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ŽSR tender results puzzle audit firms

The issue of transparency and the clarity of public tenders came to the fore again after the state-owned national railway company Železnice Slovenskej Republiky (ŽSR) awarded a contract to audit its books to international audit house Ernst & Young - even though the winning bid was about four million crowns higher than the cheapest offer.
The tender, which was called in early August, had been contested by four international audit houses active in Slovakia - Ernst & Young, Arthur Andersen, KPMG and PricewaterhouseCoopers. Along with international auditor Deloitte & Touche, which did not submit a bid, these companies are collectively known as "the Big Five."
Ernst & Young's managing partner Peter Feith told The Slovak Spectator that his firm's bid for the ŽSR audit contract had been approximately 10 million Slovak crowns ($240,000).

The issue of transparency and the clarity of public tenders came to the fore again after the state-owned national railway company Železnice Slovenskej Republiky (ŽSR) awarded a contract to audit its books to international audit house Ernst & Young - even though the winning bid was about four million crowns higher than the cheapest offer.

The tender, which was called in early August, had been contested by four international audit houses active in Slovakia - Ernst & Young, Arthur Andersen, KPMG and PricewaterhouseCoopers. Along with international auditor Deloitte & Touche, which did not submit a bid, these companies are collectively known as "the Big Five."

Ernst & Young's managing partner Peter Feith told The Slovak Spectator that his firm's bid for the ŽSR audit contract had been approximately 10 million Slovak crowns ($240,000).

Arthur Andersen bid 14 million crowns, reported the firm's tax partner Santiago Pardo, while KPMG bid 5.8 million crowns, according to Paul Meager, marketing and communications partner with KPMG. PricewaterhouseCoopers were disqualified, while Deloitte & Touche was not eligible to bid under Slovak law.

ŽSR spokesman Miloš Čikovský confirmed for The Slovak Spectator on August 12 that Ernst & Young had won the tender. When asked why the second highest bid had been selected over the cheaper offer, Čikovský responded "the [Tender] Commission took into account complex criteria, not just price." Asked what these 'complex criteria' were, Čikovský said that "information about the contents of each offer and the rank in which they finished is confidential, and neither the ŽSR nor members of the Commission may publish this information according to the Law on Public Tenders."

Ernst & Young's Feith said it was understandable that his firm had won the contract. "I believe we are the best [auditing firm] here [in Slovakia], and I would be disappointed if we hadn't won. We have been auditing Austrian Railways since 1994, and their system is very similar to that at ŽSR," he said.

But the unsuccessful bidders in the tender said they were surprised that the cheapest bid hadn't won, since all of the bidders were respected international firms and would have been more than capable of performing the audit.

KPMG, which made the cheapest offer but actually finished third behind Ernst & Young and Arthur Andersen, was perhaps the most disappointed with the tender result. "We really made a huge effort to win the tender," said Meager. "I have a feeling that ŽSR management doesn't understand the process, or they wouldn't have chosen the higher offer. We still haven't got any feedback on why we didn't succeed, and we would really like to know."

Arthur Andersen's Pardo was inclined to be less critical. "Quality of services, not price, is generally the key factor," he said. "We are selling quality. If a company doesn't accept it [our quality] I am not interested anymore." However, Pardo said that if quality had really been the deciding factor in the ŽSR tender, Ernst & Young would not have won.

Ernst & Young has audited several well-known Slovak companies and banks which have had serious financial problems, such as the troubled eastern Slovak steelmaker VSŽ and state banks IRB and SLSP. Pardo explained that Ernst & Young had not done enough in the past to inform creditors and the wider financial community of financial problems at their client companies.

VSŽ unexpectedly defaulted on a $35 million syndicated loan from Merrill Lynch last November, while IRB was placed under a caretaker administration by the National Bank of Slovakia for liquidity problems in December 1997.

"If companies like VSŽ had similar problem in the US, for example, the auditor would have to pay fines," said one senior auditor who asked not to be named. "They [Ernst & Young] should have gone and informed bankers, not only the former management under [former VSŽ President Alexander] Rezeš, which obviously knew all about it. If I were one of VSŽ's creditors, I would go after them [Ernst & Young]."

But Ernst & Young's Feith said his firm had, in accordance with standard IAS audit procedures, informed VSŽ management of the company's problems in 1995, 1996 and 1997. "We are only auditors - we can't change the financial state of the companies we audit," he said.

Moreover, both VSŽ spokesman Jozef Marko and SLSP bank chief strategist Martin Barto said that their companies had no doubts about the quality of Ernst & Young's services. "We have been very satisfied with them," both men said.

In an often bitter contest between "the Big Five" for both contracts and reputation, the ŽSR audit battle may be a mere skirmish before bigger wars to come: both VSŽ and state bank VÚB have opened tenders for an auditor.

"I don't consider the results of the ŽSR tender as the biggest scandal this year," said Arthur Andersen's Pardo. "They [the ŽSR] have already called me and offered us another project. However, the Big Five will meet again, because we have all been invited to participate in a tender at VSŽ and VÚB."

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