in-depth review of znfu - svtstatic.se · 2.1 background for the support and in-depth review 7 2.2...

In-Depth Review of ZNFU

Ministry for Foreign Affairs of Finland

2016-08-29

Contents

1 Introduction 4

1.1 Scope and Execution of the Assignment 4

1.2 Limitations and Disclaimers 4

2 Executive Summary 7

2.1 Background for the Support and In-Depth Review 7

2.2 EMM Report and ZNFU Reply 7

2.3 Accounting and Financial Administration 8

2.4 Construction Costs 8

2.5 Lima Credit Scheme 9

2.6 Management Compensation 9

2.7 Unsupported Costs 10

3 Background and Objective 11

3.1 Objective of the Programme and Scope of the JFA 11

3.2 Proposed Budget 11

4 Funding Arrangements and Agreements 12

4.1 Joint Financing Arrangement (JFA) 12

4.2 Bilateral Agreements 13

5 Financial Management 15

5.1 ZNFU’s Financial Management and Procurement Guidelines 15

5.2 JFA and a Prerequisite for the CP’s Support 16

5.3 Observations by EMM and KPMG 17

6 Construction/Property Costs 19

6.1 CSP II Grant Management: Head Office 19

6.2 Presentation of the New Office Complex in Reporting and Plans 22

6.3 Presentation in the Financial Statements for 2014 27

6.4 EMM on ZNFU’s Own Funding 28

7 Executive Compensation 29

7.1 Executive Director Salary and Contract 29

7.2 Loans, Advances, Leave Pay and Gratuity 30

7.3 Landscaping Costs 32

7.4 Vehicle Tracking Costs – Jambo Tracking 33

8 Lima Accounts 37

9 Unsupported Costs 39

10 Annex 1 – Key terms of the Joint Financing Arrangement (JFA) 40

10.1 Reporting according to the JFA 40

10.2 Terms and Conditions on Financial Statements and Accounting 40

10.3 Non-compliance, Force Majeure 41

11 Annex 2 - Bilateral Agreements 42


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Abbreviations and Acronyms

CP Cooperation Partners (i.e. donors)

ED Executive Director

EMM EMM Corporate Partners

EUR Euro

GoF Government of Finland

MFA Ministry for Foreign Affairs of Finland

PLARD Il Programme for Luapula Agricultural and Rural Development Phase Two

Sida Swedish International Development Agency

TA Technical Assistance

TOR Terms of Reference

VAT Value Added Tax

ZMW Zambian Kwacha

ZNFU Zambian National Farmers Union


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1 Introduction

1.1 Scope and Execution of the Assignment

The Assignment is based on the Framework Agreement between the Ministry for Foreign Affairs of

Finland and KPMG as well as Terms of Reference (TOR). The aim of the Assignment is the aim is to

review and clarify the use of funding, clarify the previous audit process conducted by EMM and review

selected findings made by in the previous EMM audit. The In-Depth Review is not engaged to redo the

previous EMM Audit. The In-Depth Review was focused on the same period as the EMM audit namely

2014 to 08/2015.

The Assignment is focused on the following topics:

— Review and assess the final EMM audit report

— Review and assess ZNFU´s answer to the EMM audit report

— Visit ZNFU and review selected audit findings, for example:

— Budget process and steering committee work, agreements

— Management fees and approvals

— Procurement

— Loans

— Meet with the donors, possibly EMM and other relevant actors

— Assess whether CP´s funds have been used for intended purposes.

— Review any other relevant aspects given the purpose of the audit.

The field visit of the Review was conducted in Lusaka, Zambia. The Assignment took place in the period

of May to July 2016. The Assignment was conducted by KPMG Finland. Anders Lundin, Authorized

Public Accountant, and Lauri Tuomaala, Authorized Public Accountant, were responsible for the overall

Assignment. The field work was carried out by KPMG Finland team with the support of KPMG Namibia.

The Assignment was performed in good co-operation with the parties involved. We would like to express

our appreciation for all parties involved.

According to the agreement between MFA and KPMG, this Review report is for internal use of the donors

only.

1.2 Limitations and Disclaimers

In accordance with the terms of reference set out we enclose our report on the In-Depth Review of

ZNFU. The purpose of the Review was to review some of the audit findings made by EMM Corporate

Partners, not to redo the actual audit. This has had material impact on the procedures carried out and the

level of the findings.

This report is based only on work performed by KPMG up until the 6 July, 2016 and it is in all respects

subject to the provisions and limitations set out in the Terms of Reference and the following discussion

with donors. It should be noted that our final written report shall take precedence over any draft, and

that no reliance will be placed by you on any draft other than at your own risk. It should also be noted

that following the Terms of Reference this report has not been commented by ZNFU.


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The interpretation of legal consequences of our findings is solely a responsibility of the donors. We do

not accept any responsibility relating to adequacy of our procedures or our report for the purposes of the

recipients of the report.

Our work has been limited to ToR of the Assignment. We have not had full access to accounting and

bookkeeping material of ZNFU. Due to significant unavailability of original accounting documentation we

have not been able to trace and follow audit trail from accounting entries recorded to original

documentations. We understand that this situation was also faced by EMM Corporate Partners when

they carried out their special audit between November 2015 and February 2016. Based on our work and

according to our understanding there is an existence of an information system which fails, whether by

design or by accident, to provide an adequate audit trail or sufficient evidence. In addition due to access

limitation we have not reviewed the bookkeeping or financial statements of ZNFU Properties Ltd, nor

any other entities which might be owned by ZNFU (including Lizara Investment].

We understand that there have been personnel changes in ZNFU’s accounting unit in 2016 and this

might have corresponding impact on responses we have managed to obtain from ZNFU. Due to these

personnel changes KPMG was not able to interview all personnel of the finance unit that had been

working during the Review period.

We have not reviewed who has had rights and access to accounting software and who has actually made

the original accounting entries, made revisions, corrections or otherwise changed them. Further, due to

unavailability of original accounting documentation we have not been able to review for accounting

entries who has reviewed and approved accounting entries/documents recorded in the bookkeeping.

Regarding the ZNFU’s financial statements for 2014 KPMG has not been provided with any management

letters issued by the Auditors (as requested in the bilateral agreement between Sida and ZNFU) i.e. we

are not aware whether the auditors have stated whether the financial statements complies with ZNFU’s

accounting records, what observations and recommendations were made and whether ZNFU has taken

any appropriate actions.

Our work has been based on the documentation and information provided to us by ZNFU and oral

information provided in the interviews. We have indicated within our report the sources of the

information presented and have satisfied ourselves, so far as possible, that the information presented is

consistent with other information which was made available to us in the course of our work in accordance

with the terms of reference. We have not, however, sought to establish the reliability of the sources by

reference to other evidence. We have not tested the documents to exclude the possibility of other

manipulations or controversially to confirm the authenticity of those or any third party documents. Certain

of this information was based on details that may be subjective (i.e. names, surnames, initials). We have

not verified the factual accuracy of this information through independent sources. The procedures that

we have performed will not constitute an audit or a review made in accordance with any generally

accepted standards on auditing or any generally accepted standards on review engagements and,

consequently, no assurance will be expressed. Had we performed additional procedures, an audit or a

review, other matters might have come to light that would have been reported to you.

Our work commenced in May 2016 and was completed on in July 2015. The draft report was issued on

6 July, 2016 and as such the work upon which this report is prepared is limited and we have not

performed any procedures subsequent to 6 July, 2016. You should, therefore, bear in mind when

considering the draft report that the information contained within it and our preliminary findings based

thereon may have altered or been refined if we had performed additional procedures.

We would like to draw your attention to the fact that we have requested a number of key documents

from ZNFU. ZNFU has explained that part of the documentation are still missing due to the previous

EMM audit, the procedures of the Drug Enforcement Commission (DECE) and due to a break-in in the

ZNFU office prior to the EMM Audit.


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Before commencing our field work in Lusaka (Zambia) we were confirmed by ZNFU on 27th

May 2016

that all key personnel and key management staff would be available for discussions during our visit.

However, when we arrived at ZNFU we were informed that the Executive Director Mr Ndambo was on

leave and not available for discussions. In addition, we were also confirmed that ZNFU will provide us

with all requested materials on 30th

May 2016. Unfortunately, essential part of material requested, such

as accounting & journal vouchers with all supporting documentation and calculations, was not available

during our field work – and critical part of the requested information is still missing.

— Below is listed some major documents requested by KPMG but not provided to us. The list is not

comprehensive and for illustrative purpose only:

— The financial statements for 2015 were not available during the time of our engagement.

— Supporting documentation relating to an accounting entry made on 30 June 2015 when the account

7100>040 (ZNFU Properties Ltd) has been debited and the account 8430 (Payments Control account)

has been credited with an amount of 4,375,110 ZMW by a journal voucher JV300615 with a

description “Journalising of investment in ZNFU Properties Ltd”

— Supporting documentation for an accounting entry made on 14 March 2014 (reference TT150314)

according to which the account 6100>004 (Office Complex) was debited and the account 8400

(Standard Chartered Bank Main) was credited by an amount of 1,000,000 ZMW.

— Supporting documentation for an accounting entry made on 19 March 2014 (reference TT190314)

according to which the account 6100>004 (Office Complex) was debited and the account 8400

(Standard Chartered Bank Main) was credited by an amount of 1,044,095 ZMW.

— Explanation on the accounting entries related to the withdrawal of ZMW 10,300,000 made from the

Lima Credit Scheme which has not been presented as a liability in the accounting and financial

statements of ZNFU.

We would like to remind you that the comments included in the report are only for internal purposes and

that if taken out of context of the general background information known to you may lead to a wrong

impression. KPMG Oy Ab disclaims all liability to any third party seeking to rely on information contained

herein. The report should neither be released nor its contents revealed to any external party.

This report is confidential. It may not be disclosed, copied, quoted or referred to in whole or in part,

whether for the purposes of disciplinary proceedings or otherwise without our prior written consent.

Such consent, if given, may be on conditions including, without limitation, an indemnity against any

claims by third parties arising from release of any part of our report.


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2 Executive Summary

2.1 Background for the Support and In-Depth Review

The Swedish International Development Agency (Sida), We Effect and the Ministry for Foreign Affairs of

Finland (MFA) (hereafter referred as donors) jointly agreed to the finance the Core Support Programme

(CSP) Phase II 2014-2017 of the Zambian National Farmers Union (ZNFU) under a Joint Financing

Arrangement (JFA). The funding agreements were signed in 2014 and the overall objective of the CSP II

is to contribute towards the realization of a sustainable and competitive agricultural sector that

contributes to improved household food security, on-farm incomes and employment creation in Zambia.

According to the CSP II Proposal 2014-2017 document the CSP II budget 2014-17 is USD 27.3 million.

Sida agreed to finance the CSP II with SEK 47.5 million (USD 7.3 million at the time of signing), We Effect

agreed to finance ZNFU’s activities in 2014 – 2015 with a total of SEK 6.1 million (USD 0.9 million at the

time of signing) and the MFA approved a funding of EUR 7.8 million (USD 10.8 million at the time of

signing). The contribution ZNFU according to the budget is USD 7.7 million for the four year period. The

feedback of the Mid-term Review (MTR) conducted in CSP I was generally positive and the MTR

recommended to continue the core support mode of funding.

According to the JFA, a prerequisite for the CSP Phase II support is that the ZNFU undergoes a

satisfactory Pre-award audit. KPMG reviewed the report issued by Newton Lungu & Associates dated

29 August 2013 on “Zambia National Farmers’ Union – Financial Management Assessment – August

2013”. According to the overall conclusions of the report, there were serious deficiencies in financial

management, internal controls, recording of transactions and financial reporting of ZNFU. ZNFU provided

responses to the recommendations of the report and according to the responses ZNFU complies with

the recommendations. We are not aware how the accuracy of the ZNFU responses has been reviewed.

At the end of the Finnish-funded Programme for Luapula Agricultural and Rural Development Phase Two

(PLARD Il) a final audit was carried out. The final audit report and the verification report of the Programme

costs incurred by ZNFU revealed some weaknesses in ZNFU’s accounting system and internal controls.

Hence, the donors engaged a special audit that was conducted by EMM.

2.2 EMM Report and ZNFU Reply

In the end of 2015 EMM Corporate Partners (EMM) conducted a special audit of ZNFU for the period of

January 2014 to August 2015. The objective of the audit was to ascertain whether the funds disbursed

to ZNFU under the donor-funded CSP II and PLARD ll had been used for the intended purpose and

properly accounted. The EMM audit made several observations that included misapplication or

misappropriation of donor funds amounting to a total ZMW 33,944,347 and high levels of suspected

fraud. EMM assessed the headquarter controls of ZNFU mostly as “seriously deficient”. The EMM audit

includes a limitation in scope as ZNFU decided to set aside the draft audit report and consequently didn’t

provide all necessary justifications and material for verification.

The EMM made observations in respect of executive management compensation including salary, loans

and advances as well as vehicle tracking, landscaping and construction costs. The amount of costs

including discrepancies in the executive compensation according to the EMM report was ZMW

7,572,866. For example the vehicle tracking costs from a related party with a total of ZMW 1,484,615

were considered ineligible. Similarly, landscaping and irrigation costs of ZMW 1,351,863 were found

ineligible and/or unsupported. A major observation was the construction costs in the amount of ZMW

13,970,479 for the construction of the office complex of ZNFU Properties Ltd that had been recorded as

an asset in the accounting of ZNFU. In addition, the construction costs included accounting errors

including journalising of investment without supporting documentation and recording of loan repayments

as fixed assets.

The funding provided by the donors is core funding and is not separated in the accounting of ZNFU

between donors and own contribution. Consequently, all costs that are not project based are jointly

funded by ZNFU and the donors. According to the EMM report, ZNFU was most likely using grant funds


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for the questioned costs observed in the audit, as its own resources were not sufficient to make

investments for example in property and construction.

ZNFU provided comments to the draft EMM reports and a formal management response to the draft

report. Based on the view of ZNFU management the observations of EMM were mostly unsupported

and had been based on a flawed audit process. ZNFU’s comments led to some updates to the first draft

versions of the EMM report. However, significant observations remained in the final EMM report. Based

on the KPMG Review, the ZNFU management responses provide limited information and evidence on

the observations that were the focus of this Review.

Based on our Review of the findings presented in the EMM report, material received during our

engagement and procedures carried by us nothing material has come to our attention that causes us to

question the findings presented in the EMM report. The differences in findings noted by KPMG are

highlighted in this Review report. Some additional documentation related to costs previously reported as

unsupported in the EMM report was received by KPMG during the In-Depth Review.

2.3 Accounting and Financial Administration

Based on the findings made by EMM, procedures carried out by KPMG and unavailability of

documentation, material deficiencies in the compliance with the requirements of the JFA and the bilateral

agreements with MFA, Sida and We Effect were noted. For example material deficiencies were noted

in the compliance of ZNFU accounting with an agreed financial reporting framework – International

Accounting Standards or other mutually acceptable standards as required by the JFA.

During the Review ZNFU was unable to deliver several key documents or to explain the unclear

accounting entries. In addition, ZNFU confirmed several incorrect accounting entries and errors some of

which were significant in monetary terms at the financial statement level. The general ledger includes

numerous manual journal vouchers, accounting entries without any supporting documentation,

accounting entries between seemingly unrelated accounts and unnecessary and extensive use of control

accounts. Accounting documents relating to journal vouchers were not available which can be considered

as a non-compliance with generally accepted accounting principles and ZNFU’s own internal guidelines.

The extensive use of journal vouchers is a red-flag for potentially misleading or fraudulent accounting.

Similarly, ZNFU was unable to deliver the requested reconciliation between CSP II financial reporting and

accounting for 2014 or clarify the differences between the reports. KPMG reviewed the financial

reporting and the financial statements on a general level and noted that there are discrepancies between

the reports. For example the total income of ZNFU for 2014 amounts to ZMW 47,221,138 while in the

CSP II financial report the total income amounts to ZMW 48,003,995. Hence, the audit trail is not

complete.

Significant cost items related to construction of properties that are outside the approved annual work

plans and budget have been paid by ZNFU on behalf of ZNFU Properties Ltd. The accounting indicates

that the separation of the accounting between entities has not been appropriate as ZNFU has recorded

costs in their accounting for costs of ZNFU Properties Ltd.

To conclude, based on the EMM audit report and the KPMG Review procedures the accounting and

financial reporting of ZNFU cannot be considered as reliable. Based on the pervasive errors in accounting

and financial reporting it is not possible to summarize the amount of ineligible costs as ZNFU is not able

to demonstrate the use of funding through financial reporting and accounting records.

2.4 Construction Costs

Based on the information made available to us and procedures carried out it seems that the property

costs/construction costs presented in the EMM report of ZMW 13,970,479 are related to ZNFU

Properties Ltd and not ZNFU. Further, there is no evidence that any part of the CSP II budget could be

allocated to the construction costs of the new office complex paid by ZNFU on behalf of ZNFU Properties


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Ltd. Therefore based on the EMM audit and the KPMG Review the costs of ZMW 13,970,479 could be

considered illegible as they relate to ZNFU Properties Ltd and are not included in the CSP II budgets. In

addition, there were several accounting entries which were not supported by adequate documentations

and remain unclear. Further, on 15 June 2016 KPMG received confirmations from ZNFU on wrong

accounting entries in the construction costs. Based on the EMM audit and the KPMG Review for example

loan payments have been recorded in the construction costs as a fixed asset.

2.5 Lima Credit Scheme

KPMG observed that ZNFU has withdrawn funds from the Lima Credit Scheme (LCS) in the amount of

ZMW 10.3 million in 2014. According to the management of ZNFU the funds have been utilized for the

operational costs of ZNFU and the construction of the ZNFU office complex. The intention of LCS funds

is to facilitate loans to small scale farmers. Based on the documentation available ZNFU does not have

the right to use the funds for its own operational purposes. ZNFU did not provide all relevant and final

documents related to the LCS for the KPMG Review. In 2015, a total of ZMW 9,065,000 was paid back

to the LCS. ZNFU was not able to explain how the repayment to LCS has been funded. At the time of

the Review in May 2016, ZNFU still owed ZMW 1,235,000 to the LCS.

Notwithstanding the eligibility of the withdrawal the liability to the LCS and the farmers should have

according to our understanding been presented in the financial statements of ZNFU for 2014. However,

the audited balance sheet of ZNFU amounting to a total of ZMW 34.2 million does not include the ZMW

10.3 million liability. Similarly, the liability is missing from the accounting of ZNFU. Consequently, the

balance sheet includes a significant error (30% of the balance sheet amount) and hence the financial

statements are materially misstated.

Based on the accounting of ZNFU and their confirmation the accounting entries related to the Lima

withdrawals have been incorrect. The audit trail for the transaction is not clear and has been made with

several journal vouchers. ZNFU has not been able to clarify the accurate entries. It cannot be ruled out

that the withdrawn amounts have been paid out from ZNFU without a corresponding service and/or

without an accounting entry to the appropriate accounts.

2.6 Management Compensation

EMM recognized that the salary paid to the ED has been ZMW 2,337,120 higher than the level that has

been communicated to the donors. The Employment Contract for Executive Director of ZNFU has been

signed twenty months after the contract period of March 2012 to February 2016 started. According to

the Contract ZNFU shall pay “a monthly net salary of $ 15,000”. According to ZNFU the net salary has

been processed so that the ED has received the net payment of USD 15,000. Thus, the gross salary of

the ED has been USD 23,077. In addition, the ED is entitled to a gratuity of 25% which means that the

monthly salary level is USD 28,846.

In preparation of the CSP II funding ZNFU provided on 14 November, 2013 a breakdown of the salaries

to Sida and the in the breakdown the monthly salary of the ED is ZMW 81,538. However, according to

the contract salary of USD 23,077 and the prevailing foreign exchange rate (5,489) the reported gross

monthly salary of the ED should have been ZMW 126,671. The difference to the reported salary is ZMW

45,133 which 55% of the reported salary. It should be noted that the information was provided on the

same day that the contract of the ED was signed so the information on the new salary level should have

been available for ZNFU. In addition, the gratuity is further excess of this level. Based on the

documentation available it can be concluded that ZNFU has provided incorrect information to Sida on the

salary of the ED and/or the contract of the ED. Similarly, it should be noted that the monthly gross salary

in 2015 has been over three times the level that was reported to Sida in the beginning of the CSP II.

In addition other discrepancies including unrecovered loan, advance and gratuity payments in the

compensation of the ED were noted by EMM. Based on the KPMG review no significant new

documentation was provided that would question the observations of the EMM. KPMG noted that a loan

of ZMW 100,000 has been paid to the ED without a loan agreement and in addition the loan payment


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has according to ZNFU been recorded as a fixed asset to ZNFU properties account. ZNFU also made a

payment of USD 18,790 (ZMW 98,100) to Israel to a supplier of Jambo Tracking, a company owned by

the ED, to purchase equipment for Jambo Tracking. The payment has been recorded as a cost of ZNFU.

Jambo Tracking was later selected as the supplier of ZNFU for vehicle tracking services. No PAYE (Pay

As You Earn, Zambian income tax) has been paid for the gratuity payments or other similar payments to

the ED. In addition, salary advance and gratuity payments have been made without a proper follow-up.

2.6.1 Landscaping

The EMM audit noted ineligible and out-of-budget payments of at least ZMW 1,351,863 incurred on

landscaping costs. According to the EMM audit report, no adequate supporting documentation was

available for expenses amounting to ZMW 923,971. KPMG requested the supporting documentation but

was not provided with additional documentation that would adequately support the expenses and thus

the EMM observation was found to be reported as a matter of fact. No documentation was available on

the ZMW 120,000 landscaping costs that were recorded as gratuity in the accounting. According to the

ZNFU reply to the EMM draft report the accounting entry is a misposting and should have been recorded

to ZNFU properties. No additional information has been provided for the KPMG Review. Similarly, KPMG

noted that an accounting entry in the amount of ZMW 74,900 has been recorded with a bookkeeping

reference of “Landscaping in Chongwe – ED”.

Based on the EMM report and KPMG Review procedures the landscaping costs cannot be considered

as eligible. A proper tender process has not been followed in the procurement of landscaping services

and there is indication that the costs have been incurred for landscaping of properties not belonging to

the ZNFU. The lack of supporting documentation is a severe financial administration deficiency and is a

clear breach in eligibility of funded costs.

2.6.2 Jambo Tracking – Vehicle Tracking Services

The EMM audit report noted that ineligible payments of at least ZMW 1,494,615 have been made to or

for Jambo Tracking, an entity belonging to the ED and his wife. The amount includes the equipment

purchase of ZMW 98,100 (mentioned above) and the vehicle tracking costs of ZMW 1,396,515. The ED

and her wife are directors/partners of the company. The EMM report finds the process of appointment

of Jambo Tracking is not complying with basic tender procedures. According to ZNFU most of the

documentation related to Jambo Tracking is missing due to a DEC investigation and the EMM audit.

Based on the KPMG Review procedures the tendering process for the vehicle tracking includes

discrepancies that have not been appropriately explained by ZNFU. The documentation on the selection

of most economical quotation is missing and based on the available documents the most economical

service provider has not been selected. The costs incurred by vehicle tracking are not in line with the

tender process, contract or transparent presentation of costs. Lack of follow-up of the costs is apparent

and consequently overbilling as according to the EMM report cannot be ruled out. Considering the nature

of the procurement from a related party the transparency should have been highlighted. Based on the

documentation there is an indication that the ED has been involved in decision making related to the

vehicle tracking system. The ED has also approved payments to a company owned by him.

2.7 Unsupported Costs

The EMM audit report noted unsupported capital costs amounting to ZMW 2,386,170. According to the

report, the auditors were not provided supporting documentation for these costs at the time of the audit.

In the response, ZNFU management stated that payment vouchers are available for verification.

According to KPMG Review procedures, supporting documents for the tested transactions were

available. Based on the Review there is no direct indication that the documents had been recently

prepared merely for the purpose of the Review. However, KPMG observed challenges in linking some

of the documents to the correct transactions due to incorrect/incomplete descriptions used in the

accounting records.


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3 Background and Objective

3.1 Objective of the Programme and Scope of the JFA

According to the Joint Financing Arrangement (JFA) signed between Swedish Development Cooperation

(Sida), We Effect and the Ministry for Foreign Affairs of Finland (MFA) and the Zambia National Farmers’

Union (ZNFU) regarding the implementation of the ZNFU Core Support Programme (CSP) Phase II 2014-

2017:

— The overall objective of the ZNFU CSP Phase II is to contribute towards the realization of a sustainable

and competitive agricultural sector that contributes to improved household food security, on-farm

incomes and employment creation in Zambia, as stated in the proposed ZNFU CSP Phase II

programme document, dated 1 November 2013.

— The proposal is based on the ZNFU Strategic Plan 2012-2016, a policy framework document that

describes the ZNFU strategy and action plan, including the organizational specific goals and its

contribution to national development goals.

— The Strategic Plan envisions;“a vibrant, inclusive, influential and self-sustaining nationwide Union,

with capacity to sustain its members’ aspirations”, by specifically seeking to establish by 2016, a

ZNFU with strong leadership and organizational structures, that effectively and efficiently serve its

membership, while fully exploiting its income generating capacities at both national and district

levels.

— The ZNFU CSP Phase II programme document will be brought up to date whenever required, taking

into account the result of the reviews and the decisions taken by ZNFU jointly with the CPs.

— This JFA sets forth the jointly agreed terms and procedures for financial support to the ZNFU CSP

Phase II and serves as a coordinating framework for consultation with the ZNFU, for joint annual

reviews of performance, for common procedures on disbursement, for reporting and for audits.

— The CPs will establish bilateral agreements that are compatible with the spirit and provisions of this

JFA and will refrain, as far as possible, from setting conditions in the bilateral agreements which

contradict or diverge from the spirit or the provisions of this JFA. If there is any inconsistency or

contradiction between the terms and conditions of this JFA and any of the bilateral agreements, the

provisions of the bilateral agreements will prevail. In so far as specific provisions of a bilateral

agreement deviate from the JFA, the CPs concerned will inform the other CPs thereof, by supplying

a copy of it to each CP, specifying the provision(s) concerned.

— The CPs will base their actual support on the progress attained in the implementation of the ZNFU

CSP Phase II. Progress will be measured through the common agreed performance indicators as

described in the Log Framework (may be revised according to paragraph 8)

3.2 Proposed Budget

According to the Core Support Programme (CSP) II Proposal 2014-2017 document dated 1st November

2013 - A total of US$27,323,627 has been proposed as the 2014-17 CSP II budget. The following funding

sources have also been proposed: US$10,000,000 from the Embassy of Finland; US$7,800,000 from the

Embassy of Sweden; and US$1,840,000 from SCC (W-effect). ZNFU own contribution is USD 7,683,627

during the 4 year period according to the budget.

Based on the funding agreements Sida has agreed to finance the CSP II with SEK 47.5 million (USD 7.3

million at the time of signing in early 2014). We Effect has agreed to finance ZNFU’s activities in 2014 –

2015 with a total of SEK 6.1 million (USD 0.9 million at the time of signing in early 2014). The MFA has

signed an agreement in May 2014 amounting to a total of EUR 7.8 million (USD 10.8 million at the time

of signing). ZNFU own contribution according to the budget is USD 7,683,627 for the 4 year period.


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4 Funding Arrangements and Agreements

4.1 Joint Financing Arrangement (JFA)

The Joint Financing Arrangement (JFA) has been signed between Swedish Development Cooperation,

We Effect and the Ministry for Foreign Affairs of Finland and The Zambia National Farmers’ Union (ZNFU)

regarding the implementation of the ZNFU Core Support Programme (CSP) Phase II 2014-2017. The JFA

was signed by ZNFU on 28 November, 2013, the Embassy of Sweden on 27 November, 2013, the

Ministry for Foreign Affairs Finland on 13 December, 2013 and We Effect on 18 December, 2013. In

addition to the JFA the bilateral agreements between ZNFU and each partner have been signed on the

funding arrangements.

According to the minutes of the 325th

ZNFU Board Meeting held 19th

December 2013, the ZNFU

assessment for the CSP II had been completed – this involved the financial systems audit and overall

programme assessment and the estimated budget over the four year period is $26 million. The audit

appears to refer to the report issued by Newton Lungu & Associates dated 29 August 2013 on “ZNFU –

Financial Management Assessment – August 2013”

KPMG reviewed the JFA and the key terms of the Arrangement. The financial statements for 2015 were

not available during the Review. However, based on the requirements the Draft Financial Report for 2015

should have been available.

According to the JFA, the Financial Report should compare the actual costs of activities for the current

reporting period with the budgeted costs for the same period, and in the same currency. The Financial

Report should be prepared in a form and at a level of detail that enables comparison of the budget with

actual progress.

Based on the KPMG Review the reporting format for the Financial Report has not, according to our

understanding, been defined that is whether it should be presented in the same format as Financial

Statements, or in another format agreed between CPs and ZNFU. KPMG has requested but not received

a reconciliation CSP II reporting and accounting/financial statements for 2014.

KPMG also observed that the budget comparison with actuals presented in the CSP II 2014 Annual

Report (page 17 to the Annual Report) cannot be reconciled with the accounting general ledgers. ZNFU

has not been able to provide the necessary bridge calculations. KPMG reviewed the financial reporting

and the financial statements on a general level and noted that there are discrepancies between the

reports. For example the total income of ZNFU for 2014 amounts to ZMW 47,221,138 while in the CSP

II financial report the total income amounts to ZMW 48,003,995. ZNFU has not been able to clarify the

differences between the reports.

Based on the Agreement between Sida and ZNFU, ZNFU’s auditor shall in the audit report and the

management letter comment on, among others, whether attached financial report complies with ZNFU’s

accounting records. Based on the Review no management letter has been prepared.

According to the paragraph 11 to the JFA (Non-compliance, force majeure) in the case of serious non-

compliance with the terms of this JFA and/or violation of the fundamental principles set out in this JFA

on the part of the ZNFU, any CPs may suspend further disbursements to the ZNFU CSP Phase II and

reclaim the funds already transferred in whole or part. Such non-compliance could include inter alia

substantial deviations from agreed plans and budgets, misuse of funds or non-compliance with agreed

preconditions relating to the implementation of the ZNFU CSP Phase II.


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4.2 Bilateral Agreements

Based on the minutes of the 326th


April 2014 (regarding the Core Support

Program II 2014-17), “The Board was informed that the Core Support for 2014-2017 was approved and

Bilateral Agreements signed with the other partners except for Finland with whom signing was expected

to be done in the near future”.

4.2.1 Bilateral Agreement between MFA Finland and ZNFU

The agreement between the Ministry for Foreign Affairs of Finland (the Ministry) and the Zambia National

Farmers’ Union (ZNFU/Agency) on the Ministry’s support towards the funding of the implementation of

the Zambia National Farmers Union (ZNFU) core support programme phase II 2014-2015 was signed on

6th

May 2014.

The bilateral agreement between the Ministry and ZNFU includes for example the following terms:

— The use of the Finnish contribution and the management of funds shall comply with professionally

accepted administrative, accounting, auditing and other financial standards and practices. The

Agency shall ensure that no illegal or corrupt practices are connected with the use of the Ministry's

contribution.

— All procurements shall be made in accordance with generally accepted principles and good

procurement practices.

— The MFA reserves the right to suspend payments in the event that there is reasonable cause for

doubting that the Agency ignores the conditions laid down in the Agreement. Similarly, the MFA can

claim for recovery in full or in part if the Agency has provided incorrect or misleading information, the

Agency hinders the execution measures related to the inspection and audit on the use of the

contribution, the contribution is found to be misused, not satisfactorily accounted for, or there are

other relevant grounds for claiming repayment in accordance with the Finnish legislation related

to state subsidies (Finnish Act on Discretionary Government Transfers 688/2001). The key aspects

of the Finnish Act on Discretionary Government Transfers are presented in the Annex 2 of this report.

However, briefly according to the Finnish Act on Discretionary Government Transfers, recipients of

discretionary Government transfers must provide State aid authorities with correct and sufficient

information for the purpose of paying the transfer and funds can be reclaimed if the transfer has been

used a purpose essentially different from that for which it was granted or false or misleading

information has been provided to the State authority.

During the KPMG in-depth Review engagement, we have made the following findings, among others,

which should be considered when evaluating potential actions:

— ZNFU’s inability to deliver requested information and reconciliation between CSP II reporting and

accounting for 2014 that effectively make the review of use of funding impossible;

— Numerous unsupported accounting entries;

— Non-compliance with ZNFU’s own Financial Management and Procurement Guidelines, and the

Board Charter;

— Non-compliance with the requirements of the JFA and bilateral agreement between MFA (Finland)

and ZNFU;

— Confirmations received from ZNFU on incorrect accounting entries/errors;

— Use of potentially restricted Lima Accounts intended for financing of small-scale farmers.


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4.2.2 Bilateral agreement between Sida and ZNFU

The agreement on Core Support to Zambia National Farmers Union 2014-2014 between The Swedish

International Development Cooperation Agency (Sida) and ZNFU was signed on 20 February 2014.

According to Article 6 to this agreement, there is the following condition for the disbursement to ZNFU

in 2015: ZNFU has, among other things, ensured that all priority 1 recommendations (high risk) and

priority 2 (significant risk) as established by the financial management assessment report 1 have been

attended to. This relates to the Financial assessment report by Newton Lungu and Associates 2013 -

engaged to assess financial management systems of ZNFU prior to CSP II (Findings made by Newton

Lungu are summarized later in our report). Based on the Review no management letters have been

issued by the Auditors regarding the ZNFU’s financial statements for 2014. Consequently, KPMG is not

aware whether the auditors have stated whether the financial statements complies with ZNFU’s

accounting records, what observations and recommendations were made and whether ZNFU has taken

any appropriate actions as required in the funding agreement with Sida.

According to the Article 11 (Reports and other documents), ZNFU shall annually submit its financial

statement to Sida. The financial statement shall include all income and shall specifically display all funding

sources, including Funds allocated by Sida. It shall also contain a comparison of actual costs for Core

Activities for the current reporting period to budgeted costs for the same period. The financial statement

shall include information on interest and / or unspent funds. The financial statement shall be signed the

Executive Director of the ZNFU. KPMG observed that the financial statements for 2014 do not include

funds allocated by Sida but a consolidated “Grants and donations”.

Based on the CSP II Proposal 2014-17 document principal ZNFU functions include lobby and advocacy;

member service provision and information dissemination and communication to members. The financial

statements for 2014 include budget comparison to actuals in the following areas: Lima credit scheme

extended to 40 district and to 35 000 farmers, Lima credit scheme extended beyond maize, Lima

financing beyond ZANACO and development of additional financial service package, Expansion of Lima

marketing development possibilities, Office equipment, ZNFU promotional Activities, Training Course for

ZNFU Agribusiness Managers and Senior Agribusiness Managers. Hire of Professional Journalist to write

articles for Zambian Farmer and Field Tours by 4 of Senior ZNFU HQ Management. As a consequence,

the requirement that financial statements should contain a comparison of actual costs for Core Activities

(Functions) for the current reporting period to budgeted costs for the same period is not in line with what

has reported in the financial statements for 2014. KPMG has not reviewed the information presented in

the financial statements for 2014 relating to budget comparison to actuals disclosed in the schedules V-

VI to the financial statement 2014.

4.2.3 Bilateral Agreement between We Effect and ZNFU

The agreement of cooperation between Zambia National Farmers Union (ZNFU) and We Effect for ZNFU

Core Support (CSP) Phase II Programme has been signed on 31st January 2014. The content of the

agreement is not discussed or referred to in detail here. According to the Article 2.3 to the agreement

this agreement is compatible with the spirit and provisions of the Joint Financing Arrangement (JFA)

between Sida, the MFA, We Effect and ZNFU. The JFA sets forth the jointly agreed terms and

procedures for financial support to the ZNFU Core Support Phase II Programme and serves as a

coordinating framework for consultation with the ZNFU, for joint annual reviews of performance, for

common procedures on disbursement, for reporting and for audits.


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5 Financial Management

5.1 ZNFU’s Financial Management and Procurement Guidelines

ZNFU’s financial management is governed by ZNFU’s Financial Management and Procurement

Guidelines (Guidelines). The Guidelines discuss in details the following areas: Organization and

management, Accounting policies, General accounting procedures, Payment procedures, Management

of project funds, Financial and management reporting requirements, Internal control and management

practices, Procurement and Audit management. Below are some extracts from the Guidelines.

5.1.1 Accounting Policies

According to the Guidelines, “The Union’s books of accounts shall be maintained on a double entry basis

on historical cost convention and going-concern basis in accordance with International Accounting

Standards (IASs) and other generally accepted accounting practices (GAAP). The Union will adopt an

accruals type of accounting except for special projects whose receipts and payments would be

accounted for on cash basis”.

5.1.2 Books of Accounts

According to the Guidelines (section 3.4 Books of Accounts, “Books of accounts shall be maintained on

a historical cost accounting basis to enable dissemination of financial statements and financial

management records on a timely basis. These shall include all standard books of accounts and accounting

records. The following books shall be maintained at all levels: Cash books; Expenditure ledgers; Registers

(Imprest, fixed assets etc.); Payment Vouchers with supporting documents; Bank Reconciliations and

Receipt books”. Regarding the payment vouchers it is mentioned that “A payment voucher is a

document which is used for preparation of payments showing details of payee, nature of payment,

authority, account codes, cheque number, date of issue, etc. Before completing a payment voucher, the

accountant responsible for compiling the voucher shall ensure for example that authority for the purchase

and tender authority are available, three Proforma invoices or quotations have been obtained and the

LPO is signed by an authorized officer.

5.1.3 Payment Procedures

Pursuant to the Guidelines, “All payments will be made in accordance with the following: ZNFU financial

regulations in the blue print, Approved Annual Work plan and budgets and Procurement of goods and

services regulations laid down by the Union”. A payment is initiated by raising a payment voucher. A

payment voucher will have all the necessary supporting documents i.e. three proforma

invoices/quotations, tax invoices, and relevant correspondence. Before approving the voucher, the

Authorizing Officer shall ensure that the voucher has been signed by the Compiling Officer.

5.1.4 Management of Project Funds

Pursuant to the Guidelines (section 5 – Management of project funds), “Where the Union manages

projects, financial transactions related to these funds shall be presented separately in the ZNFU financial

reports.” Further, pursuant to the section 5.1.1 (Direct Support), the Guidelines instruct that “These are

one-off financial support to the Union. Funds shall be deposited in the ZNFU Main account and disclosure

will be required for clear understanding of the source of funding in the financial statements. The funds

shall be used towards approved activities.”

5.1.5 Account Forms

According to the Guidelines (section 6.3.2 Accounts Forms), “The data input forms to be used when

entering data into the accounting system shall be payment vouchers, receipt vouchers, general journal

vouchers and invoices. The data inputs shall contain the Transaction date, Description of the transaction,

Officer preparing the voucher, Officer authorizing the voucher, Transaction reference and Account codes.

In order to protect the data integrity in the system, all officers who shall have access to system will be

assigned passwords and Identity numbers and will have varying authorities in the system.”


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5.2 JFA and a Prerequisite for the CP’s Support

As mentioned earlier there was a prerequisite for the CPs’ support of the ZNFU CSP Phase II according

to which “the ZNFU will have under gone a satisfactory Pre- award audit of its financial management and

organizational systems. Furthermore ZNFU will implement the jointly agreed actions based on the Pre-

award audit observations and recommendations.” Aforementioned Pre- award audit and its overall

findings are discussed in more details below:

5.2.1 Findings of the Financial Management Assessment Report in 2013

During the engagement we were provided with a report issued by Newton Lungu & Associates dated

29 August 2013 on “Zambia National Farmers’ Union – Financial Management Assessment – August

2013”. Newton Lungu and Associates were engaged on behalf of the JFA partners, by the Finland

Embassy, to make a review of the budget, accounting and reporting system used within ZNFU. According

to the overall findings and conclusions presented in the section 2.1:

a) “ZNFU’s Organisational Structure

The Financial Management and Procurement Guidelines states that there will be an Internal

Audit function. However, deficiencies were discovered Inadequate documentation of human

resource policies, procedures and conditions of service

The staffing levels in Head Office – Finance is inadequate to carry out regular accounting

work and at the same time monitor district expenditure

b) Financial Management

There is no adherence to internal controls and financial procedures in relation to timely

financial reporting.

There was inadequate staff awareness of the existence of documented internal controls and

financial procedures

There was no evidence that regular accounting reconciliations and recording of transactions

was taking place in the organisation.

There was no evidence that bank reconciliations are prepared and signed on a monthly basis

in the Districts and at Head Office.

There was a weakness in financial reporting and control at all levels due to failure to update

the financial accounting system and lapse in recording of financial transactions.

We observed inaccuracies in the fixed asset register and that the organisation did not label

its assets adequately.

There was an exhibition of poor institutional capacity to ensure that critical resources such

as accounting software licences are renewed in time and computers are available to staff.

Regional and district offices did not have the capacity to utilise Pastel Evolution

c) Procedures for procurement

The procurement procedures are well documented. Because no transaction records were

availed to us during the assessment, it was not possible to assess whether the policies and

procedures were being adhered to. “

ZNFU provided responses to the recommendations of the Newton Lungu report. The response are brief

and ZNFU mostly acknowledges that it complies with the recommendations. KPMG is not aware how

the management responses of ZNFU have been reviewed. The document that includes the management

responses doesn’t include all of the recommendations of the Newton Lungu report that was provided

for the KPMG review. Significant observations of the Newton Lungu report have been omitted.


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5.3 Observations by EMM and KPMG

Based on the findings made by EMM, discussions with representatives of ZNFU and EMM, procedures

carried out by KPMG as well as unavailable documentation, material deficiencies in the compliance with

the requirements of the JFA, the bilateral agreement with MFA, Sida and We Effect were noted. For

example material deficiencies were noted in the compliance of ZNFU accounting with an agreed financial

reporting framework – International Accounting Standards or other mutually acceptable standards as

required by the JFA. In addition, material deficiencies in the compliance with ZNFU’s own Guidelines

were noted. During our engagement ZNFU was unable to deliver requested reconciliations between CSP

II reporting and accounting for 2014 and other key supporting documentation as well as was unable to

explain the questionable accounting entries and confirmed incorrect accounting entries/errors part of

which were significant in monetary terms.

Findings made by EMM and KPMG during our engagement revealed material amount of non-compliance

issues: missing or inadequate accounting documentation such as but not limited to supporting

documentation for journal vouchers, a vast number of journal vouchers, illogical accounting entries,

accounting entries between seemingly unrelated accounts and extensive use of control accounts for

transactions that do not normally require use of control accounts, confirmations received from ZNFU on

incorrect accounting entries/errors, arbitrary figures posted as journal entries, duplication of accounting

entries etc. Journal vouchers are normally used for accounting entries related to accruals, corrections

and changes. Consequently, the compliance with “an agreed financial reporting framework –

International Accounting Standards or other mutually acceptable standards”, can be questioned. In this

respect actions mentioned in the paragraph 11 (Non-compliance, force majeure) to the JFA should be

considered. Aforementioned paragraph stipulates that in the case of serious non-compliance with the

terms of this JFA and/or violation of fundamental principles set out in this JFA on the part of the JFA,

any CPs may suspend further disbursements to the ZNFU SP II Phase II and reclaim the funds already

transferred in whole or part. Such non-compliance could include inter alia misuse of funds or non-

compliance with agreed preconditions relating to the implementation of the ZNFU CSP Phase II.

Further, we found that there was internal non-compliance with Board Charter issued 2007 with regards

Conflict of Interest (absence of Register of Conflict of Interest) and ZNFU’s Financial Management and

Procurement Guidelines.

5.3.1 Reconciliation between CSP II Reporting and Accounting for 2014

We have requested a reconciliation between CSP II reporting and accounting for 2014. However, ZNFU

has not been able to provide us with the requested reconciliation. We have therefore tried but not

succeeded to reconcile CSP II 2014 Annual Report (page 17; Core support budget comparison to actuals)

with the accounting material and the ZNFU’s financial statements for the year ended 31 December 2014.

KPMG reviewed the financial reporting and the financial statements on a general level and noted that

there are discrepancies between the reports. For example the total income of ZNFU for 2014 amounts

to ZMW 47,221,138 while in the CSP II financial report the total income amounts to ZMW 48,003,995.

ZNFU has not been able to clarify the differences between the reports.

5.3.2 Confirmation on Incorrect Accounting Entries and Errors

We have received some limited explanations to our information requests from ZNFU. Below are some

examples of these explanations which we have received by 20 June 2016. The explanations question

the quality of the accounting at ZNFU:

Regarding the management compensation KPMG requested additional information relating to loan

agreement for ED loan in 2013 and the accounting treatment. Based on the ZNFU’s response:

“ZNFU does not have a written loan agreement between the Executive Director and the ZNFU. However,

loans are permissible in the staff blue print, page 16, clause 4.6. The loan was charged to ZNFU properties


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Ltd - account code 7100>040. Instead of the liability account. We note however, that the accounting

treatment is incorrect. This will be corrected.”

KPMG was delivered by ZNFU’s CFO the following information on Lima account on 16 June 2016:

“As can be seen from Mr. Mudenda’s explanation, the loan scheme was not affected by the monies that

were transferred from the Lima Account. The schedules he has sent show the number of districts that

participated in the programme for the farming season, 2014/2015. Further, the funds were used for the

following;

— Construction costs for the office complex- due to escalation costs

— Operation costs.”

On 15 June 2016 KPMG received some further confirmations relating to wrong accounting entries:

“Kindly note that the following entries are not supposed to be in the ledger accounts that they were

posted to. These were arbitrary figures that were posted as journal entries without matching them to

supporting documents. The figures should be reversed.

1 21/05/2015 JV 210515 Settlement of outstanding office complex construction payments

K360,000.00-Ledger A/c No.6100>004

2 30/06/2014 JV 300614 109th Annual congress expenses K500,000.00 – Ledger A/c No.3002>066”

“Concerning the K465,160 sitting in both account No. 6100>004 and 7100>040, ZNFU only has

supporting documents for one entry which we have since sent to yourselves. The other entry appears

to be a duplication.”


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6 Construction/Property Costs

6.1 CSP II Grant Management: Head Office

EMM findings relating to construction/property costs are summarized on several pages in their report:

on the pages 7 (Head Office Special Audit Questioned Cost Analysis), 8 (Financial Quantification of Head

Office Special Audit Findings), 10-11(Discussion and Implication on Head Office), 20 and 95 (CSP II Grant

Management: Head Office).

According to the EMM report, the property/construction costs presented in the table below were

questioned costs on CSP II, or transactions were deemed to potentially represent misappropriation

corporate/management of funds, deemed ineligible, unsupported or having duplicated effect due to

journalising of investments (increasing values in balance sheet without any reasonable justifications).

Pages 8, 20 and 95 of the EMM report include the following amounts of questioned costs on CSP II:

Based on our review of the EMM report findings, material received and procedures carried by us nothing

has come to our attention that causes us to question EMM findings relating to Property Costs Charged

to CSP II (construction costs). Below each item is discussed separately.

6.1.1 Note 1: Pre 2014: ZNFU Property Costs Charged to CSP 1 (3,335,883 ZMW)

According to EMM report (pages 84 and 104), “Pre-2014 costs on ZNFU Properties Limited of

K3,335,883 are deemed illegible and refundable as they were for another entity and not ZNFU and could

not be verified to CSP budget”.

The opening balances of accounts 6100>004 (Office Complex) and 7100>040 (ZNFU Properties Ltd)

were 1,362,703 ZMW and 1,973,180 ZMW respectively as at 1 January 2014. These amounts (total

3,335,883 ZMW) consisted of pre-2014 costs and thus is a part of Core Support Programme (CSP I)

which covered the time period from 2009 to 2013. KPMG has not reviewed these items since they relate

to CSP I and were out of scope. Should this amount relate to the construction costs of the new office

complex paid by ZNFU on behalf of ZNFU Properties Ltd, these costs should have been recorded as

receivable from ZNFU Properties Ltd. However, these amounts are presented in ‘Other non-current

assets’ in the audited Financial Statements for the year ended 31 December 2014, and thus this could

be considered as a misrepresentation of the balance sheet.

Further, the costs could be considered ineligible for CSP II and refundable since they appear to relate to

another entity than ZNFU and construction costs of new office complex have not been included in the

CSP II budget.

6.1.2 Note 2: 2014 & 2015 ZNFU Property Costs - CSP II: ZNFU (6,596,758 ZMW)

According to EMM report (page 104) “Payments incurred on ZNFU Propertied Ltd of K13,970,479 in total

and K10,634,596 for 2014 and 2015 are deemed illegible, of which K6,596,758 is chargeable to ZNFU

and K4,037,838 (K5,024,709 in invalid debit entries and K986,871 in unexplained credits) is chargeable

to management.” In addition, in the EMM report on page 84 it was noted that some expenses relating

Item Costs Note

Pre 2014: ZNFU Property Costs Charged to CSP 1 3 335 883 1

2014 & 2015 ZNFU Property Costs - CSP II: ZNFU 6 596 758 2

2015: ZNFU Property Costs Charged to Staff 4 037 838 3

Total 13 970 479 4

CSP II Grant Managment - EMM report pages 8, 20 and 95 (Property Costs

questionned)


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to ZNFU Properties were posted to asset account codes held by ZNFU (office complex) when they

actually related to ZNFU Properties Ltd and should have been in Account code 7100>040.

Based on the EMM audit paper file review carried out by KPMG and descriptions in the ledger accounts

these costs seem to relate to construction of the new office building and paid by ZNFU on behalf of

ZNFU Properties Ltd. KPMG observed that some accounting entries were not supported adequately, and

appeared to be made between seemingly unrelated accounts and appeared illogical. The missing

supporting documentation makes it impossible to follow the audit trail. Further, due to ZNFU’s inability

to provide requested accounting documents including journal vouchers with all supporting

documentations and unclear journal voucher entries, the audit trail for some of the entries remained

unclear. In general, these items should have, according to our understanding, been recorded as

receivable from ZNFU Properties Ltd.

Based on the material and information made available to KPMG, this amount (6,596,758 ZMW) could be

considered ineligible since it seems to relate to other entity than ZNFU and the construction costs of

new office complex have not been included explicitly in the CSP II budget. However, we would like to

note that there is a line “Support to ZNFU long term investment for sustainability” in CSP II Detailed

Budget 2014 received in Excel format amounting to 3,500,000 ZMW shown under HQ Capital

expenditure budget. The wording might leave room for interpretations whether this item (“Support to

ZNFU long term investment in sustainability”) might refer to construction costs of the new office

complex, or to some other investments. We do not have any information or document showing what

the CPs/Donors and ZNFU have agreed on the usage of this sum, and whether construction costs, paid

by ZNFU on behalf of ZNFU Properties Ltd, of new office building could be included herein.

6.1.2.1 Information Requested but Not Delivered by ZNFU

Below is listed some major documents requested by KPMG from ZNFU but not provided to us. The list

is not comprehensive. The ZNFU’s inability to provide the requested documentation and information has

remained unclear to us.

Supporting documentation for an accounting entry made on 14 March 2014 (reference

TT150314, description “Deposit towards office complex construction”) according to which the

account 6100>004 (Office Complex) was debited and the account 8400 (Standard Chartered

Bank Main) was credited by an amount of 1,000,000 ZMW.

Supporting documentation for an accounting entry made on 19 March 2014 (reference

TT190314, description “Part payment towards office complex construction”) according to which

the account 6100>004 (Office Complex) was debited and the account 8400 (Standard Chartered

Bank Main) was credited by an amount of 1,044,095 ZMW.

6.1.3 Note 3: 2015: ZNFU Property Costs Charged to Staff (4,037,838 ZMW)

According to the EMM report (page 104), 4,037,838 ZMW is considered as Questioned Costs

(Unsupported ZNFU Properties Costs). These costs can be broken down as follows (see also the page 7

to the EMM report):

Below each item is discussed separately.

EMM report pages 7 and 104-105

Construction Costs: ZMW Note

Duplicated Effect of Journalising of Investments 4 375 110 a

Dublicated Effect on Capitalisation of Borrow ing Repayments 649 599 b

Unsupported Credits in ZNFU Property Costs Accounts -986 871 c

Total 4 037 838


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6.1.3.1 Note a: Duplicated Effect of Journalising of Investment (4,375,110 ZMW)

Pursuant to the EMM report (page 84), “Numerous costs incurred on the building activity were either

unsupported of were not valid for capitalisation. The latter anomaly is noticeably demonstrated by, among

others, a transaction labelled as “journalising of Investments of K4,375,110” in the accounts to August

2015, which is represented as a capitalisation of repayments on borrowings made for the building costs

(and thus a duplication)”. We understand that EMM did not receive any adequate documentation which

would have explained the nature of these entries.

According to an accounting entry made on 30 June 2015 the account 7100>040 (ZNFU Properties Ltd)

has been debited and the account 8430 (Payments Control account) has been credited with an amount

of 4,375,110 ZMW by a journal voucher JV300615 with a description “Journalising of investment in ZNFU

Properties Ltd”. This in one example of illogical accounting entry between seemingly unrelated accounts.

The Management Response to the report issued by EMM states that

“After following up with your findings, we have established that the K4,375,100 that you have

termed “irrecoverable payments” was actually repayment of an advance taken from the Lima

account in 2014. Bank statements showing ZNFU borrowing money from the said account in

2014 and repayment in 2015 are readily available.”

EMM commented ZNFU’s Management Response as follows (see audit redirect, page 105):

”The accounting entry for the K4,375,110 stated to be repayment on LIMA Accounts do not

seem to tally with expected accounting convention. Why should a capital asset account record

a JV showing LIMA Account advance repayment, when the costs for which the borrowing was

made were already capitalised? Capitalising the repayment duplicates the cost incurred, giving

credence to the audit concerns in the above observation. The LIMA account was a restricted

account and funds should not have been borrowed for these stated uses.”

KPMG has requested documentation relating to this transaction and the corresponding journal voucher.

However, we have not received any further information on the accounting entry nor any supporting

documentation. Thus the accounting entry remains questionable and illogical. In addition, the description

“Journalising of investment in ZNFU Properties Ltd” refers to other entity than ZNFU and corresponding

accounting entry should, according to our understanding, be made to correct the accounting. During our

meeting with key management and the CFO on 2 June 2016 the ZNFU confirmed that this accounting

entry was incorrect and an error, and will be reviewed by ZNFU. However, ZNFU has not been able to

clarify how the error would be corrected.

Based on the information available it appears that ZNFU has recorded a repayment of withdrawal of

funds from the Lima Credit as an asset to its balance sheet. The correct accounting entry would have

been deduction of the liability. However, as noted elsewhere in this Report the initial entries related to

the withdrawal have been incorrectly recorded. As consequence, it cannot be ruled out that funds have

been withdrawn from ZNFU for ineligible purposes and the accounting entries related to this journalising

of investment has been used to conceal the true nature of transactions and accounting entries. Based

on the KPMG’s Review it is clear the item should not have been capitalised at all and the account

7100>040 (ZNFU Properties Ltd) should not have been debited.

6.1.3.2 Note b: Duplicated Effect on Capitalisation of Borrowing Repayments (649,599 ZMW)

According to EMM report, there has been a Duplicated Effect on the Capitalisation of Borrowing costs

of 649,599 ZMW. Based on the general ledger, ZNFU has made the following accounting entries as

presented in the table. As a result the repayment of a loan payment has been capitalized and shown in

the account “ZNFU Properties Ltd”.

ZNFU sent KPMG the following explanation on 16 June 2016 relating to above: “Attached also are three

pages from the November 2014 bank statements for the Kwacha Account reflecting the three entries

for the K649,599.04 transfer for ZNFU Properties (Highlighted in pink). The first page shows the


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K649,599.04 as a debit on 27/11/2014 whereas the next page shows a reversal of the same amount by

the bank (28/11/2014). The transfer finally went through on 5/12/2014 (second debit).This progression

on the bank statement forms basis for the three entries that you see on ledger account 7100>040 for

K649,599.04.”

According to our understanding the above clarification does not explain or justify the accounting entry.

We have not received any explanations why the repayment of the loan has been capitalized. Based on

discussion above and the table below accounting entries and unsupported documentation, the

accounting treatment seems to be unfounded, irregular and should be reversed.

6.1.3.3 Note c: Unsupported Credits in ZNFU Property Costs Accounts

There are, according to the EMM report, “Unsupported Credits in ZNFU Property Costs Accounts

amounted to -986,871 ZMW (in unexplained credits).” During the Review KPMG did not receive

additional supporting documentation to review and comment these credits.

6.1.4 Note 4: Total (13,970,479 ZMW) - Conclusion

Based on our review of the EMM report findings, material received and procedures carried by us nothing

has come to our attention that causes us to question EMM findings relating to Property Costs Charged

to CSP II (construction costs).

6.2 Presentation of the New Office Complex in Reporting and Plans

6.2.1 ZNFU Core Support Programme I Completion Report

ZNFU Core Support Programme I Completion Report (dated 2014) mentions the Office building in the

sections 3.9.1. according to which “The Union has responded to this trend in the sustainability index by

undertaking medium to long term investments such as real estates (Office building) and other income

generating activities such as the Agritech-Expo at GART.”

In addition, in section 5.0. it is mentioned that “The Union continued with its investment drive to ensure

future sustainability of the activities and structures. In line with this, the Union continued with the

construction of the office building within the showground. Significant progress was made on the ZNFU

office complex save for a 12 weeks construction over run. This meant that the project was going to be

completed around April-May 2014 as opposed to the initial completion target of end of 2013. The Union

had to also source for additional funding for additional works bringing the total loan to ZMWK14 million

in addition to ZNFU’s own financial contribution of ZMW6 million. In tandem with ongoing construction,

the Union also managed to find a tenant, FHI 360, who would occupy the new office complex

immediately after completing the construction works.”

Further, the section 6.0. (Risk Assessment and Mitigation Measures – ZNFU is unable to increase HQ

financial sustainability index according to agreed schedule) mentions that “….The Union has responded

to this trend in the sustainability index investing in real estates (Office building) and other income

generating activities such as the Agritech-Expo at GART in Chisamba which income from these

investments should be realised within medium to long term.”

Despite of the references to [new] office building, no monetary amounts needed for the investment are

discussed other than the loans mentioned above.


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6.2.2 Final Draft CSP II Proposal 2014-17

We understand that the Final draft CSP II Proposal 2014-17 (dated 1st November 2013) does not include

any reference to investing in new office complex/construction costs. Further, the table 5 to

aforementioned document (Proposed CSP II 2014-17 Budget) does not define any budget for the new

office complex/construction costs. However, it is mentioned on the page 15 that “ZNFU own income

has mainly come from membership subscriptions and investment revenue. Part of the CSP is to help

ZNFU increase its investments and build its asset base to guarantee future financial sustainability of the

Union”.

6.2.3 Strategic Plan and Budget 2012-2016

According to the ZNFU’s Strategic plan and budget 2012-2016, the proposed 2012-16 Assets

Replacement and Acquisition (section 4.7.7.), the proposed asset acquisition/purchases schedule for

2012-2016 (page 70) was as presented in table below. However, as it can be seen, no new office

complex nor construction has been included in acquisitions/purchase schedule for 2012-2016.

Item 2012 2013 2014 2015 2016

ZNFU-HQ

Motor vehicles 3 4 2 1

Air

Conditioners X - - - -

Generator set X - - - -

Audio-video

equipment X - - - -

Office

Furniture X - X - X

Regional/DFAs Office

Motor vehicles 7 - 2 1

Motor bikes 12 10 12 -

Bicycles 500 500 500 500 500

Office furniture X - - X -

Explanatory Notes:

X = budgeted for

- = nothing

Source: ZNFU’s Strategic plan and budget 2012-2016, page 70

Improving on the generation of ZNFU own income is discussed in the section 4.9.3. to the strategic plan

and budget. Construction of the Proposed Two Storey ZNFU Commercial Office Complex is further

elaborated in the section 4.9.4.1., according to which “One of the major investment projects to be

embarked in 2012 is the construction of an ultra-modern ZNFU two storey office complex within the

show grounds, next the ZNFU Head Office complex. This complex is expected to offer state of

art/modern office and conference space of about 5000 square meters that will be rented out to corporate

tenants and generate income. This is expected to bring in net rental income of ZMW1,106,045,000 in

2014, ZMW 1,180,375,000 in 2015 and ZMW 1,257,490,000 in 2016. The Union has acquired a long term

loan from ZANACO for this project, and if the expected cash flows materialize, then the Union is going

to break even in year 8 and start making profits thereafter”.

Further, according to the Table 2 to the Strategic plan and budget (Explanatory Notes to the Budget,

capital expenditure for 2013-2016, page 82) capital expenditure was broken down as follows:


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24

New office complex is not shown in the capital expenditure for 2013-2016 and thus, according to our

understanding not included in the strategic plan and budget 2012-2016.

6.2.4 ZNFU 2014 Annual Workplan and Budget

ZNFU 2014 Annual Workplan and Budget document (Approved Final Report dated December 2013)

discusses investments in the section 3.3.1.3 according to which “The Union continued with its

investment drive to ensure future sustainability of the activities and structures. In line with this, the Union

continued with the construction of the office building within the showground’s, renovation of the Ibex

hill properties as well as investment in the capital market. In addition to the above, investments were

also allocated to the development of the Agritech Expo in Chisamba among others. Significant progress

has been recorded on the ZNFU office complex and conference facilities save for a 10 weeks

construction over run. This means that the project will now be completed sometime in January, 2014 as

opposed to the initial completion target of October 2013”.

Further, in the section 3.3.2.1 (2014 Planned Investments) it is mentioned that

— “To continue with the investment drive, AFA [The Admin Finance and Accounts Unit] will facilitate

the undertaking of the following planned investments projects and activities:

— Completion of the two storey office and conferencing facilities currently under

construction;

— Completion of the fencing and construction of ablution blocks and a livestock auctioning facility

at the Agritech Expo;

— Facilitate the establishment of the ZNFU LCS investment fund;

— Any other viable investment opportunities that may arise”


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The table 2 to the ZNFU 2014 Annual Workplan and Budget document (Proposed 2014 CSP II

Consolidated Budget) shows only Capital Expenditure of 5,128,00 ZMW and 1,554,000 for ZNFU

Headquerters and DFA respectively (amounts do not specify any investments in new office

complex/construction costs). These amounts differs from CSP II Detailed Budget which is discussed

below in more details.

6.2.5 CSP II Detailed Budget 2014

According to CSP II Detailed Budget 2014 received, the capital expenditure consisted of two budgeted

areas, namely HQ and Regional Office capital expenditures. These can be broken down as follows:

HQ Capital expenditure - CSP II Detailed Budget 2014 (Zambian Kwacha (ZMW)

Pursuant to the EMM report (page 104), “the audit found that in 2014, ZNFU did have a budget line in

the CSP II budget for the investment of K3.5million which was used to proceed with these transactions

in that year. However, the audit found that these property costs are not to be considered investments,

as the ultimate properties are not owned by ZNFU, but ZNFU Properties Ltd, and do not result in any

earnings by ZNFU, as would be expected on investments, but are a loan to ZNFU Properties Ltd. These

loan amounts potentially represent payments to another entity through loans that may never be

recovered. In addition, as ZNFUs own funds are not sufficient to meet these costs, the audit classified

this cost as having been passed on to grant funds, and thus illegible.”

We would like to note that there is a line “Support to ZNFU long term investment for sustainability” in

CSP II Detailed Budget 2014 received in Excel format amounting to 3,500,000 ZMW shown under HQ

Capital expenditure budget. The wording might leave room for interpretations whether this item could

even be linked to construction costs of the new office complex, or to some other investments. We do

not have any information or documentation showing what the CPs/Donors and ZNFU have agreed on the

usage of this sum, and whether construction costs [paid on behalf of ZNFU Properties Ltd] of new office

building could be included herein.

Source: 2014 Final copy of Revised ZNFU CSP Budget (2014 Final Copy of Revised ZNFU CSP Budget 27-01-14 NKPMCH (2).xls)

However, ZNFU has recorded 3,518,384 ZMW construction/property costs under the account 6100>004

(Office Complex) as additions in 2014. According to our understanding these costs relate to a property

owned by ZNFU Properties Ltd (not ZNFU), and therefore, this amount among others should not be

considered as an investment but as a loan receivable from ZNFU Properties Ltd., and thus illegible use

of donors funds unless otherwise agreed with the donors and ZNFU.


Budget item Unit # of Units Unit Cost

motor vehicles # of vehicles 3 216 000 648 000

furniture for new officers and chairs for board room lumpsum/yr 1 200 000 200 000

Desktop Computers/laptops/printers/UPS # of each item 15 10 000 150 000

Support to ZNFU long term investments for sustainability lumpsum/yr 1 3 500 000 3 500 000

Subtotal 4 498 000


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Regional Office Capital Expenditure - CSP II Detailed Budget 2014

Source: 2014 Final copy of Revised ZNFU CSP Budget (2014 Final Copy of Revised ZNFU CSP Budget 27-01-14 NKPMCH (2).xls)

As it can be seen from above no clear capital expenditure has been budgeted for the new office building.

Moreover, all capital expenditure has been included in the ZNFU HQ and Regional Office expenses in

the aforementioned 2014 ZNFU CSP budget. Hence, according to the budget no items are being

capitalized.

6.2.6 ZNFU Core Support Programme II – 2014 Annual Report

The section 3.6.1. (Investments) to the aforementioned document discusses the following:

To ensure sustainability of the Union, investments continued in 2014 and he following was achieved:

— Operationalized the Farmers’ Expo Zambia Ltd and the first ever expo was held in April 2014;

— continued with an active arm in the money markets and K2m was placed on fixed deposit at a rate

of 17% for 45 days yielding K41, 000 and

— completed the office complex construction and the building is occupied by FHI 360 at a rental income

of US$42,000 per month.

There is also a budget comparison to actuals on the page 17. Regarding the capital expenditure the

budgeted amounts are the same as discussed under the headline “CSP II Detailed Budget 2014” in this

report (i.e. no capital expenditure has been budgeted for the new office building). Moreover, all capital

expenditure has been included in the ZNFU HQ and Regional Office expenses in the aforementioned

2014 ZNFU CSP budget. Hence, according to the budget no items are being capitalized.

6.2.7 2015 Annual Workplan and Budget (Word)

Under the section 3.5.1. (2014 AFA Unit Results) to the ZNFU’s 2015 Workplan and Budget document it

is mentioned that To ensure sustainability of the Union, investments continued in 2014 and he following

was achieved: 1) operationalized the Farmers’ Expo Zambia Ltd and the first ever expo was held in April

2014; 2) continued with an active arm in the money markets and K2m was placed on fixed deposit at a

rate of 17% for 45% yielding K41,000, and 3) completed the office complex construction and the

building is occupied by FHI 360 at a rental income of FHI3$42,000 per month. Further, the table 2

to the aforementioned document includes Proposed 2014 CSP II Consolidated Budget (KPMG: there is

obviously a type here and the year might refer to 2015). Based on the table 2 Capital expenditure for the

HQ expenses and DFA expenses totalled 1,995,000 ZMW and 1,267,500 ZMW respectively.

Moreover, all capital expenditure has been included in the ZNFU HQ and DFA expenses in the

aforementioned 2015 ZNFU CSP II budget. Hence, according to the budget no items are being

capitalized. Further, no budget has been allocated to [new] office complex/construction costs.

Regional Office Capital expenditure - CSP II Detailed Budget 2014 (Zambian Kwacha (ZMW)

Budget item Unit # of Units Unit Cost

motor vehicles # of vehicles 2 216 000 432 000

motor bikes # of motor bikes 12 36 000 432 000

bicycles & w orksuits for CFs # of bicycles 1500 500 750 000

computers/printers/photocopiers # of each item 20 7 000 140 000

Office furniture lumpsum/yr/region 10 30 000 300 000

Subtotal 2 054 000


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6.2.8 Proposed ZNFU CSP Budget for 2015 (Excel)

Proposed ZNFU CSP II Budget for 2015 includes capital expenditures for the HQ and DFAs of 495,000

ZMW and 1,267,500 ZMW respectively. These are broken down in the detailed budget as follows:

As it can been seen from above no budget has been allocated to [new] office complex/construction costs

in 2015.

6.2.9 Semi Annual Report 2015 (Word)

ZNFU’s Core Support Programme II Semi Annual Report (dated July 2015) does not has any reference

to [new] office complex/construction costs.

6.2.10 CSP II Semi-Financial Report 2015 (Excel)

“CSP II semi-Financial report 2015” document received in Excel format showed the following budgeted

amounts for HQ and Regional Offices capital expenditure for 2015: 395,000 ZMW and 1,267,500 ZMW

respectively. No budget has been allocated to [new] office complex/construction costs.

6.3 Presentation in the Financial Statements for 2014

According to the notes number 9 to the ZNFU’s financial statements 2014, non-current assets totalled

31,763,051 ZMW and were broken down as follows:

The item “Other non-current assets” consisted of the following items:


Budget item Unit # of Uints Unit Cost

CSP

Budget

2014

Budget

Utilization

YTD

30.11.14

Proposed

Budget

2015

motor vehicles # of vehicles 1 260 000 648 000 299 746 260 000

furniture for off ices lumpsum/yr 1 100 000 200 000 210 546 100 000

Desktop Computers/laptops/printers/UPS # of each item 18 7 500 150 000 148 326 135 000

Support to ZNFU long term investments for sustainability 1 0 3 500 000 3 657 587

Subtotal 4 498 000 4 316 204 495 000

DFAs Capital expenditure - CSP II Detailed Budget 2015 (Zambian Kwacha (ZMW)

Budget item Unit # of Uints Unit Cost

CSP

Budget

2014

Budget

Utilization

YTD

30.11.14

Proposed

Budget

2015

motor vehicles # of vehicles 1 260 000 432 000 499 491 260 000

motor bikes # of motor bikes 12 40 000 432 000 480 000

bicycles # of bicycles 250 1 000 250 000 378 000 250 000

computers/printers/photocopiers # of each item 37 7 500 140 000 110 625 277 500

Office furniture lumpsum/yr/region 10 0 300 000 264 782 0

Subtotal 1 554 000 1 252 898 1 267 500

Assets: Non-current assets - ZMW

Property, plant and equipment 8 094 533

Investment property 13 737 495

Financial assets at fair value 397 000

Other non-current assets 9 534 023

Total 31 763 051


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This represents, pursuant to the financial statements, expenditure incurred by Zambia National Farmers’

Union on behalf of ZNFU Properties Limited. The opening balance as at 1 January 2014 consist of pre-

2014 costs and thus part of Core Support Programme (CSP I) which covered the time period from 2009

to 2013. Expenditure during the year (6,198,139 ZMW) represents additions discussed in the EMM report

(pages 7, 84-85).

We have reviewed the working papers of EMM, accounting entries made by ZNFU in 2014, financial

statements for 2014 as well as accounting entries from 1 January to 30 August 2015. Based on the

procedures carried out we have no indication to question the findings made by EMM during their Special

Audit. The presentation of costs belonging to another entity as non-current assets of ZNFU appears to

be a mispresentation of the balance sheet. The costs, if eligible, could be represented as receivables

from ZNFU Properties Limited depending on nature of agreements, which were not available, between

the related parties. Most of the costs relate to the construction costs of the new office building owned

by ZNFU Properties Ltd. According to information received the building was completed in June 2014.

6.4 EMM on ZNFU’s Own Funding

According to the EMM report (pages 17-18), “for the questioned costs incurred on this audit, ZNFU was

most likely using grant funds and not ZNFU funds as its own resources were not sufficient to make

investments in leases, property costs etc. as shown [below in the EMM report]. This is because the net

cash held without donor grants is in deficit as shown [below]”. Further, “with deficits of up to USD7.44

million in 2012 to 2014, ZNFU is unlikely to have used its own resources to make any out of CSP budget

payments questioned during this [EMM] audit”.

According to the calculations prepared by EMM supposedly on the basis of ZNFU’s financial statements

for 2014, this deficit seems to be apparent and the conclusion agreeable. Nothing has come to KPMG’s

attention which would cause us to question EMM’s findings with this respect.

The funding provided by the donors is considered as core funding and not separated in the accounting

of ZNFU based on donors or ZNFU own contribution. Consequently, all costs that are not project based

are jointly funded by ZNFU and the donors as communicated by ZNFU as well. As there is no separation

of funds it can be concluded that the ZNFU has been using donor funding for the constructions costs of

the office complex.

Other non-current assets - ZMW

At 1 January 2014 3 335 884

Transfer from capital w ork in progress

Expenditure during the year 6 198 139

As at 31 December 2014 9 534 023


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7 Executive Compensation

7.1 Executive Director Salary and Contract

The Contract of Employment between ZNFU and the Executive Director has been signed by the ZNFU

on 13 November 2013 and by the ED on 14 November 2013. The Contract states that it has been made

on the 1 March 2012 but based on the signatures this doesn’t appear to be the case. The four-year

Contract period is from March 2012 to February 2016. The Contract has been signed twenty months

after the Contract period has started.

According to the Contract ZNFU shall pay the ED “a monthly net salary of $ 15,000 net”. According the

CFO the net salary has been processed so that the ED has received a net payment of USD 15,000. The

gross salary of the ED has thus been USD 23,077. The amount of USD 8,077 based on the highest tax

category of 35% has been added to the net salary of the USD 15,000. However, it should be noted that

the payments have been made in Kwachas.

The actual paid salary in Kwachas has varied. In 2014, the monthly salary has been ZMW 124,615 for the

first six months and ZMW 140,769 for the last six months. Based on the actual foreign exchange rates

the payment in kwacha appears to be in line with the gross salary of USD 23,077. In 2015, the actual

payments has varied from ZMW 140,769 to ZMW 246,461. The used foreign exchange rate has been

relatively well in-line with the actual exchange rate based on the gross salary of 23,077.

In preparation of the CSPII funding ZNFU provided to Sida the breakdown of the salaries. Based on the

breakdown that was sent on 14 November 2013 the monthly salary of the ED is ZMW 81,538. However,

according to the contract that included the gross salary of USD 23,077 and the prevailing foreign

exchange rate (5,489) the reported gross monthly salary of the ED should have been ZMW 126,671. The

difference is ZMW 45,133 which 55% of the reported salary. It should be noted that the information was

provided on the same day that the contract of the ED was signed so the information on the new salary

level should have been available for ZNFU. In addition, it should be noted that according to his contract

the ED is entitled to a gratuity of 25% which means that the monthly gross compensation is USD 28,846.

2014 2015 Total

Basic Pay 1,592,305 2,283,615 3,875,920

Salary Arrears 325,729 55,200 380,929

Total 1,918,035 2,338,815 4,256,849

In addition to the gross salary the ED has been paid salary in arrears amounting to ZMW 380,929 in 2014

and 2015. The arrears has been deducted from the gross salary in any other month and has not been

included in the gratuity calculations. Based on the information available the salary in arrears payments

are not part of the contract of the ED.

Based on the documentation available it can be concluded that ZNFU has provided incorrect information

to Sida on the salary of the ED and/or the contract of the ED. Similarly, it should be noted that the level

of the monthly gross salary in 2015 has been over three times the level that was reported to Sida in the

beginning of the CSPII.


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7.2 Loans, Advances, Leave Pay and Gratuity

7.2.1 Gratuity and Other Payments to the ED

The EMM audit noted several discrepancies related to the payments to the ED. Discrepancies were

noted for example in loan payments, unrecovered advances and leave and gratuity payments.

According to the ED’s contract ZNFU “shall pay the employee at the end of the contract a gratuity

calculated at the rate if twenty five percent (25%) of his basic salary earned during the period. The ED is

entitled to the gratuity after one year of serving apportioned to the served term. The ED is not entitled

to the gratuity if the ED is dismissed due to complying with instructions, dishonest conduct or convicted

of any criminal offence”. The ED has received the gratuity during the contract period which is against

the actual terms of the contract. According to ZNFU Board and management the payments during the

period has been conducted to avoid cash flow issues and sudden increase of costs according to the

payment schedule in the end of the contract period. However, based on generally accepted accounting

principles the cost would need to be accrued for the entire contract period and no the costs would be

incurred on a straight line basis. The cash flow argument is understandable although the contract does

not allow it and the nature of the gratuity is not in line with it.

The ED has requested on 21 November 2013 to get his gratuity in several instalments during the contract

period. The President of ZNFU has approved the request 21 November 2013. However, ZNFU has not

had a systematic follow-up on the gratuity payments. According the CFO a follow-up calculation has been

prepared in the summer of 2015. However, based on the foreign exchange rate used in the calculation

the calculation has only been prepared in the end of September 2015. The follow-up includes payments

to the ED from as early as March 2013. This is clearly before the ED has requested for the gratuity

payments in several instalments. Thus, the information provided for the Review includes discrepancies.

The follow-up includes payments that according to the follow-up and the accounting documentation are

loans, salary advances, purchase of material to Jambo Tracking Ltd (a company owned by the ED) and a

purchase of a motor vehicle that the ED was using. The accounting treatment of the payments to the

ED based on the gratuity follow-up has been different. The payments have not been systematically

recorded as gratuity costs in the profit and loss statement of ZNFU. Instead, some payments have been

recorded in the balance sheet as advance or even assets.

According to the EMM report an out-of policy loan of ZMW 100,000 has been paid to the ED. The manuals

of the ZNFU do allow staff loans at the discretion of the Board. However, no regular practise has been

place to provide loans. The loan to the ED is an exemption to the practise. No loan agreement has been

prepared on the loan that was paid to the ED in March 2012. In addition, according to ZNFU the loan

payment has been recorded in balance sheet as an asset (ZNFU properties Ltd - account code 7100>040).

Based on the information available the loan to the ED has not been appropriately recorded in accounting

and has been paid without a loan agreement. The accounting treatment and lack of agreement indicate

that there hasn’t been a plan to recover the loan.

EMM noted that a payment in the amount of USD 18,790 (ZMW 98,100) to a supplier of Jambo Tracking,

a company owned by the ED, was made in November 2012 by the ZNFU. According to ZNFU the Jambo

Tracking equipment supporting documents has been lost. However, KPMG was able to review a copy

of the payment documentation at EMM. According to the documentation the payment has been made

to Pointer Telocation Ltd on 6 November 2012. The payment has been approved by the President.

According to ZNFU the payment has been recorded as expense in the P&L. However, ZNFU has not

provided more detailed information on the accounting treatment. In addition it should be noted that

according to ZNFU latest communication the total cost will be recovered from the ED which is not in line

with the explanations provided earlier that the payment has been part of the gratuity. In conclusion, it

appears that the ZNFU has paid for expenses of the Jambo Tracking, a company owned by the ED, and

recorded the costs in their accounting. The accounting treatment is incorrect and indicates

misappropriation of funds.


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The gratuity follow-up includes an item described as purchase of a motor vehicle in the amount of ZMW

53,000. According to the ZNFU this a purchase of a motor vehicle by the ED for a vehicle of the ZNFU.

According the staff policies employee is entitled to purchase a motor vehicle when the employee has

been driving it for 4 years. The selling price of the vehicle should be 25% of the market value determined.

However, KPMG did not find an accounting entry in the 2014 or 2015 accounting matching the amount

and ZNFU has not been able to indicate the accounting entry. No documentation was available for the

Review. Based on the information available no accounting entry has been done and no documentation

is available for the purchase of the vehicle.

As an example the gratuity calculation includes an item in the amount of ZMW 100,000 on 30.3.2012.

Based on the bank accounts of the general ledgers for 2013 three entries with the same amount and

reference to ED gratuity have been made.

The EMM noted that no PAYE has been paid for the gratuity payments to the ED. This indicates lack of

compliance with local tax legislation and the fact that all of the payments may not have been initially

gratuity payments.

To conclude, the gratuity follow-up cannot be considered reliable. The EMM report noted several of the

discrepancies related to the payments to the ED. Based on the KPMG procedures, no observations were

made that the findings of the EMM audit would not be valid. In addition, based on the information

available the accounting treatment of the some of the entries is incorrect and indicates misappropriation

of funds. ZNFU has also provided contradictory information on the remuneration payments and some of

the transactions seem to be missing from the accounting.

7.2.2 Leave Pay

The EMM report noted that the ED had obtained ZMW 193,729 of holiday allowance leave pay, even

though this is not stipulated in his contract or in CSP II budgets and consequently EMM concluded the

costs as ineligible. In addition, PAYE had not been paid for the leave payments.

According to the ED’s contract the ED is entitled to 24 leave days annually. However, the contract does

not mentioned additional leave pay for the ED. The ED has prepared a memo on 21 November, 2013

where the ED is requesting his leave days under his contract. The memo is addressed to the President.

The memo does not refer to any additional leave pay. The President of ZNFU has approved by signature

the payment of holiday allowance in the amount of USD 7,500 to the ED in an email copy from 27 March,

2015. In the email the ED is requesting holiday passage as per the contract.

The leave pay payments to the ED have been presented in the table below. The President has approved

all separate payments. As can be noted from the table two separate payment vouchers for the leave pay

have been made for the same day in 2014 and in 2015. In addition, based on the EMM sample testing a

third payment has been made in 2015. After the third payment the additional leave pay is in excess of

the USD 7,500 which was approved to an email copy from 27 March, 2015 by the President.

Payment Voucher

Date

Amount Amount in

ZMW

17.12.2014 USD 5,000 31,900

17.12.2014 USD 2,500 15,950

1.4.2015 ZMW 63,144 63,144

13.10.2015 USD 2,500 29,000

13.10.2015 USD 5,000 58,000

Total 193,729

Despite the emails requests and memos no contract amendment or similar documentation has been

prepared that would clearly indicate that the contract of the ED would include additional leave pay (in

addition to regular salary) for the ED. Based on the KPMG review procedures no additional information

has been provided that would question the observations noted by EMM.


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7.3 Landscaping Costs

The EMM audit noted ineligible payments of at least ZMW 1,351,863 have been incurred on landscaping

costs. The landscaping according to EMM was also not in CSP budgets. EMM noted in their audit

unsupported landscaping costs and misposted landscaping costs in gratuity ledger. All documentation

on the accounting entries was not available for the EMM audit.

Unsupported Expenses

The EMM audit report presents the expenses related to landscaping costs of ZNFU on page 88.

According to the EMM audit report, there were no supporting documentation related to the expenses

amounting to ZMW 923,971. Only payment vouchers were available but no invoices, receipts or LPO:s.

Consequently, EMM noted that the costs should be classified as unsupported. KPMG requested the

supporting documentation for the Review but was not provided with additional documentation that

would adequately support the expenses.

No documentation was provided by ZNFU on the EMM reported ZMW 120,000 landscaping costs that

were recorded as gratuity in the accounting. According to the ZNFU reply to the EMM draft report the

accounting entry is a misposting and should have been recorded to ZNFU properties.

Landscaping Works

The EMM report noted that there was no evidence to support the procurement of landscaping works.

KPMG requested for the tender documentation but didn’t receive adequate documentation to support

the selection of R.N.Parks and Gardens as the supplier despite the contract value of ZMW 1.5 million.

Contract for Landscaping & General Construction and Maintenance Works was made on the 5 January

2014 between ZNFU and R.N Parks and Gardens ltd. According to the contract, the contractor provides

landscaping, general construction and maintenance services at ZNFU Head Office, ZNFU Leopards Hill

properties, ZNFU show stand (Exhibition Pavilion in Show Grounds, ZNFU Mumbwa Agricultural Service

Centre, ZNFU Choma Agricultural Service Centre and in ZNFU-GART AGRITECH Expo Park. The contract

period is three years with a maximum fee of ZMW 1,500,000.

According to the EMM audit report (page 86) the 212,600 ZMW paid to R.N. Parks and Gardens are

ineligible as they are not according to the CSP II budget. The CSP II budget for 2014 does not clearly

indicated what kind of expenses are included in Head Quarter Capital Expenditures. The 2014 budget for

CSP II has reservation of 3,500,000 ZMW for Support to ZNFU long term investments for sustainability.

Other budget lines under HQ Capital Expenditure are motor vehicles, office furniture, desk top computers

and laptops.

However, when calculating total construction costs for 2014, they exceed substantially the given ZMW

3,500,000 budget threshold. In 2014, ZNFU has had construction costs recorded in the account ‘Office

Complex (6100>004)’ total ZMW 3,518,384. In 2014, ZNFU has had construction costs recorded also in

the account ‘ZNFU Properties Ltd’ (7100>040) total ZMW 2,679,755. These both account costs are for

construction costs and together amounts to ZMW 6,198,139. Thus, ZNFU has construction costs in 2014

total ZMW 2,698,139 more than ‘Support to ZNFU long term investments for sustainability’ budget line

agrees.

Invoice 74,900 ZMW from R.N. Parks and Gardens

According to the EMM audit report (page 87), ZNFU failed to show where the landscaping work (invoice

3/17/2015 ZMW 74,900) was performed and represented to EMM, that work had taken place at ED’s

property. KPMG noted that the ZMW 74,900 expense have been recorded in ZNFU accounting with a

reference ‘Landscaping in Chongwe– ED’ in Payment Control Account (8430) and corrected to the

account Building – Maintenance (3002>042) simultaneously changing the reference to ‘Payment for

Landscaping works’. ED has been used in accounting entries as a reference to Executive Director.


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According to the agreement with R.N. Parks and Gardens, Chongwe is not in the list of the locations and

sites where landscaping work should be conducted. In the invoice from R.N. Parks and Gardens is written

‘Chongwe works’ although ZNFU does not have properties in Chongwe.

Conclusion

Based on the EMM report and KPMG review procedures the landscaping costs cannot be considered as

eligible. A proper tender process has not been followed in the procurement of landscaping services and

there is indication that the costs have been incurred for landscaping of properties not belonging to the

ZNFU. The lack of supporting documentation is a severe administration error that is clear breach in

eligibility of funded costs.

7.4 Vehicle Tracking Costs – Jambo Tracking

7.4.1 EMM Findings

The EMM audit report noted that ineligible payments of at least ZMW 1,494,615 have been made to or

for Jambo Tracking, an entity belonging to the ED and his wife, on a service not covered in CSP II

budgets, whose contract award was considered conflicting in the interests of the ED and ZNFU. The

amount includes the equipment purchase of ZMW 98,100 and the vehicle tracking costs of ZMW

1,396,515. The EMM report finds that service is unnecessary, an undisclosed appropriation of donor

funds, given that this cost was not budgeted under CSP II, process of appointment of Jambo Tracking

materially non-compliant with both basic tender procedures and enhanced standard practice in related

party transaction and the costs seemed disproportionate to the service.

7.4.2 KPMG Procedures and Observations

According to ZNFU most of the documentation related to Jambo Tracking has gone missing due to the

DEC investigation and the EMM audit. Only the tender related material was available at ZNFU during the

Review. However, KPMG was able to review copies of documentation at EMM. KPMG reviewed the

documentation available and the EMM findings. Some new material was presented by ZNFU.

According to a copy of a document from the Patents and Companies Registration Agency the company

Jambo-Tracking Zambia Limited is owned 50/50 by the ED and his wife. According to the document the

ED and her wife are directors/partners of the company.

In the Review, KPMG noted the following. The date of the tender minutes related to Jambo Tracking

purchase is 15 March 2013. The Committee Members involved in the decision making were Mrs E.

Chembe (chairperson), Mrs N. Kauseni (secretary) and Mr M. Mailumani. The ED has approved the

Jambo Tracking decision by signature. The minutes states that three quotations were considered and

Jambo Tracking was recommended based on cost. Also the minutes states that it was agreed that the

ED would issue a declaration of interest as he was a Director in the company. The minutes has been

signed by the chairperson Chembe on 8 April, 2013 and secretary Kauseni on 4 April, 2013.

Quotations for the tracking of vehicles have been received from three suppliers between 18 and 19 of

March 2013. Two quotations have been received from Jambo Tracking dated 18 and 19 of March. The

quotations received from Jambo Tracking on 18 March refers to a total price of ZMW 40,600 and the

latter on 19 March ZMW 59,740. The total price of the Magnum Security Services for ten vehicles is

actually lower than the total price of the second quotation from Jambo Tracking which has been used as

the basis for the contract. KPMG observed that no request for quotations is available. The received

quotations are for 10 vehicles. There is a significant discrepancy between the amount of vehicles in the

quotations (10) and the actual number of tracked vehicles that has been approximately 65. The period of

vehicle tracking has also not been mentioned in the tender minutes or quotations making the overall cost

comparison difficult. The tender minutes also does not include documentation on how the overall costs

comparison has been made, for how many vehicles and for which period. The dates of quotations are

after the date of tender meeting minutes.


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It should be noted that for example quotation from Magnum Security Services includes discounts of 5-

7,5% for equipment purchases of 15 to 99 units which appear to have been omitted from the tender

review as the comparison is made for only 10 vehicles although significantly more have been invoiced.

The fee information provided in the quotations has been summarized in the tables below.

Jambo Tracking proforma invoice 19.3.2013

Description 10 qty Jambo tracking unit inclusive of fully connected sim-card @ 3150, total 31 500. 31 500

Description 10 qty Installation fee @ 200 total 2000 2 000

Description 10 qty Monthly subscription at 180 (paid yearly) total 18000 18 000

Net total 51 500

VAT 16 % 8 240

Total 59 740

Jambo Tracking proforma invoice 18.3.2013

Description 10 qty Jambo tracking unit inclusive of fully connected sim-card @ 3150, total 31 500 31 500

Description 10 qty Installation fee @ 200 total 2000 2 000

Description 10 qty Monthly subscription at 150 (paid yearly) total 1500 1 500

Net total 35 000

VAT 16 % 5 600

Total 40 600

Altech Netstar quotation 18 march 2013

Description Hardware costs 10 vehicles Vigil+ EW systems @ 3 500 total 35 000 35 000

Description Monthly airtime @ 275 per month with 12 month time 33 000

Net total 68 000

VAT 10 880

Total 78 880

Magnum Security Services

Description 01 GEOTAB G04 LIVE unit (per vehicle) K 4 637,50 + 16% VAT = 5 379,5 per vehicle 5 380

Description Option 2: GEOTAB GO 5 live unit per vehicle K 2994,50 + VAT 16 = 3473 3 473

Description Monthly fee Live Service K 159 + VAT 16% per vehicle per month 2 213

Total without option 2 per 10 vehicle 75 928

Total option 2 per 10 vehicle 56 863

In the Review, a memo was received that had been prepared for registering and declaring interest related

to the vehicle tracking system. The memo was presented to the ZNFU President on 4 May, 2013. The

memo refers to a management decision on 25 March, 2013 that decided the tracking of all vehicles. The

memo doesn’t state whether the ED was involved in the initial decision making to go ahead with a

purchase of vehicle tracking. The tender meeting minutes has been prepared on 15 March which differs

from the decision date the declaration of interest (25 March) is referring to. Based on the Memo the

declaration of interest has been made after the decision to procure the vehicle tracking from Jambo

Tracking has been made.

On 27 May, 2016 the Board members Mr Oza, Mr Rae and Mr Lisimba have provided a signed affidavit

in which they confirm that the need to introduce a vehicle tracking system was approved by the Board.

Similarly, they confirm that a declaration of interest was presented by the ED and the contract was

awarded to Jambo Tracking in April 2013. The Affidavit does not provide clarifications on why the most


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economical quotation was not selected, why the quotations have been provided after the decision

minutes has been signed or whether the declaration of interest was provided prior to all decision making.

A contract between ZNFU and Jambo Tracking has been made on 1 April, 2013 for the vehicle tracking

services. The contract has been made for five years effective from 1 April, 2013. The fee has been agreed

to ZMW 5,974/year for each unit tracked and the fee is subject to inflationary effects after each year.

The price per unit is referring to the second quotation from Jambo Tracking per unit. However, the

agreement does not reflect the fact that the quotation includes a fee for the tracking unit of ZMW 3,150

(not including the tax of 16%) and an installation fee of ZMW 200 (tax not included). The price per unit

to be invoiced yearly is actually ZMW 1,800 (tax not included). Consequently the contract does not reflect

the quotations.

KPMG also reviewed invoicing from Jambo Tracking. Based on the Review there are discrepancies

between the quotation fees, the contract and the invoiced amount. As an example on 11 August, 2014

ZMW 137,225 has been paid by ZNFU to Jambo Tracking. Based on the attached supporting

documentation Jambo Tracking is invoicing for 65 vehicles. The total amount of invoicing in the

supporting documentation is ZMW 537,225 and part of this has been paid in August. The fees in the

supporting documentation appear to be based on the hardware cost and monthly subscription. The fee

for the equipment is ZMW 3,194 per unit and the monthly subscription for the entire year ZMW 2,948.

The equipment cost is close to the quotation of ZMW 3,150 and only exceeds the quotation fee by ZMW

44. However, the monthly fee is significantly higher than the quoted fee of ZMW 1,800. In other invoices

the fees in 2014 have been ZMW 3,900 (equipment) and ZMW 3,600 (monthly fee). ZNFU has not had

a comprehensive monitoring of the invoicing for the vehicle tracking. Therefore, it is difficult to review

the accuracy of total compensation to Jambo Tracking.

The EMM report noted that based on their procedures overbillings of ZMW 308,208 occurred by the

Jambo Tracking. Due to the lack of documentation by ZNFU on monitoring of invoicing from Jambo

Tracking, EMM in their audit prepared calculations on the total reasonable invoicing based on the

quotation fees and the vehicles of ZNFU. The calculations includes assumptions because full information

was not available for EMM. Based on the KPMG Review of the EMM documentation on the calculations

of excess fees and the assumptions made for the calculations no significant discrepancies were noted.

Consequently, in the absence of more accurate calculations by ZNFU the calculations of EMM appear

reasonable.

In 2015, the invoicing from Jambo tracking has changed to USD although the contract is in ZMW.

According to the EMM audit the additional costs due to change in currency amount to ZMW 157,939.

ZNFU has not provided documentation on change of contract with Jambo Tracking agreeing to invoicing

in USD.

KPMG also noted the ED has approved payments to Jambo Tracking. The accounting entries have been

done through Control accounts and the audit trail to the income statement is not clear. Consequently, it

is not possible to follow the total costs from the income statement as the costs might be presented in

several accounts. No contradictory documentation has been provided by ZNFU on the total amount of

payments to Jambo Tracking of ZMW 1,484,615 for 2013-2015 reported by EMM.

To conclude, based on the KPMG review procedures the tendering process for the vehicle tracking

includes discrepancies that have not been explained by the ZNFU. The documentation on the selection

of most economical quotation is missing and based on the available documents the most economical

has not been necessarily selected. The costs incurred by vehicle tracking are not in line with the tender

process, contract or transparent presentation of costs. Lack of follow-up of the costs is apparent and

consequently overbilling as according to the EMM report cannot be ruled out. Considering the nature of

the procurement from a related party transparency should have been highlighted. Based on the

documentation there is indication that the ED has been involved in decision making related to the vehicle

tracking system and that he has approved payments to a company owned by him.


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7.4.3 Conflict of Interest

According to the Board Charter adopted on 14 February 2007 by the Board of Directors at its Board

Meeting, the Conflict of Interest issues should be considered as follows (see Section 10 Board Meetings,

subsection 7 Conflict of Interest):

— A conflict of interest arises where any director has a material interest, whether directly or indirectly,

in any contract of significance that the ZNFU has entered into or proposes to enter into. Directors

will disclose full details of such interests to their fellow directors in writing.

— Disclosure will be made at or in advance of the Meeting at which the matter relating to the Director's

interest will be discussed. If this is not possible, such disclosure will be made at the next subsequent

Meeting in cases where the Director's interest is discovered by the Director subsequently.

Declarations of conflict of interest will be recorded in Board Minutes.

— The Board will keep a Register of Interests that is subject to review by the external auditors. Where

a director is unsure whether or not a conflict of interests exists, he or she should discuss the matter

with the CEO or the Chairman of the Board.

Based on the email received from the CFO on 9th

June 2016, “ZNFU does not have a Register for Conflict

of Interest. However, the Conflicts of interest are only noted in the board minutes. Going forward, ZNFU

will consider introducing this register.” The current practice seems to be non-compliant with the Board

Charter. Based on the documentation available the conflict of interest related to the vehicle tracking

procurement has not been recorded in Board Minutes.


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8 Lima Accounts

As part of ZNFU’s working, ZNFU has established a LIMA Credit Scheme (LCS) which is a separate

activity aiming to provide small-scale farmers with agricultural credit services based on the Group Savings

and Loans approach linked to the commercial financial sector. The scheme mechanism has been

developed by ZNFU and its financial partner the Zambia National Commercial Bank (ZANACO) and other

partners. To get group loan from ZANACO, farmers form cash collaterals to collect 50% deposit and

deposit funds to a designated bank account (ZNFU LIMA Deposit Account) administrated by ZNFU. From

the LIMA Deposit Account funds are transferred to ZANACO deposit account for loan guarantee.

Recoveries for the loans are first collected to a designated recovery account (ZNFU LIMA Recoveries

Account) which is also administered by ZNFU. Recovery payments to ZANACO are made in larger

instalments from the Recoveries Account. Neither the Deposit Account nor the Recovery Account is

recorded in the accounting of ZNFU although the accounts are according to ZNFU registered under ZNFU.

KPMG noted in the Review that ZNFU had withdrawn ZMW 10,300,000 (approximately EUR 1.3 million)

during the period of September to December 2014 from the Lima Credit Scheme accounts. The funds

have been used according to ZNFU for the construction costs of the ZNFU office complex due to

escalation costs and for the operation costs of ZNFU. KPMG received only part of key documentation

related to the Lima Credit Scheme and part of the received information was in draft, unsigned format.

KPMG did not receive the loan agreements, registration of the accounts or final memorandum of

understanding between the stakeholders.

The liability should have been presented in the financial statements of ZNFU for 2014. However, the

signed and audited balance sheet of ZNFU amounting to a total of ZMW 34.2 million does not include

the liability of ZMW 10.3 million to Lima Credit Scheme. Consequently, the balance sheet includes a

significant error (ZMW 10.3 million and 30% of the balance sheet amount) and hence the financial

statements are materially misstated. Similarly, the liability is missing from the accounting of ZNFU. It

cannot be ruled out that the withdrawn amounts have been paid out from ZNFU without a corresponding

service and accounting entry to the appropriate accounts.

Based on the accounting of ZNFU and their confirmation the accounting entries related to the Lima

withdrawals have been made incorrectly. The withdrawals, if even eligible, should have been booked as

a liability from the Lima Credit Scheme and the farmers. Instead the amounts have been credited to a

control account and from the control account the amounts appear to have been transferred with several

journal vouchers to different accounts. The audit trail for the subsequent transfers is not clear. The ZNFU

has not been able to clarify the correct entries.

Borrowed Funds from LIMA Deposit and Recovery Accounts

Accounted in ZNFU Amount

ZMW A/C Beneficiary A/C

2.9.2014 2 000 000 LIMA Recoveries Account September 2, 2014

0013811203200

3.10.2014 2 000 000 LIMA Recoveries Account October 3, 2014

0100122078100

26.11.2014 3 300 000 LIMA Recoveries Account November 26, 2014

0100122078100

19.12.2014 3 000 000 LIMA Recoveries Account December 19, 2014

0100122078100

Total from Recovery A/C 10 300 000

Total 10 300 000

Funds have been repaid in 2015 in six instalments and remaining unpaid balance at the time of the audit

is ZMW 1,235,000. KPMG noted that all four borrowings were made from LIMA Recoveries Account

(account no. 0266591400249). However, the repayments had been made to LIMA Recoveries Account

amounting to ZMW 5,600,000 and to LIMA Deposit Account amounting to ZMW 3,465,000. Total


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repayments are ZMW 9,065,000 and remaining unpaid balance is 1,235,000 ZMW. According to the

interviews in ZNFU, the balance is still at the time of the Review 1,235,000 ZMW. However, it remains

unclear whether the unpaid balance is actually higher since repayments to ZNFU LIMA Recoveries

Account amount ZMQ 5,600,000 whereas the amount withdrawn from the same account amounts to at

least 10,300,000 ZMW. ZNFU was not able to explain what funds have been used for repaying the LCS.

It should be noted KPMG has not reviewed all bank transactions and consequently there could be

additional transfers between ZNFU and the LIMA accounts.

Repayments to LIMA Deposit and Recovery Accounts

Accounted in ZNFU Amount ZMW

A/C

18.3.2015 1 600 000 LIMA Recoveries Account March 18, 2015

16.3.2015 870 000 LIMA Deposit Account March 16, 2015

22.4.2015 2 000 000 LIMA Recoveries Account April 22, 2015

8.9.2015 2 595 000 LIMA Deposit Account September 11, 2015

22.12.2015 700 000 LIMA Recoveries Account December 24, 2015

27.12.2015 1 300 000 LIMA Recoveries Account December 24, 2016

Repayments to Recoveries A/C 5 600 000

Repayments to Deposit A/C 3 465 000

Repayments total 9 065 000

Based on the draft Memorandum of Understanding (MoU) the key liabilities of ZNFU in the Lima Credit

Scheme is to link small scale farmers to Zanaco Plc on the basis of membership through its affiliated

District Farmers’ Association and provide loan application forms for small scale farmers through the

ZNFU Districts Offices and provide guidance to small scale farmers. Furthermore, according to the

Modalities the objectives of the Lima Credit Scheme (LCS) are to improve small-scale farmers (SSFs)

access to commercial credit, increased member services and better farmer welfare through increased

income earnings, support wealth creation using the principle of a good savings and credit culture as the

catalyst among SSFs and to promote small scale farmers productivity through use of CA technologies.

The draft MoU or Modalities do not include a right for ZNFU to withdraw funds from the LCS and to use

the funds for its operational costs. Consequently, the eligibility of the withdrawals is questionable and

has not been adequately explained by ZNFU.

To summarize, based on the KPMG review procedures ZNFU has withdrawn funds intended for the small

scale farmers from the Lima Credit Scheme in the amount of ZMW 10.3 million. The funds have been

used for the costs of ZNFU although based on the documentation available ZNFU does not have the right

to use the funds for its own purposes. In addition, ZNFU has not presented the liability in its financial

statements for 2014 but through unexplained and inaccurate accounting entries has removed the liability

from its accounting causing the accounting and financial statements of 2014 to be significantly

erroneous.


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9 Unsupported Costs

In the EMM audit report have been presented unsupported mispostings on page 112. Table for

unsupported capitals costs amount to 2,386,170.32 ZMW. According to the EMM audit report, the

auditors were not provided supporting documentation for these costs at the time of the audit. In the

response, ZNFU management stated that payment vouchers are available for verification.

KPMG reviewed costs from the EMM audit report table on page 112 that exceed 50,000 ZMW.

According to KPMG review, supporting documents for the transactions are available and were provided

for the KPMG review procedures. Based on the KPMG Review there is no direct indication that the

documents had been recently prepared merely for the purpose of the KPMG Review. However, KPMG

observed challenges in linking some of the documents to the correct transactions due to

incorrect/incomplete descriptions used in the accounting records.

Helsinki, 29 August, 2016

Anders Lundin Lauri Tuomaala

Authorized Public Accountant Authorized Public Accountant


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10 Annex 1 – Key terms of the Joint Financing

Arrangement (JFA)

10.1 Reporting according to the JFA

According to the reporting requirements of the JFA the ZNFU is required to submit each year (2004-

2017) the following documents:

— Annual Report on Results, including a Draft Financial Report covering the period from January to

December of the preceding year, by February 15th

.

— The Final Financial Report for the period January to December of the preceding year, Semi-Annual

Report and Financial report covering the period from January to June, by 15th

July

— Annual Audit Report, by June 30th

.

— Annual Work Plan and Budget for the following year, by November 30th

According to the JFA, the Financial Report should compare the actual costs of activities for the current

reporting period with the budgeted costs for the same period, and in the same currency. The Financial

Report should be prepared in a form and at a level of detail that enables comparison of the budget with

actual progress.

Based on the Agreement between Sida and ZNFU, ZNFU’s auditor shall in the audit report and the

management letter comment on, among others, whether attached financial report complies with ZNFU’s

accounting records.

10.2 Terms and Conditions on Financial Statements and Accounting

The Joint Financing Arrangement (JFA) has been signed between Swedish Development Cooperation,

We Effect and the Ministry for Foreign Affairs of Finland and The Zambia National Farmers’ Union (ZNFU)

regarding the implementation of the ZNFU Core Support Programme (CSP) Phase II 2014-2017. The JFA

was signed by ZNFU on 28 November, 2013, the Embassy of Sweden on 27 November, 2013, the

Ministry for Foreign Affairs Finland on 13 December, 2013 and We Effect on 18 December, 2013. In

addition to the JFA the bilateral agreements between ZNFU and each partner have been signed on the

funding arrangements.

According to the minutes of the 325th


December 2013, the ZNFU

assessment for the CSP II had been completed – this involved the financial systems audit and overall

programme assessment and the estimated budget over the four year period is $26 million. The audit

appears to refer to the report issued by Newton Lungu & Associates dated 29 August 2013 on “ZNFU –

Financial Management Assessment – August 2013”

Responsibilities and representations are discussed in the paragraph 2 to aforementioned document.

Below is extracted certain parts of the paragraph 2.

Paragraph 2 (Responsibilities and representation)

“ 11. The ZNFU will be fully responsible for the implementation of the ZNFU CSP Phase II and for the

management of the CPs ’ financial contributions. The ZNFU will present financial statements in

accordance with an agreed financial reporting framework – International Accounting Standards or other

mutually acceptable standards (national or international). The financial statements will show all sources

of funding, with sufficient breakdowns of data to permit identification of individual sources of funds and

disbursements on major activities or types of expenditure. The ZNFU affirms that the contributions from

the CPs will be used only to cover expenditures included in the ZNFU CSP Phase II budget and only on


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expenditure on the ZNFU CSP Phase II. The CPs will not bear any responsibility and/or liability to any

third party with regard to the implementation of the ZNFU CSP Phase II.

12. The ZNFU will implement the ZNFU CSP Phase II according to the annual work plans and

budgets for 2014 – 2017, and deliver the results agreed in the ZNFU CSP Phase II.

13. A prerequisite for the CPs’ support of the ZNFU CSP Phase II is that the ZNFU will have under

gone a satisfactory Pre- award audit of its financial management and organizational systems.

Furthermore ZNFU will implement the jointly agreed actions based on the Pre- award audit observations

and recommendations.”

Aforementioned Pre- award audit and its overall findings are discussed in more details later in the report

under the section [Financial Management].

10.3 Non-compliance, Force Majeure

According to the paragraph 11 to the JFA (Non-compliance, force majeure) in the case of serious non-

compliance with the terms of this JFA and/or violation of the fundamental principles set out in this JFA

on the part of the ZNFU, any CPs may suspend further disbursements to the ZNFU CSP Phase II and

reclaim the funds already transferred in whole or part. Such non-compliance could include inter alia

substantial deviations from agreed plans and budgets, misuse of funds or non-compliance with agreed

preconditions relating to the implementation of the ZNFU CSP Phase II.

If a CP intends to suspend new disbursements or terminate its support, the CPs will call for a meeting

with the other Signatories in order to reach a joint position on the measures required, remedial or

otherwise, or to inform the other Signatories of its intentions regarding the continuation or

discontinuation of its support.


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11 Annex 2 - Bilateral Agreements

Based on the minutes of the 326th


April 2014 (regarding the Core Support

Program II 2014-17), “The Board was informed that the Core Support for 2014-2017 was approved and

Bilateral Agreements signed with the other partners except for Finland with whom signing was expected

to be done in the near future”.

11.1.1 Bilateral Agreement between MFA Finland and ZNFU

The agreement between the Ministry for Foreign Affairs of Finland (the Ministry) and the Zambia National

Farmers’ Union (ZNFU/Agency) on the Ministry’s support towards the funding of the implementation of

the Zambia National Farmers Union (ZNFU) core support programme phase II 2014-2015 was signed on

6th

May 2014.

According to the bilateral agreement between the Ministry and ZNFU:

— The Agency and the Ministry shall promptly inform each other of any event or situation which might

affect the implementation of the Activities and which may necessitate a modification or alteration of

the scope, implementation, the agreed budget or other aspects of this Agreement.

— In case any change occurs in the schedule or implementation of the Activities, the Agency shall

promptly inform the Ministry.

— The use of the Finnish contribution and the management of funds shall comply with professionally

accepted administrative, accounting, auditing and other financial standards and practices. The

Agency shall ensure that no illegal or corrupt practices are connected with the use of the Ministry's

contribution.

— All procurements shall be made in accordance with generally accepted principles and good

procurement practices. Invitations to tender as well as procurement contracts shall include a clause

on the possibility of the tender being rejected and the contract being cancelled, in case any illegal or

corrupt practices have been connected with the award or the execution of the contract.

— In addition to the provisions of the JFA, the following shall apply to repayment, suspension and

recovery of the Ministry's contribution:

— The Agency is obliged to promptly return the contribution as a whole or in part if it cannot use it

in accordance with this Agreement or it has been erroneously, excessively or otherwise

groundlessly granted to it.

— The Ministry reserves the right to;

a) suspend payments in the event that there is reasonable cause for doubting that the Agency

ignores the conditions laid down in this Agreement or otherwise set by the Ministry for the use

of the contribution, or grounds for granting the contribution have essentially changed.

b) claim for recovery in full or in part if

— the Agency has provided incorrect or misleading information or concealed aspects that

might have influenced the decision to grant the contribution or the conditions of the

contribution,

— the capacity of the Agency to carry out the Activities has been essentially reduced

because of bankruptcy, debt recovery procedure or related cause,

— the Agency hinders the execution measures related to the inspection and audit on the

use of the contribution,


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— the contribution is found to be misused, not satisfactorily accounted for or the Agency

otherwise ignores the conditions laid down in this Agreement or otherwise set by the

Ministry for the use of the contribution,

— or there are other relevant grounds for claiming repayment in accordance with

the Finnish legislation related to state subsidies (Finnish Act on Discretionary

Government Transfers 688/2001).

Finnish Act on Discretionary Government Transfers 688/2001

According to the Finnish Act on Discretionary Government Transfers,

Recipients of discretionary Government transfers must provide State aid authorities with correct

and sufficient information for the purpose of paying the transfer.

Discretionary Government transfers may be used only for the purpose stated in the discretionary

Government transfer decision.

In addition to what is laid down in this Act or in a Government decree issued under section 8,

recipients of discretionary Government transfers must observe the terms and restrictions stated

in the transfer decision concerning the project or activity for which the transfer was granted,

Recipients of discretionary Government transfers must provide the State aid authority with

correct and sufficient information for the purpose of overseeing that the terms of the transfer

decision are observed.

Recipients of discretionary Government transfers must notify the State aid authority without

delay of any changes affecting the use of the transfer in accordance with its purpose and any

other change affecting its use.

Recipients of discretionary Government transfer aid must provide auditing officials and auditors

referred to in section 16(2) with all information and reports, documents, records and other

material needed for the purposes of the audit and assistance free of charge

In case a discretionary Government transfer is granted to a foreign recipient for use outside

Finland, the State aid authority may in addition agree with the recipient on the use and terms of

use of the transfer. The agreement must include the terms needed to ensure that the transfer

is used in accordance with the State budget and for the supervision of its use.

The State aid authority may decide to interrupt the payment of a discretionary Government

transfer:

1) if grounds exist to suspect that the transfer recipient is not observing the provisions laid

down in section 12(4) or section 13 or 14;

2) the grounds on which the transfer was granted have essentially changed; or

3) interruption of payment is required by European Union law.

Recipients of discretionary Government transfer must repay without delay any transfer or part

thereof they have received through error, in excess or manifestly without cause.

State aid authorities must issue a decision ordering the discontinuation of the payment of a

discretionary Government transfer and the claw back of a transfer already paid if the recipient of

the transfer has:

1) neglected to repay a transfer or part thereof which under section 20 must be repaid;

2) used the transfer for a purpose essentially different from that for which it was granted;


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3) provided the State Aid authority with false or misleading information in a matter that was

critical to the granting of the transfer, its amount or terms, or concealed such information;

or

4) otherwise essentially violated provisions concerning the use of transfers or terms included

in the transfer decision in a manner comparable to paragraphs 1–3.

11.1.2 Bilateral agreement between Sida and ZNFU

The agreement on Core Support to Zambia National Farmers Union 2014-2014 between The Swedish

International Development Cooperation Agency (Sida) and ZNFU was signed 0n 20 February 2014.

According to Article 6 to this agreement, there is the following condition for the disbursement to ZNFU

in 2015: ZNFU has, among other things, ensured that all priority 1 recommendations (high risk) and

priority 2 (significant risk) as established by the financial management assessment report 1 have been

attended to. This relates to the Financial assessment report by Newton Lungu and Associates 2013 -

engaged to assess financial management systems of ZNFU prior to CSP II (Findings made by Newton

Lungu are summarized later in our report).

Further, according to the Article 6 (Repayment) to the agreement between Sida and ZNFU,

— Funds used in breach of the Agreement (Article 18), including accumulated interest, shall be

accounted for and repaid to Sida within 30 days of Sida's reclaim of Funds. The amount shall be

certified by ZNFU's auditor and stated in the annual financial statement and Annual Report.

— Funds not used within the Implementation Period (Article 3), including accumulated interest, as

stated in the audited - for the Sida Funds - final financial statement and Annual Report (Article 11),

shall be accounted for and repaid to Sida by 30st June 2018 at the latest.

— If all Funds have been used within the Implementation Period, on the Funds accumulated interest

shall not be repaid to Sida. The amounts shall be certified by the ZNFU's auditor.

— ZNFU shall inform Sida in writing what each paid amount relates to; payment of interest, repayment

of unspent Funds or Funds used in breach of the Agreement (Article 18). The respective amounts

shall be specified. Payments can be made via SWIFT in any currency.

Pursuant to the Article 8 (Audit)

— ZNFU is responsible for the funds and contracting independent auditors. ZNFU will draw up the

terms of reference for the audit and select auditors to be approved by Sida. The Funds as stated

in the financial statement (Article 11) are subject to an annual, audit of an external, independent

and qualified auditor who is a member of ZICA. The annual audit shall be conducted in accordance

with international standards issued by the International Federation of Accountants, IFAC, or

International Organization of Supreme Audit Institutions, INTOSAI. The cost of the audit shall be

included in the budget.

— ZNFU's ordinary audit will be accepted if it is an assurance audit and the process for audit (handling

of audit reports, management response, follow-up of recommendations etc.) is conducted

acceptably.

— The auditor shall in the audit report and the management letter comment on;

— Whether the attached financial report complies with ZNFU's accounting records,

— Observations made during the review process,

— Recommended actions,

— Whether ZNFU has taken appropriate actions according to previous audit recommendations.


29 August, 2016

Report 12/2016

45

According to the Article 11 (Reports and other documents), ZNFU shall annually submit its financial

statement to Sida. The financial statement shall include all income and shall specifically display all funding

sources, including Funds allocated by Sida. It shall also contain a comparison of actual costs for Core

Activities for the current reporting period to budgeted costs for the same period. The financial statement

shall include information on interest and I or unspent funds. The financial statement shall be signed the

Executive Director of the ZNFU.

11.1.3 Bilateral Agreement between We Effect and ZNFU

The agreement of cooperation between Zambia National Farmers Union (ZNFU) and We Effect for ZNFU

Core Support (CSP) Phase II Programme has been signed on 31st January 2014. The content of the

agreement is not discussed or referred to in detail here.

According to the Article 2.3 to the agreement this agreement is compatible with the spirit and provisions

of the Joint Financing Arrangement (JFA) between the Swedish Development Cooperation Agency

(Sida), the Ministry for Foreign Affairs Finland, We Effect and ZNFU. The JFA sets forth the jointly agreed

terms and procedures for financial support to the ZNFU Core Support Phase II Programme and serves

as a coordinating framework for consultation with the ZNFU, for joint annual reviews of performance, for

common procedures on disbursement, for reporting and for audits.

46

Contact us

Anders Lundin

Partner, Authorised Public Accountant

International Development Assistance Services

[email protected]

Lauri Tuomaala

Senior Manager, Authorised Public Accountant

International Development Assistance Services

[email protected]

www.kpmg.fi

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