BEIRUT: A leading forensic audit expert said one of the conditions for a successful examination of the Central Bank’s accounts is to have an honest and unbiased judicial system, which is not the case in Lebanon.
“Let’s say for the sake of argument that Alvarez & Marsal uncovered incriminating evidence in the accounts of BDL. Can we guarantee that this case will be treated fairly and professionally in Lebanese courts? The answer is no. The Lebanese judicial system must be rehabilitated first in order to handle cases like BDL’s accounts,” Roy Ferneini, MBA, CPA and lead forensic auditor, told The Daily Star.
The US-based auditor, who audited accounts of companies and banks in 56 countries, does not believe Alvarez is qualified to conduct proper forensic auditing of BDL’s accounts, noting that the firm is specialized in restructuring of banks.
Last November, the Lebanese Parliament passed a recommendation for a forensic audit to be carried out not just for the Central Bank, but for all state institutions.
Alvarez & Marsal, the consulting company that was tasked with conducting the Central Bank’s audit, pulled out of the contract last year, citing noncooperation by the bank in providing the necessary documents.
But the company is now reviewing its position after BDL pledged to provide Alvarez will all the information it requested.
Ferneini expressed fear that Alvarez may have struck a deal with the state to frame Gov. Riad Salameh, adding that if the government was really sincere in conducting a professional forensic audit, then they could have signed the contract with the Kroll firm, one the leading forensic firms in the world.
“The first objective of forensic auditing is to find evidence that can be used in court. The Lebanese judicial authorities do not have a good reputation and hence this case will not be handled professionally by the court,” Ferneini argued.
In his opinion, it would be wrong to blame BDL for the current financial situation in Lebanon, stressing that Salameh has lent the government and financed the needs of the state.
He added that Lebanon can’t have a proper forensic auditing as long as the same politicians are ruling the country.
“I think this campaign against Salameh is populism in order to please certain political quarters. BDL receives orders to pay the state and the bank has to oblige,” Ferneini said.
But the expert acknowledged that Salameh’s biggest mistake is that he inflated the assets of BDL.
Deloitte & EY 2018’s qualified auditor’s report revealed discrepancies in Lebanon Central Bank’s financials, mainly its balance sheet.
Deloitte & EY’s auditors believe that assets were inflated and others were not re-evaluated to reflect the 2018 balance sheet’s true value for the following reasons:
1- The inability to “physically” verify the existence of gold listed on their balance sheet which represents 8.2 percent of total assets. It is a significant percentage.
It is known that the majority of Lebanon’s 286.6 tons of gold; about 70-75 percent is held at Fort Knox, KY, and the remaining at the Central Bank.
Auditors were not able to physically verify the gold held at the Central Bank while they were working at the location where the gold is stored! If we consider that 30 percent of the 286.6 tons of gold is held at the Central Bank, we conclude that 86 tons are at the Central Bank.
Closing gold prices for 2018 were $1,278.30/ounce, it means the gold ton was $40,9 million, 86 tons’ value is $3,5 billion at LL1,515 is $5,3 trillion. The auditors were not able to confirm more than LL5.3 trillion on their balance sheet.
2- The inability to verify deposits of LL4.6 trillion that represents 61 percent of total circularized deposits.
3- They were unable to confirm LL15 billion of deposits.
3- The Central Bank has not performed an assessment of the fair value of its LL345 billion investment. My guess is because their value decreased so they did not readjust it to reflect the true market value.
4- Their major investments, MEA, Independence Plaza, and Midclear’s balance sheets were the same for 2018 and 2017.
5- Another 9.89 percent of circularized deposits were not confirmed by banks after many attempts, LL15 billion were not verified.
“Considering all the above discrepancies, I conclude that assets were overstated by LL10,275 trillion or $6.78 billion,” Ferneini said.
He added that the so-called Qualified Report failed to mention or purposely didn’t disclose what are the standards adopted by the Central Bank’s council members for better comparison, knowing that what it did is in compliance with laws of “Money and Credit,” which is practiced by other central banks mainly in Eastern Europe and Latin America.
Ferneini said the other big mistake committed by Salameh is that he failed to protect the deposits of people which were used to subsidize goods and keep the pound stable.
“Maybe Salameh thought that the situation will improve and the governments will sincerely implement reforms. But this did not happen,” he added.
Among the conditions for an effective forensic auditing is to talk to the employees of BDL, according to Ferneini, adding that forensic auditing cannot be done from a distance.
Forensic audit procedures are used to obtain evidence to be used in court.
Below are the forensic auditor’s steps to follow:
Gathered from forensic auditing is normally used for legal purposes as the requirements to have the forensic audit are different from the requirement of a financial statement’s audit. Therefore, the procedure to obtain that evidence is more specific and fact rather than assumption. It is “crucial” for forensic auditing procedures to obtain evidence. It usually requires the officers or personnel who are being investigated to be suspended temporarily.
It provides the information for auditors to have a better picture or understanding of the inappropriate act and what might have happened so that they could perform an additional procedure to gather the fact.
Where auditors, before performing any analytical review, are always very cautious to make sure that the data they use for analysis is accurate. Otherwise the result of the analytical review can not be used as evidence and it could lead to a wrong conclusion.
The most important point of this procedure is helping the auditor to see the trend or fluctuation of certain transactions consistently. If it does not flow consistently, then a detailed review should be performed.
RECALCULATION AND INSPECTION:
Recalculation and inspection of the data and the records are the most popular procedure to be used in gathering evidence regarding the forensic auditor’s job. It just simply means collecting a sample of original invoices, receipts, and other important documents. Then, figuring out how much the loss should be and where. The performance of this procedure should be alight with the result of the analytical review and inquiry that the auditor already performed.
Before performing some specific testing of the cause, it is required to understand some specific procedure or function, and to do so, auditors need to perform actual observations. It is a very important part of the forensic auditors should not avoid otherwise the performance of other procedures like inspections will not run smoothly or naturally.
“Other important things are: they might need some specific information from the person who is involved in specific procure like payroll accountants, purchasers, and councils. Moreover, the forensic auditors might inquire about information from the low level of staff to the top level or from external parties if required like banks and suppliers,” Ferneini said.