AHTC failed to address conflicts of interest, says independent auditor KPMG

In its report yesterday, KPMG described the tender processes by which AHTC's managing agent FMSS and service provider FMSI were appointed as "inadequate and unsatisfactory". It estimated that AHTC paid $1.26 million more than if CPG, which managed Al
In its report yesterday, KPMG described the tender processes by which AHTC's managing agent FMSS and service provider FMSI were appointed as "inadequate and unsatisfactory". It estimated that AHTC paid $1.26 million more than if CPG, which managed Aljunied GRC under the PAP, had been retained.PHOTO: TIFFANY GOH FOR THE STRAITS TIMES

Independent auditor says this led to improper payments; at least $624k should be recovered

The managing agent of Aljunied- Hougang Town Council (AHTC) was paid more than $600,000 in project management fees for services that should have been covered by its managing agent fees, said independent auditor KPMG in a report yesterday.

These were among several improper payments that the town council made to managing agent FM Solutions and Services (FMSS) and service provider FM Solutions and Integrated Services (FMSI), said KPMG.

Such improper payments were made in a situation where there were "control failures" and conflicts of interest, as the shareholders of the two companies were holding key management positions in the town council.

In all, KPMG identified improper payments amounting to more than $1.5 million to FMSS and FMSI, of which at least $624,621 should be recovered.

But in a written response to KPMG before the report was released, AHTC disagreed that most of the payments were improper.

The payments in question are: Project management fees In 99 invoices totalling $608,911, a 3.5 per cent project management fee was wrongly paid to FMSS for repairs and redecoration works.

 
 
 
 
  • About the issue

  • The latest KPMG report is part of its ongoing audit of Aljunied-Hougang Town Council (AHTC), after lapses in governance were flagged by both its own auditors and the Auditor-General's Office (AGO).

    In February last year, the AGO released a special report on major lapses at the then Aljunied-Hougang-Punggol East Town Council.

    The lapses date as far back as 2011, when the Workers' Party won Aljunied GRC and took over the town council.

    They included inadequate management of conflicts of interest, and weaknesses in the approval of payments.

    AHTC's external auditors had also issued "disclaimers of opinion" for each of its financial statements for FY2012 to 2015, indicating insufficient information.

    The AGO report was debated in Parliament, and the Ministry of National Development and the Housing Board applied to the courts to appoint independent accountants to look into AHTC's books.

    Last November, the Court of Appeal ordered AHTC to appoint accountants to establish whether any past payments made were improper and should thus be recovered.

    But both sides could not agree on a firm. Eventually, in January this year, the court ordered AHTC to appoint one of the Big Four accounting firms.

    In March, AHTC appointed KPMG. Since April, KPMG has provided monthly reports on AHTC's progress in rectifying issues.

The amount should be recovered, said KPMG. It is more appropriate to classify the payments as managing agent services and these would be covered by FMSS's managing agent fees.

FLAWS IN GOVERNANCE

The failed control environment ought not to have been permitted by the town councillors, pointing to a flawed system of governance overall. On the basis that such individuals hold fiduciary duties and responsibilities in respect of public funds entrusted to the town council, the town councillors bear a personal and collective responsibility for improper payments enabled or permitted by such a flawed system.

KPMG REPORT

IMPLICATIONS OF SHORTCOMINGS

While our work was not focused on identifying potential criminal acts arising from the issues we observed, we are advised that, had the shortcomings in Section 5 of this report been committed deliberately, they could amount to criminal conduct, the implications of which the town council should consider.

KPMG REPORT

KPMG also noted that on 83 occasions, project management fees totalling $611,786 were charged for what were really "a combination of project management services as well as managing agent services".

AHTC disagreed in both instances. Advice from its lawyers said it is contractually allowed to appoint the managing agent to provide project management services for cyclical works.

It noted that when Aljunied GRC was run by the People's Action Party (PAP), the then managing agent CPG had claimed project management fees for cyclical work, including repainting. Unsupported payments KPMG found $194,759 worth of payments to FMSS or FMSI that were not supported by certifications of services received, or by contracts. AHTC disagreed, providing evidence like a complaint log to show services were delivered.

But KPMG said this was not evidence that the work was satisfactorily delivered.

Payments in breach of financial authority KPMG found that $80,990 in cheque and bank transfers were made to FMSS even though the required co-signature of the AHTC chairman or vice-chairman was not obtained.

AHTC said this was a "technicality issue".

Overpayment to FMSS KPMG found that AHTC had overpaid FMSS by $8,990 for overtime claims and Central Provident Fund contributions, and by $3,720 for electrical parts.

Besides the specific improper payments found, KPMG took issue with the broader context of AHTC's "pervasive" control failures in areas such as governance, financial reporting and procurement.

These include a failure to address serious conflicts of interest and a lack of meaningful oversight by town councillors, it added.

There might be other improper payments which went undetected, it noted: "The same pervasive control failures that allowed improper payments would tend to conceal instances of improper payment."

KPMG identified six FMSS shareholders who held key management posts in AHTC, such as secretary, general manager, and finance manager - creating a conflict of interest.

There were 748 transactions, totalling more than $23 million, where these persons "effectively certified or approved payments to themselves", said KPMG.

KPMG further described the tender processes by which FMSS and FMSI were appointed as "inadequate and unsatisfactory".

The first managing agent contract worth $5.4 million, from July 15, 2011, to July 14, 2012, was awarded to FMSS without a tender, and the circumstances did not justify this, said KPMG.

The second contract worth $23.2 million was awarded by tender, but AHTC "failed to secure competitive rates or sufficiently address FMSS's serious conflicts of interest".

KPMG estimated that AHTC paid $1.26 million more than if CPG had been retained.

AHTC's "flawed governance... exposed public funds to the risk of improper use and application", concluded KPMG.

A version of this article appeared in the print edition of The Straits Times on November 02, 2016, with the headline 'AHTC 'failed to address conflicts of interest''. Print Edition | Subscribe