Ministry of Finance and Planning Data — Ramallah

From the pages of the annual report of the State Audit and Administrative Control Bureau (SAACB) for 2020, which runs to 298 pages and was issued on 12-8-2021, we present below the first installment of a series that is part of the summary of the audit report of the final accounts (consolidated financial statements) of the State of Palestine, for the years ended 31-12-2016 and 31-12-2017, issued by the Ministry of Finance.

The General Directorate of Economic Control carried out a number of audit tasks during 2020, most importantly the audit of the state's final accounts issued by the Ministry of Finance for the years 2016 and 2017. The Bureau issued a qualified opinion on these accounts, despite an improvement in the quality of the financial data, according to the Public Sector Accounting Standards – cash basis.

Although the maximum deadline for submitting the final accounts is one year from the end of the financial year, it was noticed that there was continued delay by the Ministry of Finance in issuing the final accounts for the years 2016–2017 until the end of 2019, which resulted in an increase in the number and magnitude of subsequent events that the Bureau is required to review according to auditing standards. The management issued a letter to the Ministry of Finance dated 30-6-2020, which was delivered to the Ministry of Finance and the responsibility centers, and a response was received on 11-11-2020.

We list below, by way of example, the causes of the recurring qualifications on the final accounts issued by the Ministry of Finance (2016 and 2017) and the accompanying notes.

1- Weakness in control procedures over postings: Weakness in control procedures over postings by the responsibility centers on the Unified Accounting System persists, where the Ministry of Finance prepares the consolidated accounts centrally without involving the responsibility centers in preparing financial reports and reconciliations, and collecting a large portion of state revenues via clearance, and these amounts are deducted by the other party – the Israeli side – to cover bills for treatment, water, electricity and sewage, without sufficient data available about collection operations and the deductions. In addition, some responsibility centers do not comply with preparing the bank reconciliations for the revenue account and submitting them to the Ministry of Finance, in addition to weak follow-up and matching procedures for receivable accounts, and the necessary annual reconciliations are not carried out with some institutions such as the Palestinian Pension Institution, electricity companies and others.

2- Palestinian National Fund: The funds transferred to the Palestinian National Fund are not audited in the final accounts, given that these funds are of relative importance to the general budget. The lack of an audit of the National Fund’s operations by the Bureau will keep the opinion qualified, due to the volume of funds transferred to the National Fund from the public treasury, which have the same material effect on the financial statements.

3- Purchase of fuels and gas: One of the most prominent files that needs careful follow-up and attention by the competent government authorities is the purchase of fuels and gas, including excise duties and value added tax, and then the recovery of these amounts via clearance. The excise and value added tax revenues from the General Petroleum Authority’s purchases of fuels and gas constitute more than 40% of the total monthly clearance revenues. It is worth noting that the General Petroleum Authority is financed to cover fuel purchases by borrowing from banks, and the mechanism of purchasing fuels and paying for them including excise duties and value added tax leads to an increase in the borrowing interest from banks, in addition to the collection commission that is deducted from clearance at a rate of 3% of (total clearance), and consequently this is reflected in weak liquidity available to the Ministry of Finance.

The Bureau says that the accounting policy followed by the Ministry of Finance is to disclose the excise on fuels and value added tax on purchases of fuels from the supplying companies on the Israeli side, where the amounts collected from excise on fuels and gas are recognized as clearance revenues, knowing that these amounts are amounts paid to the supplying companies by the General Petroleum Authority, and 97% of them are recovered within clearance revenues. They do not meet the definition of revenues collected via clearance...

We give here an example to illustrate the losses incurred by the public treasury from this method of purchasing fuels: in 2016 the value of excise on fuel purchases amounted to 3,002,885,448 shekels. The value of value added tax on purchases of fuels and gas amounted to 854,691,445 shekels. The value of the deductions from excise and value added tax by the Israeli side on purchases of fuels and gas (3%) amounted to 115,727,306 shekels, and the value of interest expenses borne by the Petroleum Authority as a result of borrowing from banks and institutions amounted to 51,491,388 shekels.

The matter requires searching for mechanisms to purchase fuels exempt from all types of taxes and excise, in order to provide liquidity and independence, and to reduce the amount of borrowing and the resulting interest.

4- Qualifications of the State Audit and Administrative Control Bureau (SAACB)

The qualifications of the State Audit and Administrative Control Bureau (SAACB) on the final financial statements for the years 2016 and 2017 relate to the Ministry of Finance's compliance with the Public Sector Accounting Standards – cash basis in the final accounts (above) for the following reasons:

The Ministry of Finance did not disclose some important agreements that have a material effect on decision-making by users of the financial statements, and which are considered necessary to present the financial statements fairly in all material respects. Examples of this include:

The agreement signed with the Israeli side regarding the public treasury's bearing of amounts due on Jerusalem Electricity Company and other local bodies and some other electricity companies, and individuals, resulting from accumulated electricity consumption by Palestinian customers in the West Bank and the Gaza Strip that remained unpaid to the Israeli electricity company up to 12-9-2016, amounting to 2,030,000,000 shekels, contrary to IPSAS 1-3-30... of the Public Sector Accounting Standards regarding disclosure of any additional information not presented in the body of the financial statements but necessary for a fair presentation of collections, payments and the entity’s cash balances.

Qualifications on Note No. 3 (clearance revenues) for the following reasons:

1- The Bureau was not provided with supporting documentation for some financial transactions related to clearance revenues and their disclosed deductions in the final accounts in Note on revenues – Clearance No. 3. For example, there is not sufficient supporting documentation for the deduction of 1,664,454,251 shekels from clearance revenues during the years 2016–2017 as electricity consumption charges, nor is there sufficient supporting documentation to verify the amounts that must be transferred due to deductions from the salaries and wages of Palestinians working inside the occupied territories of 1948. These qualifications recurred in previous years.

2- The Ministry of Finance recorded a deduction by the Israeli side for April 2016 in the amount of 150 million shekels without documentation supporting the deduction in the monthly clearance sessions.

3- There are not sufficient supporting documents that clarify the mechanism of recording by the Ministry of Finance the cash transfer received from the Israeli side, in the amount of 580 million شيقل... and the amount of 225 million شيقل in the final accounts for the years 2016 and 2017, respectively. (Without documentary support proving verification)....!

4- The Ministry of Health did not verify the accuracy of amounts deducted from clearance revenues related to financial claims issued by Israeli hospitals of 235,487,926 shekels and 231,132,409 shekels in the final accounts for the years 2016–2017, respectively. (Such qualifications have been repeated by the Bureau in previous years regarding the failure of the Ministry of Health and the Ministry of Finance to verify and reconcile.)

5- There are amounts that were inflated and other amounts that were reduced as a result of incorrect classification of financial transactions or duplicate entries. We list some of them by way of example:

6- (Reduction of clearance revenues) Due to incorrect classification in the disclosure of revenues related to health insurance for Palestinian workers inside Palestine 1948, transferred by the Israeli side: in the amounts of 590,057,114 shekels and 167,878,613 shekels in Note No. 5 – Revenues of Central Budget Institutions in the accounts for the years 2016–2017, respectively, instead of Note No. 3 Clearance Revenues...!

7- (Reduction) of the value of grants from the Ministry of Social Development in the amount of 1,322,287 shekels, disclosed in Note (9) to the 2017 final account, due to incorrect accounting entries in recording the transfer of the remaining amounts of the Emirati Red Crescent grant to the Treasury account..., and (inflation) of the value of the Ministry of Social Development grants account, disclosed in Note (9), by an amount of 942,266 shekels for the final accounts of both 2016–2017, due to duplicate accounting entries by the Ministry of Finance and the Ministry of Social Development.

8- The Ministry of Finance did not disclose (the indebtedness due to certain bodies and institutions) in the 2016–2017 final account... among which, for example:

·        Indebtedness due to the Palestine Pension Authority

-       The Ministry of Finance did not disclose the indebtedness due to the Palestine Pension Authority within the amounts due to the Treasury, arising from the failure to transfer amounts deducted from public employees and the government’s contribution... The balance of this indebtedness reached 7,315,444,081 shekels according to the external auditor’s report of the Pension Authority for the fiscal year 2016, as of 31-12-2016. No settlement regarding the aforementioned balance had been reached between the Pension Authority and the Ministry of Finance up to the date of the audit. As for the 2017 public debt, the external auditor’s report for the Pension Authority had not been issued as of the date of the audit. Also, amounts due to the Palestine Pension Authority resulting from failure to transfer amounts deducted from military employees and the government’s contribution were not disclosed, as the Pension Authority has no data about military employees, deductions from their salaries, the government’s contribution, and the amounts due to the Authority from military employees, and the transfer of employee data and their entitlements to the Pension Authority had not been started in accordance with the provisions of the Pension Law..!

·       Receivables due to the General Petroleum Authority from companies supplying Israeli fuel

-        The amounts due to the General Petroleum Authority in favor of the fuel supplying companies were not disclosed, amounting at year-end 2017 to 775,278,334 shekels.. and 727,408,422 shekels in 2016. This is according to confirmations received from the supplying companies.

·       Receivable due in favor of the Palestine Investment Fund

-       The amount due to the Palestine Investment Fund from the Ministry of Finance, amounting to 133,746,768 dollars at the end of 2016, and 93,598,458 dollars, according to confirmations received from the Investment Fund and submitted to the Diwan, was not disclosed. The Ministry of Finance reconciled the Palestine Investment Fund balance in 2017 relying on the Fund’s ledger balance by preparing entries, without supporting evidence to verify their correctness, and recording them as adjustments to prior years.., in addition to the lack of sufficient supporting evidence for some entries, which does not allow the Diwan to confirm and verify the accuracy of these entries and to form an opinion on them....!

-       The Ministry of Finance did not disclose the amounts due to the Palestine Monetary Authority (PMA) amounting at year-end 2016 to 11,567,692 shekels, and 10,459,188 shekels for 2017.., in addition to the amounts due to the Palestine Deposit Insurance Corporation, in terms of the unpaid amount of the Ministry of Finance’s contribution to the Corporation’s capital amounting to 7,615,186 dollars, in addition to accrued late penalties..!

-       The Ministry of Finance did not disclose the trusts due in favor of local authorities within the monthly public debt report, which include real estate tax trusts, road transport trusts and business license trusts...

-       The balance of the Clearing Sessions Payments and Deductions account was not disclosed, which had a creditor balance of 410,011,465 shekels, within the public debt reports for 2016 and 2017, in the final accounts. (This is a debt on the Palestinian side but without proper confirmations for verification).!

-       Date: 24-8-2021