Operations of the Institution for the Management and Development of Orphans’ Funds for 2020

Episode (No. 13)

- The State Audit and Administrative Control Bureau (SAACB) annual audit report for 2023, as a result of examining the operations of the Institution for the Management and Development of Orphans’ Funds for the year 2020, contains indicators, observations, and compliance violations that do not inspire confidence in the results of some activities in an important institution whose primary mission, and for which it was originally established, is the management and development of orphans’ funds — pursuant to laws issued such as Law No. 14 of 2005, which was issued by the Palestinian Legislative Council, or Legislative Decree No. 10 of 2023, to care for minors’ orphaned funds, preserve them, and develop them through investment according to Islamic financing formulas..and the institution must comply with the provisions of these laws.

- The multiplicity of violations and observations affected many departments and divisions of the institution, especially the financial and administrative ones, so that one senses weakness in control, compliance, indifference, professionalism, and transparency, and a lack of diversification in external financing, given that 97% of external financing was directed to the Petroleum Public Authority only, which exposes the management and development of orphans’ funds to significant risks.

· The following lists some of these observations and violations, which were the basis of the State Audit and Administrative Control Bureau (SAACB)’s qualified opinion:

- Reasonable assurance was not obtained regarding the fairness and accuracy of the balance of orphans’ trusts in the northern and southern governorates as disclosed in the financial statements, with the balance of orphans’ trusts in the computerized system designated for recording names, entitlements, and details of all orphans, where there are differences, either increases as in the northern governorates, or decreases, as in the southern governorates.

- There is not sufficient assurance regarding the correctness and fairness of the balance of orphans’ trusts disclosed in the financial statements, due to the allocation of retained earnings instead of distributing them to orphans’ accounts contrary to Article 24 of the Institution for the Management and Development of Orphans’ Funds Law, which provides for the distribution of profits annually and in full, which resulted in reducing the cumulative balance of orphans’ trusts.

- There is not sufficient assurance regarding the correctness and fairness of the opening balances for orphans’ trusts, whether pertaining to the northern or southern governorates, as a result of entering retroactive adjusting entries (and thus adjusting the balances of prior years).

· As for the institution’s performance and compliance with the laws, the following violations were reported:

- There was no compliance with reclassifying the rights of orphans who reached the legal age (capacity) and did not apply to receive their funds (a period of 3 years after reaching 18) from the orphans’ rights account within equity items to trusts - accounts payable within liabilities, in compliance with the provisions of Article 18 of the law, which obliged the institution to freeze the value of the orphan’s funds and their returns up to the date, in a special account.

- The law obliged the institution to allocate the remaining annual profits, after deducting the 5% reserve from the annual profit at most, to orphans’ deposits in proportion to each one’s contribution to the institution’s funds, executing the distribution on an annual basis, and for the full amount of the realized annual profit, without allocating retained earnings, which was not done.

- The pricing annex (table of financing return rates) was not included in the institution’s credit policy manual, and the credit policy did not set defined ceilings for financings, nor programs linked to those ceilings.

- The institution delegated to the chief financial officer the authority to sign bank checks, while he also prepared and approved the accounting entries, contrary to internal control regulations, which require separation between check-signing duties and accounting or the finance department duties.

- There is no effective oversight over accounting records, due to the lack of sufficient assurance on the correctness and fairness of those records and the detection of errors as soon as they occur.

· The attached financial statements

- Insufficient disclosures were included in the 2020 financial statements for each of the following:

- Disclosures regarding investment properties (lands), and whether there are restrictions and legal issues on those lands, such as the Ibn Rushd land in Hebron, on part of which there is a government school, which hinders disposal of the land!

- Disclosures on the mechanism for calculating provisions, mandatory and voluntary, and the purpose of those provisions, in addition to the absence of a provision that permits withholding amounts in reserve provisions.

● Distribution of profits (investment returns) to orphans

- Not all of the realized annual profits are distributed to orphans’ deposits, contrary to the provisions of the law.

● Reconciliations and bank accounts

- The finance department does not comply with preparing regular and properly authorized bank reconciliations, on paper, for all its active bank accounts.

- By matching confirmations received from banks with ledger bank balances, a difference in the balance of the checks in collection account was found, indicating the absence of effective control over bank accounts.

- There is no approved policy to regulate and organize procedures for handling returned checks, nor does the accounting system used by the institution contain a special control account for returned checks and accounting entries/mechanisms in the accounting system to process them, which leads to the absence of effective control over collection of loan repayment checks granted.

● credit facilities granted (murabaha)

- There is no diversification in the credit portfolio, as 97% of the volume of financings issued during 2020 were in favor of the Petroleum Authority, which increases credit risk in terms of default, portfolio risk, and assurances of continuing financing!

- Fixing murabaha rates on financings without regard to the financing amounts (4% for dollar loans, 5% for dinar loans

- The institution accepted guarantee and repayment checks without stamping them with a payee-only stamp for the primary beneficiary, which may increase the risk of misuse of these checks (their diversion)!

● Owned investment properties (lands)

- There is no written procedures manual to regulate purchase and sale processes, nor is there a clear investment plan to guide land purchase and sale operations.

- Management does not adhere to a land sale cycle, as lands are retained for long periods, sometimes exceeding 10 years.

- Sales are not conducted through public auctions to obtain the best prices, and to ensure periodicity and transparency of sales.

- The institution has not, over the financial years, prepared plans to implement projects such as (subdividing lands, connecting services, and building agricultural projects), despite owning some lands of large areas, exceeding 100 dunams, which hinders the institution’s ability to achieve the best results from investment and to deploy funds in developing orphans’ funds.

Opinion:

· The report reveals a significant weakness in control and compliance within the institution, with serious problems in fund management, profit distribution, and transparency, in addition to the high concentration of financing with the Petroleum Public Authority, which poses a risk to the institution’s stability, while the weak controls over accounting records and returned checks highlight deficiencies in financial management systems. The institution should take urgent corrective measures to ensure compliance with the laws and to enhance transparency and efficiency in managing orphans’ funds!