The Battle for Iraqi Audits

The U.S.-led Coalition Provisional Authority has approved funding for an Ernst & Young audit into the oil-for-food program -- at the expense of a KPMG audit that's been under way for three months, maintains the Iraq Governing Council.

An investigation into a United Nations oil-for-food program — and attempts to recover funds allegedly diverted by Saddam Hussein into his private coffers — are suffering from the same lack of coordination that have become all too familiar in reports from Iraq.

Audit firm KPMG; its investigative partner, law firm Freshfields Bruckhaus Deringer; and its sponsor, the Iraq Governing Council (IGC), are appealing a recent decision by the U.S.-led Coalition Provisional Authority (CPA) that, they maintain, reallocated funding from KPMG’s three-month-old audit to a new investigation by Ernst & Young.

In February, the IGC first asked KPMG to investigate the 1995-2003 oil-for-food program, according to Adam Bates, the auditor’s global head of forensic accounting. That probe has continued even though the IGC and the CPA subsequently issued competing requests for proposals to investigate the alleged scandal. KPMG eventually received a letter from the IGC approving the audit firm’s appointment, according to Bates, who added that the Iraqi ministries of oil, finance, and trade, as well as the Iraqi central bank, also approved the audit.

Nonetheless, two weeks ago, the Iraqi Board of Supreme Audit — which had the approval of CPA administrator Paul Bremer to oversee the process of selecting an auditor — named Ernst & Young to lead the investigation, according to the Associated Press. Reportedly, Bremer then rerouted at least $5 million from the existing IGC-approved KPMG audit to the Ernst & Young investigation, tapping the Development Fund of Iraq to finance the project.

KPMG, Freshfields, and the IGC received “strong legal advice” from the law firm Patton Boggs — which has offices in both Washington, D.C., and Doha, Qatar — to appeal the fund transfer on the grounds that Bremer’s actions violated CPA Regulation No. 2 and UN resolutions 1483 and 1511.

The CPA regulation, which echoes the mandates in the UN resolutions, states that disbursements from the Development Fund of Iraq — which is controlled by Bremer, and which includes revenues from the sale of Iraqi oil — must be “developed in consultation with the Iraqi interim administration.” Until now, the interim administration has been the IGC, maintained council advisor Claude Hankes-Drielsma and other sources. Hankes-Drielsma insisted that Bremer’s decision to reroute the funds to the Board of Supreme Audit was never discussed with the council, which “embodies the sovereignty of the state of Iraq.”

CPA senior advisor Dan Senor asserted, however, that Bremer informed the IGC “months ago” that the BSA would lead the investigation. At a press conference last Thursday, Senor brushed off the IGC audit completely, characterizing it as a personal undertaking of IGC member Ahmed Chalabi. (Chalabi’s home and office were raided by Iraqi police, with help from coalition forces, that same day.) Said Senor, “I am aware that Chalabi was looking into an investigation of his own… but that certainly isn’t the Iraqi government investigation.” He added that he knew of only three oil-for-food probes thus far: one by the U.S. Congress, another by the U.N., and “an Iraqi investigation.”

Hankes-Drieslma bristled at Senor’s claims, stating that “It is not only absurd, but a deception of the public, for Mr. Senor to suggest that Dr. Chalabi was looking to conduct his own private investigation.” Hankes-Drieslma pointed out that CPA representatives were present at the IGC meeting when KPMG was appointed, and that Bremer informed the IGC that financing from the Development Fund of Iraq would be available for the investigation.

KPMG’s Bates confirmed that CPA representatives were in the room when the IGC appointed the audit firm to take charge of the investigation. Bates noted that during his first visit to Baghdad in February, he met with Olin Wethington, a CPA economic development official, to discuss details of the audit proposal.

Nevertheless, the CPA and Bremer are convinced that the Board of Supreme Audit is the better organization to oversee the oil-for-food fraud investigation. At last week’s press conference, Senor pointed out that the board is an “impartial,” independent professional oversight agency that does not consist of political officials — and that it was empowered by Bremer several months ago to lead the investigation.

Setting aside the auditor selection process, not everyone is convinced that the Board of Supreme Audit is ready for duty. In its April Revenue Watch report, “Opening the Books: Transparent Budgeting for Iraq,” the private Open Society Institute criticized the CPA for providing the board with only $3 million in funding for 2004.

The report noted that under the previous Iraqi government, the board answered directly to Saddam Hussein, and its audits were top secret. That doesn’t mean the current board lacks independence, continued the report; the board’s staff may still be technically competent. But to be successful, the authors concluded, the board requires adequate resources, staff, authority and technical assistance.

At press time, neither CFO.com nor the Open Society Institute were able to obtain a list of members for the Board of Supreme Audit.

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