THE filing for Bankruptcy by Enron the darling of Wall Street in 2001 with USD63.4 billion in assets was one of the largest corporate bankruptcies in US history.
The Houston-based energy company was the victim of the biggest audit failure with CEO Jeffery Skilling and his executives developing the use of accounting loopholes to hide records of failed deals and projects to misled as well as pressure Arthur Anderson, one of the 5 largest audit and accountancy partners in the world to conceal losses incurred.
In addition to being the largest bankruptcy, Enron was regarded as the biggest audit failure.
The Enron case is a good example of audit failure and warning for auditors to remain neutral and unbiased.
For the SINPF, with only SBD2.7 billion worth of total assets is merely a speck of dust compared to the billions lost by Enron.
The purpose for highlighting this case is to remind the SINPF board of the dangers of falling into the trap of compromising the ethics of audit/(ors), ‘independence and the need to remain unbiased”.
Not only, is the role of auditors important but their professionalism and the need to remain independent and unbiased is paramount to give assurance to members of the safety of their contributions with the Fund.
This brings me to the first point I want to raise to the SINPF Board, need to observe independence and professionalism in the appointment of auditors or those engaged to perform related professional work or services for the Fund.
From observations, the Board has been engaging the same auditors for the last 3-4 years, thus the need to appoint new auditors.
There is a need to rotate auditors in order to promote independence and uphold integrity.
Auditor independence could be compromised when the same auditors are engaged for longer periods of time, or where the same auditors have been engaged by related entities.
The appointment and engagement of Baoro & Associates to do the valuation of investments is a clear example of failure of the board to uphold independence.
This is also the case with the board’s decision to engage the same auditors, KPMG (Fiji), who are also engaged by Solomon Telekom and SPOL, the Fund’s subsidiaries.
This practice portrays the low priority placed on the need to ensure due diligence and care in auditing of the Funds finances by the board and the need to promote and protect auditor’s independence and integrity in performing of the duties as required by the Act, international accounting requirements and standards.
The Regulator, CBSI could have assisted to ensure this simple requirement is upheld.
The press release by the SINPF in the Solomon Star newspaper, No.6829 on Thursday 15th February 2018 including the statement issued by the CEO of NASFUND of Papua New Guinea failed to answer the questions raised in relation to the loans, investments, and how the Fund has been managed and administered by the management and board.
The statements by the CEO of NASFUND are irrelevant for the SINPF investment in the Heritage Park Hotel.
What he should clarify is the payment of $4.7 million to CGA limited, a shareholder to ensure SINPF’s 20% shares to secure the 10% after a restructure and after SINPF already acquired the 10% shares.
This includes explanations as to why the SINPF did not receive a dividend payout in 2016 financial year.
The Heritage Park Hotel was granted an interest and tax free for 3 years which expired in 2015, why did they fail to make loans repayments in 2015 and 2016 respectively?
While the hotel investment might be good in the longer term, low return on investment and failure to consistently service their loan is enough for members to worry about this investment portfolio.
The statement issued by CBSI as regulator concerning media statements and members trying to form an association to act as a watch dog for the Fund brought to light both the failure of the CBSI to effectively and proficiently play its part as a regulator and the Fund to look into a systemic approach to enable the members to have direct access to detailed and simple information on their contributions, more so the Fund’s operations in general.
The upsurge of statements and comments in the media over the status of the Fund (both financial and non-financial) reflected the members’ lack of access to detailed financial information and simple explanation of its investments and operations over the years.
Members have the right to know the status of the Fund (simple/detailed/informative), and SINPF Board and CBSI have to find solutions to address this issue.
While the CSBI has effectively played its oversight and regulatory role to ensure the stability of the financial system, it has failed to put its foot on some of the issues relating to SINPF that have been highlight in my articles in this paper.
Some of these are:
- Tavanipupu Loan – ($15 million, now $24.4 million). Section 7 (2, a-iii, b), stated that any investments by the Fund that are invested in any security or any loans specifically approved as an investment for the purposes of the Act by the Minister or guaranteed by the Government under the Public Finance and Audit Act on the understanding that such investment/loans serves the interest of members of the Fund.
In Tavanipupu’s case, there is no way that the loan serves the interest of members. Tavanipupu failed to secure an additional commercial loan from the ANZ Bank, therefore, there was no appropriate grounds and justification then for the board to recommend the loan application for approval by the Minister. Both the board and the Minister then should also know that the SINPF is not a commercial bank.
Whatever the reason for approving the loan to Tavanipupu, the blame should lay squarely on the board, as the initiator of the loan and Minister of Finance, who has the power to approve the loan.
Apparently, the regulator was placed in an awkward position and can’t do much to uphold the process and decision to approve the loan since its regulatory role and power does not cover such areas and are only reactive in nature.
On this note, it is more relevant and urgent that CBSI work on reviewing its regulatory powers to ensure that the Fund’s lending process are subject to prudential scrutiny and review by CBSI.
Maybe, also ensure that the Fund’s loan appraisal process are aligned to the approved prudential lending requirements and practices. More importantly, CBSI’s role as regulator should be more proactive than reactive, as is the case now. But the Tavanipupu loan is a clear case of corruption being allowed to go through the system.
- Loans to Sasape International Shipyard Limited, Heritage Park Hotel, Malaita Shipping, Western Queen, SIEA Housing, SIWA Housing. Also current loans to Solomon Telekom, Soltuna have become potential risks as well as commitments that exposed the Fund to financial losses.
- One can only conclude that as a result of the reactive nature of the oversight by CBSI, they are unable to effectively control or provide regulatory oversight over the current practice of lending to related companies owned by SINPF since the process and power to approve loans rested with the board and Minister of Finance respectively.
Other Issues that the Board must clarify to the Members are:
- Provide an update on the status of the property investment in Brisbane, Australia.
- Explain the $3 million investment in King Solomon Hotel Limited.
- The out of court settlement of $156.4 million payment to GRP & Associates needs clarification.
- Key management personnel (11 mgmt. staff) employment related expenses (short-term) was recorded at $14.5 million in 2016 (page 66 – 2016 Annual Report), an increase of 209% or $9.8 million from only $4.7 million in 2015. Details of the payment was not disclosed in the 2016 Annual Report.
- The recent salary increase for 11 management staff in 2017 raised complaints from general staff. Can the board justify the salary increase in view also of the substantial increase of key management staff related expenses in 2016. Average headline inflation in 2016 was only 1.06% and -0.13% in 2017 respectively compared to the unjustified 39% average salary increase to management staff only.
Enron’s unbelievable acceleration to prominence since its formation in 1985 was short-lived when the company came crushing down like an elevator in 2001 with both shareholders and workers losing the battle to claim returns on investment and compensations.
The simple reasons for its demise, audit fraud.
The Sarbanes-Oxley Act was created to address these issues including increasing the accountability of auditing firms to remain unbiased and independent off their clients.
The same can happen to SINPF, if management (board) continuously fail to uphold the simple prudential requirements in management of the Fund.
The occurrence of such events can also be ignited by the inability to the regulator to address backdrops in legislation and the inability to practically enforce such legislations.
To close, the article by Philip Kuti of Burns Creek in the Solomon Star, No.6838, 24th February 2018 clearly stated the members perception of the Fund including their lack of access to simple and detailed information on its operations.
To me, I think the important issue to address now is for the Fund’s board to respond to the questions raised on investments and loan losses to its members.
And for the regulator, there is a need to seriously look into how to improve its ability to become rigorous and proactive in carrying out its oversight responsibilities diligently, especially keeping the financial institutions that have been established under other legislations, especially the SINPF, one with a lot of political bearings, especially high level of political influence and interference on the radar.
I wholly support the call by Charles Dausabea for the removal of the Board of the SINPF.
By GEORGE KOSUI
Honiara
