Posted by Adminstrator on September 14, 2016


You may be wondering why ZNFU will be giving its responses to the media instead of KPMG. Since our CPs went to the media, it is only fair that stakeholders are afforded an opportunity to learn of ZNFU position on various matters which have been in the public domain.


At a press briefing held by our CPs on 7th September 2016 at the Embassy of Sweden and Finland, it was reported that the final report of the KPMG In-depth review of the special audit of ZNFU has revealed that ZNFU misapplied K34,000,000 of CPs’ funds meant to assist small scale farmers of Zambia, and thus our CPs want this money reimbursed by ZNFU.


Fraud and corruption were also alleged and that ZNFU must report all fraud and corruption allegations to investigative wings and law enforcement agencies. 


ZNFU has since reviewed the Final Report of the In-depth Review by KPMG Finland which we received last Tuesday 6th September 2016.


This report gives ZNFU responses to the alleged misapplication of donors funds as reported at the Press Briefing by ZNFU CPs and as being continuously being reported in the various print, electronic and online media reports.


ZNFU responses also tackle the alleged fraud and corruption activities at ZNFU.


  1. EMM Report

The Board set aside the EMM Report as it failed to meet the basic tenets of professional work. Admittedly, there were some shortcomings in the way we managed, recorded and reported some matters but that does not justify the exaggeration and misrepresentation of facts that came from EMM. We list below some of the matters that led ZNFU to question the competence of the auditor and subsequently took the decision to set aside their report.


  1.  Reasons which Lead ZNFU to Set Aside EMM Report

Below is an outline of some of the reasons which made ZNFU to set aside the EMM audit report.


  1. EMM made an overriding assertion that ZNFU does not have sufficient funds and any expenditure were mostly likely to have been done using grants from the cooperating partners. EMM made such a blatant and misleading statement without due consideration of the facts on the ground. As a result of this, EMM wrongly calculated ZNFU own income to be K12.14 million over the period 2011 – 2014 when it was actually K41.7 million as detailed below










ZNFU Own Income ( Non grant income)


   9 533 962.73

   8 563 054.41

   12 789 868.68

   10 782 113.33


         41 668 999


EMM Reporting on ZNFU Own Resource
( Article 1.8.3 Opinion on Reported Income of their reported dated February 2016)


                3 498 998

                   4 890 980

                   4 084 796


                12 474 774








ZNFU Own Income understated by EMM


   9 533 962.73

   5 064 056.41

     7 898 888.68

     6 697 317.33


         29 194 225


This misrepresentation striped ZNFU of its own ability to make independent decisions. For instance, ZNFU as part of its outreach programmes to members in the rural areas, participates in sponsorship of traditional ceremonies. According to the auditors EMM, such actions were done without the approval of the CSP Partners and therefore represented a misapplication of CSP funds. Thus, if the auditor had reviewed the ZNFU own Incomes (non-grant income), he would have observed that ZNFU has means to meet some of it’s owns costs.


Whilst it is true that ZNFU received a considerable funding from Cooperating Partners, it is not true that all expenditures were done using only Cooperating Partners money. As can be seen from the table above, ZNFU does generate a reasonable amount of its own resources and is capable of incurring certain expenditures from its own resources.


  1. EMM failed to demonstrate an understanding of some key aspects of the Joint Financing Agreement which was key to the terms of reference and this resulted into wrong findings. This matter was confirmed by correspondence in our possession.


  1. A number of EMM findings demonstrated a failure to understand some accounting principles and standards. For instance, exchange differences on foreign currency denominated liabilities were described as fraud by EMM. Any competent accounting professional should have a basic knowledge on how foreign currency denominated transactions and balances are accounted for and reported.


  1. EMM made another allegation that ZNFU Properties Limited was set up fraudulently as a vehicle to misappropriate ZNFU resources. Had the auditor engaged with Management/Board, he would have learnt the rationale behind the establishment of ZNFU Properties Ltd, and would have also understood the legal restrictions imposed by the Societies Act in terms ownership of land property.


  1. EMM made another allegation that ZMW40,000 of CSP funds were used to procure 450 heads of cattle for the benefit of named individuals. If the auditor had been diligent and exercised due care they would have noted that the amount was in K30,000 which was payment for the construction done at the loading and off-loading bay for equipment at the Agritech Expo. Further, a simple analytical procedure would have demonstrated the unreasonableness of their assertion as no single head of cattle in Zambia can be bought for K88 each. A normal bullying heifer would cost in the region of K5,000.


  1. The first report by EMM reported a number of missing documentation. When the documentation was presented to EMM, they refused to accept the documentation and made allegations that the documents had been “manufactured after the fact”. For instance, EMM stated that capital costs of K2.3 million did not have supporting documentation when that was not factual. Subsequent review by KPMG has vindicated ZNFU.


  1. The exact amount of the alleged misapplied funds kept changing even within the same version of the report.


  • In its January 2016 Preliminary 1st draft report, EMM alleged that K34,563,512 was misapplied.
  • EMM came back in its Preliminary formal 2nd draft report issued on 2nd February 2016 with further comments from EMM indicating an amount of K22,887,343 as allegedly misapplied.
  • In that same Preliminary formal 2nd draft report, EMM indicated K29,861,748 as the amount allegedly to have been misapplied.
  • Then came the final EMM report issued in March 2016 with K33,944,347 as the amount alleged to have been misapplied.


  1. Suffice to mention that ZNFU received the Final EMM audit report on the same day the Union submitted its management responses to the formal draft to Sida (refer to 15th March 2016 letter by Sida to ZNFU). This means ZNFU responses were not taken into consideration.


It must be noted that the list above is not exhaustive but rather just indicative of the failure of the audit.


  1. Board Decision to Set Aside EMM Report

As consequence of the concerns highlighted above, the ZNFU Board found the conduct of EMM auditors below expected professional and essential qualities expected of professional auditors, which include:


  1. Integrity: The auditor omitted and obscured the information availed to him, resulting in a misleading material finding that damaged the reputation of ZNFU, its Board and management.


  1. Objectivity: The auditor appeared prejudiced against ZNFU, its Board and Management by presenting and finalising his report without taking account information or representations from management to ensure an objective outcome.


  1. Professional Competence and due care: The conduct of the auditor appeared not to have acted diligently in accordance with technical and professional standards when performing the special audits.


  1. Professional behaviour: The auditor failed to engage with ZNFU management during the course of performing his work and exhibited a total disregarded for information and representations made to him resulting in his failure to comprehend matters and gather audit evidence. As a result, the auditor got opinionated and justified himself in issuing damaging and disparaging opinions on the ZNFU, its Board and management.


Against best practice EMM has failed to return to ZNFU the documents provided to them during the audit. KPMG also made similar observations that EMM was still keeping some ZNFU documents.


Consequently, the ZNFU Board at its 29th January 2016, special Board meeting decided to set aside the EMM audit report and reported the auditor to ZICA. The Union further requested that an independent auditor be appointed to redo the audit.



  1. KPMG In-depth Review

The KPMG in-depth review of the special audit of ZNFU was mutually agreed upon during a 3rd May 2016 meeting between members of ZNFU Board and Cooperating Partners (CPs), and was meant to, within its limited scope:


  • Review in detailed selected EMM audit findings and ZNFU responses (e.g. construction costs, management compensation and loans, unsupported costs, budgeting and procurement processes);
  • Meet with CPs, EMM and other relevant actors;
  • Assess whether CPs’ funds given to ZNFU were used for intended purposes.


It should be noted that KPMG only reviewed in detail, selected EMM audit findings and did not validate the entire audit report. This fact is acknowledged by KPMG final report under 1.1 of the final report.


Despite the requirement to meet all relevant actors and their commitment to the ZNFU Board to have an exit meeting, KPMG did not meet the Board.


  1. KPMG In-depth Review Findings and Responses

KPMG in-depth review findings are summarized below and the ZNFU responses follow.


  1. EMM Report and ZNFU Reply

In their special audit covering the period January 2014 to August 2015, EMM made several observations that included misapplication or misappropriation of donor funds amounting to a total of K33,944,347and high levels of suspected fraud.


The EMM made observations in respect of executive management compensation including salary, loans and advances as well as vehicle tracking, landscaping and construction costs. ZNFU was most likely using grant funds for the questioned costs observed in the audit, as its own resources were not sufficient to make investments for example in property and construction. Based on the view of ZNFU management the observations of EMM were mostly unsupported and had been based on a flawed audit process. ZNFU’s comments led to updates to the first draft version of the EMM report.


In conclusion, nothing material came to KPMG’s attention that causes it to question the findings presented in the EMM report. The differences in findings noted by KPMG are highlighted in the review report.


  1. ZNFU Response – EMM Report and ZNFU Reply

The EMM Report was set aside by the ZNFU Board on 29th January 2016 as a consequence of the serious short comings in that audit process as explained in detail in 1.1. and 1.2 above.


Though KPMG have, in their view, observed that the EMM report findings are valid, ZNFU DOES NOT AGREE WITH THAT OPINION.


KPMG performed a limited scope assignment and therefore did not validate all the EMM findings. Therefore, we are of the opinion that KPMG Finland does not have a plausible basis to make their conclusions on the entire EMM report.


KPMG can not give credibility to a report which does not speak to their report.


As a result of the foregoing, ZNFU will only respond to KPMG findings on matters covered by their terms of reference.


  1. KPMG Finding - Accounting and Financial Administration

During the review, ZNFU was unable to deliver several key documents or to explain the unclear accounting entries. In addition, ZNFU confirmed several incorrect accounting entries and errors some of which were significant in monetary terms at the financial statement level. To conclude, the accounting and financial reporting of ZNFU cannot be considered reliable.


KPMG is not able to summarize the amount of ineligible costs within the scope of the assignment.


  1. ZNFU Response - Accounting and Financial Administration

Prior to 2009, ZNFU operated as a small establishment with separate projects on accounting and reporting systems. Growth in size and transition from disparate project accounting to a consolidated reporting of a pool of activities, i.e. Core Support Programme mode of operation over the last 7 years, has brought in complexity in ZNFU activities, operations, accounting and financial administration.


As a result of the above, our systems of accounting and reporting, may not have kept with the pace of change. The accounting may not have expanded to cope with the myriad of pooled activities and their reporting requirements. Further accounting practices and procedures have also not kept pace with the growth of the ZNFU. Consequently, some challenges have been experienced as cited in the KPMG report. 


As a matter of urgency, the ZNFU is embarking on a process to review and revise its accounting systems, practices and procedures. The ZNFU will implement the best practices in financial management, financial accounting and reporting to ensure the financial information needs of all stakeholders are well served.


In our effort to improve our control environment, the Union has strengthened its internal audit function by the recruitment of the Head of Internal Audit. Further we are enhancing our project accounting resources.


  1. KPMG Finding - Construction Costs

The property costs / construction costs of K13,970,479 are related to ZNFU Properties Limited and not ZNFU. Further, there is no evidence that any part of the CSP II budget could be allocated to the construction costs of the new office complex paid by ZNFU on behalf of ZNFU Properties Limited. Therefore, K13,970,479 is considered ineligible.


CSP II Grant Management – Property Costs Questioned




Pre 2014 ZNFU Property Costs charged to CSP I



2014 & 2015 ZNFU Property Costs – CSP II



2015 ZNFU Property Costs Charged to Staff







  1. ZNFU Response - Construction Costs

Increasing and diversifying ZNFU investments is one of the strategic pillars of the ZNFU 2012-16 work plan which was approved by the ZNFU Board and formed the basis for Cooperating Partners (CPs) to agree to support the ZNFU Core Support Programmes (CSP I & II). It is under this ZNFU investments strategic theme that construction of the ZNFU office complex was identified and approved by the ZNFU Board and CPs through CSP I & II respective annual work plans and budgets as one of the investments to help boost ZNFU asset base and long term financial sustainability. Landed property is one of the few asset classes that can be used for long-term investment. Further investment in the office complex has been a matter of discussion in a number of occasions with CPs since 2012.  The official opening of this building was graced by representation from the Swedish and Finnish Embassies.


Why construction costs relating to ZNFU Properties Ltd not ZNFU:

ZNFU as a registered society under the Societies Act, is restricted in extent of its ownership of landed properties and acquisition of loans for commercial purposes. This is why ZNFU Properties Ltd, a wholly owned entity of ZNFU was incorporated as a special vehicle for the Office complex development. Therefore, construction costs by ZNFU relating to ZNFU Properties Ltd were within the approved financing arrangements by the ZNFU Board and the CPs were aware of these financing arrangements. 


Therefore, under the CSP I & II K6.5 million was going to be funded by ZNFU and CPs, while US$2.4 million was going to be funded by Zanaco whose loan expires in 2021. 


Pre 2014: ZNFU Property Costs Charged to CSP I – K3,335,883

Pre ZNFU property costs charged to CSP I were budgeted under a budget line:  5.1.4 of the approved 2013 CSP I with K3,000,000 as the budgeted amount to support to long term investments for sustainability. The K3,335,883 construction expenses in 2013 under CSP I was thus budgeted for. over expenditure on this budget line were as a result of escalated construction costs and were met by other ZNFU own income.


2014 & 2015 ZNFU Property Costs – CSP II ZNFU – K6,596,758

ZNFU property costs charged to CSP II were budgeted under budget line of the approved 2014 CSP II budget with K3,500,000 support to long term investments for sustainability.  The K6,596,758 construction expenses incurred in 2014 under CSP II were under the approved support to long term investments for sustainability. The over expenditure on these budget lines were as a result of escalated construction costs and were met by other ZNFU own income.


2015: ZNFU Property Costs Charged to Staff: - K4,037,838

The ZNFU property costs charged to staff will require detailed investigations from the Board to establish what the exact accounting transaction it was and appropriate action will follow thereafter.


  1. KPMG Finding - Lima Credit Scheme

ZNFU withdrew K10,300,000 from Lima Credit Scheme in 2014 when it did not have the right to do so. ZNFU did not provide all relevant and final documents related to Lima Credit Scheme for the KPMG review.  In 2015, K9,065,000 was paid back to Lima Credit Scheme, ZNFU was not able to explain how the repayment was funded. The K10.3m withdraw from LCS should have been recognised as a liability in 2014 but it was not reflected as such. Therefore 2014 audited financial statements were materially misstated. The accounting for the above transactions have been incorrect, unclear using several journals. Therefore, it is possible that funds may have been misappropriated.


  1. ZNFU Response - Lima Credit Scheme

The practice of borrowing funds between projects to address short term cash flow constraints has been present in ZNFU for sometime and helped to ensure that no project suffered any disruptions due cash flow timings. This was a practical necessity. As noted by KPMG, the K10.3m that was borrowed in 2014 was substantially repaid in 2015 leaving only a balance of K1.2m. This balance is in line with the facilitation fee income that ZNFU earns in the LCS arrangement.


The accounting treatment of these transactions is being reviewed and corrective action will be undertaken. This may include restatement of 2014 financial statements. 


As has been stated elsewhere ZNFU is under taking a thorough review and revision of all its accounting systems, policies, procedures and practices to ensure compliance with relevant laws and regulations as well as with International Financial Reporting Standards.


  1. KPMG Finding - Management Compensation

In preparation of the CSP II funding, ZNFU provided on 14 November 2013 a breakdown of the salaries to SIDA in which the monthly salary of the ED was K81,538. However, according to the contract, the monthly salary of the ED should have been K126,671. ZNFU had provided incorrect information to SIDA on the salary of the ED and/or the contract of the ED.


There were discrepancies including an unrecovered loan, advance and gratuity payments in the EMM report. KPMG noted a loan of K100,000 to the ED without a loan agreement and the loan was recorded as a fixed asset. Further, a payment of USD18,790 (K98,100) was paid to a supplier of Jambo Tracking, a company owned by the ED, to purchase equipment for Jambo Tracking.


  1. ZNFU Response - Management Compensation

The Contract of employment of the Executive Director, his salary and his conditions of service were negotiated and approved by the ZNFU Board.


The Board recognizes the Budget, but exercised its discretion in signing the contract with the ED.

Management of loans and advances is guided by employee’s conditions of service.


We have however noted the KPMG observation on the loans and advances and we will investigate and take corrective action.


  1. KPMG Finding - Landscaping

There were ineligible and out-of-budget payments of K1,351,863 incurred on landscaping costs. In addition, no adequate supporting documentation was available for expenses amounting to K923,971. An amount of K120,000 in landscaping costs was recorded as gratuity, while another amount of K74,900 was recorded as “Landscaping in Chongwe - ED”.


A proper tender process was not followed in the procurement of landscaping services and there is indication that the costs have been incurred for landscaping of properties not belonging to ZNFU.


  1. ZNFU Responses - Landscaping

Admittedly this was not in the budget but was necessitated by the completion of the new Office complex which needed to have ample parking space and appropriate drainage before tenants could move in. There was also need to help expand parking space around the old ZNFU offices to create additional parking space for clients for both the new office complex and ZNFU.


We have taken note of the concerns on procurement processes, expenses and the accounting treatment of some of the landscaping expenses and further investigations will be conducted and appropriate actions taken on the matter.


  1. KPMG Finding - Jambo Tracking – Vehicle Tracking Services

Ineligible payments of K1,494,615 had been made to or for Jambo Tracking, an entity belonging to the ED and his wife. The tender process for the vehicle tracking includes discrepancies that have not been appropriately explained by ZNFU. There is indication that the ED has been involved in decision making related to the vehicle tracking system and the ED has also approved payments to a company owned by him and the wife.



  1. ZNFU Response - Jambo Tracking – Vehicle Tracking Services

The need for tracking, fleet management and monitoring arose with the expansion of ZNFU geo-foot print, increased operations by field staff on motor bikes and motor vehicles. In order to effectively monitor field operations and fleet management, vehicle tracking services were procured following Board approval.


We have noted the observations and we will pursue actions to remedy the short comings. The Union is also revisiting its processes around matters that may present opportunities for conflict of interest. The Union is opening up a register where staff will be required to declare interest on periodic basis. Each year as the Union prepares the list of registered suppliers, all staff will be required to declare their interests and all suppliers will be vetted accordingly.


  1. KPMG Finding - Unsupported Costs

The EMM report noted unsupported capital costs amounting to K2,386,170. ZNFU management response had been that the payment vouchers were available for verification. According to KPMG, supporting documentation for the tested transactions were available and there was indication that the documents had recently been prepared merely for the purpose of the review.


  1. ZNFU Response - Unsupported Costs

We note the confirmation by KPMG of the availability of adequate supporting documentation of capital costs amounting to K2,386,170, which initially were reported to have been unsupported.


  1. Alleged Fraud and Corruption

These matters have been in the public domain and investigation wings, particularly the Drug Enforcement Commission (DEC) took keen interest in the matter on February 9, 2016. We are certain that they will make their findings known to the public in good time.


As a Union, we have cooperated and will continue to cooperate with all law enforcement agencies to ensure that all matters are followed up, investigated where necessary and concluded in a just manner.

Our call to our members, members of the public, industry stakeholders, cooperating partners and friends from the media, is to allow the ongoing investigations to take due course, without undue pressure or prejudicial interference. This to us is very critical for a fair and just outcome.


  1. Dispute Resolution with CPs

Both Bilateral Agreements and the Joint Financing Arrangement between ZNFU and CPs provide for dispute settlement mechanisms which must be adhered to if we are to avoid institutional reputational damage on matters which, if acted upon as provided for in these agreements, could be amicably resolved or mediated or arbitrated upon.


Confidentiality is another key ingredient which this process has been deprived of since inception. Confidentiality must therefore be upheld if we are to avoid possible out of context interpretation of audit findings, especially at preliminary stages, and more so when auditees have not been given a chance to comment.


Both parties remain duty-bound to adhere to confidentiality provisions on reports such as the KPMG In-depth Review which expressly required prior written consent before disseminating the final report to other parties and the public at large by any means. We have found most of the various interpretations of the KPMG findings especially in media, to be out of context, prejudicial and can easily lead to unnecessary ligations. 


  1. The 34 Million Question

With the foregoing, ZNFU categorically denies that K34 million of cooperating partners’ resources have been misapplied and/or misappropriated by the Union.

The K34 million that has been reported in the media emanates from the EMM report whose credibility was question and the report set aside.  We made our comments on the various findings of the KPMG.


Though KPMG have, in their view, observed that the EMM report findings are valid, ZNFU DOES NOT AGREE WITH THAT OPINION.

KPMG performed a limited scope assignment and therefore did not validate all the EMM findings. Therefore, we are of the opinion that KPMG Finland does not have a plausible basis to make their conclusions on the entire EMM report. Even on contested EMM findings they did not validate.


Admittedly, there have been shortcomings in some areas but it must be noted that the Union has made its best efforts to carry out all activities that were planned and agreed with partners under the Core Support Programme.


It must also be noted that ZNFU has over the last four years generated substantial income of its own, to the tune of K41.66 million (non-grant income). This is well above what was envisaged in the CSP budget and made possible for some discretionary spending by ZNFU.


  1. Way Forward

As a way forward the following matters will be investigated further:


  • 2015 ZNFU Property costs charged to staff;
  • Accounting entries that are not very clear, e.g. landscaping and Jambo Tracking.


We hope to carry out and conclude an independent investigation by the end of this financial year.


ZNFU is embarking on a process to review and revise its accounting systems, practices and procedures. The ZNFU will implement the best practices in financial management, financial accounting and reporting to ensure the financial information needs of all stakeholders are well served.


In our effort to improve our control environment, the Union has strengthened its internal audit function by the recruitment of the Head of Internal Audit. Further we are enhancing our project accounting resources.

We will be submitting to our CPs how their monies have been spent in line with the approved budgets.