Fifth Report On Examination Of Audited Financial Statements For The Commodities Fund For Fys 2018/19 To 2021/22

a. I December,2023 a? REPUBLIC OF KENYA RTEENTH PARLIAMENT - SECOND SESSION THE NATIONAL ASSEMBLY SPECIAL FUNDS ACCOUNTS COMMITTEE FIFTH REPORT ON OF THE REPORT OF THE AUDITOR. GENERAL ON AN STATEMENTS FOR THE COMMODITIES FUND FOR THE FINANCIAL YEARS 2018/2019 TO 2O2II2O22 , ^J 6. ["k{"4 (, B&tr a-LTE l r .-. -r. l. U-r ^\.tl J-i f} .'r; n [, AS j f'}y;}Ly ) U 0 i UuC 2023 T,ABIII) BY: ,2 Da ?fi n cr-ER.t(-rc.r, i'H.6-Tnllf rl '., {..llb ofA , Appropriations, and Other Select Committees n \, I'tP :. , t tI B te6

I t , I T ts 2 TIONS AND ACRONYMS REWORD and Mandate of Special Funds Accounts Committee bership........ riat SERVATIONS AND RECOMMENDATIONS ........ OF THE COMMODITIES FUND OF REPORT OF THE AUDITOR GENERAL ON THE STATEMENTS FOR THE COMMODITIES FUND FOR THE YEAR 2018/2019 TO YEAR 2018t20t9 YEAR 2019t2020 YEAR 2020t202r YEAR 202u2022 26 44 5l I 2 aJ J 3 4 5 8 9 CIAL A ittee iffee

LIST OF ABBREVIATIONS AI\ID ACROI\"YMS CoK CRA FY MDAs PFM OAG LPO CRB PSASB EACC Constitution of Kenya, ZOIO Commission on Revenue Allocation Financial Year Ministries, Departments and Agencies Public Finance Management Office of the Auditor-General Local Purchase Order Credit Reference Bureau Public Sector Accounting Standards Board Ethics and Anti-Comrption Commission I ( a t I

t ial I fu ml SON'S FOREWORD , on behalf of the Special Funds Accounts Committee and under Standing Order 199, it duty and honor to present to the House the report of the Committee on the audited fi statements for the Commodities Fund for the financial years 201 812019 to 202112022 over national revenue and expenditure is amongst the roles of the National Assembly as under Article 95 (4) (c) of the Constitution of Kenya, 201 0. Further, Article 226 of the that an Act of Parliament shall provide for the designation of an Accounting Officer ln public entity at the national level who is accountable to the National Assembly for its management. In addition, Article 229(8) mandates this House to debate and take action on audit reports from the Auditor-General of these constitutional provisions, the National Assembly established various to examine reports of the Auditor-General to ascertain whether public funds are n a lawful, authorized, effective, efficient, economical, and transparent manner. The Accounts Committee, which was established in the Fifth Session of the Eleventh following the review of the National Assembly's Standing Orders, is one of these mittee received oral and written submissions from Ms. Nancy Cheruiyot, Managing Commodities Fund which formed the basis of its observations, findings, and ons. These are also contained in the minutes and Hansard reports of Committee ngs. The Committee also met Dr. Paul K. Ronoh the Principal Secretary State Department Development and Mr. George Kubai, the Managing Director Agricultural Finance ion on 28th November 2023 regarding the audit query of unrecovered funds transferred to of Agriculture and Livestock Development from the Commodities Fund and the audit ised in the financial year 2019/2020 regarding unreconciled inter- Fund transaction. , I wish to express appreciation to the Honourable Members of the Committee, the the Speaker, and the Clerk of the National Assembly, the Parliamentary Liaison Offices uditor-General and the National Treasury and the Committee Secretariat for facititating ttee in the production of this report. AWOOD ABDUL RAHIM, HSC, M.P. N C 2

1.0 PREFACE 1.1 Establishment and Mandate of Special Funds Accounts Committee The Special Funds Accounts Committee is one of the six Watchdog Committees of the National Assembly established under Standing Order 205.lt is mandated to examine the reports of the Auditor General on the following: i) Funds established by statute or by subsidiary legislation, except Funds under Standing Order 2058 (Decentralized Funds Accounts Committee) ii) The Equalization Fund; ii, The Equalization Fund Advisory Board; iv) The Political parties Fund; and v) otherfunds as may 6e communicated by the Honorable Speaker 1.2 Committee Membership 2. The Committee comprises the following members: S/N Name Constituency Party I Hon. Fatuma Zainab (Chairperson) Mohammed, MP Migori (CwR) Independent 2 Hon. Dawood Chairperson) Abdul Rahim, HSC, MP (Vice North Imenti Independent 3 Hon. Faith Wairimu Gitau, Mp Nyandarua (CWR) UDA 4 Hon. Charles Ngusya Nguna Mwingi West Wiper 5 Hon. Dr. Christine Ombaka Oduor, Mp Siaya (CWR) ODM 6 Hon. Erastus Kivasu Nzioka, MP Mbooni Wiper 7 Hon. Eve Akinyi Obara, Mp Kabondo Kasipul ODM 8 Hon. Joseph Majimbo Kalasinga, MP Kabuchai FORD-K 9 Hon. Tom Mboya Odege, Mp Nyatike ODM 10 Hon Catheri ne Nakhab Oman Yo, MP Busia (CWR) ODM 1l Hon. Cecilia Asinyen Ngitit, Mp Turkana (CWR) UDA t2 Hon. Erick Kahugu Wamumbi, Mp Mathira UDA 13 Hon. Joseph Kimutai Cherorot, Mp Kipkelion East UDA t4 Hon. Joshua Odongo Oron, MP Kisumu Central ODM 15 Hon. Paul Kibichi Biego, Mp Chesumei UDA I aJ

.3 ittee Secretariat facilitating the Committee comprises the following staff: I ilr DESIGNATION Ifrpeonard Machira Principal Clerk Assistant II Achieng Clerk Assistant III firt[silvanus Makau Clerk Assistant III ffffiobert ] Igetich FiscalAnalyst II fl{fJudith K anyoko Legal Counsel II ft{lBevalin r Mosoti Research Officer III frlflPauline Sifuma Hansard Officer III ft{lMaryan Gabow Public Communications Officer III t4lfPeter M rtethia Hansard Audio Officer III I t'llf Benard )mondi Serjeant At Arms 4

5 2.0 General Observations and Recommendations 4. During the examination of the audited reports, the Committee made the following general observations and recommendations: a. Non-Performing Long-Outstanding Loans The Committee observed that the Fund has non-performing loans that were inherited from Agriculture and Food Authority, the defunct Sugar Board and Coffee Development Fund totalling Kshs.l 9,287,452,848. 57 including principal and interest arrears. The Management sought to authority in accordance with Section 69 of the PFM Act, Z0lZtowrite-off the non- performing debts inherited from Agriculture and Food Authority, the defunct Coffee and Sugar Development Funds and interest due . The Committee noted the Accounting Officer's submissions that the the National Assembly had approved the Action Plan to revive and commercialize State Owned Sugar Companies as communicated vide Certificate No. 039/t 3th/2023. The said letter authorized the Fund to write off debts owed by five State owned Sugar Companies to Government, Kenya Sugar Board/Commodities Fund. The figures in the letter that are applicable to Commodities Fund debts are Kshs. 12,336,003,133. 7. The Committee noted the Accounting Officer's submissions non performing unsecured loan book inherited from the former coffee Development Fund was Kshs 757,5g1,523.05 out of which Kshs. 620,765,933.83 is outstanding as at 2gth November 2023 8. The Committee recommends that within three (3) months upon adoption of this report, the Accounting Officer to provide a progress report to the Auditor General on the status of the write-off process for veri fi cation. b. Corporate Status of the Commodities Fund The Committee observed that the Fund is not established as a body corporate having perpetual succession and a common seal and may not, in its corporate name, sue and be sued, which hinders its operations. The Crops Act, No.l3 of 2013, which created the Fund did not adequately expound the mandate of the Fund's Board of Trustees as well as its powers and responsibilities' The Crops Act, No.l3 of 2013, which created rhe Fund did not adequately expound the mandate of the Fund's Board of Trustees as well as its powers and responsibilities. Consequently, the Fund's Board of Trustees' ability to work independently and effectively in the absence of clear laws on its mandate, powers and responsibilities is doubtful. 10. The Committee recommends that within six months of the adoption of this report, the Accounting Officer through the relevant Cabinet Secretary for Agriculture and Livestock Development to prepare and submit Statutory Instruments to the National Assembly, to 5 6 9

I + f p ior Th the gaps in the legal status of the Fund for consideration and approval c. Unreconciledlnter-FundTransaction culture Finance Corporation (AFC) had been recruited as an intermediary to administer s to farmers by both the defunct Coffee and Sugar Development Funds. With the creation Commodities Fund the loan portfolio had to transferred to the Fund, and therefore in 's financial statements included a gross balance of Kshs.1,153,280,952 relating to vables from AFC comprisingof Kshs.l,l0l,58l,612and Kshs.S1,699,340 forsugarand loans respectively. However, confirmation of records from AFC reflects that the entity the Fund Kshs.9,515,756 resulting to an un-reconciled balance of Kshs.1,143,765,196. Committee observed that the State Department for Crop Development, the Commodities Agriculture Finance Corporation (AFC) and Agriculture and Food Authority (AFA) ha since reconciled the amount owed to the Fund with the current outstanding Principal Kshs. 666,5 42,508 and the Interest Kshs. 134, 129,351 .27 . The parties are working on th ities for the payment of funds. Committee recommends that within six months of the adoption of this report, the officer to provide a progress report on the engagement and the recovery of the ing Principal being Kshs.666,542,508 and the Interest Kshs. 134,129,351.27 to the itor General for audit verification d. Unrecovered Funds Transferred to the Ministry of Agriculture, Livestock and Fisheries Committee observed that the Fund's receivables included Kshs.40,000,000 transferred parent Ministry during the financial year 201612017 and was to reimburse these funds the National Treasury released its budgeted funds for the year. However, the Ministry to reimburse the disbursements to the Fund to date Committee recommends that within the 202312024 financial year, the Principal , State Department of Crop Development refunds the Commodities Fund Kshs. 000 transferred to the Parent Ministry during the financial year 2016/2017 e. Failure to prepare separate financial statements for the Staff Mortgage and Car Loan Scheme Fund Committee observed that the management did not prepare separate financial statements the staff mortgage and car loan scheme Fund but instead, the financial statements were ined with that ofthe commodities Fund.Therefore the Fund did not comply with Section of the PFM Act,20l2 and the SRC circular ref.No.SRC/ADM/CIR/l/13 Vol.lll (128) to 6

17. The Committee recommends that the Accounting Officer ensures that all accounting and financial controls, systems, standards, raws, and procedures are the preparation of the financial statements in compliance with public Finance Act,2012 and in accordance with the standards prescribed by the Public Sector Standards Board as per Regulation I0l(4) of the public Finance Management Government) Regulations, 20 I 2. 18. The committee also recommends that Accounting officer prepares a separate set of statements for the staff mortgage and car loan and submit them to the auditor General audit in compliance with Section 84 of the PFM Act,20l2 and the sRC circular ref. sRC/ADlv{/cIR/l/l 3 vol. III (128) in financial year 2022123. 7 t a a I

l i UND OF THE COMMODITIES FUND Commodities Fund (ComFund) is established under the Crops Act 2013 (amended May 20 Section 9 (l). The Fund is the successor of Coffee Development Fund and Sugar Fund (which was part of Kenya Sugar Board). The crops are regulated by the re Fisheries and Food Authority (AFFA), under which former crop regulatory and authorities were merged into directorates. mandate of the Fund is to provide sustainable and affordable credit and advances to sector for farm improvement, farm inputs, farming operations, agricultural development, and support for agricultural value addition initiatives, price ilization, capacity building and other lawful purpose as approved by the Cabinet fund has a Board while the Managing Trustee is the Accounting Officer of the Fund. 9 of the Crops Act establishes the Commodities Fund as follows- There is established a Fund to be known as the Commodities Fund. (2) The Fund shall consist of- (a) monies paid as license fees, commission, export or import agencyfees andfees that may accrue to or vest in the Authority in the course of exercise of itsfunctions under the Act; (b) funds from any other lawful source approved by the Trustees; and (c) funds appropriated by Parliament for this purpose. (3) The Fund shall be managed by a Board of Trustees to be appointed by the Cabinet Secretary $ l0 sets out the application of the Fund as follows- (l fhe Fund sholl be used to provide sustainable affirdable credit and qdvances to farmers for all or any of the following purposes- (o) farm improvement; (b) farm inputs; (c) farm in g operat i ons ; (d) price stabilization; and (e) any other lawful purpose approved by the Authority. (2) The Authority shall, from time to time, make rules for the better management of the Fund in the best interest offarmers. tn 8

4.0 EXAMINATION OF REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS FOR THE COMMODITIES FUND FOR THE 2018/2019 TO 2O2II2O22 FINANCIAL YEARS 23. Ms. Nancy Cheruyiot, Managing Trustee, Commodities Fund appeared before the Committee on276 June,2023,4thAugust2023 and 286 November 2023 to adduce evidence on the audited financial statements for the commodities Fund for the Financial year 201 g/201g to 2021/2022. The minutes of the Committee sitting, and submissions tabled by the Accounting Officer are annexed to this report. She was accompanied by: f I l. Ms. Roseline Wambua 2. Mr. Silas Nyaga 3. Mr. Codfrey Kinyua 4. Ms. Julie Ronguei

• Credit manager
• Finance Officer
• Accountant
• Accountant

24.The Committee also met Dr. Paul K. Ronoh the Principal Secretary State Department for Crop Development and Mr. George Kubai, the Managing Director Agricultural Finance Corporation on 28th November 2023 regarding the audit query on unrecovered funds transferred to the Ministry of Agriculture and Livestock Development from the Commodities Fund and the audit query raised in the financial year 2}lg/2020 regarding unreconciled inter- Fund transaction. 4.1 Examination of the report of the Auditor-General for the Financial Year 2018 l20lg 1. Variance between Loans Repaid and Loans Receipted 25. The statement of financial position reflects current receivables from exchange transactions- loans and advances of Kshs. 343,020,000 (2018:829,483,000) and long-term receivables from exchange transactions-Loans and advances of Kshs. 423,113,000 (201g: Kshs.7,854,8 I 1,000) as disclosed under Note l6(iii) and l6 (iv) respectively. 26. An analysis of extracts of loan repaid schedules reflects total loan repayments Kshs.3,410,147,915 while the total bank receipts of loan repayments by the farmers amounted to Kshs'2,003,326,275 resulting to a difference of Kshs.l ,406,821,640. The loan movement which is largely attributable to provision for loans and advances during the year amounted to Kshs.9,113,571,000 against total opening loan balance of Kshs.g,6g4,294,000. 27. Further, the bank statements did not include unique loan numbers or identifier against repayment receipts. It was not possible to corroborate loan repayments in the system with the with bank deposits by the loanees making it difficult for reconciliation to be done. 28. In the circumstances, it was not possible to determine the loan and advances issued and repaid based on the provisions made during the year. 9 I

' , I S by the Accounting Officer Accounting Officer submitted that the management reviewed the matter to establish the 1,406,821,636.38 difference between the repaid and receipted loans and noted the ng The repaid loans of Kshs. 3,41 0,147 ,914.29 was made up of the following: i. Coffee loan figure of Kshs.2,509,467,598.65 comprised repayments made from inception of Coffee Development Fund in2007 to 2019 (13 Years); and ii. Sugar loan figure of Kshs.900,680,315.64 ) The receipted amount of Kshs. 2,003,326,274.91 comprised of repayments for both sugar and coffee for the period 2017 to 2019 (2 years). Secondly, the figures were derived from a historic list named "Posted Receipts' instead of the cash book which is the primary record of receipts and payments. ) Data for the repaid sugar loans for the year under audit 201812019 and receipted for the same period tallied without any difference. Similarly, the receipted and repaid for coffee loans is Kshs150,788,159.61 forthe financial year20l8l20l9 tallied. Loan provision during the year: The loan movement during the year was analyzed as follows: ,OBI Movement Schedule Sugar Loans Coffee Loans Total Kshs'000 Kshs'000 Kshs'000 pros Advr Loans and nces as at | .7 .2018 15,712,416 919,352 16,631,768 loan provisions r 1.7.201 8 7.6s1.698 295.776 7.947.474 et 7 loans rnces as Dl8 and at 8.060.718 623.s76 8.684.294 nt During the Year l0

Gross Loans and Advances as at L7.2018 15,712,416 919,352 16,631,769 Add: Loans Disbursed during the Year (Annex 1J) 262,955 122,515 385,370 Less: Repayment During the Year 655.306 122.s33 777.839 Gross Loans and Advances as at 30.6.2019 r5319.965 919.334 16.239,299 Loan Provision Beginning of the year 7,651,699 295,776 7,947,474 Iess: Provision for the year 7.106.629 419.063 7.525.692 Total Provision as at 30.6.2019 14.7s8.327 714.839 15.473.t66 Net Loans Advances as 30.6.2019 and at 561.638 204.495 766.133 f 30. From the above analysis the loan loss provision charged on principal loan was Kshs. 7,525, 692,000 and not Kshs. 9,113,571,000 as reported by the auditor. This was disclosed under note l6 (iv) to the financial statements. 31. The difference between the above two figures Kshs. 1,5g7,g7g,000 was due to a provlston on interest receivables which is analyzed as follows: Interest movement schedule Sugar Coffee Total Kshs'000 Kshs'000 Kshs'000 Gross Interest as at 1.7 .2018 3,574,326 303,9 l g 3,878,244 t \

, t2 1 I fl, p:rPrrovisions 2.408.687 16.399 2.572.678 I l as at [ro[*"" 1.165.639 139.928 1.305.566 Invefent During the 't"' I Loans and as at I .7.2018 3,574,326 303,918 3,979,244 during the 380,864 49,261 430,125 r' ived During bss: eY 99.270 27.493 126.763 6 Interest as at l9 3.855.920 32s.686 4.181.606 ing of the year Provision 2,409,697 163,990 2,572,679 Provision for the 1.444.414 143.465 1.587.879 et es at l9 2.819 18.23r 21.049 I tz l portion of the provision charged on interest receivables was disclosed under Note l6 (ii) the statements of financial position. 1, e Accounting Officer acknowledged that the Fund had a challenge in identifying all ents receipts due to lack of a unique identifier. However, she reported that the bank since agreed to include the customer's mobile number in the bank statement to reduce unidentified amount. The bank was also in the process of making it compulsory to include number when a customer is banking loan repayment. bo further submitted that the Fund appealed the audit report on the basis that it made an conclusion on the variance between loans repaid and loans receipted

Observations and findings of the Committee 35. The Committee observed that: i. There was a variance of Kshs.1,406,821,640 between the loan repayments of Kshs.3,410,147,915 and the total bank receipts of loan repayments by the farmers of Kshs.2,0 03j26,27 5 ; ii. The bank deposits by the loanees and the bank statements did not include unique loan numbers or identifier against repayment receipts making it difficult for identification of payees; iii. The Fund is developing a unique loan identifier to be able to capture the details of the loan payments. In addition, the Fund has agreed with the bank to develop a deposit slip specifically for the Fund which captures farmer's details; and iv. The matter remained unresolved. Recommendations of the Committee 36. The Committee recommends that: i. Within three months of adoption of this report, the Accounting Officer provides the reconciliations for the variance of Kshs.l,406,821,640 between the loan repayments of Kshs.3,410,147,915 and the total bank receipts of loan repayments by the farmers of Kshs.2,O03,326,275 to the Office of the Auditor - General for audit verification; and tI. Within three months of adoption of this report, the accounting officer takes appropriate measures to ensure complete identification of bank receipts including capturing farmers details in deposit slips and to ensure monthly reconciliations to reduce unidentified receipts: 2. Long Outstanding Reconciliation Loan Balances 37. The statement of financial position reflects current and long-term receivables from exchange transactions - Loans and advances of Kshs.343,020,000 and Kshs.423,l13,000 respectively and as disclosed under Note l6(iii) and l6(iv). 38. An extract of amount received in the system and the bank receipts reflects unidentified receipts amounting to Kshs.l 3,463,098.91 which dates to 2ol7 . 39. Management had not investigated what the balances retate to or made recommendations for clearance from the books 40. No explanation was provided for the non-reconciliation and identification of farmers, loan repayment. l3

u a J s by the Accounting Officer Accounting Officer acknowledged that the Fund held unidentified receipts totaling to 5,194,567 and not Kshs. 13,463,098.91 as stated in the audit report. She stated that the le of unidentified receipts for Kshs. 5,194,567 were submitted to the auditor during t2 audit and could be traced inside "Payments received in advance" figure of Kshs 76,000 reported under note 2l to their financial statements. also explained that the unidentified repayments declined significantly due to steps taken ito of the problem. In addition, she noted that the bank agreed to include phone numbers in the bank statement which eased identification of funds. She also noted that the was in the process of identifying the Kshs. 5,194,567 outstanding as at 30e June .2019 s and findings of the Committee Committee observed that: . The Fund held unidentified receipts amounting to Kshs. 13,463,098.91 outstanding as at 30th June 2019; . The Fund is developing a unique loan identifier to be able to capture the details of the loan payments. In addition, the Fund has agreed with the bank to develop a deposit slip specifically for the Fund which captures farmer's details; . The matter remained unresolved. m endations of the Committee Committee recommends that i. Within three months of adoption of this report, the Accounting Officer provides the reconciliations of the unidentified balances to the Auditor - General for audit verification; and i. Within three months of adoption of this report, the accounting officer takes appropriate measures to ensure complete identification of bank receipts including capturing farmers details in deposit slips and to ensure monthly reconciliations to reduce unidentified receipts. oflnterest on Loans f statement of financial position reflects current and long-term receivables from exchange ions-Loans and advances of Kshs.343,020,000 and Kshs.423,l13,000 respectively as disclosed underNote l6(iii) and l6(iv) iew of extracted loans data revealed that the Fund had frozen interest on 62,731 loans outstanding principal balance of Kshs.261,053,043 and interest balance of s.l4l ,997,009 Fund does not have proper guidelines or policy to regulate the freezing of interests. t4 A w 7

48. The loans included 63 loans on coffee portfolio with a total balance of Kshs.91,451,530 issued during the year, out of which 34 loans with a loan balance of Kshs.5 g,5g3,13ghad the interests frozen. Submissions by the Accounting Officer 49. The Managing Trustee responded that the Fund had a clear policy on the freezeof interest on loans. She noted that the policy was approved in a meeting held on l6th Octob er 2016 by ttre Management and later ratified by the Board of Trustees. In accordance with the policy, interest accrual is stopped /suspended five years after the due date. 50. She further explained that the outstanding balance of Kshs. 261,053,042.69 and interest balance of Kshs. 141,997,009.27 all totaling Kshs. 403,050,051.96 were issued between the year 2007 to 2014 and there was no single loan that was issued in Fy ZOlg/2Olg. 5 l. She indicated that during the year under review, the Fund issued seventy-seven Coffee loans amounting to Kshs.122,514,950.00 and the outstanding loan balance stood at Kshs. 68,487,862.57. The earliest freeze date for those loans would be 3.d December 2OZ3 and the latest freeze date would be 26th JuneZ}Z9. 52. The Managing Trustee further clarified that none of the interest on loans issued in 201 g/Z0lg was frozen. Observations and findings of the Committee 53. The Committee observed that: i. The Fund has a policy on freezing of interest on loans. The policy was approved in october 2016by the management and ratified by the Board of Trustees; ii. The period of freezing of loans is 5 years after due date whether repayments arc continuing or not. The earliest loan issue date was August 2018 with a freezedate of April 2024 and last loan issue date was June 201 9 with a freeze date of Jun e 2029; iii. None of the interest on loans issued in 201 g/z0lg was frozen; and iv. The matter is resolved. I l5

4 with Outstanding Balances Reflected as Cleared in the System statement of financial position reflects current and long-term receivables from exchange s - Loans and advances of Kshs.343,020,000 and Kshs.423,113,000 respectively as disclosed under Note l6(iii) and l6(iv) above balances exclude the principal loan balance amounting to Kshs.595,062,000 which been cleared. The above loan balance had accumulated interest of Kshs.2,203,538,506 ofwhich only Kshs.7 ,417,810 had been repaid resulting to Kshs.2, 196,120,696.52 cleared t supporting documents o<planation was provided on how the accumulated interest was cleared up and the ponding repayments. by the Accounting Officer Managing Trustee clarified that the loans in question were not cleared and were still ding. The management enclosed loan statements and a schedule for the said loans the credit management system for audit verification as proof that they were not cleared ns and findings of the Committee Committee observed that: Accumulated interest of Kshs. 2,196,120,696.52 out of the total amount of Kshs. 2,203,538,506 were erroneously reflected as cleared without supporting documents; ii. The loans have not been cleared and are still outstanding; and The matter is resolved. ortization of Loans 9 statement of financial position reflects current and long-term receivables from exchange s-Loans and advances of Kshs.343,020,000 and Kshs.423,113,000 respectively as disclosed under Note 16(iii) and l6(iv). Fund's credit policy manual provides that for all loans disbursed, repayment was on a g balance method. However, approved loans totalling Kshs.1,769,626,283 with ances totalling to Kshs.967,028,087 were amortized using straight line method during the period contrary to the credit policy manual 6l nder the circumstances, the accuracy and completeness of the account balances of 43,020,000 reflected in the statement of financial position could not be confirmed 6,N 5 bo. 1 I l6

Submissions by the Accounting Officer 62'The Managing Trustee responded that the interest computation on Commodities Fund loans was based on a reducing balance method. She noted that loan repayment (instalment) took two forms: a) Reducing monthly instalments i.e monthly amount not equal. b) Constant instalment i.e equal monthly instalments. 63. She also stated that the repayment method adopted for any borrower was determined by the borrower's cash flows. Further, she indicated that the computation of interest was an automated process. Management enclosed copies of the amortization schedules in the response to demonstrate same. Observations and findings of the Committee 64. The Committee observed that: i' The Fund's interest computation is based on a reducing balance method as is provided by the Fund's manual credit policy; and ii. The matter is resolved. 6. write-off of Receivables from Non-Exchange Transactions 65. The statement of financial position reflects a balance of Kshs.45,455,000 under receivables from non-exchange transactions which includes an amount of Kshs.34,753,000 indicated as funds held by intermediaries. No details were provided on the specific farmers given the loans by the intermediaries. It was not clear how the provision was made and how the loans would be collected. Management made provision on receivables from non-exchange contracts of Kshs.34,753,000 without any justifiable reason. The validity of the provision could not therefore be confirmed. Submissions by the Accounting Officer 66. The Managing Trustee submitted that prior to 2013, the Coffee Development Fund operated a business model where loans were issued to farmers through intermediaries. In the said model the farmer's cooperative societies would forward loan requirements by their members to intermediaries who would then request for the funds from Coffee Development Fund (Codf) for loaning to the indicated farmers. 67' She also indicated that seven intermediaries listed below were unable to account for funds they received from the Fund to a tune of Kshs. 34,753,099.03: Name of Intermediary Amount Meru Central Farmers Sacco 736,6t4.00 17

I Meru North Farmers Sacco 9,859.00 Michimikuru Rural Sacco 8,094,756.00 Mugama Farmers Co-op. Union 22,382,967.17 Nandi Farmers Sacco 1,528,400.00 Universal Traders Sacco 1,455,812.86 Cheskaki Sacco 544,690.00 TOTAL 34,753,099.03 S also informed the Committee that the intermediary lending model was terminated in 3. She noted that where a schedule of specific farmers who benefited from the above it had been provided, the loans were to be charged in their individual accounts and where not proved, the entity was charged with the amount as a loan to the entity. further clarified that the provision of the receivable was done in accordance with odities Fund loan provisioning policy given the intent of receivable was loans 1.. tions and findings of the Committee Committee observed that: i. The Fund has non-exchange receivables of Kshs.34,753,000 which are being held by intermediaries; i. Priorto 2013, the Coffee Development Fund operated a business model where loans were issued to farmers through intermediaries; ii. Seven intermediaries were unable to account for funds they received from the Fund to a tune of Kshs. 34,753,099.03; and v. The matter remained unresolved. of the Committee e Committee recommends that within three months of adoption of this report, the unting Officer to submit to the Auditor-General, the status of the write-off of the n-performing loans and the recovery of the outstanding loan. of Expenditure disclosed under Note 9 to the financial statements, the statement of financial performance an amount of Kshs. I14,432,000 in respect to employee costs. A review of the account ed that the above balance, which includes travel, accommodation, subsistence, and r allowances amounting to Kshs.25,135,049. l8

I 73. The above expenses are operational expenses and do not relate to employee costs. In the circumstances, the employee costs have been overstated by Kshs.25,l3S,O4g while ttre general expenditure has been reduced by a similar margin. Submissions by the Accounting Officer 74.The Managing Trustee acknowledged that the financial statements submitted during the audit reflected an expenditure on employees amounting to Kshs. I 14,470,000 which included travel, subsistence, and other allowances of Kshs. 25,135,049 as disclosed underNote 9 to the financial statements. 75. She also stated that the financial statements enclosed were amended to re-classify the expenditure from employee cost Note 9 to Operational Expenditure Note l3 to financial statements. Observations and findings of the Committee 76. The Committee observed that: i. The Fund misclassified the expenditure of Kshs.25,135,049 relating to travel, accommodation, subsistence, and other allowances as employee costs instead of operational expenses, thereby overstating the employee costs and understating the general expenditure costs; ii. The Fund has since amended the financial statements to re-classify the expenditure from employee cost to Operational Expenditure; iii. The matter remained unresolved. Recommendations of the Committee 77 . The Committee recommends that: i. The Accounting Officer submits a report on the reclassification of the expenditure of Kshs.25,135,049 relating to travel, accommodation, subsistence, and other allowances to the Auditor- General within three months. ii. The Accounting Officer ensures that all applicable accounting and financial controls, systems, standards, laws, and procedures are followed in the preparation of the financial statements in compliance with Public Finance Management Act, 2012 and' in accordance with the standards prescribed by the Public Sector Accounting Standards Board as per Regulation 101(4) of the public Finance Management (National Government) Regulations, 2012. I l9

8. Shortfall and Unauthorized Expenditure Unauthorized Expenditure Managing Trustee submitted that the overall over expenditure of Kshs I ,614,712,000 as result of a provision forbad loans amountingto Kshs 9,134,837,000 made during year against a budget of Kshs 363,394,000 resulting to over expenditure of Kshs 1,443 e noted that Adoption of the new policy was necessary as all inherited loans from former were long overdue and risk of loss was real. Further although the Fund had made above provision, loan recovery efforts continued. further stated that the Fund sought approval of over expenditure from the National ry through the parent Ministry on 4th of May 2021. The Ministry then requested for same on 25th May, 2021 but the approval was yet to be received. statement of comparison of budget and actual amounts reflects approved receipts budget actual on comparable basis amount of Kshs.853,753,000 and Kshs.549,870,000, ively, resulting to shortfall in receipts of Kshs.303,883,000 or 36Yo. Fu the Fund's approved expenditure budget was Kshs.757,577,000 while the actual nditure was Kshs.9,372,289,000, resulting in an over-expenditure of 8,614,712,000 or ll37Yo. There is no evidence that the Management sought any ion to overspend excessively over and above the approved budget underfunding and underperformance affected the planned activities and has impacted on service delivery to the public by the Accounting Officer Revenue Short Fall Managing Trustee responded that the Fund had an approved operating budget of Kshs ,753,000. The Actual revenue realized was Kshs. 549,870,000 resulting in a shortfall of 303,883,000 (36%) explained that the shortfall was because of Kshs. 126,600,000 expected from the for Integrated Coffee Productivity Project (ICPP) was not received. Secondly, coffee and sugar loan repayment performed poorly leading to suspension of interest which to shortfall of Kshs.243,833,000. Th 8 a d+. i 8s I 20

Observations and findings of the Committee 86. The Committee observed that: i. The Fund had a shortfall in revenue receipts of Kshs.303,883,000 and an over- expenditure of Kshs.8,6 I 4,7 12,000; ii. The revenue shortfall resulted from non-receipt of Kshs. 126,600,000 expected from the Government for Integrated Coffee Productivity Project (lcpp) and poor loan repayment performance of the coffee and sugar loans which led to shortfall of Kshs.243,833,000; iii. The over-expenditure of Kshs 8,614,712,000 was as a result of a provision for bad loans; iv. The matter remained unresolved. Recommendations of the Committee 87. The Committee recommends that within three months of adoption of this report, the Accounting Officer to submit to the National Assembly and the Auditor-General, the status of the write-off of the non-performing loans and the recovery of the outstanding loan. 9. Unresolved Prior Year Matters 88. In the audit report of the previous year, several issues were raised under the Report on Financial Statements. However, Management has not resolved the issues or disclosed all the prior year matters as provided by the Public Sector Accounting Standards Board templates and firmed by The National Treasury's Circular Ref: PSASB/lll2 Vol.l(aa) of 256 June, 2019. Submissions by the Accounting Officer 89. There was no response from the Managing Trustee concerning unresolved prior year matters. Observations and findings of the Committee 90. The Committee observed that; i. Prior-year audit issues remained unresolved as at 30 June2020 against the requirement of Section 68(2Xi) of the Public Finance ManagementAct, 2012; and ii. The matter remained unresolved. Recommendations of the Committee 91. The Committee recommends that the Accounting Officer ensures that all applicable accounting and financial controls, systems, standards, laws, and procedures are followed in the preparation of the financial statements in compliance with public Finance Management Act, 2012 and in accordance with the standards prescribed by the Public Sector Accounting Standards Board as per Regulation l0l(4) of the public Finance Management (National Government) Regulations, 2012, 21 I

Th Ks SU K i I I b I 2 00 I case by Kibos Sugar & Allied Industries receivables from exchange transactions - loans, advances and interests balances totaling .787,183,000 as at 30 June, 2019 includes loan advances amounting to .133,972,375 advanced to Kibos Sugar & Allied Industries. noted that the Company has never repaid any of the stated loans. Further the Company the Commodities Fund and the Agriculture and Food Authority in the High Court of mu vide Petition No. l9 of 2019, in which it denied receiving any money by the Fund. the petitioner acknowledged that the loans were instead advanced by the Kenya Board and not Commodities Fund. It is not clear how the loan will be paid and why y resorted to legal action no accrued interest has been made in the amount advanced. In these circumstances, Fund may not realize the amount classified as loans. by the Accounting Officer Managing Trustee submitted that Kibos Sugar & Allied Industries were advanced Kshs. ,972,375 on l6th June 2014 for cane development by the defunct Kenya Sugar Board. the loan book was transferred to Commodities Fund, demand letters were issued to Sugar and Allied Industries for repayment of the outstanding amounts. company instituted legal action to block the demand to repay these amounts. The court since dismissed the petition with costs. Fund issued the company with the I st demand notice on 28th April 2023 and received s from their lawyers to stop harassing their client. The Fund proceeded and issued 2nd demand notice on 6th June2023. clarified that the loan balance as of 20th June 2023 was Kshs.20l,916,125.5l and it nued to accrue interest which would be frozen five years after the due date of l6th June l9 which would be on l6th June 2024. and findings of the Committee Committee observed that: As at 30 June,20l9 the Fund had a loan balance of Kshs.133,972,375 advanced to Kibos Sugar & Allied Industries in June 2014 for cane development by the defunct Kenya Sugar Board; 22

ii. The company instituted legalaction to block the demand for payment by the Fund. The petition was however dismissed; iii' The Fund has issued demand notices for the payment of the loan balances; iv. The loan balance as of 20th Junez0z3 was Kshs. zol,916,125.5l; and v. The matter remained unresolved. Recommendations of the Committee l0l. The Committee recommends that: i. The Accounting Officer to take appropriate measures to ensure the recovery of the outstanding loans and interest; and ii. Within three months of the adoption of this report, the Accounting Officer to submit to the Auditor-General, the status of the recovery of the outstanding Ioan. I l. Irregular Procurement of General Insurance Services 102. The provision of general insurance services was procured vide Tender No. COMFUND/T/02/2018/19 dated l2th March,20l9 and thirteen (13) bidders responded. The evaluation was based only on premium and excess on the quoted amount. The lowest bidder as per the evaluation was awarded the contract for a sum of Kshs.861,323. 103. The criteria set by the procurement unit was that the evaluation and final ranking of the bid would consider the scope of the cover in relation to the premium which was to have a weight of 70Yo and excess which was to have a weight of 30%o. The cost of items not priced would be assumed to be included in other costing in the proposal. The award was to be made to the Iowest evaluated bidder. 104. The Procurement Act provides for both technical and financial evaluation regarding such services. It was noted that only financial evaluation was done. It was therefore not possible to ascertain the capability of the winning firm without assessing its technical capability. 105. In the circumstances, the Management contravened Section a6$)(a) of the public Procurement and Asset Disposal Act, 2015. Submissions by the Accounting Officer 106. The Managing Trustee submitted that the tender was evaluated based on the firms meeting the mandatory (eligibility) requirements as set out in the tender document before being considered for technical evaluation on their excess and premiums quoted by each bidder which were assigned 30Yo and 7\yo weights respectively. 23

q l T t e m I ? o stated that that this was a regulated industry where firms were required to maintain in minimum thresholds before their licenses are renewed and allowed to operate. and findings of the Committee Committee observed that: Fund used only financial evaluation and not technical evaluation in procuring general surance services contrary to Section a6($(a) of the Public Procurement and Asset I Act, 2015 matter remained unresolved of the Committee Committee recommends that the Accounting Officer should always ensure that, Public Procurement and Asset Disposal Act, 2015 and Regulations are complied when procuring goods and services. Costs - Staff Establishment Shortfall Fund had forty-four (44) employees against staff establishment of one hundred and fifty- (154) during the year under review, resulting in a shortfall of staff totaling to one and ten (ll0) or 7lo/o. The Management had serious challenges with staffing, ly in the procurement, transport and credit control units. by the Accounting Officer Managing Trustee acknowledged that the staff shortage especially in the credit and that authority to employ thirteen (13) additional staff was sought from the al Treasury in 2017. She indicated that the authority was granted in May 2020 and itment, selection and placement was completed in November 2020 rther, she stated that the Fund also sought approval of Human Resource instruments. The was not granted due to gaps in the legal status of the Fund. and findings of the Committee Committee observed that i. The Fund had a shortfall in staff establishment, the Fund however has recruited l3 additional staff in 2020; ii. The Fund sought approval of Human Resource instruments but was not granted due to gaps in the legal status of the Fund; and iii. The matter remained unresolved. I 24

Recommendations of the Committee ll4. The Committee recommends that within three months of the adoption of this report, the Accounting Officer, through the Cabinet Secretary for Agriculture and Livestock Development to submit Statutory Instruments to the National Assembly to address the gaps in the legal status of the Fund for consideration. 13. Functionality of the Board of Trustees ll5. The Crops Act, No.l3 of 2013, which created the Fund did not adequately expound the mandate of the Fund's Board of Trustees as wellas its powers and responsibilities. The Fund is not established as a body corporate having perpetual succession and a common seal and may not, in its corporate name, sue and be sued, which hinders its operations. I 16. Consequently, the Fund's Board of Trustees ability to work independently and effectively in the absence of clear laws on its mandate, powers and responsibilities is doubtful. Submissions by the Accounting Officer 1 17. The Managing Trustee submitted that the Fund identified the gaps in the current Act and drafted a Bill which was expected to fill the gaps. She noted that the Bill was expected to be resubmitted to the National Assembly for consideration . Observations and findings of the Committee I 18. The Committee observed that: i. The Fund identified the gaps in the current Act and drafted a Bill which is to be submitted to the National Assembly for legislation; ii. The matter remained unresolved. Recommendations of the Committee 119. The Committee recommends that within three months of the adoption of this report, the Accounting Officer through the relevant Cabinet Secretary for Agriculture and Livestock Development to submit Statutory Instruments to the National Assembly, to address the gaps in the legal status of the Fund for consideration and approval. 14. Missing Numbers in Loans Issued 120. The Fund operated through a Microsoft Navision System in the daily operations. However, examination of records on the loans issued revealed a series of Loan Number (LN)-00000001 to LN-00159265. However, it was noted that there were 17,676 gaps in the issuance of the loans which could not be accounted for. The gaps in the loan series were neither invalidated nor cancelled in the system. No documentary evidence was provided to show how the missing gaps in loans issuance arose. t2t 25

gaps in the system could have led to issuance of some loans and deleting of the same amounts without a trail of repayments. by the Accounting Officer Managing Trustee submitted that all loans were accounted for regardless of gaps in bering. She indicated the loan listing and general ledger agreed which was an indication all the loans were successfully uploaded. o Xz. Committee observed that: tions and findings of the Committee An analysis of the Navision System (Loan Management System) revealed missing loan records totaling to 17,676 which might have been deleted from system; The management did not provide the supporting documents to confirm that all loans were accounted for regardless of gaps in numbering; and The matter remained unresolved. endations of the Committee e Committee recommends that within three months of the adoption of this report, the Accounting Officer to provide supporting documents for the 17,676 gaps to the r General for verification ,l 5 nce of Multiple Account Numbers to Loan Account Holders ination of the farmers' loans accounts and identification numbers revealed that the odities Fund was issuing different account numbers to the same farmer. A sample of (47) loans accounts had the same identification number but different accounts. explanation was provided for the issuance of different account numbers to the same by the Accounting Officer Managing Trustee responded that the intermediary lending model was used for the 2007 to 2012).ln the model, loan issued jointly through an intermediary or Sacco were managed separately (within the system) without mixing with direct lending nts since they had their own joint collateral. She also stated that a farmer loan showed unique identifier for the farmer (CODF/49969) with three different loan (lnfrastructure Loan, Coffee Farm Establishment Loan and Water Development ) identified by unique loan numbers (LN79223,LN799226,LN79235). The loan summary showed the overall liability of the farmer to Fund 26

Observations and findings of the Committee 127. The Committee observed that: i. The management did not provide the supporting documents to identify the loans through the unique loan numbers; and ii. The matter is unresolved Recommendations of the Committee 128. The Committee recommends that within three (3) months upon the adoption of this report the accounting officer submits the supporting documents to identify the loans through the unique loan numbers to the Auditor-General for verification t29 17. Ineffective Debt Recovery The statement of financial performance reflects general expenses totalling Kshs.9,197,022,000 and which includes provision for bad debts of Kshs.9,l13,574,000 as disclosed underNote l3 to the financial statements. Although the loan balances have been outstanding for a long time, and the provision was made as per the Fund,s policy, no meaningful effort appears to have been made towards full recovery of the loan balances. Submissions by the Accounting Officer 130. The Managing Trustee agreed that the Fund made provisions for bad and doubtful debts amounting to Kshs. 9,113,574,000 in the year ended 30th June 2}lg. While it was true that the provision was high, the same was informed by many long overdue loans. The provisions were done as per Fund's policy. She stated that the Fund issued demand letters and entered into loan repayment plan agreement with several loanees in effort to increase Ioan repayment of the defaulted loans. Further the Fund listed the defaulters to enhance loans collection capacity. The Fund employed additional staff in November 2020 which has increased loan collection capacity. l3l. She further stated that the Fund's corporate status limited its powers to collect loans and realize loan securities. The management was reviewing the Act to give the Fund legal powers to sue loan defaulters and dispose securities. The Fund was also pursuing the full hand over of assets and Liabilities of the former Sugar Development Fund which will enable it collect debts with authority. The Fund also established a Debt Recoverv Unit to ease loan collections. Observations and findings of the Committee 132. The Committee observed that: i. The Fund's provision for bad debts of Kshs. 9,113,574,000 was informed by the Fund's policy; 27

ll No meaningful effort appears to have been made by management to recover fully the loan balances of Kshs. 9,113,574,000 before making a provision on the balance for bad and doubtful debts; and The matter remained unresolved. the Committee recommends that: nting Officer to pursue the write-off of the non-performing loans as provision of Section 69 of the Public Finance. Management Act2012 145 of the PFM Regulations; and six months of adoption of this report, the Accounting Officer to submit uditor-General, the status of the write-off of the non-performing loans recovery of the outstanding loan. ll Comm The per and to the and 28

4.2. Examination of the report of the Auditor-General for the Financial year 201912020. l. Long term receivables from exchange transactions- Loans and advances 134 1.1 High Rate of Provisioning on Loans and Advances . As disclosed under Note l6(iv) to the financial statements, the gross loans and advances reflected in the financial statements amounted to Kshs.16,503,64g,000 with a total provision of Kshs.15,574,004,000 which translate to 94oh of the loans and advances to farmers. Management has not given the basis for the huge provision for the loans. Consequently, the validity, accuracy, and full recoverability of the long-term receivables from exchange transactions - loans and advances totalling to Kshs.2l7,264,000 could not be confirmed. Submissions by the Accounting Officer 135. The Accounting Officer submitted that upon operationalization of Crops. Act, 2013 on lst August, 2014 all assets and liabilities of the defunct Coffee Development Fund were automatically taken over by the new Commodities Fund. She stated that Included in the assets was book loan amounting to Kshs.757,591,523.05, On the other hand, assets and liabilities of the defunct Sugar Development Fund were shared between Commodities Fund and Agriculture and Food Authority (AFA) with Commodities Fund being allocated the book loan amounting toKshs. 14,982,616,069 comprising of principal loanKshs. 12,862,899,003, and accrued interest of Kshs.2, llg,717 ,066. 136. She explained that the book provisions on those loans amounted to Kshs. 4,172,474,52s. She Further stated that the Commodities Fund was handed over additional book loan amounting to Kshs. 2,811,344,927 .99 being loans disbursed by the AFA to Sugar sub-sector from August2014 to July 20l6.The principal loan Components inherited from the former institution and AFA was as follows: Principal Loan Balance coffee portfolio Kshs 757,5 91,523.05 Principal Loan Balance sugar portfolio Kshs 12,g62,g99,003.00 Additional Disbursement By AFA, Kshs 2,g lr,344.gz7.gg Total Principal Loan component from AFA Kshs. 16,43 1,g35,454.06 137. She stated that the above loans represented 99o/o of the total outstanding principal loan balance of Kshs. 16,503,648,000 reported on 30th June 2020. She noted that the loans were not secured by any tangible security and the Commodities Fund risks to lose this core asset in event it becomes uncollectable. 29

that: The provision for bad and doubtful debts of 94Yo is based on the non-performing debts inherited from the defunct Coffee and Sugar Development Funds; The Management did not provide the original signed board minutes on the approval of the new provisioning policy for audit verification. The matter remained unresolved. m endations of the Committee 9 e Committee recommends that within three (3) months upon the adoption of this rt, The Accounting Officer to provide the new provisioning policy on loans and e original signed minutes of the board's approval of the policy to the Auditor- I for audit verification. ,N rming Loans l6(iv) to the financial statements reflects gross loans and advances amounting to 16,503,648,000. However, site visits to sampled regional offices and review of uments and records revealed a gross portfolio of Kshs.l9,l9l,900,3l4 resulting in an iled difference of Kshs.2,688 ,252,314. In addition,96%o of loans disbursed to the ients were overdue and non-performing as tabulated below Amount Advanced Total standing Out- Total Overdue Nakuru 64,865,878 48,720,932 47,215,768 Kisumu 16,825,539,534 18,901 ,620,139 18,197,684,206 Kericho 489,226,981 108,360,69 I 94,500,746 Eldoret 246,410,379 133,198,562 97,360,358 Total 17,626,042,772 19,191,900,315 18,436,761,077 Portfolio at Risk (PAR) 96"/0 4t er, no concrete efforts appear to have been made towards the recovery of the long ing balances and no documented criteria of appraising the borrowers and monitoring utilizations was provided. Consequently, the validity, accuracy and completeness of the -term receivables from exchange transactions - loans and advances totaling s.217,264,000 could not be confirmed by the Accounting Officer Accounting Officer submitted that the gross loans and advances of Kshs. 16,503,648,000 financial statements refers to the principal loan outstanding only while the gross lio of Kshs. 19,191,900,314 for the sampled regional offices is inclusive of interest 30 b I 42. the

outstanding. The long outstanding balances include those inherited from the defunct Sugar and Coffee Development Funds which had no tangible securities at the time of transfer to the Fund. The inherited Coffee loans were secured by social guarantees while the sugar loans the bulk were secured by floating debentures. On the efforts made towards recovery of the loan outstanding loans, the Accounting Oflicer submitted that the Board approved the set-up of a debt recovery unit in the month of December 2020 to assist in the recovery of the loans in arrears. 144 She further submitted that to address the issue of non-performing loans the bulk of which were inherited from the previous Funds the Full Board at a meeting held on l5th April 2021 resolved to seek debt write-off of the loans as at 3l st March 2O2l made up of intermediary coffee loans, sugar loans to public mills, out grower institutions, Govemment of Kenya loans under the Nzoia Arkel Project and companies with part Government shareholding. A letter was written to the Parent Ministry on l gth April 2021 seeking concurrence for debt write- off and subsequent request of the same to the Cabinet Secretary National Treasury to have the debt write-offapproved by Parliament. A follow-up letterwas written on 8th March2023 and feedback is awaited. She submiued that this initiative would result in over T0o/o of the Fund's debts being written off. 145. She also submitted that following the request for the write - off, the Cabinet Secretary to the National Treasury informed the Fund that the National Assembly had approved the Action Plan to revive and commercialize State Owned Sugar Companies as communicated vide Certificate No. 039/l3th/2023. The said letterauthorized the Fund to write off debts owed by five State Owned Sugar Companies to Government, Kenya Sugar Board/Commodities Fund. The figures in the letter that are applicable to Commodities Fund debts are Kshs. 12,336,003,133 143 146. She further submitted that the Fund had sort conclusion of the handover of sugar assets and Iiabilities between Agriculture and Food Authority through the Parent Ministry vide letters dated 8th Manon-performing loans issued in March 2023 and 27th April Z)23,the Fund is in the process of engaging Auctioneers to auction targeted securities have been forwarded to the Legal Department and that recovery in the four sampled regional offices totalling to Kshs, I ,194,653,502have been made. Observations and Findings of the Committee 147. The Committee observed that: i. The difference of Kshs.2,688,252,314 is the interest outstanding from the non- performing loans inherited from the defunct Sugar and Coffee Development Funds 3l

) ii. The non-performing loans are debts which the Fund inherited from the defunct Coffee and Sugar Development Funds; iii. The Accounting Officer has requested for the non-performing debts inherited from the defunct Coffee and Sugar Development Funds and interest thereon to be written- off;and iv. The matter remained unresolved. endations of the Committee Committee recommends that within three (3) months upon adoption of this report, Accounting Officer to provide a progress report on the status of the write-off of the Unsecured Loans to IntermediarieslExpired Loan Agency Agreements rcview of loans data disbursed through intermediaries indicated that the Fund held a total Kshs.18,875,168,260 in arrears. These loans were issued to farmers by intermediaries behalf of the Fund. The loan agency agreements were signed between the Fund and the iaries without any other security or collateral attached to the Fund , it was observed that the agreements held by the Fund were not valid as the had lapsed. In addition, there was no existing collateral to cushion the Fund inst default and thus there was a risk of losing the outstanding amounts secured by the agency and tripartite agreements. I 0 y, the recoverability of the current and long-term receivables from exchange

• loans and advances totaling to Kshs.712,379,000 and Kshs.217,264,000

could not be confirmed. sactions v bm ions by the Accounting Olficer 2 Accounting Officer submitted that the bulk of the loans referred to were inherited from previous Funds. The non-performing coffee intermediary loans were inherited from the er Coffee Development Fund. As at the point of inheriting the loan the portfolio was performing and the tripartite and agency agreements had already lapsed. The Agency were not renewed because the Intermediaries were underperforming and were illing to provide collateralto back up the new agency agreements. In the case of sugar, bulk of the loans were secured with floating debentures. She further submitted that going forward the Fund has continued to serve farmers through intermediaries but have ensured that all those loans are secured by bank guarantees. With respect to coffee, the loans to SACCO's from the Commodities Fund are currently being rls: 32

154 secured by bank guarantees to safeguard against loss while in the case of Sugar bank guarantees are being taken as securities for the loans advanced to Sugar Mills. She further submitted that the Fund has engaged the coffee marketers to facilitate follow-up and remittance of loans to societies secured by tripartite agreements. The non performing unsecured loan book inherited from the former Coffee Development Fund was Kshs. 757,591,523.05 out of which Kshs. 620,765,933.93. Committee Observations and Findings 155. The Committee observed that: i. The non-performing loans are debts which the Fund inherited from the defunct Coffee and Sugar Development Funds; ii. The Accounting officer has requested for the non-performing debts inherited from the defunct Coffee and Sugar Development Funds and interest thereon to be written-oq and iii. The matter remained unresolved. Recommendations of the Committee 156. The Committee recommends that within three (3) months upon adoption of this report, the Accounting Officer to provide a status report on the progress of the write- off process. ts7 3. Unreconciled Inter-Fund Transaction As disclosed underNotes l6(iii) and l6(iv) to the financial statements, the statement of financial position's total loan balance of Kshs.929,643,000 which comprises both current and non-current balances include a gross balance of Kshs.1,153,280,952 relating to receivables from Agricultural Finance Corporation comprising of Kshs.l,l0l,5gl,6l2 and Kshs.51,699,340 for sugar and coffee loans respectively. However, confirmation of records from AFC reflects that the entity owes the Fund Kshs.9,515,756 resulting to an un-reconciled balance of Kshs. 1,143,7 65,196. I 58. Consequently, the validity, accuracy and completeness of the current and long-term receivables from exchange transactions-loans and advances totalling to Kshs.7l2 ,37g,000 and Kshs.217,264,000 respectively could not be confirmed. Submissions by the Accounting Oflicer 159. The Accounting Officer submitted that the Agriculture Finance Corporation (AFC) had been recruited as an intermediary to administer loans to farmers by both the defunct Coffee and Sugar Development Funds. In the case of Coffee, the Corporation had a partnership with JJ

Coffee Development Fund that was implemented between 2007 and2013.ln March 3 the Corporation transferred the loan book back to Coffee Development Fund. ln the of Sugar, the Corporation entered into three Agency Agreements with the defunct ya Sugar Board on 2nd November 2006,6th February 2009 and24th January 2012. submitted that the Fund wrote to Agriculture Finance Corporation (AFC) on lgth April 2l requesting for the breakdown of the Kshs. 9,515,756.12. A reconciliation was dertaken on the AFC Coffee loans and the amount due from AFC that had not been itted was established to be Kshs. 2,929,674.63. The amount was remitted to the Fund l9th October 2021. 61. submitted that with respect to Sugar, the AFC loan book was handed over to the Fund thout supporting documentation. The Fund sought intervention of the Parent Ministry requests by AFA to AFC to provide the documents failed. . The Parent Ministry a Committee on Handing Over of Sugar Assets and Liabilities whose terms of ference were specific to the Sugar Development Fund/AFC Agency Agreement. 1i62. he further submitted that the State Department for Crop Development, the Commodities und, Agriculture Finance Corporation (AFC) and Agriculture and Food have since carried reconciliations on the disbursed and repaid amounts owed to the Commodities Fund. rising from the reconciliations, the current outstanding Principal was Kshs. 666,542,508 the interest was Kshs. 134,129,351.27. bmissions by the Principal Secretary State Department for Crop Development Principal Secretary State Department for Crop Development in a follow - up meeting d on 28th November, 2023 submitted that the State Department for Crop Development, the ities Fund, Agriculture Finance Corporation (AFC) and Agriculture and Food out reconciliations on the disbursed and repaid amounts owed to the Commodities F nd. Arising from the reconciliations, the current outstanding Principal was Kshs. 8 and the interest was Kshs. 134,129,351.27 as highlighted here below: Funds Movement AFC - KSB (Commodities Fund) Seed Allocation Kshs. 1,000,000,000.00 Revolved Funds to AFC Kshs. 230,976,154.70 Total Funds to AFC Kshs. 1,230,97 6,154.7 0 Total Repayments by AFC to KSB Kshs. 513,200,330.30 Revolving Funds Available Kshs. 717,775,824.40 Less: Agency Fees 34

Dec 2006 Kshs. 200 million Kshs. 1,500,000 June2007 Kshs. 100 million Kshs. 750,000 Sept 2007 Kshs. 200 million Kshs. 1,500,000 March 201I Kshs. 180.97 million Kshs. 1,357,321.16 Sept 201I Kshs. 50 million Kshs. 375,000 lanuary 2012 Kshs. 12,500,000 Kshs. 17,982,321.2 Sub Total Less Administration Fees Kshs. 500 million @ 1.5% Kshs.7,500,000 Less: Kapsabet Fraud Cases Kshs.25,750,995 Principal Outstanding Kshs. 666,542,508 164. Subsequently, the interest outstanding to the Fund was reconciled to Kshs. 134,129,351.27, 165. The process of handing over has commenced with the setting up of Committee on Handing overof Assets and Liabilities between AFA and the Commodities Fund. The Committee was formed in l4th December 2021. The Committee has developed the following schedules to support the reconciliation of the funds outstanding. i. Detailed list of beneficiaries ii. Amount recovered per loanee and amount remitted iii. The amount recovered per loanee and not remitted iv. Details of the arrears v. Details of foreclosed cases vi. Details of fraud cases t66. The parties have concluded the reconciliation and submitted the report to the handing over committee. The Committee is working on the repayment schedule from AFC to the Commodities Fund. Committee Observations and Findings 167. The Committee observed that: i. The State Department for Crop Development, the Commodities Fund, Agriculture Finance Corporation (AFC) and Agriculture and Food Authority (AFA) have since reconciled the amount owed to the Fund with the current outstanding principal being Kshs. 666,542,508 and the Interest Kshs. 134,129,351.27 but the documentary was not provided for verification; 35 .

I 4 As ii. The four parties were working on modalities to facilitate the disbursement of the owed amounts of Kshs. 666,542,508 and the Interest Kshs. 134,129,351.27 from AFC to Commodities Fund; and iii. The matter remained unresolved. tions of the Committee Committee recommends that within three months of the adoption of this report, accounting officer to provide the documentary evidence on the reconciliation of outstanding principal of Kshs. 666,542,508 and the Interest Kshs. 134,129,351.27 the Auditor - General for verification Unrecovered Funds Transferred to the Ministry of Agriculture, Livestock and Fisheries isclosed under Note l7 to the financial statements, the statement of financial position receivables from non-exchange transactions of Kshs.46,055,000 which includes ,000 transferred to the parent Ministry during the financial year 201612017. to memos Ref: MOA/SDA/SC/40A dated l8 January, 2017 and Ref: /CORP/I l/23/2 of 9 May,2017, the Ministry was to reimburse these funds once the Treasury released its budgeted funds for the year. However, the Ministry failed to the disbursements to the Fund t7 the circumstances, the accuracy and full recoverability of receivabtes from nonexchange ns of Kshs.46,055,000 could not be confirmed ions by the Accounting Officer Accounting Officer submitted that the Parent Ministry of Agriculture and livestock lopment requested the transfer of the said Funds through Memo Ref: OAiSDA/SC14}A dated l8th January,2017 and Ref: MOALF/CORP/I ll23l2 of 9 May, 17. The Ministry through the two memos had promised to refund the funds once the al Treasury released its budgeted funds. Unfortunately, the Ministry has not refunded funds to date despite receiving demand letters from Commodities Fund. 7 Submissions by the Principal Secretary State Department for Crop Development The Principal Secretary State Department for Crop Development in a follow - up meeting held on 28th November 2023 submitted that the Commodities Fund transferred Kshs 40,000,000 to the Ministry of Agriculture and Livestock in the financial year 20l6117.The State Department had requested the funds as follows: i. Kshs 20,000,000 to be used by the Coffee sub sector task force. 36 M N re

t73 ii. Kshs 20,000,000 to be transferred to chemelil Sugar company. He further submitted that the Coffee sub sector Implementation committee was appointed by his Excellency the President on March2016 by Kenya GazetteNotice dated 4th March 2016 to address and give recommendations to revive the coffee industry as one of the major cash crops in the country. 174. The State Department for Agriculture requested for Ksh 20 million from the Commodity Fund to facilitate the committee which was to be later reimbursed once the funds were availed by the National Treasury. 175. The State Department received KES 20,000,000 from Commodity Fund on 6th February 20l7.The funds were utilized to pay for the task force allowances in accordance with the approved Salaries and Remuneration Committee rates. The breakdown of the expenditure is as follows: Payee Voucher no. Description Amount P/S Department Agriculture State of l24l Payment of taskforce allowance for the national coffee sub sector Reforms team for 7 months 2,380,000 P/S Department Agriculture State of 907 Payment of taskforce allowance for the national coffee sub sector Reforms meetings 5 17,900 P/S Department Agriculture State of 004122 Payment of taskforce allowance for the national coffee sub sector Reforms implementing committee for 7 months. 17,480,000 176. The funds borrowed to cater for the expenses of the Coffee Task Force has not been reimbursed to the commodity fund due to rack of budget provision. 177. The State Department also requested Kshs 20,000,000 for financial assistance to Chemelil Sugar Company to enable the company to enhance its sugar production with a view of forestalling sugar shortages in the country. Commodity fund transferred KES 20,000,000 to the State Department on l5 May 2OlT,which was later transferred to Chemelil Sugar on l9 May 2017 as per our Bank Statement. 37

il Sugar Company had committed to repay the loan at a rate of Kshs 6 million per with effect from October2018 and to clear by April 2019, as per their letter dated August 2018. Chemelil Sugar Company has not reimbursed the funds due to cash flow However, the amount owed by the company have since been written - off Observations and Findings Committee observed that: i. The Fund transferred Kshs.40,000,000 to the state department for crop development in the financial year 2016/2017 and has remained outstanding to date. ii. The matter remained unresolved. s of the Committee Committee recommends that within the current financial year, the Principal ry, State Department of Crop Development refunds Kshs. 40,000,000 ities Fund. Repayments - Payment Received in Advance disclosed under Note 2l to the Financial Statements, the statement of financial position trade and other payables from exchange transactions (creditors and accruals) ling to Kshs.24,391,000. The amount includes payments received in advance of 10,643,000 which constitutes an amount of Kshs.5,527,735, being unidentified loan ments, which were received by the fund but could not be linked to specific r accounts. The supporting schedules indicated that the amount was a lative figure from the year 20ll to 2020 Furtheq the amount of Kshs.10,643,000 includes overpayment on loans and advances amounting to Kshs.5,ll5,5l0, which could not be traced to individual farmers. No satisfactory explanation was provided on why the amounts had not been reconciled to their respective debtors. tly, the completeness and accuracy of the trade and other payables from ge transactions (creditors and accruals) totalling to Kshs.24,391,000 could not be firmed by the Accounting Officer Accounting Officer submitted that the Fund held a total of Kshs. 5,527,725 on account f unidentified deposits. To address the problem of unidentified deposits, the bank was and agreed to capture in the bank statement the following details: Depositors ame, telephone number and Commodities Fund loan number. Following the agreement, 38

the bank was able to capture the depositor's name and telephone number which has eased the identification of deposits. l8s Following this development, the Fund has been able to identify all deposits for year 2021 and2022 except four deposits totaling Kshs.206,572. She submitted that the unidentified deposits of Kshs. 5,527,725 then, has reduced to Kshs. 1,724,5t6 which the management is still trying to identify. Committee Observations and Findings 186. The Committee observed that: i. As at 30s June2020,the Fund had Kshs.10,643,000 being payments received in advance of which Kshs.5,527,735 could not be identified; ii. The Accounting Officer did not provide a schedule or reconciliation to support the deduction of unidentified deposits from Kshs. Kshs.5,527,735 to Kshs. 1,724,596; iii. The Accounting Officer did not provide debtors' aging analysis for the Kshs.5,l 15,5 l0; iv. The bank deposits by the loanees and the bank statements did not include unique loan numbers or identifier against repayment receipts making it difficult for identification of payees; v. The Fund is developing a unique loan identifier to be able to capture the details of the loan payments. In addition, the Fund has agreed with the bank to develop a deposit slip specifically for the Fund which captures farmer's details; vi. Following this development, the Fund has been able to identify all deposits for year 2021 and 2022 except four deposits totalling Kshs.206,5 72; and vii. The matter remains unresolved. Recommendations of the Committee 187. The Committee recommends that: i. Within three months of the adoption of this report, the Accounting Officer to provide supporting documents on the reconciliation of unidentified deposits from Kshs.5,527,735 to Kshs. 1,724,586 to the Auditor- General for audit verification; I tt. Within three months of adoption of this report, the Accounting Oflicer takes appropriate measures to ensure complete identification of bank receiptr including capturing farmers details in deposit slips and to ensure monthly reconciliations to reduce unidentified receipts: and The Accounting Officer provide debtors'aging analysis for the Kshs.S,ll5,5l0 to the Auditor General within three months of the adoption of this report. 39 ul.

I f t nfirmed Expenditure on Maintenance of an ERP disclosed under Note 12 to the financial statements, the statement of financial ance reflects expenditure of Kshs.10,685,000 under repairs and maintenance. The nt includes Kshs.4,535,734 described as office and communication equipment but ich related to payment for an annual software renewal and support fee paid to a vendor the entity had not upgraded its Enterprise Resource Planning (ERP) to the latest lable version and was using a previous version of the ERP which was less suited for e Fund's current needs and is prone to internet vulnerabilities. This is despite contractual ligations of Kshs.2,000,000 annual mandatory payments to the service provider for usiness Ready Enhancement Plan subscriptions as outlined in the contract. The ing receipts from the vendor for the payment of the annual subscriptions were provided for audit. nder the circumstances, the accuracy and validity and value for money on the expenditure Kshs.4,535,734 could not be confirmed ions by the Accounting Officer Accounting Officer submitted that the vendor, Sure step, was paid Kshs. 4,535 ,734 for ual licenses and support as observed by the auditor. The contract entailed support ices and system licenses. She further submitted that the system had not been upgraded at the time of audit, but the vendor was engaged and upgraded the system to the current version. The Fund was currently operating on Microsoft Navision Dynamics 365 Business Central and not Microsoft Navision Dynamics Version 2017 thatwas there at the time of audit. She further confirmed the receipt for the above amount which has been retrieved and given to the auditor and attached copies of receipts. and Finding of the Committee The Committee observed that: i. The Fund paid Kshs.4,535 ,734 for an annual software renewal but the system had not been upgraded at the time of audit; ii. the Accounting Officer submitted that the system has since been updated to the curr¤nt version; and iii. The matter remains unresolved. t, 193 40

Recommendations of the Committee 194. The Committee recommends that the Auditor General to verify whether the system has been upgraded to the current version during the audit for the financial yeer 2022t23. 7 . Irregular Appointment of Board Members 195. As disclosed under Note l0 to the financial statements, the statement of financiat performance reflects remuneration to trustees amounting to Kshs.17,73g,000 which includes an amount of Kshs.4,280,000 paid to six members of the Board of Trustees and Ministry representatives whose letters of appointment were not provided for audit review. 196. Consequently, the appointment of the four Board Members and the validity of the expenditure amounting to Kshs.4,280,000 courd not be confirmed. Submissions by the Accounting Officer 197. The Accounting Officer submitted that the Fund paid Kshs.4,280,000 to four board members who were gazetted but the appointment letters were not issued by the appointing authority. The Fund requested the Parent Ministry to avail the Appointment letters for the chairman and three board members via a letter referenced Com/Fund /F.l/BoT/Vol.2 dated l6th December 2019 in vain. The term of office of the four directors expired and new directors appointed to replace them. All new directors were gazetted and issued with appointment letters. Observations and Finding of the Committee 198. The Committee observed that: i. The term of office of the four directors lapsed and new directors were appointed to replace them; and ii. The matter is resolved. Other matters 8. Budgetary Control and performance 199. The statement of comparative budget and actual amounts reflects a final revenue budget and actual on comparable basis of Kshs.598,622,000 and Kshs.481,165,000 respectively resulting to an under-funding of Kshs. 117,457,000 or 2}Yoof the budget. Similarly, the Fund expended Kshs.562,846,000 against an approved budget of Kshs.584,704,000 resulting to an under-expenditure of Kshs.21,858,000 or 20yo of the budget. 200. The underfunding and underperformance affected the planned activities and may have impacted negatively on service delivery to the public. 4t

2 ns by the Accounting Officer Accounting Officer submitted that the Fund had an approved budget revenue budget Kshs 598,622,000. Revenue realized during the year amounted to Kshs. 481,165,000 ng to under collection of Kshs. 117,457,000 equivalent to 20o/o. The shortfall is ted to poor loan performance more so from the sugar sector that was projected 82%o of the targeted revenue but the actual result was 66Yo resulting to a shortfall 16%. further submitted that the Fund had approved expenditure budget of Kshs 584,704,000 utilized Kshs. 562,858,000 resulting to underutilization of Kshs 21,858,000 or 4Yo. in the total expenditure of Kshs 562,846,000 is the personnel expenditure of Kshs 8,000 against a budget of Kshs 124,713,000 resulting to savings of Kshs 38,105,000 he further submitted that the Fund had budgeted to recruit l3 new stafffrom July 2020 the authority to employ was received in May 2020 and employment process completed November 2020. Further, the Fund had planned to adjust staff salaries in the year subject the approval of organization structure, Salary scale and Career progression. The approval not granted, and funds meant for salary adjustments were not utilized 6ons and Findings of the Committee Committee observed that: i. the Fund expended Kshs.562,846,000 against an approved budget of Kshs.584,704,000 resulting to an under-expenditure of Kshs.21,858,000 or 20Yo of the budget; ii. The Fund had budgeted to recruit l3 new stafffrom luly 2020 but the authority to employ was received in May 2020 and the employment process was completed in November 2020; iii. The Fund had planned to adjust staffsalaries in the year subject to approvalof organization structure, Salary scale and Career progression. The approval was not granted and funds meant for salary adjustments were not utilized. iv. The matter is resolved Unresolved Prior Year issues In the audit report of the previous year, several issues were raised under the Report on Financial Statements, Report on Lawfulness and Effectiveness in Use of Public Resources, and Report on Effectiveness of Internal Controls, Risk Management and Governance. However, although the Management has indicated that the issues have been 9 42

responded to, the matters have remained unresolved as the Public Accounts Committee has not deliberated on the issues. Submissions by the Accounting Oflicers 206. Management did not provide a response. Observations and Findings of the Committee 207. The Committee observed that: i. Prior-year audit issues remained unresolved as at 30 June 2020 against the requirement of Section 68(2XI) of the Public Finance ManagementAct, 2012; ii. The matter remains unresolved. Recommendations of the Committee 208. The Committee recommends that within three (3) months upon the adoption of thb report, the Accounting Officer takes appropriate actions to address unresolved prior year matters as provided in section 53 of the Public Audit Act, 2015; Section 68(2)(I) of the Public Finance Management Act, 2012 and submit the status report to the Auditor General for audit verification. Lawfulness and effectiveness in use of public resources I 0. Un-Approved Remuneration Structure 209. As disclosed under Note 9 to the financial statements, the statement of financial performance reflects employees' costs amounting to Kshs.96,085,000 which includes salaries and wages, housing benefits and allowances, pensions contributions and medical aids. However, the salary structure and scale on payment of employees' salaries and allowances used by the Fund was not approved by the Salaries and Remuneration Commission contrary to Article 230(4) (b) of the Constitution which provides that the powers and functions of the Salaries and Remuneration Commission shall be to advise the National and County Governments on the remuneration and benefits of all other public officers. consequently, the management is in breach of the law. Submissions by the Accounting Officer 210. The Accounting Officer submitted that the salary structure and scale on payment of employees' salaries and allowances used by the Fund was not approved by Salaries and Remuneration Commission. The Fund submitted the HR instruments to the parent Ministry, SRC, SCAC for guidance and approval but the same could not be acted due to legal gaps that exist in the establishment Act. The Fund has therefore continued to use the salary structure of the former Coffee Development Fund awaiting resolution of the above matter. 43

u bm m u H S J S 2 and Finding of the Committee Committee observed that: The Fund's staff establishment and the salary structure and scale used by the Fund for payment of employees' salaries and allowances has not been approved by the Salaries and Remuneration Commission because of the corporate status of the Fund; The staff instruments in use were approved by the Commodities Fund Board of Trustees; and iii. The matter remained unresolved ations of the Committee 2 Committee recommends that within three months of adoption of this report, the ting Officer to engage the Salaries and Remuneration Commission (SRC) to e up with an approved rates for compensation of employees which the Fund can n-Compliance with the National Cohesion and Integration Commission Act,2008 under Note 9 to the financial statements, the statement of financial performance ects employee costs amounting to Kshs.96,085,000. The amount comprises of salaries wages, housing benellts and allowances, pensions 467 contributions and medical aids. r, out of the fifty-six (56) regular employees of the Fund, twenty (20) representing of the total employees were from one ethnic community contrary to the provision of 7(2) of the National Cohesion and Integration Commission Act, 2008 which provides no public establishment shall have more than one third of its stafffrom the same ethnic rnunity. Consequently, the management is in breach of the law. by the Accounting Officer 2 Accounting Officer submitted that the Fund had fifty-six (56) regular employees and (20) representing 36oh of the total employees were from one ethnic community. She submitted that the Fund promotes equal employment opportunities and ent is committed to progressively ensure ethnic representation and balance on itment of new ernployee and replacement of existing ones. 2 further submitted that the Fund has a representation of ll communities despite the few numbers. The Iast recruitment of l3 employees saw a representation of 9 communities. current position has also been disclosed annually as the Fund reports to the Public Commission on Compliance with the Values and Principles in Articles l0 and232 the Constitutions with an undertaking to progressively ensure that as many of the 48 rnunities are represented as per the PSC evaluations. This, management undertook to gh open and fair advertisement, shortlisting, interviewing and placement for new and Iacement positions as well as applying affirmative action to comply with the various 44

I statutory requirements including compliance with the provision of section 7 of the National Cohesion and Integration Commission Act 2008. Observations and Finding of the Committee 216. The Committee observed that: i. 36% of the total employees were from one ethnic community contrary to the provision of Section 7(2) of the National Cohesion and Integration Commission Ac! 2008; and The matter remained unresolved. il Recommendations of the Committee 217 . The Committee recommends that the Accounting Officer to ensure that there is ethnic balance in recruitment of staff in the Fund in compliance with Section 7(2) of thc National Cohesion and Integration Commission Act, 200g. Report on effective of internal controls, risk management and governance 12. Laxity in Implementation of Off-site Back-up 218. A site visit to the offsite back-up on 22 March, 2021 revealed the following: (i) The offsite back-up server was placed in an open area wherein the stipulated requirements for physical access and environmental conditions for server installations including manufacturers design temperature and humidity conditions cannot be implemented; (ii) Security Parameters governing access to the server were not defined and did not meet the minimum standards implemented at the head office; (iii) The server was placed in an open area with no controlled access; (iv) The building in which the server is located does not belong to the entity; and (v) Access to the server is not monitored and physical access logs were not maintained. In the circumstances, the entity risks loss of valuable sensitive data, and the offsite servers are prone to theft and unwarranted destruction 219- ln the circumstances, the entity risks loss of valuable data, and the offsite servers are prone to theft and unwarranted destruction. Submissions by the Accounting OIIicer 220. The Accounting Officer submitted that the Fund has in place the IT Strategic Committee/lT Steering Committee from lgth Jan 2021 and members are as follows: Solomon Kirw4 Godfrey Kinyus, Beatrice Koskei and Nesline Okiko 221. She submitted that the committee was not trained in the year due to budget constraints, but two members were subsequently trained on 22nd to 26th February 2021. The she 45

2 ledged the Nakuru and Eldoret regional offices did not have fire extinguishers and rel on those installed by the landlord. The anomaly was rectified later in the year by ling own fire extinguishers in those offices further submitted that that all regional offices have LAN and that they took measure to itize on use of the facilities. All staff are currently using the facility without any problem. confirmed that at the time of the audit, some of the desktops did not have functional r backups. This has since been rectified by procuring and distributing power backups affected offices/staff. urtheq she confirmed sensitization of staff on matters ICT functionality has been taken seriously and staff are always sensitized whenever there is any new development / functionality tions and Finding of the Committee Committee observed that: The Fund's offsite back-up server was placed in an open area at the time of audit. Management have since rectified this anomaly by partitioning the room and installing a biometric access control to the server room and the server room now meets the minimum standards required of such a room; and The matter remained unresolved. tions of the Committee The Committee recommends that the Accounting Officer submits documentary evidence on the corrections of the anomalies to the Auditor - General for verification. IT Internal Control and IT Governance Weaknesses ng the year, the Fund had the following IT intemal control weaknesses i. The Fund had not established an IT Strategic Committee, an IT Steering Committee and has not undertaken any trainings of ICT Staff during the audit period.; ii. Further, no fire extinguishers have been installed in the Eldoret and Nakuru Branches; the entity was relying on extinguishers installed by the building owners to which they have no control of maintenance. iii. The Fund has a local area network (LAN) installed in their regional offices. However, a visit to the sampled regions revealed that some of the offices were not using the LAN for internet connectivity since officers were not aware about the functionality. In case of downtime with WIFI, officers had to wait for resumption of WIFI so as to be able to access and use the system.; 46

I iv. The audit observed 5 computers (Coded 000474,000005, OOOOzZand 000024) witr no UPS Back-ups. All desktop computers at the Nakuru and Eldoret Branches have no power backups installed; v. Management did not undertake proper training and sensitization on tCT functionality. Lack of continuous training in ICT hinders the ability of the entity to benefit from ICT solutions in achieving its mandate. Consequently, IT governance and IT internal controls were not adequate or effective. Submissions by the Accounting Officer 228. The Accounting Officer submitted as follows: i. The Fund has in place the IT Strategic Committee/lT Steering Committee from lgth Jan202l and members are as follows:Solomon Kirwa, Godfrey Kinyus, Beatrice Koskei, Nesline Okiko; ii. It is true the committee was not trained in the year due to budget constraint, but two members were subsequently trained on22nd to 26th February 2021; iii. Further, the Fund acknowledges the Nakuru and Eldoret regional offices did not have fire extinguishers and relied on those installed by the landlord. The anomaly was rectified later in the year by installing own fire extinguishers in those offices. iv. All regional offices have LAN and they took measure to sensitize on use of the facilities. All staffare currently using the facility without any problem; and v. During the audit, some of the desktops did not have functional power backups. This has since been rectified by procuring and distributing power backups to affected offices/staff. Observations and Finding of the Committee 229. The Committee observed that: i. The members of the ICT Strategic Committee were not trained; and ii. The matter remained unresolved. Recommendations of the Committee 230. The Committee recommends that within three months of the adoption of this report, the Accounting Officer to provide a status report on the training of members of the ICT Strategic Committee. 14. Functionality of the Board of Trustee 231. As previously reported, the CropsAct, No.l3 of 2013, which created the Fund did not spell out clearly the mandate of the Fund's Board of Trustees as well as its powers and responsibilities. The Fund is not established as a body corporate having perpetual succession and a common seal and may not, in its corporate name, sue and be sued, which hinders its operations. 47

a flfe Fund's Board of Trustees ability to work independently and effectively in cfear laws on its mandate, powers and responsibilities is doubtful. I by Accounting OIIicer Officer submitted that the Crops Act No. l3 of 2013, which created the Fund clearly the mandate of the Fund's Board of Trustees as well as its powers It is also true that the Fund is not established as a body Corporate having ion and a common seal and may not, in its corporate name, sue and be sued, its operations to amend the Crops Act 2016 has proved futile since the amendment would and would affect many other agencies that rely on it. the Fund has initiated a process to develop its own Act which if enacted will said legal gaps. The Commodities Fund Bill2023 is currently in draft I be submitted to the NationalAssembly before end of June 2023 nding of the Committee observed that: provisions of the Crops Act,2013 establishing the Commodities Fund do not the functions of the Board of Trustees; exist no rules for the management of the Fund as required by Section l0(2) Crops Act,20l3; and matter remains unresolved. of the Committee ittee recommends that within three months of adoption of this report, Officer through the relevant Cabinet Secretary for Agriculture, and Development to submit to the National Assembly, a Bill /Statutory m to address the gaps in the Crops Act, 2013 for consideration. of spell al hinders 6. all the Comm of Th set and and 48

4.3 Examination of the report of the Auditor-General for the Financial year 2020t2021 1. Unsupported Prior yearAdjustment 238. The statement of changes in net assets reflects a Revenue Reserve net balance of Kshs.12,039,180,000 that includes prior year adjustments to the revenue reserves of Kshs.74,939,000 dating back to financial year 2016/2017 that could not be traced in the prior year operations. Although the Management explained that the prior year adjustments arose after a reconciliation of the loans and perfection of the Credit Management System, the reconciliation figures were not supported by the loan statements. 239. Consequently, the accuracy, completeness and presentation and disclosure of the revenue reserves balance of Kshs.15,264,852,000 as at 30 June, 2021 could not be confirmed. Submissions by the Accounting Officer 240. The Accounting officer submitted that the Fund reported a revenue reserve balance of Kshs. (12,039,180,000) that included prior year adjustments of Kshs. 74,939,000. The adjustments resulted from perfection of the Credit Management Systern that was under development from 2017 . Following its completion, it was noted that the formula that was in place to compute the interest on coflee loans was not accurate and was resulting to under cast. Similar errors were also noted on Sugar portfolio that were managed manually. Overall, the interest was understated by Kshs, 74,939,000 which was adjusted in the revenue reserve. 241. She further submitted that Management had attached loan balance for period prior to reconciliation and after to show the adjustments made. Further, the Fund used to maintain its loan book per intermediary based on agency agreements which mandated them to disburse and collect loans on behalf of the Fund. However, this arrangement changed when the agreements lapsed, and the Fund started lending and collecting its own loans. Consequently, the new Credit Management system, the Fund has captured all customers including those who were under intermediaries. 242. The Accounting Officer attached the Ioan master to support the interest balances as at ilOth June202l and similar schedule in support of balances prior to adjustments. The difference between two supports is the additional interest of Kshs. 74,g3g,000 charged in the revenue reserye. customer statements can be verified directly from the system. Observations and Finding of the Committee 243. The Committee observed that: i. The Fund included prior year adjustments of Kshs. 74,939,000 in the Revenue Reserve relating an understatement for interest on coffee loans and Sugar loans; 49 I I

a 2 ll The Accounting officer did not provide journals to support the adjustment of Kshs.74,939,000 The matter remained unresolved lll tions of the Committee Committee recommends that: i. Within three months of the adoption of this report the Accounting Officer to provide journals to support the adjustment of Kshs.74,939,000 to the Auditor General for audit verification; and ii. The Accounting Officer to submit the prior year adjustments to the Auditor- General for verification within three months of adoption of this report High Rate of Provisioning on Loans and Advances disclosed under Note l7(iv) to the financial statements, the gross loans and advances in the financial statements amounted to Kshs.16,103,966,000 with a total provision o Kshs.14,732,422,000 which translate to 9lYo of the loans and advances to farmers. has not given the basis for the huge provision for the loans. er, the Fund disbursed approximately Kshs.321,168,000 for sugar and coffee rtfolios during the year under review, despite the high percentage of the portfolio risk. sequently, the validity, accuracy, and full recoverability of the long-term receivables exchange transactions - loans and advances totalling to Kshs.754,905,000 could not be firmed. ions by the Accounting Officer Accounting Officer submitted that the financial statements of the Fund reflected gross and advances amounting to Kshs. 16,103,966,000 and corresponding loan loss ion amountirrg to Kshs. I 4,732,422,000 which was equivalent to gloh of all loans. The of provision was the Commodities Fund Provisioning policy Chapter 7.0. Section 7.1 submitted furtl.rer that loans are classified into Normal, Watch, Sub-standard, doubtful loss. The applicable provision rate for each of the five categories are: Normal (Grade l) %o, watch (Grade Two) - 3%o, Substandard (crade 3) - 20yo, doubtful (Grade 4) - l00yo, (Grade 5) - 100%. schedule of gross loans, classifications, applicable provisioning rate and the resultant n was attached. The Accounting Officer further submitted that provisions of l% 8 i 50

made for new loans that are advanced and the loans that are continuing to accrue intercst prior to the freeze date which contribute to the increase in loan provisions. Observations and Findings of the Committee 250. The Committee observed that: i. The provision for bad and doubtful debts of 94Yo is based on the non-perfirrming debts inherited from the defunct Coffee and Sugar Development Funds; ii. The Management did not provide the original signed board minutes on the ap,proval of the new provisioning policy for audit verification. iii. The matter remained unresolved. Recommendations of the Committee 251. The Committee recommends that within three (3) months upon the adoption of this report, the Accounting Officer to provide the new provisioning policy on loans & advances and the original signed minutes of the board's approval of the policy to the Auditor-General for audit verification. 3. Unsupported Loans and Advances Balance 252. The statement of financial position reflects a balance of Kshs.754,905,000 under lon5;-term receivables from exchange transactions - loans and advances as disclosed in Note l Triiv) to the financial statements. However, the amount was not supported by any verifiable document or records. 253. ln the circumstances, the accuracy and completeness of the long-term receivables from exchange transactions - loans and advances of Kshs.754,gO5,0O0 as at 30 June,202l could not be confirmed. Submissions by the Accounting Officer 254. The Accounting Officer submitted that the statements of financial position reflect a balance of Kshs. 754,905,000 under long-term receivables, loans, and advances. The amount is a portion of the entire loan portfolio that is receivable beyond a period of twelve months from the balance sheet date. The Accounting Officer gave a list of the entire loan portfolio and a similar schedule of long-term loans of Kshs. 754,905,000. Observations and Findings of the Committee 255. The Committee observed that: i. The Accounting Officer did not provide a schedule to support the Kshs. 754,905,000 under long term receivables from exchange transactions; and a 5l

a 8 ii. The issue remained unresolved endations by the Committee 6. Committee recommends that within three months of the adoption of this report, Accounting Officer to provide a schedule to support the Kshs.754,905,000 under term receivables from exchange transactions to the Auditor General for verification. Unrecovered Fund Transferred to the Parent Ministry statement of financial position reflects receivables from non-exchange transactions of s.46,410,000 and as disclosed in Note l8 to the financial statements. Included in the ance is an amount of Kshs.40,000,000 advanced to the parent Ministry to offer financial to Chernilil Sugar Company to enhance its sugar production that has 73 remained ing since 2017. The Ministry was to reimburse these funds once the National ury released its budgeted funds for the year , the Ministry failed to reimburse the funds to the Fund. It was not clear if the isbursement was approved by the National Treasury. Further, a scrutiny of the sponding letter to the Managing 1'rustee revealed that the Principal Secretary did not ign the advance request. Consequently, the accuracy and validity of Kshs.40,000,000 vanced to the Parent Ministry to offer financial assistance to Chemilil Sugar Company ld not be confirmed issions by the Accounting 0fficer 59 Accounting Olficer submitted that the Parent Ministry of Agriculture and livestock Development recluestcd the transfer of the said Funds through Memo Ref: MOA/SDA/SC/40A dated l8 January, 2017 and Ref: MOALF/CORP/I l/2312 of 9 May, 2017. The Ministry through the two memos had promised to refund the funds once the National Treasury releases its budgeted funds. Unfortunately, the Ministry has not refunded the funds to date despite the many demand letters from Commodities Fund. Submissions by the I'}rincipal Secretary State Department for Crop Development The Principal Secretary State Department for Crop Development in a follow - up meeting held on 28th November 2023 submitted that the Commodities Fund transferred Kshs 40,000,000 to the Ministry of Agriculture and Livestock in the financial year 2016/17.The State Department had requested the funds as follows: i. Kshs 20,000,000 to be used by the Coffee sub sector task force. 5Z I l I

ii. Kshs 20,000,000 to be transferred to chemelil Sugar cornpary. 261. He further submitted that the Coffee sub sector Implementation committee was appointed by his Excellency the President on March 2016 by Kenya Gazette Notice dated 4th March 2016 to address and give recommendations to revive the coffee industry as one of the major cash crops in the Country. 262 The State Department for Agriculture requested for Ksh 20 r.nilliorr from the Comrnodity Fund to facilitate the committee which was to be later reimburscd once the fundsr were availed by the National Treasury. 263 The State Department received KES 20,000,000 from Commodity Fund on 6n February 2017.The funds were utilized to pay for the task force allowances in accordance with the approved Salaries and Remuneration Committee rates. The breakdown of the expenditure is as follows: Payee Voucher no. Description Amount P/S Department Agriculture State of l24t Payment of taskforce allowance for the national coffee sub sector Reforms team for 7 months 2,390,000 5 17,900 P/S Department Agriculture State of 907 Payment of taskforce allowance for the national coffee sub sector Reforms meetings P/S Department Agriculture State of 004122 Payment of taskforce allowance for the national coffee sub sector Reforms implementing committee for 7 months. 17,490,000 264. The funds borrowed to cater for the expenses of the Coffee Task Force have not been reimbursed to the commodity fund due to rack of budget provision. 265. The State Department also requested Kshs 20,000,000 from the Fund for financial assistance to Chemelil Sugar Company to enable the company to enhance its sugar production with a view of forestalling sugar shortages in the country. Commodity funrJ transferred KES 20,000,000 to the State Department on l5 May 2017, which was later transferred to chemelil sugar on l9 May 2017 as per our Bank Statement. I s3

a 2 lil Sugar Company had committed to repay the loan at a rate of Kshs 6 million per with effect from October2018 and to clear by April 2019, as pertheir letter dated 28 2018. Chemelil Sugar Company has not reimbursed the funds due to cash flow lems. However, the amount owed by the company has since been written off Observations and Findings Committee observed that: The Fund transferred Kshs.40,000,000 to the state department for crop developrnent in the financial year 201612017 and has remained outstanding to date. The matter rernained unresolved. tions of the Committee The Committee recommends that within the current financial year, the Principal Secretary, State Department of Crop Development refunds Kshs. 40,000,000 Commodities Fund. Unsupported Trade and Other Payables disclosed in Notc 23 to the financial statements, the statement of financial position reflects trade and other payables from exchange transactions (creditors and accruals) of Kshs.63,825,000 which includes trade payables balance of Kshs.9,608,000. However, the trade payables inclr,rde s unsupported balance amounting to Kshs.5,765,258. Further, the general leclger of trade and other payables include a journalvoucher entry for Kshs.2,997,214 dated I st July, 2020 which was not explained nor supported. Consequently, the accuracy, completeness, and validity of the trade and other payables from er<change transactions balance of Kshs.63,825,000 could not be confirmed. by the Accounting Officer The Accounting Officer submitted that the Fund held creditors and accrual balance of Kshs. 63,825,000 which includes trade payables balance of Kshs. 9,608,000. The trade payables included Kshs. 5,765,258 of which Kshs. 4,1 13,360 was provisions for audit fee while the balance of Kshs. 1,65 1,898 was made up of balances for ongoing works. Further reconciliation of'trade payables was done and the correction joumal provided. Further, the management provided the supporting document for the joumal of Kshs. 2,997,214. m 7 u P,o I lztr b 2 2 54

Observations and Findings of the Committee 274. The Committee observed that: i. The payment vouchers, invoices and contracts have since been provided to the Auditor General; ii. The Accounting officer did not provide details supporting the journal vouchers for Kshs2,997,214; and iii. The issue remained unresolved. Recommendations of the Committee 275. The Committee recommends that within three months of the adoption of this report, the Accounting Officer to provide details supporting the journal vouchers for Kshs2,997,214 to the Auditor - General for audit verification. 276 6. Unconfirmed Expenditure on Remuneration of Trustees As disclosed in Note I I to the financial statements, the statement of financial performrance reflects an expenditure on remuneration of trustees of Kshs.18,949,000. The expenditure includes an amount of Kshs.9,756,563 that was paid to thrce (3) members of the Board of Trustees. However, their letters of appointment wcre not provided for audit rel'iew. Consequently, the validity of the expenditure amounting to Kshs.9,7 56,563 could not be confirmed. Submissions by the Accounting Officer 277. The Accounting Officer submitted that the Fund paid Kshs. 9,756,563 to three (3) board members who were gazetted but the appointment letters were not issued by the appointing authority. The Fund requested the Parent Ministry to avail the appointment letters for the chairman and two board members via a letter referenced ComFund/F.l/BoT/Vol.2?lO4 Dated l6th December 2019 which has been in vain. 278 The term of office of the four directors expired and new directors appointed to replace them. All new directors were gazetted and issued with the appointment letters. Observations and Findings of the Committee 279. The Committee observed that: i. The term of office of the board members lapsed and the appointment of current members regularized; and ii. The matter is resolved. t 55

o tters Control and Performance statement of comparison of budget and actual amounts reflects final revenue budget actual on comparable basis of Kshs.815,370,000 and Kshs.498,517,000 respectively, ulting to an under-lunding of Kshs.316,853,000 or 38%o of the budget. Similarly, the nt reflects linal expenditure budget and actual on comparable basis of 293,892,000 and Kshs .255,152,000 respectively, resulting to an under-expenditure of 38,740,000 or l3oh of the budget. fther, the statemcnt ol- financial performance reflects remuneration of trustees of hs.18,949,000 and as disclosed in Note ll to the financial statements which includes tting allowance totalling Kshs.7,860,000. Flowever, the approved budget for sitting lowance was Kshs.4,800.000 resulting in an overpayment of Kshs.3,060,000 or 63Yo. Ithough the Managcrnent explained that the board members were required to attend s organized by the Ministry on all coffee growing regions to sensitize coffee 74 olders on Coffee Bill, 2020 leading to the more meetings than had been anticipated, was no eviclencc to show that the over expenditure was authorized on the approvctl e stimates, under-funding and under-expenditure affected the planned vities and may harc inrpacted negatively on service delivery to the public while the idity of the expenditure on remuneration of trustees of Kshs.18,949,000 could not be 7 ed by the Accounting Officer J Accounting ol'lrcer submitted that the revenue budget was missed by Kshs. 16,853,000. Thc sliortlitll was attributed to impact of Covid- l9 and restrictions imposed the parent ministrv to have all loans granted seek concurrence by the Cabinet Secretary re disbursement. n s a result of this requirement, the Fund disbursed a mere Kshs. 321 illion against budget of Kshs. 700million. Consequently, interest income projected from was not achievecl. Adclitionally, market interest rates on investments were lower than leading to low' income on investment 84 Accounting Ol'llccr sr.rbmitted further that expenditure were below the budget by Kshs 8,740,000. Mucli ol'thc savings were derived from staff salaries as a result of employing l3 new staff in Decernber of 2020 instead of the budgeted period of July 2020. Further, management acknorvlcclges the sitting allowance sub-vote of the directors' vote exceeded its allocation by Kshs. 3,060,000 that was drawn from director's accommodation sub-vote. Overall, the director"s votc cxceeded the budget by 4% which is within the acceptable l0% level. Management hus takcn steps ensure any over expenditures within sub-votes is authorized in advancc. 1 I 56

Observations and Findings of the Committee 285. The Committee observed that: i. Management has taken steps to regularisc thc ovcr-cxpenditure; and ii. The issue is resolved. Lawfulness and effectiveness in use of public resources 8. Single Sourcing of Security Services and Fuel products 286. The statement of financial performance reflects expenditure on use of goods and services of Kshs.98,805,000 as disclosed in Note 9 to the financialstarements. The balance includes security and vehicle running expenses of Kshs. 1,130,000 ancl Kshs.7 ,ZO7,0OO respectively. Analysis of the supporting documents for these expenses revealed that during th,e ys61 under review, a security firm was awarded a contract effective from I't September. 2020 with an expiry date of 3l August, 2021. The security firrr was single sourced without justification contrary to the requirements of Section 103 ol'the Public procuremerrt and Asset Disposal Act,20l5 on direct procurement. 287. It was also noted that, for the first two months of the llrrarrcial year under audit, the procuring entity paid the security firm an amount of Kshs. I 5 7.5 I 6 against a lapsed contract. 288. Further, the Fund single sourced oil, fuel and lubricants from a fuel company contrary to the requirements of Section 103 of the Public Procurement arrd Asset DisposalAct,20l5 on direct procurement. In addition, no documentary evidence was provided for aurlit to confirm that a contract agreement was signed between the procuring entity and the fuel company. 289. Under the circumstances, the regularity and value for money for the above expenditure totalling Kshs.8,337,000 on security and vehicle running expenses could not be confinned. Submissions by the Accounting Officer 290. The Accounting Officer acknowledged the auditor's observatiorr and clarified that rvhat happened was extension of contracts for the two suppliers. The two had been procured procedurally but their contracts were extended severally. 291. On the supply of fuel, she submitted that the Fund retained the services of Total Energies as it has a widespread network of pump stations to cope with its rnandate of carrying out field activities through use of fuelcards. The pricing of fuel in Kenya is also controlleclby the Energy and Petroleum Regulatory Authority which has nrade it difficult for marketers to compete on pricing. She further subrnitted that management has since procured new a 57

a I r 5 providers lor lLrcl Ms. National Oil corporation and are in process of procuring ity services he submitted that the security services for the Wells Fargo Ltd were procured through request for cluotation method of procurement in line with Section 105-106 of the ublic Procurement arrd Disposal Act 2015 and thereafter the contract was extended. s and Findings ol'the Committee Committee obscrvecl that: i. The Accounting Olilccr irregularly procured security and vehicle running expenses for Kshs.l,l:10,000 and Kshs.7,207,000 respectively contrary to the provisions of section I 03 o I' thc l)Lrb lic Procurement and Asset Disposal Act, 201 5 ii. Management rlirl not provide evidence to indicate that contracts between the Fund and the service prol'iclcr r,rcre signed. iii.The issue rernains unrcsolved. endations of the Committee Committee recommends that: i. Within thrce months of the adoption of this report, the Accounting Officer to provitlc contracts signed between the Fund and the service providers for security and vehicle running expenses for Kshs.1,130,000 and Kshs.7,207,000 respectively to the Auditor General for verification; and ii. The Accounting Oflicer to ensure compliance with the Public Procurement and Asset l)isposal Act when procuring goods and services for the Fund. . Non-Compliance n'ith thc One-Third of Basic Salary Rule During the year cndccl 30tr' Junc. 2021, some employees earned a net salary of less than a third (l/3) of the basic salary Ibr all the twelve months of the financial year contrary to Section C.l(3) ol'tlrc I)ublic Service Commission (PSC) Human Resource Policies, 2016. The Management has not c.rplained failure to comply with the policy. In the circumstance, the Fund Managcmcnl contravened Section C.l(3) of the Public Service Commission (PSC) Human llcsourcc I)olicics,20l6 as this may expose the staff to pecuniary embarrassment. ns by the Accounting Ollicer The Accounting Olliccr submittcd that of its employees' net salary as at 30th June 2021 were receiving less tlrurr orrc third of their salary. This was an oversight and has since been regularized. 58 2

Observations and Findings of the Committee 297. The Committee observed that: i. Some employees of the Fund eamed a net salary ol'less than a third (l/3) of the basic salary for all the twelve months of the financial ycar contrary to Section C.l(3) of the Public Service commission (pSC) Human Resource policies, 2ol6; ii. The matter remains unresolved. Recommendations of the Committee 298. The Committee recommends that the Accounting Officcr to cnsure compliancr: with Section C.1(3) of the Public Service Commission (PSC) [Iuman Resource policies, 2016. I 0. Un-Approved Remuneration Structure 299. As disclosed under Note l0 to the financial statcnrcnrs. rhc statement of finarncial performance reflects employees' costs amounting to Kshs.lll,0l0,000 which includes salaries and wages, housing benefits and allowances, pensiorrs contributions and medical aids. However, as previously reported, the salary structure and scale on payment of employees'salaries and allowances used by the Fund was nor approved by the Salarier; and Remuneration Commission contrary to Article 230(4) (b) of- the Constitution ,*,hich provides that the powers and functions of the Salaries ancl Rcrnr-rncration Commission rshall be to advise the National and County Governments on the rcnruneration and benefits of all other public officers. Consequently, the Management is in brcach of the law. Submissions by the Accounting Officer 300. The Accounting Officer submitted that the salary structurc arrd scale on paymenrt of employees' salaries and allowances used by the Fund was not approved by Salaries and Remuneration Commission. She submitted that Fund had sLrbrnitted the HR instruments to the Parent Ministry, SRC, SCAC for guidance and approval but the same could not be ac,ted due to legal gaps that exist in the establishment Act. 301. The Fund has therefore continued to use the salary structure of the former Coffee Development Fund awaiting resolution of the above mau.er. Observations and Finding of the Committee 302. The Committee observed that: i. The Fund's staff establishment and the salary structure and scale used by the Fund for payment of employees' salaries and allowances has not been O 59

il ilt. tv approved by the Salaries and Remuneration Commission because of the corporate statLts ol'the Fund; The fiund has dcveloped its HR instruments including salary structures and is awaiting SI{(' grridance and approval for implementation; The stat'l'instrurncnts in use were approved by the Commodities Fund Board of T'rustces: ancl The matter remained unresolved. / b. cndations of thc Conrrnittee Committee rccornmcnds that within three months of adoption of this report, the nting ollicer to cngagc the Salaries and Remuneration Commission (SRC) the parent ministrl' to come up with an approved rates for compensation of mployees . Non-Compliance with Law on Ethnic Composition As reflccted unclcr Note l0 to the financial statements, the statement of financial performance re-llccts cntployce costs amounting to Kshs.lll,0l0,000. The amount compriscs of salaries i.ltd ,\'itscs, housing benefits and allowances, pensions contributions and medical aicls. I'lorvcver. cluring the year under review, 34Yo of the employees were from the same ethrlic c,onrnunity. This is contrary to Section 7(l) and (2) of the National Cohesion and Intcgration Act, 2008 which states that all public offices shall seek to represent the clivcrsitl ol'tlre people of Kenya in employment of staff and that no public institution shall have nrore than one third of its staff establishment from the same ethnic community. Consecprcrrtly. rhc Management is in breach of the law. igsions by the Accounting Ollicer TheAccounting Ollicer submitted that 34%oof the employees as at 30th June202l were from sat'ne ethnic corrmunitl,. She submitted further that the Fund promotes equal employment oppurtunities ancl management is committed to progressively ensure ethic representation ancl balunce on rccruitment of new employee and replacement of existing ones. The Fund [ras a reprcscntr.rtion of ll communities despite the few staffnumbers. The last recruitment ol' I3 crnployees in year 2020 saw a representation of 9 communities. rTations and Finding ol'the Committee . The Committec obscrvccl tlrat: i. 34% of the total enrployees were from one ethnic community contrary to the provision ol'Scctiorr 7(2) ol'the National Cohesion and Integration Commission Act, 2008; and I aJ ii. The matter remains trnresolved 60

Recommendations of the Committee 307. The Committee recommends that the Accounting Officer to ensure that ethnic balance in recruitment in compliance with Section 7(2) of the Cohesion and Integration Commission Act, 200g. 6l a a t t I

4. of the report of the Auditor-General for the Financial Year 202112022 Unsupported Prior Year Adjustments statement of llnancial position and as disclosed in Note 26 to the financial statements revenue rcscrvr: s ol' (Kshs.l 1,981,926,000) which includes a prior year ustment figure ol' (Kslrs.1,006,000) dating back to 2016120217 financial year ugh Managerncnt crplained that the prior year adjustments arose after a iliation of loans, the reconciliation amounts were not supported by the loan statements. In the circumstances, the validity, accuracy, and completeness of the prior adjustments ol'(Kshs. 1,006,000) could not be confirmed. S issions by thc Accounting Oflicer The Accounting Ot'ficer subrnitted that the statement of financial position and as disclosed in Note 26 to the llnancial statements reflects revenue reserves of (Kshs. 11,981,926) which includes a prior ycar adjustment figure of (Kshs. 1,006,000) dating back to 201612027-year operatiorrs. Tlie prior- year adjustments arose after a reconciliation of some loans which rcsultccl in recognition of additional interest affecting prior periods. Management has givcn statcrnents regarding the loans in question for your review. tions antl lrinding ol'the Committee Cornmittee obsen,ccl that: i. T'he rc\/enLrs reserves included a prior year adjustment figure of (Kshs. I ,006,000) clating back to 2016120217 arising after a reconciliation of loans, the rcconciliation amounts were not supported by the loan statements; arrd ii. The matter rcnrainecl unresolved dations of thc Cornmittee The Committcc rcconuncntls that within three months of adoption of this report, the nting Ol'liccr provitlcs lhe Auditor-General with supporting documents including loan statcmcnts to support thc prior year adjustments. 2. Lack of Logbooks lilr Motor Vehicles The statcmcnt ol' llnancial position reflects property, plant and equipment balance of 17,364,000 rvhose original cost as disclosed in Note 2l to the financial statements was 110,172,000. 'l'hc balancc ol'Kshs.170,172,000 includes motor vehicles with a cost of ,208,000. Ilowevcr, the lrLrnd did not have logbooks for one motor vehicle and one costing Kshs.8.ti59.358 and Kshs. I I 1,071 respectively, both totalling 08 I dq I 0 i I I i I l2 shs.8,970,429 62

313. In the circumstances, ownership status of the motor vclriclc and the motorcycle valued at Kshs.8,970,429 could not be confirmed. Submissions by the Accounting Officer 314. The Accounting Officer acknowledged that the logbooks for motor car registrati<ln No. KDA 561P and motorcycle registration No. KDG 243C tl"ratcost Kshs. 8,859,35g ancl Kshs. I I1,071 respectively had not been issued by NTSA ar rhe timc of audit. 315 She however confirmed that the two vehicles are registered undcr the Commoditiesr Fund as reflected in the virtual logbooks on the Fund's N'ISA porral. The Fund was ac;tively following up with NTSA to secure the physical logbooks lbr the two. The Fund has since secured the logbook for the car registration No. KDA 561 p. Observations and Finding of the Committee 316. The Committee observed that: i. The Fund did not have logbooks for one motorcycle cosr.irig Kshs. I ll,07l respectively; ii. The motorcycle and the vehicle are registered under Cornmodities Fund name asi reflected in the virtual logbooks on the Fund,s NTSA portal. iii. The Fund has since secured the Log book for thc Car KDn 561p and is following up with NTSA to secure the physical logbook rbr trrc rnotorc'cle; and iv. The matter remained unresolved. Recommendations of the Committee 317. The Committee recommends that the Accounting Officcr to provide the logbools to the Auditor General for verification within thrcc months of the adoption of this report. 3r8. 3. Long Outstanding Loans The statement of financial position reflects long teun reccivables of Kshs.657,067,t)00 which as disclosed in Note l8 (iv) to the financial staternents is a net of gross loans ilnd advances of Kshs.15,805,522,000 and of atotal provision ol'Kshs. 14,6g6.7g6,000 or 93% of the gross amounts. Review of loans disbursemerrt records revealed that the balance includes a loan number LN0377 of Kshs.31,100,000 for coflee establishment that trad 63

64 I I disb trrsed to a farmer in Nyeri on 2 March,2016 and was to be repaid within 18 Iowever, the farntcrr had not finished servicing the loan by the renegotiated t clate of 30th June 2021 and the outstanding balance as at 30 lune,2022 was nths. I Kshs.46,2119,452. 9 cr, thc balance includes loans that were inherited from Agriculture and Food uthority, Sugar Board and ('ol'lce Development Fund that are non-performing and have utstantrittu overdue total principal and interest arrears balances totalling l().2.\7,452,848. 57. In tlrc circumstances, the accuracy and recoverability of the ivrblcs liom exchange transactions - gross loans and advances of Kshs.15,805,522,000 lcl not [rc confirmed 0 bmis"-ions by the Accounting Officer Thc lccoLrnting Officer subrlitted that management held meetings with the client after the l 'sc ol-the negotiated rcpayment date to enable regularization of the loan account. Thc elir'r't had targeted to clispose one of their properties. The failure to receive repa'nr, ''is led to three denrancl notices being issued and the client notified us that the file lrrrd i;ecn forwarded to the [)ebt Recovery Unit (DRU) for execution of the requisite debt rccovery measures. 321 The !"rccirl Fund Accounts (lommittee in its sixth report dated October 2019 necon' ,"trr','d that the Board in consultation with the Parent Ministry and approval by the Cabin :r"'retary National 'l'rclsury consider writing off loans to Public Mills and Out !tor.r,,''' 'r titutions that wcre inherited by Commodities Fund based on their low f¤cort','rilr,,iry in accordance ri,ith Section 69 (2) of the Public Finance Management Act 2012. J The Ir a mc,. with I il i:"ld a meeting with thc National Treasury which culminated in the Board holding 't'1'r seek debt write ol'l'clue to doubtfulness in ability to recover. This is in line '' 'r 69 of the Public lrinunce Management Act 2012. ln lin.'''rt r the Board resolution the Fund sort debt write-off from the Parent Ministry of non-pt'.{irrming loans vide lettcrs dated lgth April 2021 and 8th March 2023. The r "'l ;"''t Secretary to the National Treasury informed the Fund that the National Assci l'' r rs since approvcrl thc Action PIan to revive and commercialize State Owned Sugrr' " r;anies as commurricated vide Certificate No. 039/13th/2023. The said letter autho , 'l 'lte Fund to write oll'clebts owed by the five State Owned Sugar Companies to Govc ''ir( il, Kenya Sugar lloarcl/Commodities Fund. The figures in the letter that are applir.' r'!r'to Commodities FLrncl debts are Kshs. 12,336,003,133

32s The non performing unsecured loan book inheritcd linm the former Coflee Development Fund was Kshs 757,591,523.05 out of which Kshs 620,765,933.81 is outstanding as d 28th November 2023 326. The rate of provisioning will increase with every rror, loan taken becairsc provisions of loZ are made for loans advanced that are performing ancl non- perforrrring loarrs that were inherited and are continuing to accrue interest until thcv are frozen 5 ycr,rs altcr the due date. Observations and Finding of the Committee 327. The Committee observed that: i' The Fund has a loan of Kshs. 31,100,000 issuccl to a farmer on 2 lVtarch ,2016 for coffee establishment but the farmer has defaulted payrrcrrt and the outsranding balance as at 30 June, 2022 was Kshs.46,289,452; ii. The loan is secured and the Fund is in the proccss of liquidating propert), to recover the outstanding loan balances; iii. The Fund has loans that were inherited fronr thc defunct Sug.,r lloard and Cc,ffee Development Fund that are non-performing and have outstanding lirirrcipal and interest arrears balances totaling Kshs. I 9,28 7 ,452,948: iv. The Fund sought to write-off the non-perfornrirrg loans through thc parcnt Ministry in line with the Board resolution and as per thc provision of Section 69 of the pulblic Finance Management Act 2012 and Regulatiorr l,l5 of the PFM rcgulations. v. The matter in not resolved. Recommendations of the Committee 328. The Committee recommends that: The Accounting Officer to recover outstanding loan of Kshs.46,289,452 as at 30 June, 2022; and ii' Within three months of adoption of this report. thc Accounting Oi'iiccr ro submit to the Auditor-Ceneral, the status of the write-of{' ol' the non-perltrr.rrrirrg Ioans and ttre recovery of the outstanding loan. 4. Failure to Revalue Fully Depreciated Asscts 329. The statement of financial position reflects property. plant, and ccluipment balance of Kshs.17,364,000. However, Note 2l to the financial statements rellccts fully depreciatecl property, plant and equipment with a historical cost value of Kshs. l40,l2B,Z4B whose, residual values over the remaining useful life of asscts was not estirnated and disclosed in the financial statements. This indicates a possible nratcrial variance between the fair value 65

x the carrying value ofthe assets necessitating a revaluation as required under paragraph of IPSAS l7 - property, pltrnt and equipment. 0 rther, the Fund has no asscts and liabilities management policy contrary to Paragraph 4.5) of The National Treasulv l'olicy on Assets and Liabilities Management in the public . In the circumstances, it has not been possible to confirm the fair statement of the , plant and equipment net book value of Kshs. 17 ,364,000 reflected in the financial ent. bmissions by the Accounting Officer The Accounting Officer aelinowledged that some of the items reflected underNote 2l on property, plant and ctluipmcnt were fully depreciated. Having recognized this, management budgeted to r ulue the assets in FY 2022/2023 and procurement for the same is ongoing. The Fr"rncl has the assets and liabilities management policy which complies with the National 'I'reasury Policy on Assets and Liabilities Management in the Public Sector. 32. bservations and Finding of thc Committee The Committee observed thaV: i. The Fund did not revaluc lirlll, depreciated assets therefore not giving a fair value of the property, plant and ecpiprnent; ii. The Fund has budgeted lbr the revaluing of its assets in FY 202312024 and is in the procurement stage; i. The Fund did not have assets and liabilities management policy contrary to the National Treasury Policy orr Asscts and Liabilities Management in the public sector; iv. The matter remained unrcsolved dations of the Corrrrnittce JJJ The Committee recommends rhat: i. Within three months of the adoption of this report, the Accounting Officer to submit the status report on revaluation of assets to the Auditor-General; ii. Within three months of the adoption of this report, the Accounting Officer to submit thc assets and liabilities management policy to the office of the Auditor-Ccncral lbr audit verification. 5. Irregular Payment ol'Ilousc Allowances The statement of financial pcllirrmrrnce reflects Kshs.l 15,697,000 in respect of employee costs. However, review of tlre payroll records for the year under review revealed that there were employees whose housc ulkrrvanccs exceeded the approved rate by the Salaries and Remuneration Commissiotr 1Sl{C) as per their respective grades resulting in an over- JJ 66

expenditure of Kshs.3,270,250. No evidence was provided to confirnr ,l': payments of the allowances was granted by SRC. ln the circumstanccs. , the house allowance payment of Kshs.3,270,zso could not be confirnrecl. . val for the , r 3.ularity of Submissions by the Accounting Officer 335. The Accounting Officer admitted that since its inccption, the Fund has . .iinued to use the remuneration policy of its predecessor; Col'l'cc Development Funcl s, 'its Fluman Resource Instruments are yet to be approved. -l"lrc I;und engaged the . ,rn .,rcy arm of the Public Service Commission in the Develo;rrncnt of its HR inst,ir,.. .s including salary structures and the same were submittccl to various bodies iltcl.,.,,,,g SRC for guidance and approval for implementation. Thc irrstruments are yet ro bc r,lrproved. 336. She also stated that the staff grading as per trrc rcrnuneration policl,a,e basis from grade I to grade vl. Grade I being rlrc highest. The gradirrg i: public service grading system. The commoditics Fund house allou r,ircr within the SRC guidelines with most of the em1'rlovces getting belorr ,lre ,r a nUffir-.ricll ,rpped to the lre therefore , trpper limil Observations and Finding of the Committee 337. The Committee observed that: i. The Fund incurred an over-expenditure of Kslrs..l,27O,25O by payirrg its cmployees house allowances above the approved rate by tlrc Salaries and Repr.,,rc, .iion Commission (SRC); ii. The Fund has developed its HR instruments inclrrcling salary struct.,,cs .. .l is awaiting SRC guidance and approval for iniplcrlcntation; iii. The matter remained unresolved Recommendations of the Committee 338. The Committee recommends that within three months of the adoption of this report, the Accounting Officer, through the Ministry of Agricultur. r .l Livestock Development to engage the Salaries and Remuncration Commissi..rr , iC) to come up with approved rates for compensation of enrployees which the i'urr.. run utilize. 7. Lack of an Approved Staff Establishment ancl llcmuneration Structui . 339. During the year under audit, the Fund did not havc zrn updated approvecl sra,', cstablishment hence it was not possible to establish the optimal lcr,cls or number of crnp,.,,, ces per post. In addition, the salary structure and scale used bv the Fund for paynrcnt t,['employees, salaries and allowances was not approved by thc Salaries and Remuncr.,titi,r Commissic,n 67

I42. 43 to Article 230(4) (a & b) of the Constitution. In the circumstances, the regularity the payments of salaries ancl allowances could not be confirmed missions by the Accounting Oflicer Accounting Officer aclnritled that the Fund does not have an approved HR instruments as the same a\\iril.s rcsolution on the legal status of the Fund. Resolution of the legal status/corporate stutus will enable the relevant government agencies to categorize the Fund and appror c llll. instruments including staff establishment. The said staff instruments fully approvcd by the Commodities Fund Board of Trustees are being held by various government agencies but cannot approve until corporate status issue is resolved. rvations and Finding ol'the Committee Committee observed that i. The Fund's staff establishrncnt and the salary structure and scale used by the Fund for payment of employees' sul:.rries and allowances has not been approved by the Salaries and Remuneration Comrnission because of the corporate status of the Fund; i. The staff instruments in use \vere approved by the Commodities Fund Board of Trustees; ii. The matter remained uhrcsolvcd mmendations of the Colnnrittce The Committee recommentls that within three months of adoption of this report, the Accounting Officer to eng:rgc through the Ministry of Agriculture and Livestock Development to develop the lluman Itesource Instruments for compensation of employees. Irregular Procurement of Sccurity Expenses The statement of financill pcrlbrmance reflects an amount of Kshs.100,402,000 in respect of use of goods ancl scrvices which includes a payment of Kshs.l,l74,000 that was made to a security firnr. 'l'his rvas because of a contract extension to provide security service at Kshs.40,000 plrrs VA'f per guard per month. The contract was an extension of an earlier contract datcd I January,20l7 whose charges for security services was Kshs.27,543 plus VAT pcr !,.Lrartl per month. In the circumstances, it was not possible to confirm if value for money was realized for Kshs. 1,174,000 expenditurc orr sccurity services. Submissions by the Accountirrg Ollicer The Accounting Officer subrnittccl that the Fund first contracted Wells Fargo Ltd for the provision of security serviccs rrr 2017 at a l'ee of Kshs. 27,543.10 per guard per month. I l3 I / 34 l 68

Through a series of price revisions with reasons thclcol as per the attached price revision letters it necessitated the change in prices fronr thc initial plan. One of the reasons raras the presidential declaration of an increment in minintunl \\ age brought about by inflation and an increase in the cost-of-living index in Kenya as clattorated in the price revision letters. Therefore, the Fund revised the contract fee in 20 I 8 to a monthly fee of Kshs. 34,543.00 and in202l at a fee of Kshs. 40,000.00. 346. Consequently, in 2022, the Fund contracted/ Procurcd a new security service provider, Mocam Security Ltd, through the request for qLro(ation procurement method ancl thus terminated the services of Wells Fargo Ltd. on 27th.luly 2022. The monthly fee forthe new firm is Kshs. 38,280. Observations and Finding of the Committee 347. The Committee observed that: i) The fund has since regularized the procurenrurl of security services in the current financial year. ii) The variance in the contract price was the catcr lbr the minimum wage incremelt iii) The matter is resolved. 9. Board of Trustees Matters 348. The statement of financial performancc rcllccts remuneration of trustees of Kshs.l 7,160,000 and as disclosed under Note I I to the financial statements. However. the appointment letters for two (2) Board Membcrs rvcrc not provided for audit review. The Fund Management vide a letter dated l6tr'Dcccrnber,2019 requested the principal Secretary, State Department for Crops Developntcnt and Agricultural Research for the appointment letters but no evidence was providccl to indicate that they were received. [n addition, the []und did not have a substantive Iroldcr lirr the position of Corporate Secretary. Minutes of the Board meetings were taken by the Lcgtal Manager on behalf ofthe Managing Trustee but no evidence inform of delegation ol' authority or appointment letter rvas provided for audit. In the circumstances, ManagcrltcnI was in breach of the law. Submissions by the Accounting Officer 349. The Accounting Officer submitted that two (2) ol- thc Fund's trustees board members did not have appointment letters from the appointing authority. The Fund requested the parent Ministry to avail the Appointment letters for tlre trvo hoard members via a letter referenced ComFund/F.l/BoT/Vol.2?104 Dated l6th Decenrbcr 2019 but the ministry did not issue the requested letters. The two directors left the Furrcl within the year ZOZ\lZ022. All ne:w directors appointed to replace them were gazcttecl and issued with appointment letters. 350. She also acknowledged the Legal Manager was taking Board minutes on behalf of the Managing Trustee who is the Substantive Secretarl to the Board of Trustees. The new 69

I aJ o structure awaiting approval has created a position for Corporation Secretary. anomaly will be resolved once the new structure is approved and implemented ns and Finding of the Committee Committee observed that: i. The Fund had not provided the appointment letters for two (2) Board Members for audit review. The two directors left the Fund within the year 202112022. All nor clircctors appointed to replace them were gazetted and issued with appoinunont letters; and ii. The matter is resolved 10. re to Prepare Financial Statements for the Staff Car Loan and Mortgage 23 to the financial statcnrcnts re llects investment in staff mortgage loan and car loan 1 15,01 1,000 and Kshs. I I ,i26,000 respectively. However, the Fund did not prepare I statements for the schcrnes and submit them for audit as required by a Circular of I 1s2 i lnancra J 5 lTth December,20l4 on Car l-oan and Mortgage Schemes for State Officers and other lic Officers of the Governmerrt of Kenya. The National Treasury through a memo dated 20 June, 2022 gave Managcnrent the authority to open and operate a Commodities Staff Mortgage Account. Managenrent opened an account with a local bank and deposited Kshs.30,000,000 to tlrc account *,ithout entering into a contractual agreement with the bank on the management ol-thc schcnrc. ln addition, the status report on the transition from the Housing Finance Compatty (ltlrc) Scheme to the Cooperative Scheme was not provided for audit review. ln tlte circunrstances, Managenrent contravened the requirements of the Salary and Renurneration Conrnrission circular on car loan and mortgage schemes. missions by the Accounting Ol'licer The Accounting Ol'liccr conlllrncd that the Fund did not prepare separate financial statements for thc sclrcure instcurl the scheme's financial statemcnts were combined with that of the Fund. Irailure to prcpare the separate statements rvas an oversight as the National Treasury advisccl that thc same was nreant for larger schemes. The Accounting Olliccr statccl that the management, was ready to prepare separate financial statcn.tcttts [:cginning 1Y202212023. Further, the Fund was granted authority to open and opclaic ('on-rnroclil;'s Staff Mortgage Account with Co-operative bank on 20th June, 2022. Alri)rovccl t:rrtlgcted amount for the scheme Kshs. 30 million was deposited in thc accorrnt orr 3Oth .\une2022. The operationalization of the scheme was done on I Oth o l' lrcbruary 2 02 3 rvith the sign ing of the agreements on criteria and rules for offering mortgages to rrrcrnbcrs. 70

3s5. She also reported that the transfer of mortgagc lacilities issued by HF to Co-opr:rative bank was on-going. The process took a long tirnc since all staff holding the fa,:ilities had to be involved in every step as they are the ones to meet the cost of transfer. The exercise is expected to be completed by the cncl o{'.tuly 2023. Observations and Finding of the Committec 356. The Committee observed that: i. Management did not prepare separate firrarrcial statements for the staff mortgage and car loan scheme Fund but instead, thc financial statements were combined with that of the commodities Fund. ii. The Fund should prepare a separate sct of financial statements for the staff mortgage and car loan and submit thcnr to the auditor General for aurjit in compliance with Section 84 of thc PI]M Act,20l2 and the SRC circular ref.No.SRC/ADM/CIRi l/13 Vol.ilt ( l2ti)r ancl iii. The matter remained unresolved. Recommendations of the Committee The Committee recommends that the Accounting Officer ensures that all applicable accounting and financial controls, systems, stanclards, laws, and procedures are followed in the preparation of the financial stalcrnents in compliance with public Finance Management Act, 2012 antl in accortlancc with the standards prescribecl by the Public Sector Accounting Standards Board as per Regulation l0l(4) of the public Finance Management (National Govcrnment) Rcgurations, 2012; and ii. The Accounting Officer should prepare a scparatc set of financial statements for the staff mortgage and car loan and submit thcnr to the auditor General for audit in compliance with Section 84 of the PFM Act,20l2 and the SRC circular ref. I\o. SRC/ADM/CIR/1/13 Vol. III (128) in financiat 1,car 2022/23 11. Irregular Investment of Surplus Funds in Fixctl l)cposits at Commercial Banks 357. The reported cash and cash equivalents balarrce of Kshs.1,g80,202,000 inclucles Kshs.1,794,659,000 being fixed deposits hcld irr commercial banks, as disclosed uncler Note l7 (C) to the financial statenrents.-l'his u,;rs contrary to The National Treasury Circular of 26 March, 2018 whrch directcd all State Corporations and Semi- Autonomous Government Agencies (SAGAs) to irrvest surplus funds in Treasury Biills and/or Treasury Bonds directly through Central Ilank of Kenya without intermediariers. All funds previously held in fixed deposits in cornmercial banks/financial institutions were not to be rolled over but retired and invcstcd in Treasury bills/bonds. Althouplh Management provided authority frcrn National 'l lcasury dated l3 November,Z0lT in 7t a

t B I i 1," i I i i / 62 t 72 I I I I I I I i i I I 358 I i 9 support of the fixed deposits, the letter only authorizes the Fund to invest in on call deposits. In the circumstances, the regularity of the investment of Kshs.1,794,659,000 in fixed deposits accounts could rrot be conflrmed. nissions by the Accounting Officer Accounting Officer subrnitted that management was aware of the National Treasury Ref: DMD 4102'll'63) of 26 March,20l8 which directed all state Corporations Semi-Autonomous Government Agencies (SAGAs) to invest surplus funds in rcasury Bills and/or Treasury []onds. Considering the mandate of the Fund of providing ssible and affordable credit to farmers, the lrund sought and got exemption from the circular. The authority to invest in short term deposit/call deposit was granted through letter Ref: CONF/MOF16310l 'TY'date l3th November2017. Following this authority, the Fund has since invested its surplus liquid funds in call and short-term deposits which do not go beyond six months. The arrangement has helped the Fund to invest its funds and Iifi the same any time they are required to disburse to farmers without losing the already earned interest. tions and Finding of the Committee Committee observed that i. Thr: Accounting Officer relied on an exemption given to the Fund on l3th November 2017 to invest in short term deposit cafl-and did not complytit{t-thedireotive iseued ..-. by the National Treasury in warctrllZOlS to all State Cg-rpoiqtions and Semi- I Autonomous Covernment Agencies tS4CASI to invest surplui-ftr# in Treasury Bills : and/orTreasuryBondsdirectlythrougfriCenrt;BankidnU'' ' -l r'')-l-^''^-.'Y i r i'| gr.'z ii. Thc matter remained unresolved. mnrendations of the Committee The Cornmittee rccommends that the accounting and linancial controls, followcd in the preparation of the F'inance Management Act, 2012 and i'Atri-i ti o i 1,. ensures that all applicable ! ' Sttrtdti laws, and procedu res are r 0 t te" 2813 finan [:['61"; r' statemen in*eppfifirelyrtlr. -Public-.t in accordance with the standards prescribed by the Ilublic Sector Accounting Standards Board as per Regulation 101(4) of the Public Finance Management (National Government) Regulations, 2012. ...DA'[E

I i a HON. DAWOOD ABDUL ITAIIIM,IISC, M.P. (vrcE cHAIRPrruSoN) SPECIAL FUNDS ACCOUN'I'S COMMI'ITEE 73 t