Iraq’s EITI report shows discrepancies with a KPMG audit

We were running some numbers on Iraq’s first EITI report, published in December, and stumbled on a surprising fact: the reconciliation report carried out by Price Waterhouse Cooper, mapped exactly onto an audit by KPMG of the Development Fund for Iraq accounts held in New York. And yet there is a discrepancy of at least $80 million between the two reports, and possibly as much as four billion dollars.

Of course, discrepancies do not prove anything in and of themselves. But the uncertainty over the first report, which cost $190,000, by the way, complete with typos, combined with uncertainties about the scope of reporting, suggests that the EITI board would do well to consider carefully how to deal with the pending question of possible compliance for Iraq later this year, possibly before a second reconciliation report with a broader scope and no discrepancies has been completed.

It’s an almost unique situation. Iraq’s oil is 100 percent owned and marketed, and it was this that allowed the Iraqi government to make a case that the first report, covering the year 2009 before service agreements were signed with IOCs, could cover only export sales. But it’s also that unique situation, and Iraq’s own turbulent history, which allows direct comparison with another audit which should be authoritative: a formal audit by a Big Four accounting firm.

Under arrangements made during the time of Saddam Hussein, all of Iraq’s oil revenues are supposed to be paid into accounts of the Development Fund for Iraq (DFI) at the Federal Reserve Bank of New York and have fallen under UN supervision. These are the accounts that KMPG audited as part of continued international supervision of Iraq’s oil proceeds. This means the DFI accounts audited by KPMG should match exactly the results of the EITI reconciliation report, which are based on matching sales statements from Iraq’s monopoly selling organisation, SOMO, with those of international trading companies that bought oil in 2009. But they don’t.

Within the EITI report, as we previously noted, there was a discrepancy of just over a billion dollars between the sums reported by SOMO and the companies. SOMO’s was the higher sum at $41,249,682,456, $1,090 million higher than the companies totals. But the KPMG audit shows a figure in the DFI accounts that is $41,329,854,000, some $80 million higher even than the SOMO figure.

Price Waterhouse explain that the billion dollar difference between the two sums in the reconciliation report is explained simply by different accounting methods, cash or accrual. When sales shipped in December 2008 but paid for in 2009, or shipped in 2009 but paid for in January 2010 were included, there was a discrepancy of only $700.

But while this could explain the difference between the two totals in the EITI report, it can’t explain the difference between both of them and the KPMG audit because its figure is $80 million higher than the higher of the two EITI figures.

But there is more. The KMPG audit also states that in addition to the funds paid on crude which went into the DFI accounts, some $250 million were paid into SOMO’s accounts outside the UN mechanism for sale of petroleum products during 2009. Further, the KPMG audit also seems to account for the difference between cash and accrual in DFI – but with the difference at over three billion dollars. In other words, the $80 million is the smallest of three possible discrepancies.

 

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