ICPAK RESPONSE TO THE PETITION ON THE REMOVAL FROM THE OFFICE OF THE AUDITOR GENERAL, FCPA EDWARD OUKO. 23 rd February 2017

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1 ICPAK RESPONSE TO THE PETITION ON THE REMOVAL FROM THE OFFICE OF THE AUDITOR GENERAL, FCPA EDWARD OUKO 23 rd February ICPAK s Mandate The Institute of Certified Public Accountants of Kenya (ICPAK) is the statutory body of accountants established by the Accountants Act of 1978, and as repealed under the Accountants Act Number 15 of 2008, mandated to develop and regulate the Accountancy Profession in Kenya. It is also a member of the International Federation of Accountants (IFAC), the global umbrella body for the accountancy profession. Section 8 of the Accountants Act stipulates the functions of the Institute as follows: a) promote standards of professional competence and practice amongst members of the Institute b) promote research into the subjects of accountancy and finance and related matters, and the publication of books, periodicals, journals and articles in connection therewith; c) promote the international recognition of the Institute; d) advise the Examinations Board on matters relating to examinations standards and policies; e) advise the Minister on matters relating to financial accountability in all sectors of the economy; f) carry out any other functions prescribed for it under any of the other provisions of this Act or any other written law; and g) do anything incidental or conducive to the performance of any of the preceding functions 2. Why ICPAK is responding to the Petition? The Institute is aware of the Petition No. 007 of 2017 regarding the removal from office of the Auditor-General, FCPA Edward Ouko. The Institute seeks to respond to this petition due to the following reasons: (i) (ii) ICPAK is mandated by the Accountants Act 2008 to regulate the accountancy profession in Kenya: It is imperative to note that the Petition points out matters that touch on the mandate of the Institute, in particular, matters related to conflict of interests and threats to independence of the Auditor General; ICPAK partnered with KENAO in implementation of the "Framework for Partnership with KENAO on audit of public sector and donor funded by Audit firms in Kenya project. We have considered the various issues raised and wish to respond as follows: 1

2 3. Part I: Matters touching on ICPAK Mandate as a regulator of the Accountancy Profession in Kenya Assignment of Extra Work to Review Internal Controls (Paragraphs 6, 28, 29,30,31,32 and 33 of the Petition) Right at the onset, it is proper to distinguish internal audit from external audit. Internal audit is an internal function aimed at system verification and employed to provide internal assurance on the strength of systems of internal controls as applied by an organization. Its focus is thus the key risks facing the organization and risk mitigating measures to help the organisation achieve its objectives. The practice of internal audit is governed under best practice standards (Internal Auditing Standards) developed and generally agreed upon for global application. External audit on the other hand, is an independent function which resides outside of the organisation which it is auditing. It is focused on the financial statements or risks associated with finance and are appointed by the company shareholders for private entiry and for the case at hand, by Parliament. The main responsibility of external audit is to perform the annual statutory audit of the financial statements, providing an opinion on whether they are a true and fair reflection of the company s financial position. As part of this, external auditors often examine and evaluate internal controls put in place to manage the risks which could affect the financial statement, to determine if they are working as intended. We wish to underscore that it is within professional norms for a firm to be engaged by the same client for assurance (financial audit) services and other non-assurance (business advisory) services. In such a situation, both the auditee and the auditor are professionally obligated to put in place safeguards against threats to their independence by giving or accepting any assurance services. However, the duty of care is weighed more on the part of the auditor. The Code of Ethics for Professional Accountants Section 290 as issued by the International Ethics Standards Board of Accountants (IESBA) and adopted by the Institute, requires that in assurance engagements that firms be independent of assurance clients. It further states that before providing a non-assurance (consultancy/advisory) service to an assurance (audit) client the firm should determine whether providing such a service would create threats to its independence. If a threat is created that cannot be reduced to an acceptable level even by applying appropriate safeguards the non-assurance service should not be provided. In the matter at hand, we have obtained confirmation that was contracted by the Office of the Auditor General to provide additional but separate work on ascertaining the strength of internal controls for the Office. We have obtained satisfactory evidence that M/s. Baker Tily Merali (BTM) indeed employed adequate safeguards that enabled the firm to deliver both services. The safeguards are as follows: i. The auditor required of the client (Office of the Auditor General) to obtain a no objection clearance from Parliament ahead of accepting appointment. We sighted a letter from the OAG to Parliament seeking no objection and a response from 2

3 Parliament providing the no objection (clearance) which then set the stage for the appointment of the M/s. Baker Tilly Merali, to provide on consultancy basis, services involving the review of the internal systems of control. ii. It is crucial to note that Code of Ethics No. 290 obligates the auditor and the auditee to put in place safeguards necessary to checks against the threats to independence, but with the auditor, M/s. Baker Tilly Merali with the greater responsibility. The auditor (BTM) has in accordance with Code of Ethics 290, demonstrated to the satisfaction of the Institute that the firm took the necessary steps to manage threats to its independence by having separate and distinct teams undertaking the two assignments independently. 4. Part II: Matters touching on ICPAK as a Service Provider to KENAO under the Project, Framework for Partnership by KENAO with Audit firms in Kenya (Paragraph Thirty-Two (32) of the Petition) The Petitioner alleges THAT the Auditor General further engages the same firm (Baker Tilly Merali CPAs of Kenya) together with ICPAK to undertake a project called Framework for Partnership by KENAO with Audit firms in Kenya. The project initiated by the office of the Auditor General together with ICPAK and its output was purely for the consumption of the Auditor General. The project was headed by Sudhir Bhandari who is one of the directors of the firm. The Institute of Certified Public Accountants of Kenya (ICPAK) wishes to respond as follows; Part A: Statement of Facts 1. THAT on 18 th March 2013, ICPAK acting independently submitted a proposal to World Bank to fund activities in strengthening the practice of Accountancy in Kenya. 2. THAT on 27 th January 2014, the World Bank Director approved the Institutional Development Fund as a grant to ICPAK amounting to USD 698,000 (Attached and marked ICPAK 1 is the Contract Agreement) 3. THAT a number of contracts and purchase of goods of and services were captured in the contract specifically; Contract 1: Development of a practice quality review and assurance program based on International good practice Contract 2: Development of an online continuous professional development & registration software Contract 3: Development of a customer relationship management, integrated enterprise resource planning & cloud hosted mail with workflow management system Contract 4: Development of E-Learning system Contract 5: Purchase of Laptops Contract 6: Purchase of Servers Contract 7: Purchase of Operating system 3

4 Contract 8: Development of a framework for improving quality of audit among small and medium sized audit firms for audit of the public sector and donor projects Contract 9: Development of trainee accountants practical experience framework Contract 10: Development of a budgeting and financial reporting framework based on IPSAS for county governments Contract 11: Development of a financial reporting award tool for county governments Contract 12: Audit of the world bank grant 4. THAT prior to the award of the grant, World Bank reviewed ICPAK policies and processes to ensure their adequacy; 5. THAT in line with WORLD Bank Procurement Guidelines and ICPAK Procurement Policies, ICPAK advertised in an open international tender to which the following firms responded; (i) Mbaya & Associates CPAs of Kenya (ii) Baker Tilly Merali(BTM) CPAs of Kenya (iii) KK Co. Consulting Ltd (iv) PKF CPAs of Kenya (v) Data Prime Solutions - South African Firm (vi) DCDM Strategic Consulting and Capacity Building, BDO (vii) The Institute of Chartered Accountants in England and Wales - UK Firm (viii) Accounting and Audit Reform Consultants Ltd A firm from IRELAND 6. THAT in accordance with Consultant Qualification for Services (CQS) method of the World Bank, ICPAK processed the bids and awarded the contract No. 8 to Baker Tilly Merali to develop of a framework for improving quality of audit among small and medium sized audit firms for audit of the public sector and donor projects 7. THAT in discharging its mandate BTM had interface with the Office of the Auditor General s Office as indeed other stakeholders in the donor funded projects; 8. THAT BTM developed and trained firms selected by ICPAK on how to audit public sector institutions and donor funded projects on behalf of the Auditor General; 9. THAT upon hand over of the report, a framework was developed to guide the partnership between ICPAK and the Office of the Auditor General in relation to effecting the collaboration. 10. THAT ICPAK has previously signed a number of frameworks and MOUs with Government and Non-Government Institutions and hence there is nothing untoward in the framework with the Office of OAG 11. THAT World Bank has organized country missions to review the projects under the grant and received reports from independent auditors who were appointed under their guidance to review all the contracts under this funding arrangements. All the contracts were cleared as having been implemented in accordance with the conditions guiding the grant. Consequently even the contract 8 which the petitioner is casting doubt on has received clearance by the World Bank. 4

5 Part B: Rebuttal That ICPAK wishes to correct the erroneous statements as follows; 1. THAT ICPAK did not at any time together or jointly with the Auditor General award a contract to BTM 2. THAT ICPAK acted alone and in accordance with World Bank Guidelines on Procurement and its own policies in procuring a consultant to develop a framework for audit of the Public Sector and Donor Funded Projects; 3. THAT the contracts awarded to BTM by the Institute was to develop the framework for audit of public and donor funded projects, it is therefore NOT TRUE as the petitioner avers that the contract was purely for use by the Office of the Auditor General 5. General Submission Upon reading the basis of the Petition, the Institute is of the considered opinion that the petition should be accorded the most objective review as it speaks to the core constitutional provisions on independence of the offices charged with budget oversight. This notwithstanding, it is proper that the Committee of the National Assembly seized of this matter (Finance, Planning and Trade Committee) takes cognizance of efforts in the recent past with similar objective but which were dispelled for lack of substantive evidence to advance the course of action sought by the then petitioners. In accordance with Article 47 of the Constitution, we implore the Committee to accord the Auditor General and the petitioner fair administrative action by requiring the petitioner to substantiate all the claims beyond reasonable doubt and to the Auditor General and any interested citizen an opportunity to appear and be heard. The Committee should then evaluate the evidence adduced and return a verdict that would serve to strengthen the voice of accountability and also embolden Parliament as the advocate of constitutionalism of last resort. 5