GAMETEL- LEAKED AUDIT REPORT UNCOVERS FINANCIAL DISASTER AT GAMTEL; AS UK AUDITORS EXPOSED MASSIVE CORRUPTION AT GAMTEL-PART TWO

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GAMTEL – Summary findings and recommendations

2.69 According to GAMTEL’s draft unaudited Balance Sheet, as at December 31, 2017, GAMTEL has a positive Net Asset position and was solvent on a balance sheet basis.

2.70        The principal assets in GAMTEL’s 2017 Balance Sheet were Receivables at 53% of total assets (GMD 902m / USD 19m), and Fixed Assets (known as Property, Plant and Equipment) at 31% of total assets (GMD 533m / USD 11m). Its principal liabilities are Trade and Other Payables which represented 92% of total payables (GMD 371m / USD 8m).

2.71        Receivables have increased by approximately GMD 770m (USD 15m) since 2011 and ‘Receivables days’ (indicating the number of days on average taken to collect revenue) have deteriorated from 33 to 293 days over the same period. Our fieldwork indicates the balance contains a high proportion of Receivables that are not recoverable.

2.72        With the exception of 2016, Trade Payables have continually increased since 2012, by approximately GMD 200m (USD 4m), and payables days has increased from 63 to 283. GAMTEL has delayed paying its liabilities in response to the slower collection of Receivables.

2.73 From 2015 onwards, GAMTEL has increased its operating profit annually from GMD 21m (USD 0.5m) in 2015 to GMD 202m (USD 4.2m) in 2017, when the International Gateway revenue is included.

2.74       GAMTEL’s draft unaudited Balance Sheet as at December 21, 2017 is set out below.

Table 8: Draft unaudited summary Balance Sheet as at December 31, 2017

  2016

(GMD’000)

2016 (USD’000) % of asset / liability total 2017 (GMD’000) 2017 (USD’000) % of asset / liability total
Assets            
Property, plant and Equipment 620,365 14,175 40% 532,769 11,098 31%
Investments 163,981 3,747 11% 163,981 3,416 10%
Inventory 20,981 476 1% 26,407 550 2%
Receivables 730,164 16,684 47% 901,570 18,780 53%
Cash and Bank 10,323 234 1% 85,804 1,787 5%
Total assets 1,545,814 35,316 100% 1,710,530 35,630 100%[1]
Liabilities            

Borrowings due  31,170     712          7% after 1 year

34,590                  721     9%

Borrowing due                39,181                  895                   8%

within 1 year

Trade and Other Payables 352,968 8,065 75% 374,410 7,736 91%
Bank overdraft 19,167 438 4% 0%
Taxation 29,287 669 6% 0%
Total liabilities 471,773 10,780 100% 406,001 8,457 100%
Net assets 1,074,041 24,536   1,304,529 27,173  

Source: GAMTEL’s  2017 Trial Balance; GAMTEL’s 2016 Financial Statements. We applied exchange rates of GMD 43.764: USD 1 for 2016 and GMD 48.008:USD 1 for 2017. Therefore, the GMD depreciated by almost 10% between the two dates.

2.75        In December 2018, GAMTEL provided EY with a set of draft and unaudited 2017 Financial Statements, in Excel format. However, during our fieldwork in January 2019, we noted several inconsistences between the draft set of unaudited Financial Statements and the Access Accounting system downloads of the Trial Balance and General Ledger. We understand that these differences were mainly due to the posting of additional journals after the draft set of unaudited Financial Statements was originally produced.

2.76        We based our findings and results on the Trial Balance obtained in January 2019. Our ‘mapping’ of accounts from the Trial Balance was performed based on the original mapping provided in 2018, and based on prior years’ audited Financial Statements. It should be noted that the 2017 Trial Balance did not include any taxation liability accounts.

2.77        We received good cooperation and access to staff from GAMTEL during the Forensic audit. However, we experienced delays in receiving supporting documentation that was readily available to the Finance team (i.e. documentation stored in their offices). To date, we have not yet received all the requested documentation as set out in the various sections of this report. As at the end of our fieldwork on February 17, 2019, we were not yet been provided with a draft audited set of Financial Statements for 2017.

Financial impact of the issues identified

2.78        The approximate financial impact of the issues highlighted in our work to date are captured in the tables below, shown against the net equity position of the draft balance sheet as at December 31, 2017. Issues that cannot be or have not yet been quantified are explained more fully in the commentary:

Table 9: Financial impact of issues uncovered during the Forensic Audit

2017      2017

Brief description of issue                                                                         (GMD’000)                                            (USD’000)

Net Assets / Equity as at December 31, 2017

Section 1 – Adjustments that could be quantified (above USD 20k):    
1            Write-off of CFD loan 36,000 758
2              Write-off of RASCOM investment (2016) (25,593) (533)
3              Impairment of GSM investment (GAMCEL) (93,833) (1,955)
Section 2 – Adjustments that could not be quantified, however could be broadly estimated:  
4             Removal of ‘GTMI Tuition Fee Arrears’ from overall entity Trial Balance (19,000) (396)
5             Decrease WIP balance for GAMCEL’s portion of the ACE Investment (14,900) (310)
6            Provide for post-paid debtors over 360 days old (735,587) (15,322)
7 Interconnection receivable should be fully provided for while approval from the Board is sought to write off the amount (388,000) (8,082)
8             Provide for unrecoverable MGI receivables (21,000) (430)

Section 3 – Adjustments that cannot currently be quantified nor estimated, but likely to be above USD 20k:

9             Loss of International Gateway Revenue TBC TBC
10           Write-off of specific unrecoverable post-paid receivables TBC TBC
11           Revision of the general provision for doubtful debts TBC TBC
12           Write off the GRTS intercompany balance TBC TBC
13         Remove the account 7440 “Stock take adjustment” and impair inventory balance for any damaged goods TBC TBC
14           Provide for unrecoverable staff loans balances TBC TBC
Suggested revised Net Liabilities / Equity following adjustments in Section 1 and Section 2 only 42,616 903

Significant findings

2.79 The significant findings arising from our Special Audit of GAMTEL as at December 31, 2017, which are explained more fully in the main GAMTEL section of the report, are summarized as follows:

Political uncertainty regarding the International Gateway (Financial impact table item 9)

►    The International Gateway handles all incoming and outgoing international calls for networks within The Gambia. It is managed by a Gateway Manager, the mandate of which is to perform revenue assurance, collection and settlements for these international voice calls. Who acts as the Gateway Manager and/or is entitled to the revenues for international calls has long been subject to political interference which creates uncertainty for GAMTEL. The International Gateway has historically been a significant source of revenue for GAMTEL, although it has not enjoyed these revenues continuously.

►    In 2017 approximately 50% of GAMTEL’s revenues on an annualized basis were from this source. Without these revenues GAMTEL would likely report a loss in 2017. Management’s view is that these revenues are critical to GAMTEL to fund investment for when the international call market is opened up to the market competition. Management’s budget for 2019 shows GAMTEL making a loss of GMD 172m (USD 3.5m) in the absence of International Gateway revenues.

►    We understand that between 2006 and 2013 GAMTEL did not act as the Gateway Manager but did receive 50% of the International Gateway revenues, net of costs charged by the Gateway Manager.

►    In September 2013, an Executive Directive issued by the Office of the President terminated this arrangement and henceforward required the revenues previously enjoyed by GAMTEL were instead paid into an International Gateway Account held at the Central Bank of Gambia.

►    In July 2017, the new Government of The Gambia terminated the contract of the incumbent Gateway Manager, and instructed GAMTEL to take over the management of the Gateway. GAMTEL has remained the Gateway Manager since that time, incurring the costs of being the Gateway Manager. In November 2017, MoFEA instructed GAMTEL to transfer all International Gateway funds to the Central Bank of The Gambia. GAMTEL made a transfer of USD 2.5m (GMD 118m)[2] during February 2018, but has not made any subsequent transfers. The Board was advised that the correct procedure is for GAMTEL to submit these revenues to the Government’s account—and then for GAMTEL through its line Ministry, to separately make a case to the Government for any financial support that it requires from these ‘Gateway revenues’.

[1] Rounding difference noted of 1%

[2] Spot rate of USD 1:GMD 47,169 as on February 23, 2018

We understand from Senior Management that they have been instructed by the current Government of The Gambia not to use the International Gateway revenues that are GAMTEL’s retains.

►    In response to this sequence of events, the External Auditors have required that International Gateway revenues should not be recognized in GAMTEL’s accounts.

GAMTEL has been given guidance by the Government to the same effect.

►    Management should consider seeking consent to off-set the costs incurred as Gateway Manager from any further transfers of International Gateway revenues it is required to make to the Government.

Investments (GMD 164m, USD 3.4m / 10% of Total Assets) (Financial impact table items 2,3,5)

► Based on our testing, the carrying values of the majority of GAMTEL’s investments are overstated at December 31, 2017:

►    An investment in RASCOM (GMD 26m / USD 533k) should be fully written off as the project has been dormant since at least 2016. Currently the investment is carried at its full investment cost; and

► The Global System for Mobile communications (“GSM”) investment (GMD 94m / USD 2m) is impaired as GAMCEL is not considered a going concern as at December 31, 2017 and should be fully provided against.

►    In 2011, six Gambian companies[1] signed a joint agreement, which was brokered by the Gambian Government, to establish a public-private partnership (“PPP”) financing agreement for USD 25m (GMD 710m) through the vehicle of Gambia Submarine Cable Company Limited (“GSC Ltd”). The purpose of the partnership was to jointly contribute towards the cost of financing a landing station in The Gambia for the Africa Coast to Europe Submarine Cable (“ACE”), a submarine fiber cable laid from France through the coast of Africa to South Africa. In the agreement, GAMTEL and GAMCEL were each allocated 20% and 10% respectively of the cable capacity allocated to The Gambia.

►   GAMTEL’s 2011 Financial Statements included a work in progress (“WIP”) balance of GMD 44m (USD 1.5m) and GMD 14.9m (USD 0.5m) that represented GAMTEL and GAMCEL’s respective shareholding in GSC Ltd. The GMD 14.9m (USD 0.5m) was paid by GAMCEL to GAMTEL via the intercompany account in 2010. The ACE landing station was completed and inaugurated in December 2012, where upon the GMD 44m (USD 1.5m) balance was reclassified from work in progress to investment in GSC Ltd. ►             We noted the following:

►    The balance of GMD 14.9m (USD 0.4m) ought to be in GAMCEL’s balance sheet, but it is not. We suspect that this balance has been incorrectly retained in GAMTEL’s work in progress but we cannot confirm this as Management was unable to provide us with a breakdown of its WIP.

► Both balances are recorded at cost but should be at fair value. The fair value ought to reflect the future revenues to be derived from GAMTEL’s and GAMCEL’s capacity entitlement.

►    The investments for RASCOM, GSM and the balance with the Gambia Radio and Television Services (“GRTS”) should be written off.

►    Management needs to analyse GAMTEL’s WIP balance and ascertain if it includes the balance of GMD 14.9m relating to the ACE investment. If it is not in WIP then Management needs to perform a wider balance sheet analysis to identify it.

►    Management should perform a fair value assessment of the ACE investments as at December 31, 2017 for both balances of GMD 44m (USD 1.5m) and GMD

14.9m (USD 0.5m) that represented GAMTEL and GAMCEL’s respective shareholding.

Receivables (GMD 902m, USD 18.8m / 53% of Total Assets) (Financial impact table items

6,7,8,10,11,12,14)

► Post-paid debtors accounted for 59% of the total Trade Receivables balance as at December 31, 2017. Our testing suggests that the post-paid receivable balances are overstated:

► As at December 31, 2017, 88% of GAMTEL’s post-paid debtors are over 360 days old, totaling GMD 736m (USD 15m). It is unlikely that debts unpaid for such a length of time will be recovered and they should be provided against.

►    We identified 1,383 debtor balances totaling GMD 353m (USD 7m) recorded as due from counterparties with “Gamtel” as part of their name. It is unlikely that these are third party receivables and in any event the balances are almost all more than 360 days old. These balances should be provided against.

►    We discovered that GAMTEL has continued billing customers who have in fact closed their accounts and were no longer using GAMTEL services. We identified one such balance for GMD 17m (USD 354k) and upon enquiry Management notified us of an additional nine balances totaling GMD 31m (USD 65k) that arose in the same way. It was not feasible in the timeframe of our fieldwork to perform additional work to seek to quantify the totality of such balances and nor was the information readily available to do so, but there may be a significant number and value of post-paid debtor balances that arise from this error and are not genuine receivables. Management needs to ascertain the full extent of this issue.

►    GAMTEL’s receivables include the interconnection fee (GMD 388m / USD 8m) due from GAMCEL. Due to GAMCEL’s declining financial position, it is doubtful that this amount will be recoverable and should be fully provided for.

►    GAMTEL recognizes a receivable from MGI in the amount of GMD 21m (USD 430k). In light of GAMTEL’s difficult relationship history with this counterparty and the fact that MGI is no longer present in The Gambia and there is no ongoing working relationship with GAMTEL, it is doubtful that this account will be recovered, and it should be fully provided for.

► We understand that by way of an Executive Order, in approximately 1995, GAMTEL was requested to pay for the land, building and equipment to establish GRTS. GAMTEL records these expenditures totaling GMD 40m (USD 898k) as being recoverable from GRTS, but, given the passage of time in which no repayment has been forthcoming it is doubtful that this amount will be recovered and should be fully provided for.

►    The trial balance shows Staff loans of GMD 3.5m (USD 75k) more than the underlying schedules. This amount is also unlikely to be recoverable. Furthermore, a significant portion of the staff loan balances with ex-employees are not being paid. Whilst GAMTEL has engaged a lawyer to seek collection, it is unlikely they will be recovered. These doubtful balances should be provided for, totaling GMD 12m (USD 255k).

►    In summary, of the total Receivables recorded by GAMTEL as at December 31, 2017 of GMD 1,466m (USD 31m), approximately GMD 1,149m (USD 23m) appears to be doubtful.

►    Management should reassess GAMTEL’s receivables as it appears to be overstated:

► GAMTEL’s post-paid debtors that are over 360 days old (GMD 736m / USD 15m are unlikely to be recovered and they should be provided against;

►    The 1,383 debtor balances totaling GMD 353m (USD 7m) recorded as due from counterparties with ‘Gamtel’ as part of their name should be provided against as it is unlikely that these are third party receivables and in any event the balances are almost all more than 360 days old;

► Management should determine the number of balances whereby the billing department continued to bill the customer after the account was closed, and these balances should be written off as bad debt;

► The GAMCEL Interconnection receivable of GMD 388m (USD 8m) should be fully provided for as doubtful debt while approval from the Board is sought to write off the amount in GAMTEL’s financial records;

► Management should create a provision for doubtful debts greater than the required 2% per policy due to the significant ageing balance; and

► The provision should include both the GRTS and MGI balances, along with any other receivables that management consider to be doubtful (i.e., staff loans, unreconciled receivables).

Loans and securities (GMD 35m, USD 721k / 9% of Total Liabilities) (Financial impact table item 1)

► GAMTEL shows a liability of GMD 36m (USD 785k) comprising of a loan due to Caisse Centrale De Cooperation Economique’ (“CFD”). We have seen correspondence showing that the loan was in fact repaid by the Government in 2017 but that the Government has yet to determine if this payment is to be treated as a grant, shareholder contribution or an allocation of International Gateway revenues held by GAMTEL (either in which cases GAMTEL no longer has a liability of this amount) or as a new loan between GAMTEL and the Government (in which case GAMTEL would continue to have a liability of this amount).

►    Our testing suggests that the CFD loan appears to be overstated:

[

The 2017 Trial Balance is reflecting a value of GMD 36m (USD 758k) for this loan, however Management provided correspondence to us that suggests that the loan was fully settled by the Government of The Gambia.

►    While the balance of this loan should be reflected as zero, GAMTEL has not yet removed the loan from its accounting records as it is unclear whether the Government will treat their payment as a loan, grant, shareholder contribution or just Gateway funds utilized by GAMTEL.

Management should obtain clarification whether or not the Government regards any amounts to be due from GAMTEL as a result of the repayment of the loan.

Executive Directives

►    The Gambia Agricultural Marketing Company Limited (“GAMCO”) investment represents the total advances made by GAMTEL to GAMCO during the period 2004 to 2005. Management informed us that these advances were made following Executive Directives issued by the Ministry of Agriculture on behalf of the Government. These Executive Directives were issued in an attempt to facilitate the groundnut trade.

 

GAMTEL provided us with further examples of Executive Directives affecting its business, both at the strategic level and as regards to day-to-day operations, in the form of appointments, sponsorships and donations.

►    During 2016, a waiver that was provided by the Government to exempt GAMTEL from paying taxes due to the Gambia Revenue Authority (“GRA”) was annulled. This resulted in GAMTEL owing the GRA an amount of GMD 354m (USD 7m) and was subsequently accounted for in GAMTEL’s Trial Balance.

Overstaffing

►    We understand that GAMTEL, similar to other SOEs, is perceived as having an obligation to create social employment for the people of The Gambia and that attempts to downsize to tackle overstaffing could have political repercussions.

►    During 2017, staff costs accounted for 38% of operating expenses. As at December 31, 2017, GAMTEL had 1,046 permanent employees. Of the total workforce, 25% of the employees were allocated as support services, which mainly consists of cleaners, drivers and security staff. A further 24% of the employees were allocated to customer services.

►    Numerous members of management have informed us that, in their opinion, GAMTEL suffers from overstaffing. One commonly suggested solution would be to streamline GAMTEL so that it only retains core staff to perform its core functions, i.e., telecommunications. Management has floated the idea of outsourcing their Support Services such as security guards and drivers, claiming that this would remove some of the burden on GAMTEL and allow it to increase efficiency.

►    We were also informed that “most” of the core departments are over-staffed. One director claimed that they had sent some employees on unapproved paid leave, without informing HR, simply to remove disruptive, unproductive staff and attempt to improve the efficiency of their department.

►    A study published in July 2016 by consultancy firm Senghore Associates found that as at December 2014, GAMTEL employed 53% of the total staff of the Gambian leading Telecoms providers, more than double any competitor. Moreover, GAMTEL and GAMCEL combined employed 73% of the staff in the sector, at a time when they reportedly held a combined 21% market share.

Other findings

2.80 Other findings arising from our Special Audit of GAMTEL as at December 31, 2017, which are explained more fully in the following sections of the report, are summarised as follows:

Property, Plant and Equipment (GMD 532m, USD 11m / 32% of Total Assets)

►    GAMTEL has encountered operational issues with their Fixed Assets management system and has since resorted to using a manual FAR, based in Excel. The Net Book Value of the FAR does not agree to GAMTEL’s Trial Balance at December 31, 2017 by GMD 15.5m (USD 323k) and does not provide a breakdown of any equipment classified as work-in-progress. Management are yet to satisfactorily explain the differences.

►    Historically, assets on the FAR were not assigned an individual asset code. Instead they were grouped into one asset code, e.g. “5410 – GTMI Computers”. For most of these asset classes, no breakdown is available to ascertain the quantity and nature of assets in each code. Efforts have been made in the past two years to address this concern and it is now standard practice to assign every new asset a unique code.

Management should complete an overhaul of the current asset register by ensuring that all assets are tagged with a unique asset code, reflected in the FAR and are valued at the current Net Book Value. The FAR should be reconciled to the values for Fixed Assets in the Trial Balance.

Trade and Other Payables (GMD 371m, USD 8m / 91% of Total Liabilities) (Financial impact table item 3)

►    Code Division Multiple Access (“CDMA”) Network Improvement accruals total to GMD 120m (USD 2m). These are two accruals for amounts due to Huawei in connection with the CDMA Network Maintenance and Improvement contracts. These CDMA accruals were raised in 2015 and no subsequent payments have been made to Huawei and no adjustments were made to these accounts. However, it was also noted that the Technical team responsible for CDMA were unaware of any obligation to Huawei. In these circumstances the accrual may not be required.

► GTMI is the training institution of GAMTEL and a division of GAMTEL. The GTMI Tuition Fee Arrears account (GMD 19m; USD 396k) represents when GTMI invoiced an amount GAMTEL for training provided to GAMTEL staff by GTMI. GTMI and GAMTEL agreed that the salaries cost that GAMTEL incurs for the GTMI staff should be offset against the invoices. As the invoiced amount is not equivalent to the salary cost, a difference accumulates. While a balance might be due between the divisions, it should not be included in GAMTEL’s entity level balance sheet as it is not recoverable from a third party. Moreover, this results in staff costs being understated on the Income Statement.

The Finance and Technical teams responsible for CDMA should review the transactions to which these accounts relate to determine if GAMTEL still has an obligation to Huawei and, if not, release the account.

Management should reverse the ‘GTMI Tuition Fee Arrears’ account from the overall entity Trial Balance.

Cash and bank (GMD 85m, USD 2m / 5% of Total Assets)

► Through our testing, we identified an account from Guaranty Bank with a description of “Dollar A/C:201-102593-2 4000-0 (Lc & Bc)” with a credit value of approximately USD 1m (GMD 54m). This account was not being reconciled. GAMTEL’s Finance team informed us that this account is a ‘sub-account’ to the main GAMTEL account and it was not being reconciled as it is a sub-account. GAMTEL began reconciliation of this account during our fieldwork.

►    Management should ensure that GAMTEL performs full reconciliations of each of the bank accounts held by GAMTEL. Any reconciling items identified from the reconciliation of the Guaranty Bank USD sub-account as at December 31, 2017 should be addressed to ascertain if accounting adjustments are required.

Inventory (GMD 26m, USD 550k / 2% of Total Assets) (Financial impact table item 13)

►    High value items such as fiber cables (GMD 6.4m / USD 133k) are being stored outdoors in an insecure manner. During GAMTEL’s stock counts, these cables are not measured or verified. For these stock items, the stock balance in the accounting system is used as the basis for the Financial Statements, without adjustment for any differences identified during stock counts.

►    GAMTEL is holding stock in the stores that has water damage or deemed to be obsolete, despite GAMTEL being strained for capacity in these stores.

GAMTEL should consider reviewing the policy regarding inventory storage and stock counts (in particular, high value cabling) and ensure all valuable assets are kept in a secure, sufficiently-sized location, which protects the assets from the elements.

►   Any obsolete items should be disposed of when removed from the stock listing.

In particular, Management should review the variances between the Trial Balance and stock listing records, remove the use of the “Stock take adjustment” account and adjust the records accordingly.

Treatment of GAMCEL

►    In summary terms, international Generally Accepted Accounting Principles (“GAAP”) requires the consolidation[1] of entities in which a company owns shares and where the company exercises “control”, as defined in GAAP, over the business in which it owns shares. Whether or not a company has ‘control’ can be a complex assessment and is not addressed here. GAMTEL owns 99% of GAMCEL, which is an indication that it controls GAMCEL. We understood that GAMTEL has never prepared consolidated accounts. If it was concluded that GAMTEL does indeed “control” GAMCEL, then the failure to prepare consolidated accounts may be in noncompliance with the relevant GAAP and the local Companies Acts. We emphasize that this would not have any implications for the day-to-day management of either of the two businesses.

Sponsorship and donations

► Sponsorship and donations expenditure has increased by 266%, from GMD 2.3m (USD 81k) in 2011 to GMD 6.1m (USD 145k) in 2016.

►    While our testing revealed that the expenditure included items such as Ramadan donations, the GAMTEL football team and the sponsorship of music and fundraising events, we also noted that it included the installation of wired line access (fixed line) to the new President Adama Barrow’s first residence, prior to him moving to the State House. This came as the result of an Executive Directive and amounted to GMD 513k (USD 11.2k).

 

GAMCEL – Summary findings and recommendations

2.81        GAMCEL is not considered a going concern. Its retained earnings balance has been negative

since 2013, and is continuing to decline. GAMCEL has had a continually declining Net Assets balance since 2010 and a Net Liability position from 2014 onwards. This issue of Going Concern is discussed further in the “Significant Findings” section below.

2.82        Fixed Assets is by far the largest proportion of assets, accounting for 71%, while Trade Receivables represent the other significant balance at 19%. Inventory accounts for a small portion of the total Assets balance (4%), and staff loans account for 3%. Liabilities consist mainly of Trade Payables (59%), Accruals and Similar Payables (11%), and Other Liabilities (16%). The latter consists mainly of loan repayments due within 1 year.

2.83        Management informed us that the key reason behind GAMCEL’s decline in performance is its failure to sufficiently reinvest in its network infrastructure. This capital investment is crucial in a market as dynamic as telecommunications.

2.84        As a continually loss-making entity, GAMCEL would most likely be expected to use long term borrowings to fund its large-scale capital expenditure. However, the Fixed Assets balances reflected a decline or a stagnation when compared to long term borrowing, which fell from GMD 637m (USD 17m) in 2012 to GMD 388m (USD 8m) in 2017.

2.85        GAMCEL’s draft Balance Sheet as at December 31, 2017, is set out below:

Table 10: Summary draft Balance Sheet as at December 31, 2017

[1] Consolidation is an accounting practice which shows the assets, liabilities and trading results of the company in which shares are held as if they were paid  of the company owning the shares.

  2016

(GMD’000)

2016 (USD’000) % of asset /

liability total

2017 (GMD’000) 2017

(USD’000)

% of asset /

liability total

Assets            
Fixed Assets 478,695 10,938 77% 387,573 8,073 71%
Trade receivables 86,302 1,972 14% 104,178 2,170 19%
Other receivables 177 4 0% 6,257 130 1%
Staff Loans 16,080 367 3% 16,450 343 3%
In Put VAT Credit 0 0 0% 4,736 99 0%
Stock Inventory 24,820 567 4% 23,499 489 4%
Cash and Bank balances 11,920 272 2% 2,139 45 0%
Prepayments 1,588 36 0% 704 15 0%
Total assets 619,582 14,157 100% 545,536 11,364 100%
Liabilities            
Trade Payables 552,590 12,627 63% 604,196 12,585 59%
Other payables 90,068 2,058 10% 59,937 1,248 6%
Taxation 2,456 56 0% 6,912 144 1%
Accruals and

Similar Payables

49,107 1,122 6% 108,728 2,265 11%
Deferred

Liabilities – Prepaid Customers

77,158 1,763 9% 1,019 21 0%
Bank overdraft 7,512 172 1% 1,295 27 0%
Long term loans 102,556 2,343 12% 84,937 1,769 8%
Other liabilities 0 0 0% 165,000 3,437 16%
Total Liabilities 881,446 20,141 100% 1,032,024 21,497 100%
Net Assets (261,864) 5,984   (486,488) (10,133)  

Source: GAMCEL’s Financial Statements. We applied exchange rates of GMD 43.764:USD 1 for 2016 and GMD 48.008 : USD 1 for 2017. Therefore, the GMD depreciated by almost 10% between the two dates.

2.86        GAMCEL has experienced a dramatic revenue decline in recent years, with revenue falling by approximately 65% from 2011 to GMD 387.4m (USD 8m) in 2017. This was largely due to increasingly competitive market conditions and high market saturation, with four major network providers operating in The Gambia. GAMCEL has undertaken cost reduction efforts in recent years, in an attempt to limit the impact of the declining annual revenue, most of which have been focused on operating costs.

2.87 GAMCEL has been generating an operating loss since at least 2009. While the most significant operating loss occurred in 2013 and totaled GMD 234m (USD 7m), GAMCEL’s operating loss had since lessened to GMD124m (USD 3m) in 2017.

Figure 2: GAMCEL’s revenue and net profit

Source: GAMCEL’s Financial Statements

2.88        GAMCEL’s revenue and billing capabilities were significantly impacted during 2017. The disruption transpired when Redknee abruptly switched off GAMCEL’s billing system following MGI’s demand for payment from GAMCEL for USD 1.7m. The demand for payment took place soon after the Government had terminated MGI’s contract as the Gateway manager. Consequently, GAMCEL reverted to its old billing system and only managed to restore some of its core services to customers three weeks later.

2.89 This event had a significant effect on GAMCEL’s revenue, as it resorted to making all calls free of charge for a three-week period, until a new billing system was put into place. As a result, GAMCEL’s revenue dropped by 80% during August 2017.

2.90        The management also explained to us that it took GAMCEL more than three months before it could restore the billing of its customers. This situation had a severe impact on GAMCEL’s revenue. Not only did GAMCEL’s revenue decline during August 2017, but their customers still do not have the same user experience as before. These limited services have continued impacting revenue in the months that followed.

EY

2.91      We received good cooperation and access to staff from GAMCEL during the Forensic audit.

In general, supporting documentation was readily made available to us from the Finance

Team as well as other divisions within GAMCEL. However, due to the billing situation, GAMCEL could not provide us with an accurate account receivable age analysis or complete post-paid debtors breakdown as at December 31, 2017. While the 2017 Financial Statements remained unsigned, they had no significant changes during the period of our engagement.

Financial impact of the issues identified

2.92        The approximate financial impact of the issues highlighted in our work to date are captured in the table below, shown against the net equity position of the draft balance sheet as at December 31, 2017. Issues that cannot be or have not yet been quantified are explained more fully in the commentary:

Table 11: Financial impact of issues uncovered during the Forensic Audit

2017         2017

Brief description of issue                                                                       (GMD’000) (USD’000)

Net Assets / Equity as at December 31, 2017 (486,488) (10,133)
Section 1 – Adjustments that could be quantified (above USD 20k):    
1.        Post-paid receivable adjustment for receivables not on active customer listing or expected bad debts listing (19,608) (408)
Section 2 – Adjustments that could not be quantified, however could be broadly estimated:  
2.          GAMCEL share of the ACE investment                                                            14,900 310
3.          Unrecorded liabilities                                                                                      (2,009) (42)

Section 3 – Adjustments that cannot currently be quantified nor estimated, but likely to be above USD 20k:

4.        Review recoverability of post-paid receivables and adjustment provision of bad debts TBC TBC
5. Adjustment per full reconciliation between the Roaming Receivables and actual payment journals TBC TBC
6.        Adjustment per full reconciliation between the Roaming Payables and actual payment received journals TBC TBC
7. Review inventory to ensure it is held at the lower of cost and NRV, in line with the recommendations given below TBC TBC
8. Missing bank accounts (including Deutsche Bank accounts) are included in the cash and bank figure of the Financial Statements TBC TBC
Suggested revised Net Liabilities / Equity following adjustments in Section 1 and Section 2 only (493,205) (10,273)

2.93   These proposed adjustments will have a further negative impact on GAMCEL’s existing Net

Liability position.

Significant findings

2.94        The significant findings arising from our Special Audit of GAMCEL as at December 31, 2017, which are explained more fully in the following sections of the report, are summarized as follows:

Going Concern

►    GAMCEL is not considered a going concern. Its retained earnings balance has been negative since 2013, and is continuing to decline. GAMCEL has had a continually declining Net Assets balance since 2010 and negative Net Assets (Net Liability) position from 2014 onwards. Moreover, its liability and liquidity positions are also declining. It is clear that GAMCEL has neither a history of profitable operations nor

 

immediate access to sufficient financial resources. In the current situation, the management must consider the latter factors and reassess whether GAMCEL truly represents a viable going concern in terms of IAS 1, in particular regarding the ‘potential sources of replacement financing’.

►    According to our discussion with the GAMCEL management, the GAMCEL financial position has been communicated to all stakeholders including the Board, the line ministry, the MoFEA, and the Office of the President, adding that the management has learnt that the Government is in the process of reforming the SOEs and may have strategies to reposition the company.

Infrastructure / Fixed Assets (GMD 388m, USD 8m / 71% of Total Assets)

► GAMCEL is in critical need of funding in order to update its infrastructure.  Many key GSM assets are approaching obsolescence or have already reached it. The GSM equipment provides primarily 2G network coverage, whereas competitors offer 4G coverage. Management recognizes there is an urgent need to upgrade the network infrastructure, to enable GAMCEL to remain competitive.

►    Management need to continue to assess the options to upgrade its current network infrastructure. Government or third-party funding will likely need to be obtained, or GAMCEL should enter into partnerships with other entities. In the highly competitive telecommunication market, it is critical that GAMCEL updates its infrastructure in order to survive.

Post-Paid Debtors (GMD 70m, USD 1.4m / 13% of Total Assets) (Financial impact table items

1,4)

Post-paid debtors are overstated by at least 28%, which represents GMD 19,608k (USD 408k). As GAMCEL was not able to provide us with any breakdown for these debtors, we were unable to reach a view on whether they are correctly stated.
Furthermore, GAMCEL is currently determining whether a further 31% of their postpaid receivables, or GMD 28m (USD 0.6m), are recoverable and had fully provided the balance as doubtful debts.
We noted that the remaining 41% of the post-paid debtors balance is per the “active customers’ balances listing” that reflects only 352 customers, which includes some significant Government balances;
Management should reassess GAMCEL’s receivables balance for

recoverability. GAMCEL should urgently complete its assessment to determine if any of the post-paid receivable balance of GMD 28m (USD 0.6m) is recoverable. Based on the outcome, these debtor balances should be adjusted accordingly.

Roaming Receivables (GMD 55m, USD 1.1m / 10% of Total Assets) & Payables (GMD 63m,

USD 1.3m / 12% of Total Assets) (Financial impact table items 5,6,8)

► From a financial and an accounting perspective, the Roaming division at GAMCEL is currently facing severe challenges. Whilst improvements are visible with the Roaming accounting records post 2015, significant issues remain. Examples include:

► GAMCEL is not in full control of two of its Deutsche Bank accounts. GAMCEL’s appointed clearing house is currently managing these accounts on behalf of

GAMCEL. Moreover, these accounts have never been accounted for in GAMCEL’s records, despite being opened since 2015. The management has now requested to receive the bank statements for these accounts, in order to monitor and take ownership of these bank accounts;

► The roaming receivables reconciliation does not reconcile to the roaming receivable balance in the 2017 Financial Statements by GMD 39m (USD 805k). While a portion of this difference could be attributed to exchange rate differences, a proper and comprehensive reconciliation should be performed. It is essential that the reconciliation takes into account all GAMCEL’s receivables, including the ones paid into the two Deutsche bank accounts, as at present only one monthly journal (reflecting the net receivable from the roaming partners) is posted to the accounts. The balance will therefore always increase as no double entry (payment received portion) of the journal is posted at present. In addition to the above, no doubtful debt provision is calculated for roaming receivables;

►    Similarly, the Roaming Payables reconciliation does not reconcile to the Roaming Payables balance in the 2017 Financial Statements by GMD 4m (USD 81k). While a portion of this difference could be attributed to exchange rate differences, a proper and comprehensive payable reconciliation should also be completed. In fact, it is essential that the reconciliation takes into account all payments made from the two Deutsche bank accounts, as at present only one monthly journal (reflecting the net payable from the roaming partners) is being posted to the accounts. The balance will therefore always increase as no double entry (payment made portion) of the journal is being posted;

►    Management should complete a full reconciliation between the Roaming Receivables and actual payment journals, and post these journals to reflect the true Roaming Receivable balance. Accordingly, the provision for bad debts needs to include a provision for doubtful roaming receivables.

►    The Deutsche Bank missing accounts should be reflected in GAMCEL’s own accounting records. GAMCEL should request STARHOME MACH S.R.L. (the organization that acts as the roaming clearing house) to provide further information in order to clarify its rights and obligations with regards to these accounts.

Investments (Financial impact table item 2)

►    GAMCEL’s investments may be understated by GMD 14.9m (USD 0.3m). In 2011, six Gambian companies signed a joint agreement, which was brokered by the Gambian

Government, to establish a public-private partnership (PPP) financing agreement for USD 25m (GMD 710m) through the vehicle of GSC Ltd. The purpose of the partnership was to jointly contribute towards the cost of financing a landing station in The Gambia for the Africa Coast to Europe Submarine Cable (ACE), a submarine fiber cable laid from France through the coast of Africa to South Africa. In the agreement, GAMTEL and GAMCEL were each allocated 20% and 10% respectively of the cable capacity allocated to The Gambia.

► GAMTEL’s 2011 Financial Statements included a WIP balance of GMD 44m (USD 1.5m) and GMD 14.9m (USD 0.5m) that represented GAMTEL and GAMCEL’s respective shareholding in GSC Ltd. The GMD 14.9m (USD 0.5m) was paid by GAMCEL to GAMTEL via the intercompany account in 2010. The ACE landing station was completed and inaugurated in December 2012.

►    We noted the following:

►    The balance of GMD 14.9m (USD 0.3m) ought to be in GAMCEL’s balance sheet, but it is not. We suspect that this balance has been incorrectly retained in GAMTEL’s work in progress, but we cannot confirm this as GAMTEL’s Management was unable to provide us with a breakdown of its WIP.

► Both balances are recorded at cost but should be at fair value. The fair value ought to reflect the future revenues to be derived from GAMTEL’s and GAMCEL’s capacity entitlement.

►    Management will need to complete a reconciliation to determine the amounts paid by GAMTEL and GAMCEL for their respective shareholdings in the PPP financing arrangement for the ACE Investment. Management need to access whether GAMCEL should record their shareholding as an investment at fair value in its accounting records.

Overstaffing

►    We understand that GAMCEL, similar to other SOEs, is perceived as having an obligation to create social employment for the people of The Gambia and that attempts to downsize to tackle overstaffing could have political repercussions.

► Management informed us that GAMCEL suffers from overstaffing. The December 31, 2017 payroll report showed that 26% of staff were support services, however management confirmed that up to 45% of employees were support services. GAMCEL currently has a high use of contractors following an internal recruitment freeze and has followed a Government integrated pay scale, which has not been updated since 2006. Despite this basic pay freeze, GAMCEL’s average income rose by approximately GMD 15,000 (USD 300) between 2015 and 2017. GAMCEL struggles to retain skilled staff, due to uncompetitive remuneration.

►    An independent report recommended that GAMCEL sub-contract the 40 to 50% of its workforce considered to be non-core. These recommendations were not implemented as it was estimated to cost GMD 437m (USD 10m) in compensation. The report stated that “the case for attaining the practical level of staffing is overwhelming given the real and present competitive threats to the organization’s survival”.

► GAMCEL has historically received numerous Executive Directives regarding the appointment and termination of specific employees, without a business need. We were given sight of at least five such Directives, dated prior to December 2017.

Executive Directives

►    A loan of GMD 15m (USD 0.5m) was provided by GAMCEL to Gambia International Airlines (“GIA”) in 2006 following an Executive Order issued by MoFEA. MoFEA issued the Executive Order in order for GIA to procure equipment, as the equipment was “in dire need for the AU Summit”.

► GAMCEL provided us with further examples of Executive Directives affecting its business, both at the strategic level as regards to day-to-day operations, in the form of appointments, sponsorships and donations.

►    During 2014, a waiver that was provided by the Government to exempt GAMCEL from paying taxes due to Gambia Revenue Authority (“GRA”) was annulled. This resulted in GAMCEL owing the GRA an amount of GMD 195m (USD 4m) and was subsequently accounted for in GAMCEL’s Trial Balance.

Other findings

2.95 Other findings arising from our Special Audit of GAMTEL as at December 31, 2017, which are explained more fully in the following sections of the report, are summarized, as follows:

Inventory (GMD 23m, USD 489k / 4% of Total Assets) (Financial impact table item 7)

► Inventory consists mostly of SIM cards, scratch cards and stationery. We tested 90% of the value of this balance and noted no significant inconsistencies.

►    We were informed that the Store Manager is able to overwrite the value of stock items.

►    Management should review the process for stock valuation and ensure it is held at the lower value of cost and Net Realizable Value (“NRV”). Management should review the entire inventory balance and seek board approval for necessary write-offs, without reliance on the auditor’s recommendation. Management should further review the policy for the storage of hazardous materials and take appropriate measures.

Staff Loans (GMD 17m, USD 356k / 3% of Total Assets)

► We identified that GAMCEL’s supporting loan schedules did not reconcile to the figures per the 2017 Financial statements, by a total of GMD 496k (USD 7k). We further identified instances of incomplete documentation of loan applications and applications not following due process. We understand a lawyer has been engaged by GAMCEL to assist with loan recoverability, however the External Audit’s 2017 Management Letter recommended GAMCEL accelerate the rate of recovery.

►    Based on our analysis in which we compared GAMCEL’s Financial Statements and its loan schedules, it appears that the staff loan receivable might be understated by GMD 316k (USD 7k). However, we also identified that the provision for doubtful debts for staff loans was less than the loan amounts classified as dormant. These loans are not being serviced by definition, therefore it would be prudent to increase the provision to cover this dormant loan balance.

Sponsorship / Donation Expenditure (GMD 9m, USD 192k / 0.9% of Total Liabilities)

► Across the period 2010 – 2017, GAMCEL’s Donations and Sponsorship expenditure was significantly higher in real terms than that of its parent company, GAMTEL.

►    The most notable expenditure included GMD 105k (USD 2.2k) to new-born children in Gambian hospitals, which came as a request from the Office of the former President. Management had no margin to refuse, effectively rendering this an

Executive Directive. This was allegedly in collaboration with the charity “Save The Children”, however we understand a frozen bank account with the same name, was previously under the control of former President Jammeh.

Cash & Bank (GMD 2m, USD 45k / 0.4% of Total Assets)

►    The overall cash and bank balances for GAMCEL were extremely volatile during the period of our review. In addition to the two Deutsche Bank accounts, we identified an account held at the Access Bank that the Finance team was unaware of. As GAMCEL has substantially increased the number of bank accounts held over the last few years, GAMCEL’s management should consider conducting a full reconciliation exercise. All of the banks in which GAMCEL holds a bank account should be included in the exercise.

►    GAMCEL has substantially increased the number of bank accounts it holds over the last few years. The GAMCEL management should conduct a full reconciliation of each of the banks to identify all the bank accounts held on behalf of GAMCEL.

Unrecorded Liabilities

►    We identified an unrecorded liability as at 31 December 2017, derived from a court ruling regarding the appeal of the termination of a former employee. As at 28 December 2017, management noted in an email that GAMCEL were obligated to repay a fine of GMD 1.2m (USD 25k) and salary arrears of GMD 437k (USD 9k). As GAMCEL had an obligation to settle these amounts, it should have provided for the total amount, however it did not do this.

► GAMCEL also failed to accrue for GMD 372k (USD 8k) of liabilities owed to GSC Ltd, relating to prior periods. The collective unrecorded liabilities identified were GMD 2.0m (USD 41.8k).

►    GAMCEL should ensure that it records all liabilities at year-end, including obligations arising from court case outcomes.

GAMCEL and GAMTEL Relationship

►    GAMCEL’s interconnection payable to GAMTEL stood at GMD 376m (USD 8m), as at 31 December 2017. It was suggested to the Board in 2018 that they consider the interconnection payable as an additional equity for GAMCEL and an investment for GAMTEL. This suggestion was intended to reduce GAMCEL’s indebtedness to GAMTEL. GAMCEL’s retained earnings have been consumed and the entity is loss making, leaving it with no payment options.

► The infrastructures of the two organizations are highly interconnected. Most of GAMCEL’s equipment is housed within the GAMTEL infrastructure, and its usage is shared between the two entities. In some cases, the usage of infrastructure can be measured, and is subsequently billed between the two entities. However, it cannot be measured in other instances and is therefore never billed or accounted for as intercompany transactions.

►    In summary terms, international GAAP requires the consolidation[1] of entities in which a company owns shares where the company exercises ‘control’, as defined in GAAP, over the business in which it owns shares. Whether or not a company has

“control” can be a complex assessment and is not addressed here. GAMTEL owns 99% of GAMCEL, which is an indication that it controls GAMCEL. We understood that GAMTEL has never prepared consolidated accounts. If it were concluded that GAMTEL does indeed “control” GAMCEL, then the failure to prepare consolidated accounts may be a breach of the relevant GAAP and the local Companies Acts. We emphasize that this would not have any implications for the day-to-day management of either of the two businesses.

[1] Consolidation is an accounting practice which shows the assets, liabilities and trading results of the company in which shares are held as if they were paid  of the company owning the shares.

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