KPMG had responsibility for auditing the MEA’s annual accounts and it would appear they never challenged the Board over the legality of the loans and clearly there was no qualification of the accounts following the drawing down of the facilities.

Former Manx Electricity Authority (MEA) Board member, and Chairman of the Audit Committee,  Terry MacKay told the Tynwald Select Committee, investigating the MEA ‘loans affair’, he “felt extremely let down by KPMG for not highlighting the possible legal issue of the £35million loan for MCC from HSBC which had occurred twelve months prior to the Barclays loan”.

This was because the Barclays Bank loans of £70m & £50m were taken out in the same way as the HSBC loan.

He also told the Committee he always believed Treasury were “supportive and had full knowledge of the transactions as neither they nor KPMG had commented adversely on either the first or subsequent loans”.

KPMG had responsibility for auditing the MEA’s annual accounts and it would appear they never challenged the Board over the legality of the loans and clearly there was no qualification of the accounts following the drawing down of the facilities.

KPMG are yet to be called to give evidence but no doubt, when they are called, they will offer an opposing view to Mr MacKay’s.

Mr MacKay, the former Managing Director of Kenmac and Chairman of the manufacturing Committee of the IOM Chamber of Commerce, commenced his opening statement by describing the MEA as being in a woeful state when he joined the Board.

He stated a “potential disaster” was on the cards, due to the inadequate power supply infrastructure to meet projected demand, on top of which morale was low; and there was an absence of a Health & Safety culture, inadequate audit provision and poor financial management.

He put to the Committee, no doubt as element of mitigation, they should consider of the 32 projects in progress when Enron collapsed only 2 have so far been completed – one of which is the Pulrose Power Station.

He said he was bewildered by the brushing aside of the PKF report by the government and the actions of KPMG over what he believed to be an issue of miscommunication. It was his firm belief a meeting between all the parties could have resolved the issue at no cost. He said he, and Charles Fargher, had tried on several occasions; but their approaches met with no success.

Mr MacKay is also very disappointed the Government failed to appreciate the “unique opportunity” put to them by the MEA, in the Vision 2010 proposal, for an all-embracing Island utility.

He ended by stating he hoped the true story, of what had gone on, will one day be published; and so the public will come to realize the injustice he and his fellow Board members have suffered.

Mr MacKay was then asked the same series of questions posed to his fellow Board members.

Committee Chairman, Speaker Steve Rodan began with querying his knowledge of the MEA’s compliance with financial regulations, with Mr McKay explaining he was aware of some “anomalies”, but he didn’t think they were of a serious level; and added that the MEA operated projects on an EPC basis.

In response to Clare Christian MLC, inquiring when it was he had become aware of these difficulties, Mr MacKay recalled that Paul Dewer, the MEA’s internal auditor, had informed him Mike Proffitt had instructed him to “trawl” through the Capital Procedure Notes (CPN) to find where they did not comply. He remarked it was a long job.

So he hadn’t been aware of any stresses in the preceding 2 years; to which Mr MacKay replied he didn’t think there had been any “serious stresses”.

Referring to the issuing of the Treasury direction, Mr Rodan wondered if Mr Proffitt had previously advised the Board of any Treasury dissatisfaction; but Mr MacKay said the arrival of the direction was the first the Board knew of any problem. He reiterated the MEA was at the time going through the CPN and he had thought Clive McGreal, from Treasury Internal Audit, had been sympathetic to the MEA’s predicament.

He went on to point out it took two years after he had resigned form the Board before any changes were made to the CPN; clearly inferring if the problem had been that simple, or a priority, the new Board and Treasury would have sorted out the changes a lot sooner.

As with the other members of the Board he denied he, or his colleagues, had threatened to resign at the time of the direction.

When it was put to him, by Mr Rodan, that Mr Proffitt had been infuriated by Treasury’s action, Mr MacKay said he was surprised by this. He put back to the Committee that Mr Proffitt, at the time, was singly keeping 5 balls in the air by working hard and diligently. He also pointed out the reporting on the project was going via Ashton Lewis, who he said had been meeting with the DTI; so as far as he was concerned financial reporting lines were in place.

So why hadn’t the Board approached the Treasury for the borrowing in order to acquire a better interest rate, inquired Mr Rodan. Mr MacKay responded by saying he was not an accountant, but he did understand it was a short-term position and that tapping the bond at a later date was an option; so while, to him, it appeared to make little difference, he couldn’t give a precise answer.

Mr Rodan next asked - if it had been because they thought they didn’t need approval from Treasury - why hadn’t they been “helpful” and just told Treasury; but Mr MacKay said he thought they knew.

Mr Rodan followed this up by asking if it was ever discussed, by the Board, Treasury’s awareness of the loans, but it hadn’t, so had any Board member raised the loan issue at all.

Mr MacKay just pointed out the HSBC loan had never been queried so they proceeded on the same basis for the new loans.

Asked to explain why the loans had been taken though the Manx Cable Company (MCC) and not the MEA, he reminded the Committee the cable had originally been a joint venture and so, when it came to buying out the National Grid, it was sensible for MCC to take the money.

So it hadn’t been a device to circumvent financial regulations, inquired Mr Rodan; to which an irritated Mr MacKay wanted to know why they would do that when there was no personal gain; and in any case MCC was part of the same group. He was absolutely emphatic there was “no skulduggery” involved.

Mr Butt MLC queried his assumption that Treasury and KPMG were aware of the loans and the date they would have known, but Mr MacKay couldn’t give an exact date. However, he wondered why KPMG, who audited the accounts, failed to highlight the issue.

Mr Butt put it to Mr MacKay that Treasury claim November 2004 - when the 2004 accounts were produced - was the first time they knew of the loans; to which he acknowledged that is what they claimed, but he didn’t know that prior to that they didn’t know.

David Callister MLC reminded Mr MacKay he had said controls at the MEA were poor; but he explained this related mainly to H & S concerns regarding the gas infrastructure. He added many of the procedures were stored in the head of Jim Crombie, a former MEA manager, rather than being written down so he had focused, to start with, on that issue.

He also pointed out the level of debtors was “horrendous”, with many debts 12 months old, and amounting to £2m; but the business still had to carry on.

So had improvements been made, was Mr Callister’s follow-up question; to which Mr Mackay replied they had, even to the extent Treasury Internal Audit had complimented them on the vast improvements.

Mr Callister then sought confirmation Treasury had been given all the information they needed to know that there was an increase in costs; and he confirmed the matrix they were using made it quite clear, once compared with other reports.

Mrs Christian wondered if he had been aware of the different sections of Treasury, which he wasn’t too sure about; and he pointed out he only became involved in the CPN issue later on.

Mrs Christian inquired if subsequent to the issuing of the direction whether discussions were held at Board, or at Audit Committee, level on the progress with the matrix; or the need for further discussions or action.

Mr MacKay said he had talked to Mr Dewar, who he said had informed him Mr McGreal was sympathetic to the MEA’s situation and he would help sort it out with Treasury.

Changing subject, Mr Rodan asked why, if the chief job of the auditor is to “safeguard” the business why did he agree to MCC not being audited by Mr Dewar.

Mr Mackay refuted this, but pointed out if had not been appropriate at the time as there were only 12 transactions to audit; and it was audited by KPMG.

He explained he had far more pressing priorities elsewhere to deal with; not least the selling of white goods from a van in Glen Vine, stock missing from the stores and thousands of other retail transactions.

Mr Butt asked if Mr Dewar had audited MCC he would have noticed the loans; to which Mr MacKay suggested not necessarily as KPMG had missed them.

Mr Butt found this answer surprising, given the size of the loans, and wondered if he was saying MCC didn’t actually have any records.

Bringing the questioning to a close, Mr Rodan pointed out the procedures in place meant the head of audit reported to the Chief Executive, and he wanted to know if Mr MacKay was confident this provision didn’t compromise the situation.

He didn’t, and suggested the arrangement was quite normal; with a “dotted line to the audit committee chairman”. Similarly, he explained, the compliance reports were included as a dotted line to the Board.