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Auditing in Iraq Part Two: Enter the Professionals
After the downfall of Saddam Hussein, Iraq's occupying Coalition Provisional Authority (CPA) had to win the peace. To do so, the US began spending vast sums of money with an almost tactical recklessness, quickly notching up billions of dollar of unaccounted expenditure, much of it belonging to the Iraqi people themselves (see Auditing in Iraq Part One). It was almost a year before a qualified accountant came anywhere near it.The start of 2004 was comparatively tranquil for post-invasion Iraq. As it happens, this was when the accountants finally started to arrive. In February, Ernst & Young announced they were re-opening their Baghdad office (the office had opened for the first time in 1923, when Iraq was a British mandate). Ahmed Al-Aiban, chairman and chief executive of Ernst & Young Middle East, said he expected "substantial demand" for the firm's services.
Ernst & Young's first footsteps
Ernst & Young's early confidence was rewarded within weeks. By mid-March, it was reported that the CPA had awarded the firm a $13m contract to trace Iraq's loan contracts. According to the Iraqi planning minister, Mehdi Al Hafedh, the country's total debt was in the region of $120bn but it wasn't clear how much would be paid out. Even G7 ministers disagreed about who was owed what.
From the very first, there was a substantial political element to accounting in Iraq. Like it or not, the accounting firms setting up shop in that troubled country found themselves embroiled in some lofty international debates. From fairly early on, the US and the CPA had pressed for all the Iraqi debt incurred by Saddam Hussein to be written off. Countries like Russia and France – neither of whom supported the war – were less forgiving. France argued that Iraq's rich oil resources did not mean she should be shown more generosity than poorer countries (it is estimated that at the time of the invasion, Iraq owed France between $3 and $6bn).
In any case, a staggered write-off was eventually agreed upon between Western creditors, providing Iraq could comply with the recommendations of the International Monetary Fund, thereby opening up the country for foreign investment. Non-European creditors, such as Saudi Arabia and Kuwait, have yet to agree on anything at all. While the US could not be seen to speak on behalf of the Iraqi Finance Ministry, it sent out strong diplomatic signals that non-cooperation by these countries could incur the States' diplomatic displeasure.
"If these guys want to be stubborn, inordinately demanding, then they should know that America is in an awful strong position to say they don't get paid for many, many years," said Senator Pete Domenici.
Since Ernst & Young opened the Iraqi Debt Reconciliation Office various deals have been put on the table for those still insisting on their money. In 2005, Iraq was offering a 10.25% 'cash buy-back' for outstanding loans. But most non-European creditors declined, and are still holding out for payment.
Interestingly, despite the press release issued by Ernst & Young about the re-opening of their Baghdad office, the address for the Iraqi Debt Reconciliation Office is a post box in the Jordanian capital of Amman. At $13m, this may make it one of the most expensive business mail boxes in the world. Nevertheless, the stamp of accounting credibility the Big Four firm leant proceedings was doubtless of some value, even if it has not swayed those still holding-out. Prior to closing the programme in July 2006 it reconciled almost $20bn of debt.
Cynically, it could be argued that write-offs by oil producers such as Kuwait and Saudi Arabia always looked unlikely, in that aiding the Iraqi reconstruction would only bring down the price of oil. Only last month Iraqi prime minister Nouri al-Maliki pleaded again for his country's neighbours to forgive Iraq's debt, but as yet many have yet to even open diplomatic relations. Despite its hard-line stance, the debt reconciliation programme was re-opened in January.
KPMG join the fray
Hot on the heels of Ernst & Young was KPMG, although the firm fell victim to post-war intrigue within months. Not surprising, given that the firm's arrival was linked to one of the biggest mysteries of Hussein's Iraq: the oil-for-food scandal.
While the CPA effectively ran the country, Iraq had an embryonic indigenous government in the form of the Iraqi Governing Council (IGC). IGC members were appointed by the CPA, one of whom was oil minister Ahmed Chalabi, a paid informant of the US government, and once touted as a possible future leader of the country.
It was an open secret of the Hussein era that prominent individuals and organisations around the world had illegally profited from the 1990s sanction against Iraq. In January an Iraqi newspaper, al Mada, published a list of 270 names, including politicians and UN officials, who had taken kickbacks from the former dictator. Chalabi claimed ownership of the original documents, recovered from the ruins of the Ministry of Oil, and intimated there were more names to come.
The IGC appointed KPMG in February to investigate the suspected corruption and recover the assets, and immediately began tracing substantial bank transfers to Syria, Jordan and elsewhere. An estimated $10.6bn of backhanders had been paid out, and a liberated Iraq wanted them back. By May, however, progress had stalled. The CPA claimed that the investigation had not been properly tendered, and refused payment. Given that the CPA had failed to tender far bigger projects on its own books, many commentators opined that the decision was politically motivated. Matters weren't helped when the IGC complied, put the project out to tender, and re-appointed KPMG as the best candidate. The CPA continued to refuse payment, and appointed Ernst & Young to investigate the matter on the CPA's behalf.
Retrospectively, it appears clear that the oil-for-food list was so politically sensitive that the US felt compelled to take ownership. Later that month US soldiers raided Chalabi's offices, who according to his supporters, soon became the target of a smear campaign. Most informants tend to have a dubious moral history, and as Chalabi was no exception, this would not have been difficult. Nevertheless, accusations by the US that Chalabi had betrayed military secrets to Iran came to naught. Arrest warrants were issued against him for counterfeiting and the murder of his own nephew, but both charges were later dropped.
In a Senate hearing, the former US ambassador to the UN, John Negroponte, explained that the US had known about the illicit oil-for-food payments, which it allowed to continue because several of its Middle Eastern allies were benefiting from them.
"This was a bit of a special arrangement here," Negroponte said. "We wanted to avoid unnecessarily and unfairly penalising the people of Jordan [and elsewhere] from the negative economic consequences of sanctions on Iraq."
Interestingly, as KPMG's global head of forensics Adam Bates observed, Ernst & Young's contract with the CPA did not instruct them to recover any assets, only to work on "a fact-finding mission" and "make recommendations". Ernst & Young spent at least the first few weeks arguing about the "terms of engagement", and its findings, if it ever made any, have not been made public. Less than two months after the contract was awarded, the CPA handed over authority, and thus the firm's client had ceased to exist.
Since then the US government has been highly selective in its usage of the oil-for-food list, as was the case when it accused the Respect MP George Galloway of accepting bribes the following year. That ultimate irony is that given Chalabi's financial and political incentives, the list may not have been that trustworthy in the first place. There has only been one oil-for-food conviction to date.
Marketing your practice in a war zone
There was one last big accounting contract to be handed out in 2004. As stipulated by the UN prior to the invasion, the Development Fund for Iraq (DFI), by far the lion's share of the money being spent in that country, was subject to independent audit. Since the occupation it had been administered exclusively by the CPA.
The UN, through the auspices of the International and Advisory Monitoring Board, appointed KPMG to conduct the DFI audit in April 2004, by which time the firm had already aroused the ire of the CPA due to their contract with Chalabi and the IGC. Furthermore, given the way the CPA had openly handled the DFI, it was fairly obvious that any meaningful accounting review would have to be a negative one.
And so it proved. As early as July 2004, KPMG's preliminary findings contained harsh criticism. Before the end of the summer it became clear that the two Big Four firms operating in Iraq had achieved rather different marketing positioning.
Ernst & Young had rushed to open a Baghdad office, of which it made much political capital, full of optimism for the new Iraq. Back in the US, it was awarding entrepreneurial awards to some of the private security companies working for the CPA (one of which went to Custer Battles, a firm later dogged by accusations of illegal profiteering). Its first contract, for the Debt Reconciliation Office, was a non-controversial one which saw it helping to implement US foreign policy on Iraqi debt.
Contrast this with KPMG, still working largely out of its Bahrain office, which found itself working for the IGC and the out-of-favour Chalabi, and afterwards for Kofi Annan's UN, which was even less popular with the US government. In retrospect, given the political landscape, KPMG may have been drinking from a poisoned chalice. Within two years, the DFI audit was quietly handed over to Ernst & Young (who, it should be said, continue to express grave concerns).
The other two Big Four firms have taken different approaches. In the US, Deloitte's public relations people have been keen to distance themselves from the country. Officially, "neither Deloitte Touche Tohmatsu nor any of its member firms do business in Iraq," although the firm's website has previously suggested otherwise. Meanwhile, the biggest and most profitable of the Big Four, PricewaterhouseCoopers, has remained conspicuous in its absence.
Perhaps PwC has decided that auditing in Iraq is more trouble than its worth. The former head of Iraq's Supreme Board of Audit (SBA), Ihsan Karim, would doubtlessly agree, if he was still alive. The CPA appointed Karim to head the Iraqi side of the oil-for-food investigation alongside Ernst & Young. After the CPA pulled out Karim lasted for five days before being assassinated.
Iraq is a country where auditors can know far too much.
AccountingWEB.co.uk 8-May-2008
Categories: Financial Reporting Features
Times read: 2155
To start to uderstand the real reasons behind this illegal invasion and occupation of an oil rich country in which over 1.2 million innocent Iraqi citizens have been murdered by us - Britain and America - follow the money, leading to massively profiting corporations such as Blackwater and Haliburton, to name a couple.
The spoils of war, and here we are speaking of auditing it. One day, (perhaps) our senior politicians will stand trial for their war crimes and crimes against humanity.
