A development fund bathing in beer river

Photo: Mihkel Maripuu

For fast growth, tech start-ups mostly need beer. Barrels of it – as seen in analysis of Estonian Development Fund under leadership of Tõnis Arro by Interna, an auditor.

This summer, Tõnis Arro – a best-known management consultant in Estonia – by tacit agreement left the post at head of Estonian Development Fund, the Arengufond financed out of state budget and dealing with scenarios of economic development. According to accusations thrown to the media in the fall, internal audit ordered by chairman Ville Jehe pointed to serious mistakes by Mr Arro while at helm of the fund in 2013–2014: sitting on several chairs, surprisingly big training costs, and the desire to privatise fund-owned investment firm SmartCap.

In activities by Mr Arro, nothing criminal has been discovered, as evidenced by Arengufond not filing fresh proceedings now that he is gone. Still, the faults found in the audit ring loud and clear.

«The audit played no role in Mr Arro departing; rather, what was decisive was the differing strategic vision with council,» said member of Arengufond council Jaan Männik. «Considering the business world practices, Mr Arro departing was the usual kind, comparable for instance with Sandor Liive leaving Eesti Energia as the management of the company needed an update.»

Even so, the management of the fund presents a glaring pattern: the previous CEO Ott Pärna (left in April 2012) became famous by splurging. By Mr Pärna, the fund, created to be an engine to Estonian enterprise, was moved to a sprawling area in a most expensive rental house in town, in a Tornimäe business centre. 20 office staff were working on over 1,000 square metres. To reach them, one had to pass a foyer resembling American oil billion TV serials.

The Arengufond council was unaware of the vastness of the expenses related to the facilities, and tasked Mr Arro with finding a new place to be. Mr Arro, however, murmured that such love for luxury may not serve to spur the start-ups onwards, rather coming across as bad example.

The move from being Swissôtel neighbour into Rotermann Quarter did diminish the fund’s outer polish, but behind closed doors, so to speak, the party continued – as claimed by the audit fatal for Mr Arro.

With the accusations against him Mr Arro fails to agree. «Though the audit is purposefully compiled as hostile towards me and into it they have indiscriminately heaped all that could cast me in a bad light, this was not the reason for me leaving,» said Mr Arro. «The errors pointed to were trifling and due to them Arengufond was not damaged.»

Chief faults listed

Excerpts from the document compiled by Interna internal audit supervisor Siiri Antsmäe, showing that the expediency of state budget money Arengufond may have been questionable.

• Representation expenses of CEO Tõnis Arro contain remarkable quantity of alcohol and catering consumed by CEO personally.
• While on trainings and business trips/assignments, the CEO has repeatedly paid by the fund’s credit card for his own catering, while receiving daily allowance. 
• A so-called happy hour was organised, for which 100 bottles of beer were purchased. According to Arengufond staff and Mr Arro, serving alcohol at public events has been necessary to create the right environment.
• To a small degree, Arengufond has done deals with Õllekunsti OÜ, the member of which board is the fund’s employee Tiit Paananen.
• As head of the agency, Mr Arro has not compiled detailed budget and a timely holidays schedule; assignment decisions for staff are lacking or have been written after the event; internal audit systems are not functioning sufficiently.
• Sitting alone, the CEO has compiled a decision to pay himself €1,200 as SmartCap council member fee, regarding which there is no entry in councils’ minutes.
• Assignment decisions for SEO or other employees are not compiled at all, or are written after the event.
• Expense receipts within a business trip are not linked in the bookkeeping, wherefore the costs are not related to the assignment decision. With overview lacking regarding real expenses, it is impossible to assess if the expenses by CEO and other staff were according to budgets and goals allowed.
• There is essentially no control over the CEO’s business trips, these are booked by a person unrelated to the fund. With all trips, explanations are lacking regarding the goal and the need.
• Arengufond’s credit cards had €2,000 limit for assistant Cathy Reiljan and €5,000 for Mr Arro. The CEO had the right to personally set his credit card limit and to independently make transfers from the fund’s bank account.
• While on business trip in Tel Aviv, Israel in March/April 2014, the report reflected four hotels. Via Estravel, they booked rooms in Herods; thereafter, Tõnis Arro booked places in Marina Tel Aviv, after which Harmony hotel in Jerusalem was booked with fund worker Cathy Reiljan’s credit card. But still they wound up staying at Rothschild 71 in Tel Aviv. For the cancelled bookings,  €725.06 was drawn from Mr Arro’s credit card. As explained by Mr Arro, the hotels were changed due to uneven quality and communication problems.  
• The trip to Israel cost €6,949.08. €1,282.94 were paid by Ms Reiljan’s credit card. Via Mr Arro’s credit card, €1,208.70 were spent, €400 of which were drawn as cash. The audit sees this as non-austerity spending.
• By Ms Reiljan’s credit card, for instance, the following purchases are paid for: €33 for five pizzas; €19 in Rimi, Friday afternoon, to buy 24 bottles of beer; €21Friday night at Kaubamaja’s Toidumaailm grocery store to buy fruit and ten beers; €86 in Rimi on Wednesday night for 91 beers and €86 for food and wine glasses.
• By Mr Arro’s credit card, the following bills were paid as considered by auditor to be the man’s personal costs: restaurant dinner for three for €105 and alcohol for €74; lunch in restaurant for two for €51.60 and alcohol for €24.50; dinner for three for €51, alcohol for €60; in Hilton, London €189.34 for alcohol; restaurant bill in London for three costing €162 for food and €224 for alcohol.
• 2014 annual report presented by Peep Siitam contains a weekday night for €219 for food and €190 for alcohol. The report says ten guests participated, and four Arengufond staff – the bill shows there were not as many people as that.
• These presents by Arengufond are untraceable: in December 2013 a Gourmet Coffee bill was paid for 12 wines, 3 kilograms of tea and 5 kg of coffee totalling €373.24; to Tallinna Kaubamaja Toidumaailm grocery store, €63 was paid for two bottles of Pierre Paillard champagne, €28 for one bottle of Prince d’Arignac wine, and €57 for rum Zacapa 23 Y Solera; the store Time & Diamonds got €523 for a Montblanc (watch, probably – edit).
• The everyday life of the fund staff also happens in a luxurious atmosphere, as they are daily served coffee prepared from Gourmet coffee beans coming at €21 per kg, and luxurious tea priced €26 a kilogram. The desks of the staff are adorned by gourmet candy purchased by the same state-owned fund.
• Every year, the fund’s staff are compensated sports costs up to €1,000 while one worker was paid dance lessons and even ballet classes.
• Twice, Mr Arro has failed to pay a parking fine which was afterwards presented by bailiff to Arengufond.
• By credit card, Mr Arro has made purchases for personal use from Apple iTunes store and also for personal buys while on vacation.
• The audit noted the Arengufond council lacks a consistent overview of Mr Arro’s training expenses which in 2013–2014 amounted to €15,512.66.
• According to the audit, Mr Arro is violating the rules regarding procurements prescribing that purchases over €5,000 require a procurement. For instance, he outsourced PR-services by OÜ Kommunikatsioonibüroo JLP for €6,928 VAT excluded with no written contract and no written procurement. Also without a procurement, Mr Arro entered a three year IT hardware rental contract for €16,223 excluding VAT.

Source: Interna’s audit

Arro scandal triggers auditor war

At the end of the document, Interna internal audit supervisor Siiri Antsmäe passes a devastating assessment on competing auditor KPMG which checked annual report by Arengufond.

«The annual report audit makes no mention of any of the faults hereby pointed out,» she wrote. «Considering the substantial faults found out by this report, the internal auditor cannot with confidence claim that the sworn auditor has done its work according to standards.»

Mr Arro, in his turn, sent the audit by Ms Antsmäe to be assessed by the auditor Ernst & Young. Though comments by certified financial fraud investigator Marilin Pikaro and public sector sworn auditor Olesia Abramova regarding Interna’s conclusions are not explicitly critical, they do demolish conclusions by Ms Antsmäe.

Namely, Ernst & Young auditors show that the 31 accusations strongly played by Ms Antsmäe are categories as non-substantial or even estimated observations. Of the long list, only five significant faults are to be found: confusion with staff catering bills; lack of control with gifts; buying products from companies linked to employees of the fund;  delays with credit card use reports; and failure to adhere to procurement rules.

On top of all that, the auditors hired by Mr Arro claim Ms Antsmäe’s conclusions are to be doubted as these may not correspond to internal audit standards: individual objectivity is lacking; the goals are not specified; trustworthiness and relevance of information has not been verified. Also, the Interna audit is not necessarily without faults, distortions, and factually precise.

Arro expenses, black on white

Interna’s audit shows Arengufond CEO Tõnis Arro’s expenses in euros from  January 1^st 2013 to May 30^th 2014.

Business trip tickets and accommodation:    €20,968

Daily allowances:                                          €6,752

Trainings:                                                       €19,161.31

Other costs at business trips:                         €4,840

Representation expenses:                              €6,331

Totalling:                                                      €58,052.31

Source: Interna