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Auditor General Issues Damning Report On Cash Strapped CPC

A damning report by the Auditor General’s Department on the position of the Ceylon Petroleum Corporation (CPC) in 2009 has highlighted many irregularities in the cash strapped government institution.

The Auditor General’s report has been handed over to the Parliamentary Committee on Public Enterprises (COPE) for further inquiries. COPE is currently probing the observations made by the Auditor General on the CPC for the years 2007, 2008 and 2009.

However, the observations on CPC for 2009 have shocked the members of COPE.
The report has highlighted financial irregularities and false tax declarations among a long list of misdeeds at the institution.

A long list of management inefficiencies has also been included among the Auditor General’s observations. (See box)
According to the report, the CPC has violated several provisions in the Sri Lanka Accounting Standards (SLAS).
The CPC had failed to include certain taxes, which are not recoverable from tax authorities in determining the cost of purchase.

The Auditor General had observed that the advertising cost of Rs. 2.9 million had been included in the manufacturing cost in violation of SLAS 05-Inventories.

The Corporation had not adopted appropriate procedures to identify impairment indicators for its assets as required by SLAS.

Interestingly, the Corporation had not obtained bank guarantees from aviation customers, private customers, dealers and government customers whose outstanding balances amount to millions.

The CPC has also understated some amounts while overstating some.

The rent income of the Corporation had been understated by Rs. 1.8 million since the rent income had not been recognized according to the rent agreement.

Goods-in-transit (crude oil) amounting to Rs. 8,700 million had not been disclosed in the financial statements.
The closing stock of fuel of Lanka Furnace Oil (LFO) 800 had been overstated by Rs. 66.6 million due to erroneous valuations.

The Auditor General had also noted that there has been a lack of evidence for audit.
The CPC has failed to produce the title deeds for the Sapugaskanda mini terminal land valued at Rs. 67 million.
The existence and recoverability of the investment aggregating to Rs. 55.5 million could not be determined due to lack of evidence.

Meanwhile, 25 acres of land valued at Rs. 259 million at Muturajawela had been shown as an asset in the balance sheet. However there are no title deeds or documents to establish ownership of the land.
The CPC had failed to provide sufficient evidence regarding the assets purchased prior to December 31, 2002 reflected under property, plant and equipment.

No evidence had been made available regarding the assets prior to December 31, 2002 reflected under property, plant and equipment. As a result, the ownership, existence and completeness of such assets could not be determined in the audit.

Sufficient evidence was not made available to determine the recoverability of the Exercise Duty amounting to Rs. 714 million from the General Treasury.

The CPC has also obtained services of private lawyers amounting to Rs. 5 million in the year under review, which is a higher rate, without obtaining prior approval of the Auditor General.

The Auditor General has noted that nine motor vehicles had been released to two government institutions and 18 employees had been released to several government institutions without the approval of appropriate authorities and disregarding the instructions contained in the Public Enterprise Circular No. PED/12 of 02 June 2003.

A COPE member told The Sunday Leader that the Committee has called on the CPC officials to appear before COPE with all relevant documents since a full probe is being carried out following the Auditor General’s observations.

COPE has expressed dissatisfaction at the CPC’s functions given the severity of the misappropriation of CPC funds.
Several attempts by The Sunday Leader to contact officials from the CPC for comment failed.

When The Sunday Leader telephoned the CPC head office, we were informed that the Chairman was busy and that there was no General Manager.

Acting Deputy General Manager – Administration, Samanthalal Vithana when contacted said he could not comment and asked us to contact CPC Chairman Harry Jayawardena,

Jayawardena was not contactable on his direct office telephone line on Thursday and Friday.

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Identified Losses
The Auditor General in his report on the CPC’s performance had made the following observations in 2009.
1. The Corporation had entered into bunkering business through a private company in April 2008 with the intention of carrying out that business in future. According to the Corporation, at the commencement of the business, the environment was not favourable to the Corporation since it had to adopt different strategies to compete with other competitors in the market. Therefore, during the period April 2008 to December 2008 and January 2009 to May 2009, the Corporation had sold fuel at a reduced price to a private company and as a result, the Corporation had incurred an approximate loss of Rs. 85.2 million and Rs. 125 million respectively from the bunkering business.
2. According to the current practice and the terms and conditions agreed with CPSTL, the Corporation had reimbursed to CPSTL more than the amount collected as slab from dealers. The Corporation had sustained an approximate loss of Rs. 11.1 million for the year ended 31 December 2009.
3. The Corporation had sustained a loss of Rs. 1,039 million during the year under review (previous year loss was Rs. 2,071 million) by down grading 19,502,631 liters of Aviation Turbine Fuel to Lanka Kerosene, as there was an average price difference of Rs. 18.65 per litre between these two products.
4. The Corporation had sustained a gross loss of Rs. 624 million. (Gross loss of the previous year was Rs. 4,971 million) from kerosene sales during the year under review.
5. There was no standard set for allowable operational loss of fuel deliveries through browsers and wagons and storage at depots and terminals. The practice followed by the Corporation is to allow the Own Use and Process Loss figure at 5 per cent for Crude Oil input and to allow a 0.5 per cent for evaporation loss for each transfer between two locations. However, it was observed that a loss of Rs. 576 million had been occurred with regard to evaporation, processing, operation and stock handling, product transferring etc. during the year 2009.

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Management Inefficiencies
Following are the management inefficiencies highlighted by the Auditor General:
1. No proper evaluation of the risk involved in linking the Corporation data base to an Enterprise Resource Planning (ERP) system developed by Ceylon Petroleum Storage Terminal Ltd. (CPSTL) with the assistance of the Indian Oil Company (the parent company of the major industry competitor of the Corporation) had been made by the Corporation. Since the Corporation has to commit a significant amount of its resources (both capital and human) for this purpose, a proper and in-depth analysis of the impacts that would arise through the system integration should have been done with the assistance of experts in the field of Enterprise Resource Planning Systems.
Further, it was observed that there was no agreement or a memorandum of understanding (MOU) bet-ween the Corporation, CPSTL and LIOC with regard to their respective responsibilities under this project before the implementation of same.
2. The bays No. 4C, 1D and IA at the Muturajawela Tank Farm of the Corporation were not in operation due to a technical failure. However, no action had been taken to repair the bays by the Corporation.
3. The Corporation had incurred demurrage charges amounting to Rs. 20.3 million due to delays in establishing the letters of credit.
4. The Corporation had made major investments amounting to Rs. 2,556 million in various portfolios. However, no income had been generated on these investments as at 31 December 2009.
5. The Corporation had paid Value Added Tax based on the turnover as per sales ledger. However, a difference of Rs. 550 million was observed between the aggregate amount as per sales ledger and the aggregate amount as per Value Added Tax Returns. Further, it was observed that a proper reconciliation mechanism was not in practice to monitor Value Added Tax payments/receivables.
6. The management had accepted some cargo against the recommendation of the Technical Evaluation Committee. An examination of the related file revealed that the Corporation had paid the supplier based on the price calculated on the monthly average of the respective product price. However, the TEC report available in the respective file had recommended to use the average price of two days before and after from Bill of Lading date. Due to the violation of the recommendation of the TEC the Corporation had paid an additional sum of Rs. 52.3 million.
7. As a practice, the Corporation used to select the vessel for transporting crude oil based on a competitive bidding process over the years. However, it was observed that the Corporation had entered into an agreement with only two vessel owners for a certain period at a fixed price. Hence, the Corporation had been deprived of the benefits that could have been gained if the vessels were selected on competitive bidding. Further, earlier tender conditions facilitated for out turn losses, which were favorable to the Corporation. However, it was observed that the said tender conditions had been modified and in place of out turn losses it had been agreed for in transit losses since vessel owners had not agreed with the out turn loss.
8. It was observed that 20,000 MT of High Sulphur fuel oil 1500 valued at Rs. 1,140 million imported by the Corporation had been contaminated and it has affected the independent power producers in the country and the CPC has consulted the Attorney General in this regard. The Attorney General’s opinion was that the fuel specifications and the tender conditions laid down for the import of High Sulphur fuel oil 1500 are not in favour of the Corporation in case of the above situation, and therefore taking legal action against suppliers could be a waste of money. Hence the Board of Directors has taken a decision to cancel the registration of this particular supplier.
9. According to the agreement entered into with Lanka Indian Oil Company (LIOC), the Government of Sri Lanka and the Corporation in 2003 relating to the taking over of possession and related matters of the China Bay installation, the Corporation had agreed to lease the storage facilities and the land to LIOC for a period of thirty five years and that lease agreement should be executed within 06 months from the date of the agreement.

http://www.thesundayleader.lk/2011/09/11/auditor-general-issues-damning-report-on-cash-strapped-cpc/

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