VZCZCXYZ0001
RR RUEHWEB

DE RUEHEG #1932/01 1751449
ZNR UUUUU ZZH
R 241449Z JUN 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 5812
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS CAIRO 001932 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA AND EB/IFD 
USAID FOR ANE/MEA MCCLOUD AND DUNN 
TREASURY FOR NUGENT AND HIRSON 
COMMERCE FOR 4520/ITA/ANESA/OBERG 
 
E.O. 12958: N/A 
TAGS: ECON EAID EFIN EG
SUBJECT: FINANCIAL SECTOR REFORM:  AUDITING ISSUES 
 
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Summary 
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¶1.  (SBU) The GOE's progress on meeting the remaining 
benchmarks in the Financial Sector MOU, signed in 2005, has 
been slow.  Four hundred and twenty-five million dollars is 
tied to completion of benchmarks to improve the transparency 
and soundness of the banking system.  To determine if these 
benchmarks have been met, the MOU requires accurate financial 
information on the state-owned banks.  The required external 
audit process is dragging on, however, and USAID estimates 
that there will not be another disbursement under the MOU 
this year.  The CBE has not issued the Terms of Reference for 
the external audits yet, and is vacillating on whether or not 
to include a requirement for a letter of certification from 
the international auditing firms.  The Embassy would like to 
review with Washington agencies the USG position regarding 
what the reports from the international auditing firms should 
contain, and proposes a DVC or conference call in the near 
future.  End summary. 
 
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Background 
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¶2.  (U) The Financial Sector MOU signed between the GOE and 
the U.S. in March 2005 includes important banking sector 
transparency and soundness benchmarks.  In an effort to 
achieve greater transparency, the GOE agreed to allow 
internationally-recognized, impartial auditing firms to 
conduct an initial baseline audit and subsequent annual 
audits of the state-owned banks, using internationally 
recognized accounting standards.  To support the GOE's 
efforts to achieve greater banking sector soundness, 
disbursements under the MOU would be made based on 
comparisons between the baseline audit and the subsequent 
annual audits.  The comparison must demonstrate that:  (i) 
the private sector share of new loans in the banking system 
is increasing, (ii) the share of non-performing loans (NPLs) 
as a proportion of all loans in the banking system is reduced 
by 50%, and (iii) cash recoveries of non-performing loans 
equal at least 20% of the book value of NPLs.  Disbursements 
would be made on a pro-rata basis for progress toward 
achieving these goals. 
 
¶3.  (SBU) After the baseline audits by the international 
firms began in 2005, it became clear to the CBE leadership 
that these audits would produce results which differed from 
the results of the legally-required annual audit conducted by 
the GOE's Central Accounting Agency (CAA), considered by many 
to be a political instrument, rather than an impartial 
auditing body.  The CBE balked at allowing the reports from 
the international firms to be called "audits," as the CBE 
leadership did not want two separate audits with different 
results.  The USG ultimately agreed that the international 
firms would conduct "Full Financial Due Diligence" (FFDD) in 
place of a baseline audit, and hence no opinion letter would 
be submitted.  Instead, the firms signed a cover letter 
confirming that the FFDD was done according to international 
standards.  In the case of Banque Misr, KPMG, one of the 
international firms, confirmed to emboffs that if they had 
been allowed to render an opinion it would have been a 
qualified opinion and would have found a loss of LE 16, as 
opposed to CAA's LE 300 million profit and clean audit 
opinion. 
 
------------------------------------- 
Subsequent FFDD Falls Behind Schedule 
------------------------------------- 
 
¶4.  (U) The FFDD on the three state-owned banks which serves 
as the baseline was completed in November 2006 for the fiscal 
years ending June 30, 2004 and 2005.  The baseline FFDD is 
intended to be as rigorous as an audit and produce the 
necessary information to make the annual comparisons required 
by the MOU.  In late 2006, the CBE told USAID that the 
international firms would be able to conduct the next round 
of FFDD on the state-owned banks at the same time as the CAA 
conducted its audit of the banks, in early 2007.  Post 
anticipated that the FFDD for the fiscal year ending June 30, 
2006 could be done by July 2007, so a pro rata disbursement 
(assuming progress had been made) could be made several 
months later, after the necessary comparisons had been done. 
However, CBE has not contacted the international firms to 
conduct the FFDD, although the CAA has nearly completed its 
 
 
work. 
 
¶5.  (U) Moreover, the CBE not contacted the international 
firms to conduct the FFDD, but the CBE has also not yet 
shared with USAID the Terms of Reference (TOR) for the FFDD. 
We understand that the Ministry of Finance has urged the CBE 
to provide USAID a copy of the TOR so the FFDD can proceed. 
Until the FFDD is completed and the comparisons against the 
baseline made, $425 million (almost half of the total MOU 
amount) in disbursements hangs in the balance. 
 
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Certification Letter 
-------------------- 
 
¶6. (U) The CBE has vacillated on whether or not to include in 
the TOR a requirement for a letter certifying the results of 
the FFDD.  As noted above, the baseline FFDD of the three 
state-owned banks was accompanied by a cover letter from the 
international firms stating that the FFDD was done according 
to international standards, but it was not a certification or 
opinion letter, given CBE objections.  The letter was a 
simple one-sentence summary that contained no information 
about methodology. 
 
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Action Request 
-------------- 
 
¶7.  (SBU) The TOR process for the upcoming round of FFDD is a 
good opportunity for the USG to define exactly what the cover 
letter from the auditing firms should say.  The USG has, in 
the past, considered funding the FFDD; doing so could provide 
some leverage to insist on a satisfactory certification 
letter.  USAID, however, is currently not advocating paying 
for the FFDD.  The international firms seem prepared to 
provide a certification letter and some officials at the CBE 
seem willing to include a requirement for such a letter in 
the TOR, as long as they do not have to agree to two separate 
sets of financial statements.  Post would like to review the 
requirement for a certification letter with Washington 
agencies and we propose a conference call or DVC in the near 
future. 
JONES