,
  Pensions and Gratuities totaling K223,000 and unidentified Alesco Payroll
  expenditure of K41,000

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  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 East New Britain Provincial
  Government for the year ended 31 December, 2015:

  i. Give a true fair view of the financial position and the results of its operations for the
  year then ended;

  ii. The financial statements have been presented in accordance with the Public
  Finances (Management) Act, 1995, International Public Sector According
  Standards (IPSAS) and other legislations; and

  iii. The controls exercised by the Provincial Government are sufficiently adequate to
  provide reasonable assurance that the receipt, expenditure and investment of
  moneys and acquisition and disposal of public property and incurring of liabilities
  have been in accordance with the Public Finances (Management) Act and other
  legislations.”

  6.3.2.2 Status of Financial Statements

  At the time of preparation of this Report in September, 2017, the East New Britain
  Provincial Government had submitted its financial statements for the year ended 31
  December, 2016. Field work associated with the review of the financial statements and
  the audit of the accounts and records had been completed and the results were being
  evaluated.

  6.3.3 Kokopo/Vunamami Urban Local Level Government

  The Kokopo/Vunamami Urban Local Level Government submitted its financial
  statements for the year ending 31 December, 2015. Field work associated with
  examination of the financial statements and audit of the accounts and records was
  completed with the Management Letter issued and the audit opinion report also issued to
  the Ministers concerned. The paragraphs below detail issues identified with the financial
  statements and the internal control environment.

  6.3.3.1 Comments on Financial Statements – 2015

  My report to the Ministers concerned and other relevant bodies under the Organic Law
  and the Audit Act was issued on 3rd of July, 2017. The report contained a Disclaimer
  Audit Opinion as reproduced below.

  Basis for Disclaimer Audit Opinion

  Presentation

  Finance Instructions 5/2000 issued under Section 117 of the Public Finances
  (Management) Act, 1995 prescribes the format for the preparation and fair presentation of
  the financial statements for Local level Governments. The financial statements of

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  Kokopo/Vunamami Local level Government for the year ended 31 December, 2015 fully
  complied with the formats prescribed by Finance Instructions.

  Disclosure Errors

  I noted the following disclosure errors which could have material effect on the accuracy,
  completeness and reliability of the Kokopo/Vunamami Urban Local Level Government
  Account balances and consequently, the financial position of the Local Level Government
  as at 31 December, 2015:

  Cash Balances

  The Kokopo/Vunamami Urban Local Level Government Account balance of K322, 190
  is inaccurate in view of the reconciling items identified in the bank reconciliation
  statement for December, 2015 relating to receipts and expenditure that had not been
  adjusted in the cashbook and respective revenue and expenditure ledgers and disclosed in
  Statements ‘J’ and ‘K’ which also affected the accuracy of the bank and cashbook
  balances at year end. Further, the reported account balance as per Note 3 to the accounts
  is incorrect in view of the comments made in relation to the unreliability of the operating
  deficit of K270,430 used to calculate the account balance at year end.

  Receipts and Payments

  Total revenue and expenditure of K3, 368,967 and K3, 639,397 per Statement “B” with
  an operating deficit of K270, 430 are not in agreement with the Trial Balance total
  receipts and expenditure of K3, 371,042 and K3, 658,725 respectively.

  Debtors and receivables

  The ‘Nil’ balance of debtors and receivables reported in Appendix 2 to the financial
  statements is not in agreement with the Aged Receivables Summaries balance of
  K4,374,785 hence, is inaccurate and misleading.

  Fixed Assets

  The fixed assets at historical cost of K701, 312 disclosed in Appendix 4 to the financial
  statements is acutely inaccurate and misleading in view of the following discrepancies:

   The costs of assets disclosed are basically the brought forward balances from 2011
  and as such, did not reflect complete and accurate information on additions and/or
  disposals during the year and those of the prior years;

   The Urban Local level Government did not maintain a proper Assets Register with
  updated details of additions and/or disposals during the year. Consequently,
  additions during the year totaling K322,921 had not been recorded and properly
  accounted for;

   Appendix 3 to the financial statements did not disclose any information or values in
  relation to stocks of inventories held by the Urban Local Level Government as at 31
  December, 2015. Further, I sighted no evidence to indicate that stock takes were

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  done to confirm the completeness and existence all assets and inventories owned
  and under the custody of the Urban Local Level Government at year end.

  Advances

  Appendix 6 to the financial statements showed un-acquitted cash and travel advances as
  K109,134. The accumulative balance of K109,134 contains inherited errors from prior
  years which have not been adjusted. As such, the reported balance of un-acquitted
  advances is inaccurate and misleading.

  Other Records and Registers

  Several other documentations corroborating the financial statements, such as the registers
  of investment, inventory, debtor and borrowings, commitments & arrears, and losses &
  deficiencies were not available for my review. Consequently, I could not ascertain the
  existence, completeness and accuracy of these items in the financial statements.

  Significant Control Weaknesses

  The Management Letter relating to the audit of the accounts and records for the year
  ended 31 December 2015 was issued in June, 2017. The paragraphs below give a
  summary of significant control weaknesses identified in the Kokopo/Vunamami Urban
  Local Level Government’s internal control environment:

   The Urban Local Level Government reported its annual budget estimates for
  revenue and expenditure as K7,024,000. I was not provided evidence including the
  Appropriation Act of 2015 or a certified revised budget and other relevant quarterly
  budget review documents to suggest that the original as well as the revised budgets
  were duly sanctioned and certified prior to implementation;

   The Section 32 Officers failed to disclose their designations, financial limits and
  date of approval on the Requisitions for Expenditure (FF3) when approving
  requisitions to incur expenditure. Consequently, I was unable to verify whether the
  approval for expenditure are within their delegated financial limits;

   Payments totaling K562,091 were not signed by the Certifying Officer to confirm
  the validity, accuracy and genuineness of the claims submitted for payment;

   I observed several instances of ‘splitting of orders’ whereby payments to one
  supplier and/or payee are processed and paid by way of raising several Requisitions
  for Expenditure (FF3) and Finance Form (FF4) in order to circumvent proper
  expenditure authorization procedures such as the Section 32 Officers approving
  expenditures in excess of their designated financial limits;

   The required three (3) verbal and/ or written quotations were not obtained from
  Suppliers in most instances to determine the most economical prices for the
  required goods and services. Further, I observed the payment vouchers for purchase
  of office stationaries and other operational materials and supplies were not
  supported with goods delivery dockets to confirm the accuracy of the items ordered

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  and also to ensure that the correct quantity were delivered and actually received in
  good order by the Urban LLG;

   Advance payments for supply of fuel for the year amounted to K96,497. I sighted
  no evidence to suggest proper controls including proper vehicle log sheets were
  maintained on the usage of the Urban LLG vehicles particularly after business
  hours and on the weekends;

   The Urban Local Level Government had paid a total of K309,496 in 2015 for
  rubbish removal services which included outstanding payments dating back to
  2010. I could not confirm if the payments were legal and genuine in the absence of
  any proper ledgers and/or registers to record details of outstanding invoices;

   Grants and financial assistances to various recipients including the fifteen (15)
  Local Level Government Wards and various individuals and groups totaling
  K127,966 had not been acquitted by way of furnishing accountability reports to the
  Urban Local Level Government. Further, I sighted no evidence to indicate that the
  Urban Local Level Government had sought these reports from the recipients;

   A total of K119,333 was paid out in vehicle allowances to three Senior Officers of
  the Urban Local-level Government using internal revenue funds on vote items 125
  and 135 which are intended for transport and fuel and other operational expenses
  respectively. I noted these payments as improper and an indication of non-
  adherence to proper budgetary control practices;

   The Kokopo/Vunamami Urban LLG had inappropriately charged expenditures
  totaling K18,072 to expenditure vote items 221 and 126 where funds were not
  allocated for the purposes intended;

   Payments of reimbursement claims by the Town Manager totalling K9,024 not
  supported with any valid supporting documents and legitimate evidence of prior
  approval by the District Administrator;

   Two (2) payment vouchers in respect of payments of K15,000 and K9,100 paid to a
  Joe Paraide and Alanda Trading Limited for truck and vehicle hires were missing
  from files and as such, I could not ascertain the validity as well as proper
  authorization of the claims presented for payment; and

   I observed serious lack of proper monitoring and recovery exercises on travel and
  cash advances resulting in substantial amounts dating several years back, remained
  un-acquitted as at 31 December, 2015.

  Disclaimer Audit Opinion

  Because of the significance of the matters described above, I am not able to obtain
  sufficient appropriate audit evidence and consequently, I am unable to express an opinion
  on the financial statements of Kokopo/Vunamami Urban Local-level Government for the
  year ended 31 December, 2015.

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  Other Matters

  In accordance with the Audit Act, I have duty to report on significant matters arising out
  of the financial statements to which the report relates. The following are matters of
  significance:

   The Kokopo/Vunamami Urban Local Level Government did not maintain proper
  accounts and records and has consequently breached Section 68(1) of the Public
  Finances (Management) Act 1995; and

   The receipts and payments and investment of moneys and the acquisition and
  disposal of assets during the period covered by the financial statements have not
  been in accordance with the Public Finances (Management) Act, 1995 and Organic
  Law on Provincial Governments and Local-level Governments”.

  6.3.3.2 Management Response

  Management had not responded to matters raised in my Management Letter queries.
  Consequently, I was not advised of any improvement at the time of preparation of this
  Report in September, 2017.

  6.3.3.3 Status of Financial Statements

  At the time of preparation of this Report in September, 2017, the Kokopo/Vunamami
  Urban Local-Level Government had not submitted its financial statements for the year
  ended 31 December, 2016 for my inspection and audit.

  6.3.4 Rabaul Urban Local Level Government

  The Rabaul Urban Local-Level Government submitted its financial statements for the
  year ended 31 December, 2015. Field work associated with examination of the financial
  statements and audit of the accounts and records was completed with the Management
  Letter issued and the audit opinion report also issued to the Ministers concerned. The
  paragraphs below detail issues identified with the financial statements and internal control
  environment.

  6.3.4.1 Comments on Financial Statement – 2015

  My report to the Ministers concerned and other relevant bodies under the Organic Law
  and Audit Act on the Rabaul Urban Local-Level Government’s financial statements for
  the year ended 31 December, 2015 was issued on 20th April 2017. The report contained a
  Qualified Audit Opinion as reproduced below.

  Basis for Qualified Audit Opinion

  Presentation Errors

  Finance Instructions 5/2000 issued under Section 117 of the Public Finances
  (Management) Act, 1995 prescribes the format for the preparation and pre