AUDIT OF TERMS &
CONDITIONS OF LEASED LANDED PROPERTIES
[Mismanagement or Fraud]
1.0 Introduction
1.1 An organization [‘Trustee’] was appointed by the owner [‘Owner’] of several thousand landed properties located throughout the country in both urban and rural areas to manage them in an effective and efficient manner. The ‘Trustee’s’ management fees was to be the surplus of rental revenue after deducting all the outgoings such as Local Authority Rates/Rents/Taxes/Others and utility charges wherever applicable. The ‘Properties’ included vacant lands and those with commercial and industrial buildings constructed on them. ‘Properties’ that were not required for the ‘Trustee’ own activities could be leased out to others but subject to specific terms and conditions that would protect the interest of the ‘Owner’ while providing revenue to the ‘Trustee’ at rates that were comparable to the market rates and taking into account the impact of future economic development of the country which could result in increase in revenue. The ownership of buildings and other structures constructed on leased lands would revert to the ‘Owner’ on expiry of the leased periods. The ‘Owner’ had the right to take back any ‘Property’ it needed without the consent of the ‘Trustee’.
2.0 Management
2.1 The management of these valuable ‘Properties’ was entrusted by the ‘Trustee’ to his Property Management Department [‘PMD’] that was established and was staffed by administrative personnel and professionals with knowledge and expertise relevant to effective and efficient management and financial aspects. The main responsibilities of the ‘PMD’ included the following:
[a] Rent/Lease the vacant lands/buildings at rates, terms and conditions that would provide the best returns and at the same time protect the interest of the ‘Trustee’ and the ‘Owner’;
[b] Maintain comprehensive, accurate and updated records of the ‘Properties’ detailing relevant particulars such as statutory references, location, area, usage restriction, number and type of buildings/structures erected thereon, charges/rates payable to the respective Authorities at Central/State/Local level, status [owner occupied/leased/vacant], etc.
[c] All ‘Properties’ are maintained properly and insured where appropriate;
[d] ‘Properties’ are safeguarded from being occupied by illegal persons and/or others are occupied illegally or used for illegal purposes;
[e] Rental collections and settlement of statutory/utilities dues are prompt with prompt recovery action taken where necessary from tenants/lessees. The collection responsibility was entrusted to the ‘Trustee’s’ Finance & Accounts Department [‘F-AD’];
[f] ‘Properties’ where leased are in compliance with the conditions as stipulated by the relevant land and local Authorities and other relevant laws and for legal purposes only;
[g] Ownership of leased ‘Properties’ together with any buildings/structures constructed on them including by the lessee, reverts to the ‘Owner’ on expiry of the leasehold period or due to any other reason such as their surrender by the lessee;
[h] Buildings and other structures constructed on vacant leased lands or any structural changes and renovations are with the prior approval of the ‘Trustee’ prior to any submission to any relevant approving authority;
[i] Leasing of lands/buildings is done at market rates with prior advise where necessary from property valuation professionals; and
[j] Leasing, renewals/extensions of leases and disposals of any ‘Properties’ are with approval of relevant level of authority as prescribed by the ‘Trustee’ who should obtain prior approval of the ‘Owner’ in specific cases as prescribed.
[NOTE: The term ‘Lease’ would include ‘Tenanting’/’Renting’ for short or long terms]
2.2 The ‘PMD’ is required to extend copies of all leased properties to the ‘F-AD’. The objective of this requirement is to act as internal controls and monitoring the performance of the ‘PMD’ that will ensure that all rentals and other dues are claimed when due and accounted for in the financial statements. Similarly charges due on these ‘Properties’ are settled when due without incurring any penalties for default or delays.
3.0 Role of the Finance/Accounts Department
3.1 The ‘PMD’ was required to info the ‘F-AD’ of collections to be made and dues to be settled who was entrusted with the responsibility of issuing invoices for rental, utilities, rates & taxes, insurance premiums and other dues as stipulated in the agreements. Copies of all signed Agreements were required to be extended to the ‘F-AD’ within one month of them being signed. Similarly the ‘F-AD’ was responsible for settling all dues on the ‘Properties’ for which the ‘Owner’ was legally liable. The ‘F-AD’ maintained parallel records as an additional internal control.
3.2 ‘F-AD’ was also responsible to ensure that all deposits and revenue dues were computed correctly prior to issue of invoices and collected and expenditure dues were correctly computed and settled within the stipulated periods. It was required to info the ‘PMD’ where any action needed to be taken against the tenants/lessees as the legal relationship was between the ‘PMD’ representing the ‘Trustee’ and the tenant/lessee.
3.3 The ‘F-AD’ was required to prepare status reports ‘Reports’ on a monthly basis summarizing revenue collected, expenditure paid and outstanding dues together with action
being taken to recover them. This information was deemed important for ‘Trustee’ to enable him to provide necessary instructions to the ‘PMD’ for him to take appropriate remedial action where necessary before the outstanding amounts had accumulated to such an extent as to create a situation where revenue arrears would become irrecoverable and had to be written off or the expenditure dues became subject to penalties.
3.4 Copies of these ‘Reports’ were forwarded to the ‘PMD’ for confirmation of accuracy and necessary action in the case of arrears where appropriate. Confirmations of contents of the ‘Report’ and status of action taken where necessary were required to be returned within one month.
4.0 Role of the Internal Auditor [‘Auditor’]
4.1 The ‘Auditor’ requested that copies of the ‘Reports’ and the confirmation of the ‘PMD’ be extended to him to enable him to plan the audit of the management of the ‘Properties’. It was neither possible nor practical for the ‘Auditor’ to audit all ‘Properties’ due to the number of ‘Properties’ and their locations vis-à-vis the limited manpower of the ‘Auditor’. The ‘Report’ assisted the ‘Auditor’ to select ‘Properties’ where the financial implications were material such as high rentals and dues or the arrears were accumulating. The audit procedure also required periodical on-site visit to the ‘Properties’.
5.0 Audit Findings
5.1 The ‘Auditor’ implemented his audit plan and was able to undertake the audit of 100% of the major leases and tenancies within one calendar year whereas over 90% of the ‘Properties’ were audited within five years. The ‘Auditor’ discovered during audit of the selected ‘Properties’ several cases of mismanagement and possible fraudulent situations. The more important findings of audit of selected cases are detailed in the following paragraphs.
[A] RENTAL RATE
[i] The ‘PMD’ approved an application to lease a piece of vacant land situated in the city centre about one kilometer away from the ‘Trustee’s’ Office and for a period of fifteen years. The ‘Auditor’ selected this lease for audit and visited the building after scrutinizing the Agreement and relevant correspondence files. The scrutiny revealed the following information:
The rental rate fixed was 1,000.00 per month;
Land was to be used for construction of a building that was to be for commercial purposes and constructed within two years of the lease commencement period and with prior approval of the relevant Local Authorities and with all costs/fees to be borne by the Lessee including any charges levied after the building was completed. The building was completed within the agreed period; and
Ownership of the completed buildings would revert to the ‘Owner’ on expiry of the Lease period.
[ii] The visit to the building revealed that the ground floor of the building was rented out as an electronic shop and four floors were rented out as office space to various firms and the Lessee only occupied one floor of the constructed building.
[iii] The ‘Auditor’ enquired from the ‘PMD’ whether the infringement of the stipulated condition regarding the change in building usage had been approved by the ‘PMD’ who then responded that they were not aware of the change. However remedial action was taken and the rental rate revised to 5,000.00 p.m. and backdated from the date one year after the buildings received the Certificate of Occupation from the Local Authority resulting in recovery of 96,000.00 with projected increase rental of over 480,000.00 for the next ten years of the unexpired lease period.
[iv] The ownership of the building reverted to the ‘Owner’ on expiry of the fifteen years lease period. The ‘Auditor’ conducted another audit and scrutinized the terms of the new Agreement which showed the new rental rate was 50,000.00 per annum with the tenancy being for a period of three years. This rate for the whole building was less than the former rental rate of 5, 000.00 per month or 60, 000.00 per year and thus appeared to be too low as current market rates of identical buildings was much higher.
[v] Further enquiries confirmed that the whole building was rented at rental of 70, 000.00 p.m. Consequently the ‘PMD’ had recommended and the ‘Trustee’ approved the rental of the whole building at the rate of 50,000.00 p.m with the new Lessee being responsible for all outgoings. On enquiry the ‘PMD’ replied that the per ANNUM was a typographical error and informed the Tenant of the error with a view to correct it. However the tenant responded that he was not agreeable to the change as the Agreement had been signed by both parties and sealed and thus a legally binding agreement.
[vi] The ‘Trustee’ initiated legal action against the tenant to rectify the rental rate. However as civil legal action noally takes years the whole process took almost three years by which the tenancy period expired and the ‘Trustee’ took possession of the building which was then was taken over by the ‘Owner’ for his own use and directed the discontinuing of the legal proceedings.
[vii] The negligence or blind trust of the ‘Trustee’ and ‘PMD’ in signing the Agreement without reading or examining the accuracy of the contents resulted in substantial losses computed as 1.65million in rental undercharging and further 180,000.00 for the aborted legal fees. Disciplinary action was taken against the typist who was dismissed but no action was taken against the senior officers representing the ‘Trustee’ or the ‘PMD’ for their negligence in not checking the contents of the Agreement.
[b] UTILITY RATE NOT RECOVERABLE
Electrical Power Supply
[i] The ‘PMD’ leased a building at rental rate of 5, 000.00 p.m with the tenant being responsible for settling of bill for utilities that included electrical power. The tenant was billed on the average of 150.00 p.m. for power consumed that was being metered through the ‘Trustee’s’ Account and which the tenant paid promptly. This continued for almost five years. The Auditor made a site inspection of the tenanted ‘Property’ while he was in the area for another audit assignment. The ‘Auditor’ observed that the building was being used as a workshop had 296 numbers of light 100watt bulbs in addition to 16 numbers of 2 h-p air condition units. It was further confirmed that the lights were normally lighted on the average for 14 hours daily and the a-c units were operating for about 16 hours per day. The ‘Auditor’ suspected the amount of the bill as his own residence bill for power was about 150.00 p.m for 12 lights that were on for about eight hours per 24-hours in addition to having two TV sets, two refrigerators, one washing machine, one microwave cooker and two sets of computer systems. The matter was referred to the Electrical Engineer who computed that the power bill of the rented building should be about 4, 000.00 p.m.
[ii] Both the ‘PMD’ and ‘F-AD’ were to investigate. It was subsequently discovered that the ‘PMD’s’ Local Technical Representative [‘LTR’] had provided the power supply by-passing the meter resulting in the short billing. The ‘LTR’ admitted that it was done in error. The amount of short billed was computed by the Electrical Engineer as 150, 000.00 for the five years period and a claim submitted for recovery. However the tenant rejected the claim with the reason that the monthly billing was without any condition that the bill was provisional and thus was deemed to be full and final which he had paid promptly. Legal advice confied that the ‘PMD’ did not have any legal basis to recover the amount under billed. However the Lawyer stated that had the monthly invoice included the words ‘E&OE’ meaning Errors and Omissions Excepted, the ‘PMD’ could have the right to amend the bill as a correction and been able to recover short billed amount.
[iii] Finally the obtaining of the power supply by by-passing the meter is deemed as ‘stealing’ of power which if discovered by the Power Supply Company could have resulted in heavy penalties as well as possible prison sentence. However in this case the case was solved by paying the Power Supply Company the 150, 000.00 as well as a written apology from three Senior Managers representing the ‘Owner’, ‘Trustee’ and the ‘F-AD’
Water Supply
[iv] The same tenant obtained his water supply through the bulk meter which recorded total water consumed and the bill paid by the ‘Trustee’. Here again the Water Authority charged a basic supply for the water metered and also imposed supplementary charges including conservation charge, service tax, administration charge and others. However the tenant was billed by the ‘F-AD’ only the basic charge. The resultant amount was computed as about 100, 000.00 for the five years period. This amount when claimed was also rejected by the tenant for reason same as the claim for power supply.
[v] Thus the ‘Trustee’ lost in excess of 250, 000.00. No one has been held accountable nor any action taken against any of the officers who were responsible for the connection of the power supply and billing for water supply for the defective invoicing or under billing that continued for almost five years.
[c] LENGTH OF TENANCY AGREEMENT
[i] The ‘Owner’ appointed the ‘Trustee’ to manage the ‘Properties’ to enable the ‘Trustee’ to obtain finances for its core activities which it was required to provide to the public. Ownership of some of the vacant lands was prescribed in the title deeds for a period of 999 years. The ‘PMD’ was authorized to lease some of these vacant lands with the expectation that they will provide revenue to the ‘Trustee’ at rates that were comparable with market rates. In one case the ‘PMD’ leased a lot of vacant land to a company for period as prescribed in the land title deeds i.e. 999 years at rate of 1,000.00 per month without any provision for revision of the rent rate or transfer of the land to other parties. Thus while the land value would escalate in the future in a land scarce area the benefit would accrue to the tenant and not the ‘Trustee’ nor the ‘Owner’. The tenant could also ‘transfer’ the land for a hefty profit by just selling the company with the new owners enjoying the profits for 999 years. Also the ‘Owner’ could not take back the land without paying substantial compensation at market rates to the beneficial tenant of the land. There was no response to audit findings. However the ‘Owner’ or the ‘Trustee’ could not take any remedial action for the present but assured that the tenancy would be monitored.
[d] LOCAL GOVERNMENT RATES
[i] A Company [‘Company’] applied in 1953 for 20 acres of vacant land for thirty years with option to extend twice for period of thirty years for each option. The purpose of the land was to construct a steel mill. The ‘Trustee’ approved the application at rental rate of 50,000.00 per year for the first 30 years which was to be revised to 75,000.00 and 100,000.00 for the next two option periods if approved and subject to the ‘Company’ paying any Rates that may be imposed by the Local Authority [‘SLA’]. Further the construction of the mill and other buildings/structures was subject to prior approval of the ‘Trustee’, the relevant Authorities and that the ownership of all the buildings structures would revert to the ‘Owner’ on the expiry of the lease period or where the ‘Trustee’ were to cancel the lease with compensation equal to the depreciated book value of the buildings/structures to be paid to the ‘Company’.
[ii] The land had been leased by the State Land Authority [‘SLA’] to the ‘Owner’ for a period of 999 years for a nominal rent of 1.00 per year [‘QR’]. However the responsibility for settlement of this nominal rent was not included in the signed Lease Agreement. The ‘SLA’ amended the relevant land law and commenced imposing ‘QR’ five years after the land had been leased to the ‘Company’. The ‘PMD’ settled the annual ‘Quit Rent’ as prescribed. However the ‘PMD’ did not claim this amount from the ‘Company’. The ‘SLA’ revised the ‘QR’ rate every five years over the next 30 years to 20,000.00, 30,000.00, 50,000.00, 75,000.00 and 100,000,00.
[iii] During the course of audit of this lease in 1989 the newly appointed ’Auditor’ observed the non-recovery of this ‘QR’ which had now become 100, 000.00 per year compared to the rental income received at the rate of 75, 000.00 which effectively paid a subsidy of 25, 000.00 per year to the ‘Company’ with possibility of increasing in the future depending on the ‘QR’ being imposed by the ‘SLA’.
[iv] Legal opinion confided that the ‘Owner’ could not recover the ‘QR’ from the ‘Company’ as there was no provision in the signed Lease Agreement. The ‘Auditor’ suggested that the lease be cancelled as provided in the terms and conditions prescribed in the Lease Agreement by paying compensation estimated at 1.2million being he depreciated value of the over 30 years old mill building including the installed machinery. This suggestion was based on the verbal advise of a property valuation professional who confided that the value of the 20 acres land was estimated at excess of 120.0million and the open market rental would be in excess of 1.4million per year. The ‘Owner’ and the ‘Trustee’ both rejected the ‘Auditor’s suggestion.
[v] The present management or the ‘Owner’ or the ‘Trustee’ could not be held responsible for the terms and conditions in the 1953 Lease Agreement. However neither the ‘Owner’ nor the ‘Trustee’ could provide any acceptable rationale for not reinstating the lease. The ‘Auditor’ has since retired from service. It is estimated that the ‘subsidy’ to the ‘Company’ has now escalated to 100, 000.00 per year. Further it was reported in the media in 1997 that ‘Company’ whose only asset was the 20 acre land with lease period of over 50 years and fixed rental of 100,000.00 per year, was sold to another party for 145.0million and the new owner is enjoying the ‘subsidy’ with neither the ‘Owner’ or ‘Trustee’ could do anything .
[e] LAND RENT vis-à-vis MAINTENANCE SERVICE - CONTRA
[i] The ‘Auditor’ visited the local office that was responsible for maintaining the buildings and keeping vacant lands clean. The Manager informed that the ‘Trustee’ had appointed a contractor to provide grass-cutting services on vacant lands. However instead of paying cash for the services the contractor was peitted to use a five acre piece of land for his personal use. The duration of the arrangement was only two years. He further confirmed that the ‘arrangement’ was with the verbal consent of the ‘PMD’ and that there was no foal Agreement. . It was further confirmed that the ‘arrangement’ had continued for over five years.
[ii]. It was revealed that the contractor had leveled and paved the land to provide parking services for 80 vehicles for which he charged 10.00 per day per vehicle. The monthly income from this parking service was estimated at 20, 000.00. In addition the contractor had sub-let part of the land at monthly rental or 5, 000.00 for car washing and repair services. The estimated monthly cost of grass cutting services was estimated at 3,000.00 resulting in the contractor having net monthly income of 23,000.00 and the ‘Trustee’ having monthly savings 3,000.00. Here again none of the officers responsible were held accountable.
6.0 CONCLUSIONS
6.1 It is concluded that all the direct and indirect losses can be attributed to the following reasons:
[a] Defective Terms and Conditions and not providing for future developments;
[b] Non-compliance of Terms and Conditions;
[c] Leasing without any official Lease Agreement;
[d] Responsible Officers not scrutinizing the Contents of the Agreements prior to signing
[e] Defective Invoices;
[f] ‘Owner’ having ‘blind’ trust on the ability of the ‘Trustee’ to manage the ‘Properties’ by not monitoring the performance of the management of the ‘Properties’;
[g] The ‘Trustee’ neglecting his role to monitor the activities and performance of the ‘PMD’; and
[h] ‘F-AD’ not performing its role as an additional control on the activities of the ‘PMD’.
7.0 RECOMMENDATIONS
7.1 It is important that the ‘Owner’, the ‘Trustee’, the ‘PMD’ and the ‘F-AD’ be involved in scrutinizing the Terms & Conditions together with their financial implications, of any agreement, effectively monitoring the performance of the respective entities and not to trust them without regularly monitoring their performance. Monitoring is an effective internal control which, if neglected as has been illustrated in the above examples, can cause major losses for long durations and without any possible recourse or legal remedy to rectify the errors.
7.2 Finally it can be perceived from the above referred examples that there exist elements of mismanagement and possible fraud/corruption at high level. It may be deemed that senior management professionals could include from all the parties involved such as ‘Owner’, ‘Trustee’, ‘PMD’ and the ‘F-AD’. This perception is further confirmed by the absence of any action against any of the respective senior management professionals to hold them accountable.
LEASING OF LANDED PROPERTIES ARE SUSCEPTIBLE TO MISMANAGEMENT, CORRUPTION & FRAUD
IF FINANCIAL IMPLICATIONS OF TERMS & CONDITIONS ARE NOT STUDIED, SUBJECTED TO INTERNAL CONTROLS
OR IGNORING OF MONITORING PROCESSES
GSK/Jun 09
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