CL Financial auditors under fire
By ANDRE BAGOO Friday, March 1 2013
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TESTIFY: New witness in CLICO Inquiry Auditor Keith Daniel....
AUDITORS of the CL Financial Group in the years leading up to its collapse yesterday came under fire from lawyers at the Colman Inquiry over apparent failures in their auditing processes, prior to the State’s intervention in 2009.
In particular, auditors PricewaterhouseCoopers (PwC) Trinidad and Tobago, were grilled over apparent failures to question the word of former CLF officials Lawrence Duprey, L Andre Monteil and Gita Sakal and – in once instance – for not even bothering to check the CLF financial statements when doing audits of related subsidiary companies that relied heavily on CLF’s financial health.
In contrast, the auditors appeared to have taken a more cautious approach for the accounts of smaller, less important firms in the CLF group, such as British American Insurance Company (Trinidad) Limited (BAICO), than they did with Clico’s accounts, where billions of funds belonging to third parties had accrued.
PwC partner Keith Daniel, the firm’s head of insurance services up to 2011, and a partner for the last 20 years, faced questions by lawyers for now State-owned Clico; the Clico Policyholders Group; counsel to the Inquiry and even lawyers from Ernst & Young.
There were at times heated exchanges between the witness and the attorneys. So much so that by the end of the sitting, which began at 9.30am, Daniel asked chairman of the inquiry, Sir Anthony Colman, for a break.
“Can we take a break for the day?” Daniel said at about 4.30pm, when told he could face almost an hour more of questions. “Because I am very exhausted.” There had been an hour-long lunch break and shorter breaks in the morning and afternoon.
Testifying at the Winsure Building, Richmond Street, Port-of-Spain, Daniel was grilled over whether he did all that was expected of an auditor when he handled the books of CLF subsidiary BAICO. Daniel said he was the engagement leader of the firm’s audit of BAICO in 2007. While he said he was engagement leader of the firm’s audit of Clico from 2003 to 2006, his evidence related mainly to BAICO not Clico.
The evidence yesterday painted a picture of an audit process whereby claims made by management to auditors were not subject to the most basic of checks. In particular, checking the share-structure of the CLF group was apparently not something that was not done.
Under cross-examination by counsel to the inquiry Edwin Glasgow QC, Daniel repeated that PwC got assurances from CLF management that shortfalls could always be met by dividend income from shares in group companies such as Angostura; RBL; MHTL. Yet, Glasgow said, if the auditors had checked they would realise that these claims were, in fact, untrue for CLF. CLF, he said, stood to get no dividends from RBL and only 6 percent of the dividend income of CLF.
GLASGOW: “Did anybody at PwC pause to think what those assurances were worth? Do you think anybody noticed that?”
DANIEL: “I’m not sure”.
Glasgow noted that accounting standard ISA 500 requires auditors to check the claims made in letters of assurance. He also queried how the auditors could not question the level of inter-group dealings, in particular BAICO’s reliance on CLF and vice versa.
GLASGOW: “The company whose going concern it was dependent was actually paying off the liability of the company on which it was dependent. Who was supporting who? Surely this was an extraordinary state of affairs.”
DANIEL: “Yes, it was an amount due from the parent rather than a subsidiary owing the parent.”
GLASGOW: “How on earth did that make sense at the time? How could you justify that? Did PwC ask where on earth all of this money is going to come from?”
DANIEL: “I’m not sure.”
Glasgow noted that PwC appeared to take comfort in assurances that CLF would be able to support subsidiary companies like BAICO financially. However, the CLF accounts showed huge losses. By 2007 the CLF loss was $1.2 billion.
GLASGOW: “Did anybody look at CLF’s own figures?”
DANIEL: “Well, that question will have to be put to the CLF engagement team.”
GLASGOW: “You never looked at CLF’s accounts?”
DANIEL: “These are unconsolidated accounts.”
GLASGOW: “They are the only documents we have got.”
The attorney for Ernst and Young, Stuart Young, questioned Daniel over a “letter of comfort” the auditor got from former CLF executive chairman Duprey, former CLF finance director Monteil and former corporate secretary Sakal in 2007 in relation to a hundred-million-dollar debt CLF owed to BAICO. In the letter, the three assured that, CLF was, “committed to providing financial support in the future.” Stuart suggested this letter was taken as an assurance by PwC that things were fine. But, in fact, the letter should have been a clear warning that all was not well with CLF since it indicated that CLF was not in a position to do anything other than offer a letter of comfort; could not provide immediate cash or financing.
YOUNG: “Is this not a red flag?”
DANIEL: “I was not involved in the audit in 2006 so I cannot answer that question.”
COLMAN: “Never mind that you may have not been actually personally involved in evaluating this letter. What would you have expected somebody in PwC to believe in relation to the state of play at CLF? It looks as though whatever the colour you give to the light at the very least it would not be green would it?”
DANIEL: “No. That is why we went to management and said ‘you made a promise to address this’.”
COLMAN: “Basically, unless the situation is remedied would you think there is a potential high-risk situation?”
DANIEL: “The group is a very large group, there are very significant dividends that flow from the RBL group and the MHTL assets.”
Under cross-examination by Clico attorney Neal Bisnath, Daniel said he never knew hundreds of millions in dividend income that was due to Clico never, in fact, made it to the insurance firm.
“No, I was not aware of that,” he said. In testifying, he repeatedly said auditors had regard to expected dividends when formulating an opinion on whether the group would be able to continue as a going concern. Daniel appeared to be in the dark over aspects of a Central Bank on-site inspection report which had raised questions over the way Clico was valuing policyholder liabilities, a huge component of the accounts.
“We never saw that report in 2008. We only saw the report in March 2009,” he said of the Central Bank report. “Unknown to us, the Central Bank also raised issues with the valuation of policyholders liability. If we had seen that we would have gone back to management.” The witness was yesterday presented with a chart setting out the structure of the CLF group and its subsidiary companies. He said it was the first time he had ever seen such a chart. Young said it appeared from the evidence at the inquiry that PwC took a more cautious approach with smaller entities like BAICO than it did for Clico. He noted that for the year 2007, PwC signed off on Clico’s accounts on June 26, 2008, yet took longer to sign off on BAICO’s account for the same year, signing off on November 26, 2008.
Young further noted that PwC inserted an “emphasis of matter” in its audit opinion for BAICO for all the years leading up to 2007. (An “emphasis of matter” is basically the raising of a red flag which if not addressed could lead to a qualification of the accounts.) However, the year 2007 was the year BAICO had the largest amount of inter-group debt, $141 million.
Ernst & Young were retained by the State to do a non-audit review of the CLF group in the wake of the State’s 2009 intervention.
The witness had testy exchanges with Clico Policyholders Group attorney Lynette Seebaran-Suite over whether or not a valuation was done specifically in relation to a note in CLF accounts which disclosed the $1.8 billion Green Island land deal.
“Just give me five minutes and I will answer your question!” Daniel said at one point. He said an “investment analysis” was performed in relation to the deal and there was a valuation. He said he had never seen a CLF board minute — dated later than the audit — which concluded the transaction was “corrupt”.
Under cross-examination from Glasgow, Daniel admitted that while auditors are not supposed to look behind “business transactions” Clico, as an insurance company, was not supposed to be borrowing to the level it was. “They should not be borrowing as an insurance company,” he said.
Daniel was the third auditor from the firm to take the stand in the last three days. The day before director Dwayne Rodriguez-Seijas – to give evidence in relation to Clico, a larger company that BAICO.
On Monday, PwC territory senior partner Colin Wharfe refused to comment on any detailed questions, saying he was testifying at the inquiry only to lay “the framework” for the evidence of other members of PwC with first- hand knowledge.