Cablegate: Financial Sector Reform: Auditing Issues


DE RUEHEG #1932/01 1751449
R 241449Z JUN 07





E.O. 12958: N/A


1. (SBU) The GOE's progress on meeting the remaining
benchmarks in the Financial Sector MOU, signed in 2005, has
been slow. Four hundred and twenty-five million dollars is
tied to completion of benchmarks to improve the transparency
and soundness of the banking system. To determine if these
benchmarks have been met, the MOU requires accurate financial
information on the state-owned banks. The required external
audit process is dragging on, however, and USAID estimates
that there will not be another disbursement under the MOU
this year. The CBE has not issued the Terms of Reference for
the external audits yet, and is vacillating on whether or not
to include a requirement for a letter of certification from
the international auditing firms. The Embassy would like to
review with Washington agencies the USG position regarding
what the reports from the international auditing firms should
contain, and proposes a DVC or conference call in the near
future. End summary.


2. (U) The Financial Sector MOU signed between the GOE and
the U.S. in March 2005 includes important banking sector
transparency and soundness benchmarks. In an effort to
achieve greater transparency, the GOE agreed to allow
internationally-recognized, impartial auditing firms to
conduct an initial baseline audit and subsequent annual
audits of the state-owned banks, using internationally
recognized accounting standards. To support the GOE's
efforts to achieve greater banking sector soundness,
disbursements under the MOU would be made based on
comparisons between the baseline audit and the subsequent
annual audits. The comparison must demonstrate that: (i)
the private sector share of new loans in the banking system
is increasing, (ii) the share of non-performing loans (NPLs)
as a proportion of all loans in the banking system is reduced
by 50%, and (iii) cash recoveries of non-performing loans
equal at least 20% of the book value of NPLs. Disbursements
would be made on a pro-rata basis for progress toward
achieving these goals.

3. (SBU) After the baseline audits by the international
firms began in 2005, it became clear to the CBE leadership
that these audits would produce results which differed from
the results of the legally-required annual audit conducted by
the GOE's Central Accounting Agency (CAA), considered by many
to be a political instrument, rather than an impartial
auditing body. The CBE balked at allowing the reports from
the international firms to be called "audits," as the CBE
leadership did not want two separate audits with different
results. The USG ultimately agreed that the international
firms would conduct "Full Financial Due Diligence" (FFDD) in
place of a baseline audit, and hence no opinion letter would
be submitted. Instead, the firms signed a cover letter
confirming that the FFDD was done according to international
standards. In the case of Banque Misr, KPMG, one of the
international firms, confirmed to emboffs that if they had
been allowed to render an opinion it would have been a
qualified opinion and would have found a loss of LE 16, as
opposed to CAA's LE 300 million profit and clean audit

Subsequent FFDD Falls Behind Schedule

4. (U) The FFDD on the three state-owned banks which serves
as the baseline was completed in November 2006 for the fiscal
years ending June 30, 2004 and 2005. The baseline FFDD is
intended to be as rigorous as an audit and produce the
necessary information to make the annual comparisons required
by the MOU. In late 2006, the CBE told USAID that the
international firms would be able to conduct the next round
of FFDD on the state-owned banks at the same time as the CAA
conducted its audit of the banks, in early 2007. Post
anticipated that the FFDD for the fiscal year ending June 30,
2006 could be done by July 2007, so a pro rata disbursement
(assuming progress had been made) could be made several
months later, after the necessary comparisons had been done.
However, CBE has not contacted the international firms to
conduct the FFDD, although the CAA has nearly completed its


5. (U) Moreover, the CBE not contacted the international
firms to conduct the FFDD, but the CBE has also not yet
shared with USAID the Terms of Reference (TOR) for the FFDD.
We understand that the Ministry of Finance has urged the CBE
to provide USAID a copy of the TOR so the FFDD can proceed.
Until the FFDD is completed and the comparisons against the
baseline made, $425 million (almost half of the total MOU
amount) in disbursements hangs in the balance.

Certification Letter

6. (U) The CBE has vacillated on whether or not to include in
the TOR a requirement for a letter certifying the results of
the FFDD. As noted above, the baseline FFDD of the three
state-owned banks was accompanied by a cover letter from the
international firms stating that the FFDD was done according
to international standards, but it was not a certification or
opinion letter, given CBE objections. The letter was a
simple one-sentence summary that contained no information
about methodology.

Action Request

7. (SBU) The TOR process for the upcoming round of FFDD is a
good opportunity for the USG to define exactly what the cover
letter from the auditing firms should say. The USG has, in
the past, considered funding the FFDD; doing so could provide
some leverage to insist on a satisfactory certification
letter. USAID, however, is currently not advocating paying
for the FFDD. The international firms seem prepared to
provide a certification letter and some officials at the CBE
seem willing to include a requirement for such a letter in
the TOR, as long as they do not have to agree to two separate
sets of financial statements. Post would like to review the
requirement for a certification letter with Washington
agencies and we propose a conference call or DVC in the near

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