The Final Account of the State of Palestine for 2014 and 2015

· From the (texts of the) annual report of the State Audit and Administrative Control Bureau (SAACB) for 2019: the report of the General Directorate for Economic Audit, regarding the consolidated financial statements “final account" for the financial years ended 31-12-2014 and 31-12-2015, issued by the Ministry of Finance.

- The General Directorate for Economic Audit in the State Audit and Administrative Control Bureau (SAACB) carries out audits of the economic sector, where the entities subject to the directorate include: the Ministry of Finance as the responsibility center, the Ministry of National Economy, the Palestine Investment Fund and its subsidiary companies, the Palestine Monetary Authority (PMA), and the Palestine Exchange. Four reports were issued on the economic sector; the first was a report on the consolidated financial statements (final account) for the financial years ended 31-12-2014 and 31-12-2015, issued by the Ministry of Finance, which this Ministry delivered to the SAACB in the first quarter of 2019.

- The Ministry of Finance and Planning is responsible for preparing the financial statements of the State of Palestine and presenting them fairly, in accordance with the International Public Sector Accounting Standards – cash basis (IPSAS). The Ministry is also responsible for ensuring that the activities, financial transactions and information contained in the financial statements comply with the legal (texts) rules that govern them.

- The Bureau’s responsibility is to express an opinion on these statements based on its audit, in accordance with the International Standards of Supreme Audit Institutions (INTOSAI standards) and international auditing standards. It is also the Bureau’s responsibility to express an opinion on whether the activities, financial transactions and information contained in the financial statements conform with the legal and regulatory rules (texts) that govern them.

- The State’s “final account” is considered a procedure for measuring the dimensions of implementing the general budget and a mirror reflecting the aspects of the fiscal policy of the State of Palestine. Since the general budget is the financial plan for the fiscal year to implement the governmental program and what the government will accomplish in terms of programs and projects to achieve its objectives within the framework of the main national objectives and programs, within the limits appropriated in the general budget law and what is expected to be spent on those programs and projects and what is expected to be collected in revenues from various sources during the same period, the final account is the actual financial statements of the implementation of the general budget. The final account (consolidated financial statements) of the State of Palestine and the financial statements include: “the comparative statement of budget versus actual,” the “consolidated statement of cash receipts and payments” and the accompanying disclosures for the State of Palestine, a summary of significant accounting policies, and other explanatory notes.

- Based on these concepts on which there is no disagreement, this report, which is the opinion report issued by the State Audit and Administrative Control Bureau (SAACB) on the final accounts of the State of Palestine for the period ended 31 December for the years 2014 and 2015... expresses the extent of the government’s compliance with what the legislative authority approved in the general budget law in terms of appropriations, and reveals the observations that affected the implementation of the general budget, so they may be used to improve the allocation of financial resources and reduce deviations in preparing the budget for coming years. This Bureau’s report addressed an analysis and audit of the government’s final statements shown in the general budget law for the fiscal years 2014 and 2015.

- The State final account, which is prepared by the Ministry of Finance and Planning, must be delivered to the State Audit and Administrative Control Bureau (SAACB) within one year at most from the end of the fiscal year. For example, the final account for 2019 should be delivered with the Bureau’s annual report for 2019 so that comparisons between actual and estimated amounts are appropriate for audit by the Bureau, not separated by years of events and financial developments that impede optimal audit and oversight and increase its difficulty. It is clear, however, that there was a noticeable delay in delivering the State’s final account reports by the Ministry of Finance and Planning, although the SAACB maintained continuous follow-up with the Ministry of Finance, as indicated by the content of the Bureau’s report texts, to expedite delivery of the State’s final account within the time periods specified by law and applicable regulations (State Audit and Administrative Control Bureau Law No. (15) of 2004, Chapter Five “Obligations of entities subject to the Bureau’s oversight” Article 33 and Article 34). The delivery of the final account — relating to the periods 2014 and 2015 — occurred in February 2019, i.e., with a delay of approximately four years.!

- In this regard, the Bureau notes in its report that some adjustments the Ministry of Finance made, based on the Bureau’s observations and recommendations contained in the management letter for the years 2014 and 2015, were at the level of accounting entries and account balances in the government Bisan program, which reflects on subsequent final accounts. (These adjustments and entries were not reflected in the disclosures) because the Ministry of Finance did not reissue the final accounts for 2014 and 2015.!

- The SAACB issued its report on the State of Palestine’s final account for the years 2014 and 2015, as noted above in the introduction, and the Bureau issued a qualified opinion regarding the fairness of these financial statements, as there were numerous observations, whether concerning the preparation of the financial statements on the basis of the International Public Sector Accounting Standards framework, or observations concerning the main accounting policies and the attached disclosures, or observations regarding compliance of the statements with the applicable laws, regulations and bylaws in this regard. In addition, there are observations that were not included in this report, which we did not review, because they were contained in the “management letter” to the Ministry of Finance.

- The Bureau’s report on the final accounts for 2014 and 2015 came in more than 44 pages of the SAACB’s 2019 annual report. It is understood that the Ministry of Finance in any country is the ministry of numbers, accounts and accounting equations; it is considered the state treasury in money and data, and it prepares the highest reference in issuing the state’s financial statements with utmost and final accuracy... Consequently, its issued financial statements form the basis for government planning and the basis relied upon by international institutions related to lending, finance and investment... The Ministry of Finance always includes employees, officials, reviewers, financial controllers, auditors, and staff with a high professional level to complete the work in an accredited manner.!!

- Despite the foregoing, I was astonished while reading the Bureau’s report on the State of Palestine’s final account for 2014 and 2015 and the observations it contained, whether regarding the method of preparing the financial statements based on the International Public Sector Accounting Standards framework or the reservations on the summary of significant accounting policies, which reached more than (180 observations) that led to the Bureau issuing a qualified financial opinion, in addition to the compliance-related observations with laws, regulations and bylaws which reached more than (70 observations) for the Bureau. The Bureau’s observations ranged from performance shortcomings in preparing some financial statements that revealed professional weakness in some transactions, entries and accounting treatments in preparing the financial statements, and from an unexpected confusion due to the Ministry of Finance’s non-disclosure of many financial items relevant to the report, to some observations concerning the inflation of certain figures, numbers and balances and the understatement of others due to non-disclosure, which led the Bureau to issue a qualified opinion (a qualified financial opinion) and (a qualified compliance opinion) based on the observations referred to in the report, which we will summarize in a subsequent episode... The Ministry of Finance amended and corrected some of the data in response to some of the observations contained in the Bureau’s report, in its reply to the Bureau... subject of this study..

- From the observations of the State Audit and Administrative Control Bureau (SAACB) on the final accounts, which amounted to more than 250 observations:

A reader of some of the observations contained in the Bureau's report on the final account for 2014 and 2015—which amount to more than 250 observations—and of the content of some of them, including contradictions in the financial data appearing in the final accounts of the State of Palestine for 2014 and 2015, between inflation... and deflation of values and balances..., failure to record the value of many grants, errors in accounting classification, incomplete or outright lack of disclosure of data and balances,... overlap of some of these data among some responsibility centers, reliance in some bank reconciliation preparations and some related financial data solely on bank statements...., etc..... among many violations and errors, is bound to be concerned about the inaccuracy of some of the Ministry of Finance and Planning's data, which the government considers its primary reference in preparing the state's final accounts and in disclosing the balances of those accounts, noting that the final accounts, as we indicated earlier, are a mirror of the government's implementation of its program as set out in the general budget law for 2014 and 2015, and the government and other parties rely on them in planning and in adjusting their fiscal and development policies. We note here, and as stated in the Bureau's observations, that the corrections and adjustments made by the Ministry of Finance in accordance with some of the Bureau's observations under review did not include reissuing the financial statements of the final accounts for 2014 and 2015, but rather were limited to correcting the accounting entries in the government's Bisan program, which will affect subsequent final accounts..2016 and after..! and not the final accounts 2014 and 2015 that were the subject of the Bureau's audit....

We again hope that the corrections and adjustments made by the Ministry will, in addition to corrections and amendments to accounting records, include an investigation into the causes of the laxity and the decline in professional standards observed in the preparation of some financial statements, not only with regard to those who prepared the incorrect statements but also those financial controllers in the Ministry and at some multiple responsibility centers who should have reviewed them professionally as required by their job responsibilities before they were automatically approved.!

Below we list some of the observations on some of the clarifications:

"Borrowing, interest, bank commissions and loan installment payments" (Note Nos. 20+19+10): the number of the Bureau's observations on this item is 28 observations, of which we cite the following:

(The Ministry of Finance's failure to disclose the rescheduling of certain loans) and the installments and interest due on them during 2014: the value of borrowing to reschedule certain domestic loans for 2014 amounted to 1,269,118,621 NIS, whereas the value of the actual amounts paid resulting from the rescheduling of installments and interest due on domestic loans in 2014 amounted to 1,274,802,186 NIS... a difference of 5,683,565 NIS in the final account for 2014.!

Failure to disclose in the 2015 final account the amounts of borrowings) through rescheduling of domestic loans, which totalled 800,551,843 NIS, where it disclosed an amount of 540,567,396 NIS, i.e. an allocation of 259,984,447 NIS for rescheduled loans, in addition to the failure to disclose payments of rescheduled domestic loans amounting to 261,577,477 NIS, and in addition to the 2015 financial data (Note 10) showing an increase in the total paid interest on domestic loans (restructuring) of 1,293,043 NIS, and an increase in the total delayed interest paid on domestic loans (restructuring) of 299,986 NIS..!

The Bureau — State Audit and Administrative Control Bureau (SAACB) — was unable to obtain confirmations from the donor parties for some external loans that clarify the balances of the external loans and the installments and interest due on them as of 31-12-2014 (an Islamic Development Bank loan in Jeddah; the Arab Economic and Social Development Fund)!

(Mismatch of loan balances in the monthly report) with what is recorded in the Bisan program in the financial data for 2014 and 2015, where the balance of the Chinese loan was disclosed in the public debt report issued by the Ministry as of 31-12-2014 as 20.5 million NIS, and as 19.600 million NIS on 31-12-2015, (and there are no data related to this loan in the Ministry's records on the Bisan program for 2014 and 2015).

A difference in the value of the balance of the Italian government loan, where the loan balance in the confirmation was 13,164,257 USD as of 2014, while the loan balance as recorded on the Bisan program was 16,164,257 USD.....!

Some external loan balances and some installments due on them appear (contrary to their nature) in the trial balance for 2014 and 2015, which affects the correctness and accuracy of the accounting entries and the value of presentation and disclosure in the final accounts for 2014 and 2015,!

(Mismatch) of the ceiling of facilities granted to the Petroleum Authority by the Islamic Bank, as disclosed in Note (10), with the aggregate granted financing ceiling by a difference of 23,800,000 NIS, less than the actual granted ceiling, which amounts to 180,000,000 million NIS, in the final account for 2015.!

(Failure to separate the loan interest account from the interest and commissions charged to bank accounts), (and confusion between interest due and cash interest), and therefore not showing them at their fair value in the final account for 2015....!

(Inflation) of the value of external loans by 24,394,531 EUR relating to Italian government loans, where confirmations from the Italian government showed that the value of the Italian government loan amounted to 7 million EUR, whereas three loans were disclosed in Note 10 of the 2015 final account with a total value of 24,394,531 EUR.!

(Understatement) of the balance of a National Bank loan, subsidiary account (its number is recorded in the Bureau's report), according to the financial data and accounting entries recorded in the government's Bisan program, compared with the balance in the confirmations, where the difference (a decrease) in the accounting entries and financial data amounted to 2,833,072 NIS in the 2015 final account, in addition to (an inflation of locally due interest) of 277,625 NIS and (a reduction of locally due delayed interest) of 475,497 NIS for National Bank loans, with a net effect of a reduction in locally due interest and locally due delayed interest of 197,872 NIS, as shown by the confirmations for National Bank loans in the 2015 final account....!, (and a reduction of locally due interest) of 81,503 USD, (and an inflation of locally due delayed interest) of 80,608 USD, for the Egyptian Mortgage Bank loan, based on the bank confirmations in the 2015 final account.!

(Understatement) of the recorded value of the Al-Aqsa and Jerusalem Fund loan, small projects development, subsidiary account 6,550,100 USD, as of 31-12-2015 in the accounting records, while it does not appear in the confirmation received from the Al-Aqsa and Jerusalem Fund, (and a reduction) of the value of the loans of the Al-Aqsa and Jerusalem Fund by 1,266,472 USD, based on bank confirmations as of 31-12-2015.... !

(Inflation) of the value of withdrawals (borrowing) by 11,862,754 NIS at the National Bank in the 2015 final account, due to disclosure of the National Bank's cash flow difference of 67,016,902 NIS instead of 55,154,140 NIS because of (failure to separate the value of checks for collection), and (a reduction) of the value of withdrawals (borrowing) by 20,846,571 NIS at Bank of Palestine in the 2015 final account, due to disclosure of Bank of Palestine's cash flow difference of 102,335,000 NIS instead of 123,181,571 NIS.!

Net cash flows of the General Petroleum Authority — Note No. 18 — observations include:

Presentation of the values of cash inflows and outflows on the bank accounts of the General Petroleum Authority and the net value in the final accounts for the years 2014 and 2015 without clarifying the cash receipts from the cash payments, and without classifying them (by sources of cash flows (cash receipts through collections from receivables, financing from the Orphans Institution, the Nafka Fund, cash payments to settle payables, fuel transport receivables, commissions and bank interest)).

(Inflation) of the amounts of cash inflows and outflows of the General Petroleum Authority in the 2014 final account to reach 22,060,240,605 NIS (twenty-two billion, sixty million, two hundred and forty thousand, six hundred and five NIS), and 6,274,887,323 NIS (six billion, two hundred and seventy-four million, eight hundred and eighty-seven thousand, three hundred and twenty-three NIS) in 2015, resulting from treating internal transfers between banks as cash inflows and outflows, noting that there is no effect on the net cash flows presented in the final accounts...!

(Inflation) of the amount of cash receipts of the General Petroleum Authority by 110 million NIS related to transfers received by the Authority from the Energy Authority.!

- (Inflation) the balance of cash available in banks on 31-12-2014 in the amount of 204,640,072 Shekels, which is the value of checks for collection belonging to the General Petroleum Authority.!

- Cash "restricted and available for use" disclosure 25, 22, number of the Court of Accounts' notes 19 note, from which we cite the following:

- (Invalidity ) of the bank reconciliations prepared by the Ministry of Finance, in that revenue recognition was based on the bank statement only....! and without relying on the monthly revenue reports issued by the responsibility centers, which led to an overstatement of the amount of cash and revenues in the financial statements for 2015, this being due to recording the value of returned checks and..bank errors as collected cash..!

- (Recognizing the value of checks twice), as collected cash and transferred to bank accounts, a bank check was recognized as collected cash, and transferred when it was returned because it appeared on both the debit and credit sides of the bank statement, and it was recognized again at the time of re-depositing the check..!

- The Ministry of Finance's failure to confirm the value of cash collected in the bank and transferred to bank accounts for revenues, which led to a reduction in the amounts of revenues and cash in the final account, and therefore incorrect presentation and disclosure, in addition to incorrectness of the bank reconciliations that were prepared (weak control procedures over the preparation of bank reconciliations)!

- Certain responsibility centers recording cash deposits in special accounts as expense refunds incorrectly, which affects the correctness of receivables, expenses and cash, by inflating the value of expenses by the amount of refunds deposited in bank accounts to the refunds-for-expenses account instead of recording them as collections.!

- (Inflation of receivables) by the amount of payments deposited in bank accounts to the refunds-for-expenses account..and this is due to the failure to perform the necessary reconciliations for receivables accounts.!

- (Failure to separate the value of checks deposited in banks for collection for the General Petroleum Authority), and to disclose them within cash available for use, which was declared in an inflated and incorrect manner in the final accounts with the value of these checks 198,958,947 Shekels.!

- (Failure of the Ministry of Finance and other responsibility centers to perform bank reconciliations for some bank accounts), which affects the correctness of bank balances.!

- (Existence of accounting residues) in the bank reconciliations for 2015, which were not resolved up to the date of the audit in 2018, which affects the correctness of bank balances!

- Existence of bank accounts of responsibility centers not recorded on the Bisan program, which affects the correctness of bank balances!

- On 24-12-2020