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Cyprus

State auditor eyes central bank

Auditor-general Chrystalla Georghadji raises the broader question of who audits the central bank itself?

By Elias Hazou

AUDITOR-general Chrystalla Georghadji has asked the Central Bank of Cyprus (CBC) to furnish additional documentation relating to contracts awarded by the banking regulator to foreign companies, the Mail learns.

On December 20 the official wrote anew to the CBC requesting information which apparently the CBC omitted to hand over the first time round.

It’s understood that the requested information relates to the contracts which the CBC awarded to investment firm Pimco – which carried out a due diligence of the local banking sector – and to US-based Alvarez & Marsal, a consultancy hired to lead a probe into the circumstances that led two of the island’s banks to seek state support.

The A&M contract, in particular, has come under scrutiny after reports suggesting a possible conflict of interest for the firm.

The auditor-general initially requested from the CBC all relevant documentation in October, but did not receive it until November 29, by which time her annual report for 2012 had already been completed.

The official then determined that some of the requested data was missing , prompting the follow-up letter of December 20.

“At first glance, the data [provided] displays gaps,” her annual report for 2012 report, without elaborating.

According to the same report, the auditor-general is currently sifting through documents relating to contracts awarded to third parties by the CBC in relation to ‘the problems and needs arising in the banking system of Cyprus.’

But beyond the contracts awarded by the CBC during this year, the official raises the broader question of who audits the Central Bank itself.

It turns out no one does – at least not the government. Unlike for example the US’ Federal Reserve, Cyprus’ Central Bank is a public-law entity. But as it stands, it is the only public-law organisation not audited by the Cypriot state.

Prior to 2007, the CBC’s accounts had been monitored by the auditor-general. But in 2007, parliament passed a law amending the Central Bank of Cyprus Laws of 2002 and 2003.

The legislation was passed to prepare the ground for Cyprus’ accession to the eurozone and also ensure that the CBC adhere to the Statute of the European System of Central Banks and of the European Central Bank (ECB).

The law took into account an opinion by the ECB on January 27, 2006, issued after a request from the CBC.

In its opinion, the ECB had said that, under the statute, the accounts of euro-area national central banks are audited by auditors that are both ‘independent’ and ‘external’ – essentially private firms.

“It follows that notwithstanding the Auditor General’s independence as enshrined in the Cypriot Constitution, the Audit Office is not an external auditor within the meaning of Article 27.1 of the Statute, but rather an independent Cypriot public authority,” the ECB said.

“However,” it added, “this will not prevent the Audit Office from continuing to perform a control function, provided that its auditing activities: (i) do not interfere with the review of European System of Central Banks (ESCB) related tasks of the CBC to be undertaken by the CBC’s independent external auditors to be approved by the Council of the European Union in accordance with Article 27 of the Statute; and (ii) do not jeopardise the CBC’s independence.”

But the auditor-general can probe the contracts awarded to Pimco and A&M as these do not fall within the CBC’s activities within the eurosystem. The Mail understands that the auditor-general will be issuing an interim report on her findings.

It appears that the A&M contract at least was awarded without a tender.

In an article last week, the EU Observer named four financial consultancies – including A&M – which have become ubiquitous in bailed-out countries.

Titled “Troika consultancies: A multi-million euro business beyond scrutiny,” the item said the four have so far invoiced taxpayers in Cyprus, Greece, Ireland, Portugal and Spain over €80 million.

The companies “are often hired without a public tender, posing questions on transparency and accountability,” the publication said.

In her report, Georghadji argued that the state should be entitled to “transparency and accountability in regard to all the activities of the Central Bank of Cyprus, the aim being to maintain – to the highest degree possible – control of the Central Bank of Cyprus by the auditor-general, as is the case in other eurozone member-states.”

Though keen to stress that her office isn’t questioning the integrity or quality of work of the CBC’s private auditors, Georghadji notes that these auditors do not publish their audits – which means there is no way for the state to determine “efficiency and financial management” in the Central Bank’s activities.


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