The dispute over the conflict of interests of Prime Minister Andrej Babiš, in which the European Commission and the Czech government stand against each other, has not yet had serious consequences for the Agrofert Group. Subsidy money from European Union funds continues to flow into his companies.
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This is largely due to the position of the State Agricultural Intervention Fund (SAIF), which acts as the national paying agency for the largest group of subsidies linked to agriculture. On the one hand, the fund reimburses money from the EU and also monitors whether applicants meet the prescribed criteria.
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SAIF insists that Agrofert has an undoubted right to subsidies. His opinion was not changed by last year’s conclusion of European Commission experts that Babiš can continue to effectively manage the group, even though he transferred it to trust funds a few years ago. The current situation is unbearable from the point of view of Brussels, and if Babiš does not really break away from Agrofert, the group is in danger of stopping European money.
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The SAIF’s procedure may be influenced by its auditor, who oversees that the fund is acting correctly and complies with the conditions of “accreditation” for the paying agency’s activities. If the auditor finds that the grant fund does not comply with these rules, the auditor must report it.
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Formally, such an auditor is the Ministry of Finance, but in reality it leaves the control of the SAIF to external companies. In recent years, it has been BDO CA.
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However, since this year, another large group in the field of audit and consulting, Ernst & Young (EY), has been taking over the baton.
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The contract for audit services at SZIF was awarded to its domestic branch, Ernst & Young Audit. In the programming budget period 2021 to 2027, it should carry out an “inventory” of the fund every year, for which it should receive a total of 130 million crowns from the state. The SAIF Framework Audit Agreement was signed by representatives of the Ministry of Finance and EY in February this year. In May, they followed up by signing the first annual contract.
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Interesting business
However, by accepting the contract, the audit firm found itself in a dual role.
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When auditing the SAIF, the auditor must also assess whether the fund complies with the conflict of interest rules. Specifically, it is a possible conflict with EU regulation of 2018, which applies conflicts of interest to all persons involved in the budgeting, control or audit of European money.
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Which is exactly the problem of Babiš and Agrofert. The Prime Minister co-decides on the EU budget and the direction of subsidies, while Agrofert has a huge interest in subsidies, which significantly help him to make a profit.
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Ernst & Young Audit has been the Agrofert auditor for many years. In the Group’s annual reports, it regularly confirms that its financial statements comply with regulations.
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And it’s not just the parent company. EY also audits the accounts of Agrofert’s large subsidiaries, such as Lovochemie, Deza and Penam. Together, it is a lucrative contract. In 2018 alone, Agrofert paid over 56 million crowns for audit services.
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In addition to the EY audit, it provides Agroferta with other services. He does not want to reveal what they are with reference to the obligation of confidentiality towards clients. At least in the past, EY experts have advised Agrofert’s management on company acquisitions.
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Logically, the question arises as to whether an audit firm can credibly assess a conflict of interest when it has a financial interest in both parties – the payer and the recipient of the grant.
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In addition, Andrej Babiš is on both sides – as the prime minister and head of the ANO movement, which has been held by the Ministry of Finance since 2014, and at the same time as the one who has at least the benefit and interest in Agrofert’s management.
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However, EY representatives assure that their auditors will remain independent. Mainly due to the strict principle that people working on a contract at SAIF cannot participate in the audit of Agrofert.
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“The team working on the contract is completely different in terms of personnel, management and organization – its employees are physically in another part of the building, do not have access to any information or documentation with which the audit team works, both teams are bound by a strict duty of confidentiality,” he said. List of Messages Chief of Communications of the Prague office of EY Jiří Caudr. “Team members were not allowed to participate in any audit or non-audit project for the Agrofert group on the mentioned contract, even in the past,” he added.
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EY argues similarly for other services for Agrofert. “We can provide other services to audit clients only to a limited extent, which does not constitute a conflict of interest and which does not compromise the auditor’s independence,” Caudr said.
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Code warning
The risk of conflict of interest is a serious issue in the audit profession, as impartiality is a basic condition for audit services. International ethics code, which has a Chamber of Auditors on its website, addresses conflicts of interest on four pages. “In general, the clearer the link between the professional services provided by the auditor and the matter in which the interests of stakeholders are in conflict, the more likely it is that the level of threat will not be acceptable,” the code said.
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In addition, the auditor verifies other information that his client publishes in the annual reports. In his opinion, the auditor states whether the information is “in all material respects consistent” with the financial statements and the law.
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Introductory parts of the Ernst & Young auditor’s report in Agrofet’s annual report for 2018.
The annual reports also include the so-called relationship report, which describes the ownership background of the company. In these reports, Agrofert operates with a scheme in which only trust funds appear; he does not comment at all on his relationship with Babiš as a person.
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Close to ministries and subsidies
The public competition for the selection of the SAIF inspector took place without much attention last year. In addition to EY, BDO CA and other representatives of PricewaterhouseCoopers Audit’s global audit elite re-applied for the contract.
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According to the Public Procurement Act, the conflict of interests of individual tenderers also had to be taken into account when selecting the winning company. However, according to the List of Reports, this aspect was not examined in more detail, the competitors only had to submit a written declaration that they met this criterion. “No person was found to have a conflict of interest,” the Ministry of Finance stated in a written report on the result of the competition.
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Prior to the competition, EY itself addressed the potential risk of conflict of interest. “In accordance with strict internal procedures, we had a potential conflict of interest assessed by our independent Risk Management team outside the Czech Republic, which resolves similar situations across the region. The settings we accepted internally were judged to comply with our firm rules, “said Jiří Caudr from EY.
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In the past, the Czech branch of EY was involved in the campaign for the transparency of public procurement. In 2011, she was one of the founders of the Business Coalition for Transparent Business and joined the Platform for Transparent Public Procurement.
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The EY Group has a number of other contracts with the state. Namely with the Ministry of Finance, it is mainly consulting services in accounting, subsidies, but also in the protection of personal data. EY’s services are also used by the so-called Audit Authority, which falls under the Ministry of Finance, but is to function as an independent control body for the management of European subsidies. EY also has long-standing contracts with, for example, the Department of Labor and Social Affairs.
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The Czech branch of EY was also one of two companies that in 2017 performed an “audit” of Babiš’s income from the 1990s. These were analyzes that were to prove that Babiš had enough legal income to buy Agrofert’s koruna bonds.
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