OFFICE

OF THE DEPUTY PRIME MINISTER & MINISTRY OF FINANCE

PRESS STATEMENT ON THE FINAL AUDIT REPORT ADDRESSING THE GOVERNANCE CHALLENGES IN THE KENYA EDUCATION SECTOR SUPPORT PROGRAMME (KESSP) UNDER THE MINISTRY OF EDUCATION; AND THE PENDING BILLS AUDIT OF THE MINISTRY OF MEDICAL SERVICES Members of the Press Ladies and Gentlemen The purpose of this briefing is to update Kenyans and indeed our development partners on the (i) progress we have made since October 2009 in addressing governance challenges in the education sector, more specifically the Kenya Education Sector Support Programme (KESSP) under the Ministry of Education, and, (ii) the audit for September 2008 on the Pending Bills for Ministry of Medical Services. I. THE KESSP FORENSIC AUDIT

Background of KESSP Audit

As you will recall last year on the 15th of December, 2010, I informed Kenyans on the progress made in undertaking further investigations and verification of suspected cases of fraud and misappropriation of funds in the Kenya Education Sector Support Programme (KESSP). The preliminary forensic audit, undertaken by the Treasury, indicated that while the education sector has been largely well managed, certain cases of fraud had been found. As a Government, we moved swiftly and took firm measures. The officers who were involved in the misappropriation of these funds were suspended to give way for further investigation by the Kenya Anti-corruption Commission. Further, following the investigations by the Kenya Anti-corruption Commission these officers were promptly committed to court, and the prosecution of their cases is ongoing. In the said press statement, I indicated that we will be updating Kenyans once the outcome of the final audit work by the Internal Audit Department (IAD) was concluded. This process involved the verification of additional documents submitted by the Ministry of Education, as well as on site or physical visits to 512 primary schools out of 26,000 schools and institutions receiving support under the KESSP. The 512 1

schools were selected on the basis of risk assessment which revealed that these schools represented 75% of the issues that required detailed investigation. The audit scope covered a period of four (4) financial years running from July 2005 to June 2009 of the programmes implementation. The forensic audit itself was carried out between April and September, 2010 and involved the Ministry of Finance Internal Audit Department (IAD) with technical support from DFID. This audit is now complete. Outcome of the Final KESSP Audit Investigation Ladies and Gentlemen The additional audit work done by IAD since the first draft report was issued has confirmed that ineligible expenditure from the KESSP final audit is Kshs. 4.2 billion, having reduced from the original figure of Kshs. 8.2 billion. Out of the ineligible expenditures of Kshs. 4.2 billion, a large percentagrelated to physical infrastructure. Physical visits to the schools during the audit confirmed that Kshs. 1.9 billion did not reach the schools. Additional third party evidence obtained from the dispatching bank disclosed that the funds had either been paid to institutions which were not registered, or, the school bank accounts into which disbursements were made were not the genuine bank accounts. The forensic trail was able to determine the individual account numbers and details to which the returned funds were deposited and later withdrawn. In addition, some of the funds totaling Kshs. 3.1 million were deposited in bank accounts for schools which did not have TSC codes implying that the schools were not officially recognized. The money was subsequently withdrawn by individuals whose particulars are available. Cases concerning imprests amounting to Kshs. 8.2 million could not be accounted for. The audit discovered a discrepancy relating to financial monitoring reports (FMRs) amounting to Kshs. 2.27 billion which amount was not reconcilable with the Ministrys cash books or bank account balances. The forensic trail revealed an attempt to cover up the discrepancy through manipulation of the cash books. The details of how it happened and the individuals involved are available. In summary, the IAD report contains specific information on: The specific bank account details where funds were wrongly or irregularly paid into; Details of signatories of some of the bank accounts; The details of amounts disbursed into the wrong accounts;

The details of confirmation from the schools that were to receive the funds as tabulated by the Ministry of Education but did not receive the funds as reflected in the bank payment schedules; Detailed reconciliation of the financial monitoring reports (FMRs) occasioning the Kshs. 2.3 billion difference; The reconciled details of funds received from both Government and Development Partners. Conclusion on KESSP Audit Report Despite the integrity issues flagged herein, I wish to reiterate that it is important that we are cognizant of the significant successes that KESSP has secured in enhancing our education goals for the period it has been under implementation. This is demonstrated by overall improved schools infrastructure that facilitates conducive learning, increase in the schools enrollment rate, improved school retention rate, improved transition rate from primary to secondary schools, and, tremendous improvement and enrollment in non-formal schools including in prisons and slum areas etc The embezzled amounts I have referred to in this statement amount to about 1% of the total amount of Kshs. 489 billion allocated to KESSP from 2005 to 2009. Whereas this is not meant to justify nor support the misappropriation tabled in this final audit statement, any interpretations of the report must be made against the commitment and resolve of the Government, and particularly the Treasury, in sustaining governance and anti corruption interventions in all spheres, especially within its core investment sectors. Further, remedial measures have also been instituted to enhance the control environment in the Ministry of Education. Treasury will continue to monitor the implementation of the Accountability Action Plan agreed on between development partners and Ministry of Education officials on a regular and consistent basis. Actions taken and Way Forward on KESSP Audit A copy of the KESSP report has been shared with Head of Public Service & and the Permanent Secretary, Ministry of Education to initiate administrative action in line with the Code of Regulations, and further reinforce adhearance to the Government Financial Management Act and Regulations. I wish to hereby inform the public that the audit report, together with the names of individuals both in government and non civil servants who were involved in the 3

suspected fraud have now been forwarded to the police for immediate further action. The Treasury and the Ministry of Education would wish to see the individuals arrested and charged without further delay. II MINISTRY OF MEDICAL SERVICES PENDING BILLS AUDIT The audit of pending bills was undertaken by the Internal Audit Department (IAD), to inquire into the pending bills at the Kenya Medical Supplies Agency (KEMSA) for FY 2007/2008. The aim of the exercise was mainly to determine the validity of the reasons for the pending bills at KEMSA up to the end of the FY 2007/2008 as well as conformity to regulations and procedures. Key Findings of the KEMSA Audit Report The figure presented by the Ministry of Medical Services for pending bills as at 30th June 2008 of Kshs. 1,593,976,690.08 was erroneous. After adjustments which include deliveries up to 30th October 2008 and the effect of exchange rate differences, the figure increased to Kshs. 1,646,332,693.35. The main cause of the pending bills was under provision to KEMSA by the Ministry of Medical Services. A total amount of Kshs. 886,693,090.00 was given to KEMSA against a budget provision of Kshs. 2,943,848,735.00 The audit points to failure by the Ministry of Medical Services to transfer funds meant for drugs procurement as the main cause of the pending bills at KEMSA. The audit report specifically points out instances where the Ministry of Medical Services records of disbursements to KEMSA are not reconcilable with the amounts received in KEMSAs cash book. Further, discrepancies were noted between the Ministrys IFMIS records as compared to the Ministrys bank account with Cooperative Bank. The audit also highlights significant weaknesses in the internal control framework, transparency, accountability and governance mechanisms at KEMSA and failure to adhere to the statutory procurement procedures. Action Taken on MOMS Audit Report 4

Though the pending bills audit report on the Ministry of Medical Services was concluded and forwarded to the Kenya Anti Corruption Commission in 2008, we are dissatisfied with the pace of investigations if any, and are handing over a copy of the same to the police for their further investigation and prosecution. We urge that the file be handled with expediency. CONCLUSION AND WAY FORWARD The lessons learned from these audits with respect to the weaknesses in the control environment will inform further work in the rest of the ministries in order to ensure strengthened public financial management in the entire government. In this regard, the Treasury is continually making great strides in initiating and sustaining capacity building, financial regulation, guideline development and oversight controls within the public service so as to develop an optimally efficient and effective public financial management system. I specifically refer to the re-engineered IFMIS that the Treasury is currently spearheading. This system will seeks to seamlessly integrate and automate key financial management end to end processes, with requisite authorization and security frameworks, in such a way that transgressions of this nature will be a thing of the past. High spending ministries including the ministry of education and the ministries of health are among the pilot ministries being fast tracked for the full implementation of the re engineered IFMIS. At the same time, the opportunities that the new constitution stipulates as regards effecting principles of ethics, leadership and integrity of state and public officers will inevitably offer a more accountable and effective public service. These tenets will also be reinforced by the enhanced offices of the National Police Service, Attorney General, Director of Public Prosecution and the Ethics and Anti Corruption Commission. All these interventions will ensure that the public resources are no longer at the same level of risk as before. In this regard, I wish to reiterate that the Treasury is developing a training programme on financial management, and on the Re-engineered IFMIS, which we intend to make mandatory for officers involved in management of public resources at the national and county government levels. I wish to further emphasize that the Government remains strongly committed to providing adequate resources to the education and health sector programmes as it is the surest way of attaining our development agenda as articulated in Vision 2030. Our resolution of these, and all other concerns in the sector will undoubtedly affirm our resolve, and eventually our success.

We appeal to all public servants, and, to our children, parents, teachers, development partners and citizens at large to stand by this commitment, and that of safeguarding public financial resources. I wish to conclude by reaffirming that the treasury will continue to play its role in ensuring that public resources are not only expended but that they are also used for their intended purposes. To this end the Treasury has been making public details of public finance allocations and expenditure including on our website. We shall endeavour to continue with this resolve in conforming with the new constitution, and the draft Public Financial Management Bill under development. We therefore wish to put all Accounting Officers on strict notice that the Treasury will not tolerate any laxity or underperformance in the responsibility vested upon them to ensure effective, efficient and integrity in financial management. Strict adhearance to the Government Financial Management Act and Regulations is not optional, and all officers in breach of their responsibilities under the Act will be made to account. ARID LANDS RESOURCE MANAGEMENT PROJECT Before I conclude, I would want to bring to your attention the fact that the Treasury is currently undertaking a preliminary investigation into suspected fraud and misappropriation of funds under the Arid Lands Resource Management Project (ALRMP II) within the Ministry of State for Development of Northern Kenya and Other Arid Lands. The Treasury is in communication with the World Bank, who are the principal partners in this project, to allow us conclude our consultations with the line ministry concerned, as well as initiate an in depth forensic audit in following with the laid down procedure. We will be informing the public on the progress and outcome of this audit. Thank you and God bless you, Hon. Uhuru Kenyatta Deputy Prime Minister and Minister for Finance 13th June, 2011