Adventures in forensic accounting


Source: Annahar

The file photo shows a banner saying “we will not pay the price” in front of the Lebanese Central Bank. (AFP)

By Dan Azzi

 On the 31st of August, Mr. James Daniell, on behalf of Alvarez & Marsal (A&M), and on the 1st of September, Mr. Ghazi Wazni, on behalf of the Republic of #Lebanon’s Ministry of Finance, finally signed a contract for a forensic audit to be conducted on the central bank of Lebanon (BDL).

On page 1, the contract specifies the audit limits are to the “extent admissible under applicable Lebanese laws,” which, to me, leaves a huge loophole in their ability to carry out the assignment, if you have some determined opposition on the other side.

The contract specifies that the government form a committee of three people which reports to the Minister of Finance, in addition to weekly meetings for progress reports; thus, the success of their mission requires a genuine desire by their boss to get this done without any outside interference or pressure.

James Daniell and Paul Sharma, both Managing Directors, are the senior guys representing A&M, with Daniell providing 60% of his time, while Sharma provides 20%, which means that either Sharma is three times as productive or he’s busy on another project simultaneously.

Although my choice for doing this forensic audit would have been the Rolls Royce of forensic auditors, Kroll, the good news is that James Daniell, a 7-year veteran of A&M, actually spent 9 years at Kroll, prior to joining A&M. Paul Sharma, the more senior guy, spent almost 15 years at the FSA, the regulatory authority for banks in the UK, so he has experience in a regulatory, supervisory role at a well-respected institution.

Daniel Barton, a third managing director will provide the average of the other two, so 40% of his time for this assignment. Barton’s specialty is compliance, asset recovery, fraud, etc., which should keep him quite busy and entertained here in #Beirut, and, judging by his background, I wouldn’t be surprised if he decides to move here, both for the weather and the target-rich environment.

Another 13 people: 1 analyst, 2 associates, 2 senior associates, 2 managers, 3 directors, 2 senior directors, and 1 managing director will also be assigned to the project and named later. 8 of the 13 will provide 100% of their time, while the managing director is only providing 17% of his time, which seems like a weird ratio, converting to less than a day per week.

Coming from investment banking, where we had only 5 ranks, the first thing that occurred to me was “Boy, do these accountants have a lot of ranks.” The second thing was that the list’s junior rank (the analyst) had only one guy. So this guy fetches coffee, photocopies, carries the bags … sort of like the Arabic joke about a Private called Tansa who loses his temper one day, “Ma fi gheir Tansa bhal Jeish?!”

The contract also requires security measures for accommodation and transportation, which I read to be armed bodyguards. So if you see some geeky-looking guys in suits, with thick prescription glasses, surrounded by burly guys with crew cuts, and a bulge around their waste, wearing Oakleys and an ear-piece with a beige wire hanging from their ear, suspiciously scanning the area … that’s them.

They also required contingency planning for something they call “secure extraction” which to me means a helicopter on call to get them the hell out of Dodge, if the proverbial shit hits the fan.

The company is charging $2.1 million, covering a 10 week period, which seems steep (at an annualized average rate of $682,000 per person), but is probably not unreasonable for the number of people they’ve committed and the importance of the task to the country, assuming they deliver a report which lives up to the aspirations of the Lebanese people. In addition, the company will be reimbursed up to a cap of $220,000, for accommodations, travel, and IT expenses.

The money is to be paid to HSBC bank, which is a good preliminary sign of the situational awareness of A&M, regarding the uselessness of being paid Lollars into a Lebanese bank.

The contract requires that the final report will be “unmarked” if it is further disseminated, meaning that it should not identify A&M, in any court proceedings, or if sent to other parties beyond the Minister.

The contract also stipulates that the fee cannot be paid by any person on the sanctions list, so it’s a lucky break that they were hired by this minister and not the last one.

The scope of the assignment includes what you’d expect, such as:

-Examine BDL books for the last 5 years.

-Examine any financial transactions or values that were unduly inflated.

-Examine whether payments were made to fictitious companies.

-Review expenditures for improper purpose.

-Examine the composition of BDL’s foreign currency reserves and liabilities.

-Examine financial engineering transactions for the last 5 years.

-Perform a detailed analysis of the breakdown of movement in commercial bank deposits over time at a customer and group level especially during the period of financial engineering operations.

  • -Summarize the identified key commercial banks holding Government debt and the integrity of their relevant balances held on deposit with BDL.
  • Analyze the nature of reporting of deposits and loan exposure by financial institutions to BDL and the surrounding governance.

The ability of A&M to complete its mission ultimately depends on GIGO (Garbage In, Garbage Out), which essentially means that a crucial prerequisite to the success of this endeavor depends on cooperation of the relevant people in providing the data, the accuracy of the data, and the skill level of A&M in identifying fraudulent submissions or any attempt to pull a fast one on them. The good news is that there’s some outside pressure to get this done by some very powerful players, like the IMF, France, and the United States of America. Judging by the scope, at the very least, we should expect, before the end of the year, an answer on the real level of gross reserves, the actual BDL losses, what happened to people’s deposits with BDL, and an assessment of the success or lack thereof of the financial engineering transactions. Anything beyond that doesn’t look like it’s within the scope.

By the way, the contract is marked “privileged and confidential” so please don’t share it with anyone.

An earlier version of this article incorrectly stated that Sharma spent 1 year at the FSA. 



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