Auditing

Turmoil in Iraqi Oil-for-Food Audit

Two competing RFPs from two governing authorities adds up to confusion for Big Four auditors.
Marie LeoneMay 18, 2004

A disputed auditor-selection process is widening the rift between Iraq’s Coalition Provisional Authority and the Iraqi Governing Council. As the June 30 deadline approaches for the handover of authority from the CPA to the IGC, the two groups have apparently put out competing requests for proposals to investigate an alleged scandal in Iraq’s oil-for-food program.

As a result of the dual RFPs, two Big Four audit firms have been pitted against each other to compete for the job, which could be worth between $5 million and $30 million.

Whichever firm wins the bid, the investigation will focus on alleged mismanagement of United Nations oil-for-food funds between 1995 and 2003 under the regime of Saddam Hussein, who reportedly funneled money away from the Iraqi people and into his private coffers.

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In February, the Iraqi Governing Council (IGC) asked KPMG to investigate the oil-for-food program, says Adam Bates, the auditor’s global head of forensics. The next month, however, the firm was informed by council officials that Paul Bremer, administrator of the Coalition Provisional Authority (CPA), was willing to fund a $5 million fraud investigation on the condition that the job was put out to bid.

As a result, recalls Bates, the IGC sent out a request for proposals, in which KPMG and other firms participated. Two weeks later, the CPA released its own request for proposals for the same job.

Claude Hankes-Drielsma, an advisor to the IGC, was shocked by the what he described as the CPA’s interference. Before the congressional subcommittee on National Security, Emerging Threats, and International Relations, he noted that the three firms that answered the IGC request for proposals “were clearly confused because of the parallel tender issued by the CPA.” According to sources, KPMG and Ernst & Young were two of the firms involved.

Initially, the CPA’s request for proposals had asked what a $5 million investigation would buy. When KPMG suggested that the engagement would cost considerably more, however, the CPA requested proposals with budgets of $10 million, $20 million, and $30 million.

While KPMG was preparing a second submission to answer the CPA tender, the firm was notified that it had won the first contract from IGC. Funding for that project remained a problem, however, as the IGC’s purse strings are still controlled by the CPA.

Bates says that KPMG was in talks with the CPA until May 10, when it became clear that both sides were far from resolving problems associated with the engagement’s terms and conditions. Bates — who predicts that myriad court battles will ensue once the investigation begins and individuals try to shield information from the auditors — says that the CPA was not willing to fund litigation expenses associated with the investigation.

Reportedly, after KPMG pulled out of the process, Ernst & Young was named the winning bidder by CPA officials. However, an Ernst & Young spokesman would not talk about the bid, noting only that the firm is “working with all interested parties to agree on the terms of the engagement.”

Nonetheless, last week Hankes-Drielsma denounced Bremer’s decision to appoint Ernst & Young to conduct a separate CPA-led investigation without consulting the IGC. Hankes-Drielsma also maintained that the IGC had already appointed KPMG and the law firm of Freshfields Bruckhaus Deringer to investigate the matter, “a decision which was unanimously endorsed by the Iraq Governing Council after a proper due process of tender which included members of the CPA.”

At press time, a CPA spokesperson in Baghdad was able to confirm only that Bremer ordered Iraq’s Board of Supreme Audit to oversee the second RFP process. The board, according to the spokesperson, is an independent agency that operates under the Iraq Ministry of Finance; it pre-dates the war and is similar to the U.S. General Accounting Office.

Interestingly, KPMG’s Bates notes that the two requests for proposals have one main difference. The IGC request included recovery of assets as a central part of the investigation, he maintains, while the CPA request was more of a fact-finding mission that asked only for recommendations on how to recover assets.