Six Senior IEC Execs Could Pay the Price of the NIS 1.4b Accounting Error

Electricity company's CEO, CFO among those asked to respond to allegations.

At least six top Israel Electric Corporation executives and employees may pay the price for the utility's NIS 1.4 billion accounting error.

The company's board sent these senior employees copies of the interim report investigating the affair, which came to light last week, and gave them until today to respond. The board plans to hold a special meeting tomorrow to discuss the matter.

Heading the list are CEO Eli Glickman, who tried this week to deflect the fire from himself, and Chief Financial Officer Harel Zeev Blinde. Others include the head of the company's finance division, Zechariah Kay, who two weeks ago announced his early retirement; the head of the fuel management department, Shimshon Brokman, and two finance department employees who were allegedly responsible for miscalculating the company's cash flow and for not reporting the error as soon as it was discovered.

The error, discovered last week, forced the utility to ask the government for emergency aid in the form of cash or guarantees so that it could borrow more money. The company apparently had not factored in costs including higher fuel costs into its forecasts. It took the company's finance managers several weeks to spot the error, which they should have noticed immediately. The report, drafted by consultants from Goren Capital and Ernst & Young, does not name names. Rather, it addresses how departments handled the matter.

But the people called in for questioning by the board fear that the report may be used against them. Several have already hired lawyers in order to prepare their responses.

The IEC board of directors met Monday for what was supposed to be a routine meeting. But a significant portion of it wound up being dedicated to the accounting mishap. During the discussion, it came to light that the people on the list had not been given a chance to respond to the report. Chairman Yiftah Ron Tal said the board could not discuss taking action against individual employees until these people had a chance to respond. The report was not distributed to board members, who heard an oral summation of its conclusions.

Treasury approves bond guarantees

Talks continued yesterday with the Finance Ministry over emergency financial backing for the utility, and in the afternoon it was announced that the treasury had approved guarantees for a NIS 500 million bond offering this month. Company executives have stated that it could be bankrupt by the end of the month due to the NIS 1.4 billion shortfall. Even with the new bond issue the company will still need to find an additional NIS 740 million. Meanwhile, IEC employees were fuming at the company's board and the Finance Ministry, whom they believed bore responsibility for the error.

"Why did the Finance Ministry, via the electricity authority and the IEC board, give the IEC the full burden of paying higher fuel prices, despite the company's tight financial straits?" asked one worker rhetorically. "Why didn't the government pay part of the expense or make sure that electricity rates would cover it? Is it responsible to let the IEC continue to raise money and sink deeper into debt?"

The crux of the problem is the company's shallow cash reserves: NIS 1.4 billion represents just 5% of annual turnover.

"What's NIS 1.4 billion for a company that handles NIS 30 billion a year? Is there another company in Israel that would collapse because 5% of its cash flow disappeared?" fumed the worker. In response to the news, senior government officials voiced differing opinions as to whether the company should declare bankruptcy.

"The IEC is essentially bankrupt, and it's bleeding billions," said former accountant general Yaron Zelekha. "It needs to enter receivership and get a court-appointed receiver so it can heal," he said in an interview with Army Radio. The company is trying its best "to suck tens of billions away from the public," in order to enhance its workers' salaries, and the government has repeatedly failed to institute reforms. "In receivership, the workers can't threaten the management or the state. Everything would be conducted under the oversight of the court, and not some politician with limited understanding and authority," Zelekha said.

The possibility of breaking up the IEC has been raised before, but the government decided in unofficial discussions that it wasn't realistic.

"The sentiment was that there's no reason to break up the company, since it's heading into receivership with its eyes wide open," said a source close to the discussions.