UN watchdog faults Iraq's handling of oil wealth

UNITED NATIONS, Aug 11 (Reuters) An Iraqi mechanism set up to help track Baghdad's use of its oil wealth suffers from poor management, flawed accounting systems and weak internal controls, a UN watchdog agency reported.

A draft audit report prepared by Ernst&Young for the International Advisory and Monitoring Board (IAMB) and covering oil exports for the second half of 2005 criticized a broad range of government efforts to account for oil sales and Baghdad's use of the proceeds.

Oil is the country's main source of hard currency needed to rebuild after years of war, and the energy sector is struggling to recover from years of mismanagement and UN sanctions that were lifted after the US-led 2003 invasion.

More recently the oil sector has suffered from sabotage and poor maintenance, but the audit made clear that it also suffers from mismanagement that has left the door open to smuggling and corruption.

Corruption in the energy industry has cost Iraq hundreds of millions of dollars, the general inspector of the Ministry of Oil has previously estimated.

The IAMB was created by the UN Security Council in 2003 to watch over the stewardship of Iraq's natural resources while Baghdad was under US administration.

The new government has allowed it to remain in place to reassure the international community it is managing its vast oil reserves wisely and for the benefit of the Iraqi people.

But several IAMB reports have criticized its performance, particularly the delayed installation of equipment to meter oil production, so that sales and production figures can be reconciled to guard against smuggling.

INCOMPLETE RECORDS, INEFFECTIVE CONTROLS Under a system set up for Iraq in 2003, the proceeds of all Iraqi oil sales pass through a special account called the Development Fund for Iraq.

The IAMB-ordered audit said some 22 billion dollar in proceeds were deposited in the account in all of 2005, resulting from the sale of 509 million barrels.

But managers failed to maintain complete records and created ineffective internal controls and a weak organizational structure with a poorly trained staff, the audit said.

No single executive directs the special account's overall activities, ''there is no internal audit function'' for the account and ''there are no adequate controls to prevent unauthorized transfers'' of cash, it found.

Auditors discovered that 211 million dollar of oil money had been deposited in unauthorized accounts of the State Oil Marketing Organization, or SOMO. Another 231 million dollar was turned over to ministries that were not authorized to get oil money.

SOMO, for its part, engaged in barter transactions with the Syrian government valued at 79 million dollar long after the IAMB told it to end all barter transactions, because of the difficulty of tracking barter deals.

The auditors found there was no way to determine accurately how much oil had been loaded for export, and quantities of oil recorded as sold differed from office to office.

The report also faulted US agencies still spending Iraqi oil money on projects dating back to the US occupation, which ended in June 2004. It said they kept ''an incomplete and inaccurate'' list of contractual commitments and incomplete accounting records.

Some US contracts described as closed or canceled still had outstanding balances due contractors, while payments for some contracts exceeded the total contract amount, it said.

Reuters AD VP0750