The State Audit and Administrative Control Bureau's Pen in Palestine

·        Episode No. (26)

·        Financial statements of Hebron Electric Company Private Shareholding Limited HEPCO” "

·        Today in this episode of reports of the State Audit and Administrative Control Bureau (SAACB), we review a report on the financial statements of Hebron Electric Company for the year 2022, where the General Directorate for Infrastructure Oversight conducted a financial audit and a compliance audit of some of these companies, including, for example, Hebron Electric Company.

·        Hebron Electric Company is a private limited shareholding company (and not a public shareholding company).. registered with the Companies Registry on 9-1-20009, and it is wholly owned by Hebron Municipality; it was subject to a financial audit and a compliance audit by the State Audit and Administrative Control Bureau (SAACB) for the financial year ended 31/12/2022, and this report was included in the Bureau’s 2024 annual report, where the audit revealed clear material observations affecting governance, financial discipline, tax compliance, receivables management, and the company’s financial sustainability!

·        It was observed that Hebron Electric Company — as stated in the report — suffers from numerous financial, administrative, and tax violations, extended over time, with a clear weakness in compliance with the governing regulations and laws, and evident imbalances in governance, resource management, receivables, and liabilities.

·        Such circumstances may pose a danger to financial stability and the continuity of the company’s operations, and require intervention, structural reforms, and comprehensive oversight!

·        The State Audit and Administrative Control Bureau (SAACB) report provided multiple recommendations to address and correct the administrative and financial structure of Hebron Electric Company!

·        The continued existence of the material observations shown in the aforementioned report will weaken the company’s financial and administrative conditions.... Below we list some of the material observations and violations that the Bureau’s report cited..... We also set out below our expectations of the repercussions of the continued existence of such material violations and observations ... on the company’s financial and administrative structure...

·        Material violations and observations and manifestations of non-compliance

·        First: Weakness in governance and internal control over the company’s operations:

·        Causes: The internal control unit does not report to the Board of Directors and operates under direct assignments from the General Manager, without professional independence, and there is a lack of an audit plan based on risk analysis, which weakens the ability to detect violations and limit them.

·        Risks: It may undermine the governance framework, disable preventive oversight, and increase the risks of mismanagement,

·        Second: Violations in financial control and management of custodianships

·        Causes: There are no judicial sureties for financial custodians (cashiers and collectors) in violation of the financial regulations, weak follow-up of collections by field collectors, and ineffective verification of the remittance of collected amounts.

·        Risks: The company’s funds may be exposed to the risk of loss, or to dishonesty in some individuals’ conduct, without legal guarantees.

·        Third: Striking tax and regulatory violations

·        Causes:

1-     Executing disbursement transactions without withholding tax certificates and without tax invoices.

2-     Failing to stamp invoices exceeding 10,000 shekels for value-added tax.

3-     Failing to withhold and remit the income tax due on the thirteenth salary (118,224 shekels).

4-     Paying overtime allowance at rates exceeding the legal limit (25%).

5-     Withholding tax on overtime from employees without remitting it to the Income Tax Department.

6-     Not calculating actual transportation expenses for income tax purposes.

7-     Not filing tax returns for the years 2014–2022, and relying instead on creating a large provision (12,678,257 shekels)

·        Risks: Exposing the company to substantial tax claims and fines, legal accountability, and distortion of the true financial position.

·        Fourth: Failure to present the company’s true financial position.. and accounting violations, and unreconciled adjustments at the company

·        Causes: The balances of the current accounts with Hebron Municipality do not match and reconciliations are absent; there is a debit withholding tax account in the amount of 1,140,830 shekels due to failure to provide withholding tax certificates; there are accounts outstanding with the government since 2016, with balance differences with the Ministry of Finance amounting to 986,067,306 shekels.

·        Risks: Loss of reliability of the financial records, complication of the financial position, and exposing the company to major financial disputes.

·        Fifth: Breach of contractual and financing obligations

·        Causes: Failure to pay installments of the International Bank loan since 2013, failure to pay annual installments due to the Ministry of Finance (1,761,242 dollars), and failure to record accrued loan interest (989,813 shekels).

·        Risks: Threatening the company’s credit reputation, increasing financial burdens, and legal risks.

·        Sixth: Serious weakness in receivables management and collection

·        Causes:  An increase in accounts receivable by 6% in 2022, indicating weak collection policies and delays in taking legal measures, with delays possibly reaching 10 years, filing cases only on the basis of bounced checks rather than total receivables, accepting post-dated checks which weakens the ability to collect rights, and installmenting receivables (especially major debtors) over long periods exceeding 10 years!

·        Risks: Accumulation of bad debts, erosion of liquidity, and decline in operational capacity.

·        Seventh: Electricity purchase obligations and losses

·        Causes:   Failure to pay in full the national electricity bills and incurring late payment fines. In addition, technical losses increased to 19%, with losses amounting to 66,008,845   shekels due to thefts and tampering with meters.

·        Risks : Direct financial bleeding that threatens sustainability, and reflects weak technical and field oversight.