BUSINESS PAGE is dedicated to providing objective information and issues of intrest to the business community and the public at large. The articles in Business page are prepared and contribuated by CHRISTOPHER RAM. Christopher Ram is the Managing Partner of Ram & McRae. Chartered Accountants, Professional Services Firm.

Just suppose for a moment that you as a shareholder of DDL or Banks DIH were presented with a report from the auditor advising you that:

* The Finance Department has not complied with the company's articles and by-laws requiring them to submit to you for audit the company's statements of assets and liabilities i.e. what the company owns and what it owes;

* The statements of outstanding loans and advances made from the company's main funds and the balances held on deposit as well as outstanding advances are so inadequate that he is unable to say whether they are accurate;

* Departmental financial reports are presented to the auditor late or not at all;

* That monies sent to the regions are not being properly accounted for;

* That many of the systems which have been established to protect the integrity and reliability of the records, to prevent fraud, to provide for proper accounting and accountability and generally to safeguard the assets of the company have been systematically flouted;

* That there is widespread evidence that breaches of the system if not outright fraud is evident year after year;

* That the number one man in the organisation keeps walking around asking for (further) proof while his number two states on public television that he has not read the audit reports months and months after they have been submitted to the company;

* The management of the company does not even know how much money it has in close to 1,000 bank accounts;

* That funds due to the company are being collected but not paid into the company;

* That the directors spend these illegally held funds without any reference to the relevant authority;

* That poor financial management of the company is causing the shareholders to lose billions of dollars annually;

* That you have been reporting these problems year after year with no visible attempt by the company to address them.

Suppose further that the directors now come to you and tell you that they need more money to run the company and pay themselves higher salaries and exorbitant perks which cost the company millions of dollars in scarce funds.

Speculation and reality

The only thing that is not correct about the above is that it refers to two of our better-known private sector establishments. The rest is factual and is drawn from the past four years Reports of the Auditor General on the accounts of the ministries/departments/regions. It makes sad reading and is a reflection not only of the government but of parliament which imposes burdensome taxes without any effective attempts to ensure proper accountability in this country.

PNC REFORM parliamentarian Stanley Ming who brings to the National Assembly a private sector paradigm which recognises that income has to be earned and not legislated as in the case of taxes, is so upset about this lawless state of affairs that he is threatening to withhold the payment of taxes and to resign from parliament if there is no significant improvement. These bold statements reflect the frustration of those who pay their taxes and feel completely powerless in how their money is spent and accounted for. Parliament must not forget the dictum "Taxation without representation is tyranny" or fail to recognise the immense frustration in the wider society about the increasing evidence of mismanagement, corruption and absence of meaningful accountability.

Public Accounts Committee

It is indeed unfortunate that the Public Accounts Committee which from all appearances is a very private and select group from which even other members of parliament, the press and the public are excluded, is only now considering the Auditor General's Report for 1999. Since their own report on the Auditor General's Report may not be issued until in the new year, their efforts will have come far too late to make any serious impact. More contracts would have been split to circumvent tender procedures while the wastage, inefficiencies and illegalities would have continued.

In October 2000, the Public Accounts Committee submitted to the Speaker and members of the National Assembly their report for the years 1995-1998. At that time the report could be of no more than academic interest although it highlighted some of the more egregious matters raised in the Auditor General's Report. The explanation offered by the PAC for the late consideration of the Reports by the Auditor General were as follows: The delay in having the committee constituted following the resignation of the previous chairman; the Public Service strike in 1999; and the staffing difficulties at the National Assembly's Secretariat.

It is hard to accept this explanation as anything more than weak excuses. These reports were submitted to the minister of finance and laid before the National Assembly in reasonably good time though not within the statutory deadline. Our archaic rules do not require that the report by the PAC be discussed in parliament but do impose on the government a duty to prepare a response in the form of a Treasury Memorandum outlining the action it has taken or proposes to take on the issues contained in the Auditor General's Report. No such memorandum has ever been issued on any report for the last eight years.

Financial Mismanagement

Today we look at some serious evidence of poor financial and cash management at the national level.

A significant number of bank accounts currently in use, as well as non-operational accounts were allowed to be overdrawn by large amounts in contravention of Section 22 of the Financial Administration and Audit Act. (FAA) These resulted in substantial interest charges being incurred as in the case of the Guyana High Commission London account which now has a liability of Sterling 200,212 pounds and outstanding interest of Sterling 1,496,053 pounds. As long ago as 1996, the Auditor General found it necessary to point out that 'interest charges are several times the actual overdrafts which is an indicator of the length of time the overdrafts had been in existence." He cautioned that "unless urgent action is taken to liquidate the overdrafts, the indebtedness to the bank would continue to increase significantly."

At December 31, 1999, the Consolidated Fund was overdrawn by $57.110 billion, up from $38.229 billion three years earlier. On the other hand, the sum total of all bank accounts (including the overdrawn balance on the Consolidated Fund but excluding the balances on the bank accounts special projects) reflected a positive balance of $14.101 billion. This situation has been highlighted each year by the Auditor General but no action has been taken to regularise this situation.

In 1996, the Auditor General reported that the 11 ministries, 13 departments and ten regions had a combined total of 733 bank accounts. He recommended the closure of all accounts with positive balances and their transfer to the Consolidated Fund and the opening of new bank accounts to avoid contamination with the older accounts. However, the opening of new accounts has actually led to an increase, not decrease in the number of bank accounts in operation.

The state continues to provide funding annually to several public entities even though they do not comply with their statutory duty to submit audited financial statements. This is particularly true of the town councils across the country in complete defiance of the Municipal and District Councils Act, Chapter 28:01 and despite the fact that there are two ministers in the Ministry of Local Government.

The Contingencies Fund continues to be abused despite repeated negative comments on this practice. S25 of the FAA Act stipulates that this fund should only be used if the proposed expenditure is (a) unforeseen (b) urgent (c) no other provision exists and (d) the expenditure cannot be postponed without injury to the public interest until adequate provision is made by the National Assembly.

Proceeds from the Guyana Lotteries are not being paid over to the Consolidated Fund but are kept in a "special bank account" held at the Bank of Guyana and used to meet public expenditure without parliamentary approval. The same is true of the Guyana Defence Force, the Commander-in-Chief of which is the President and which 'continues to harbour the belief that the Financial Regulations should not be applicable to it, especially as they relate to procurement and contracts for works. The Guyana Forestry Commission is in the same league and has used funds improperly held to purchase a vehicle for use by a Minister of the Government.

To be continued next week.

Public accounting and accountability

Last week we reviewed the Report of the Public Accounts Committee on the accounts of the Auditor General (AG) for the year 1995-1998 and commented on some of the more worrying findings of the AG during those years in relation to financial management by the various ministries and departments of the government. Today, in the second of this three-part article, we continue that review and look at some other significant areas that drew adverse comments from the AG.

Tendering procedures

Justifiably, this is an area of legitimate concern for several reasons: the vast sums spent annually on contracts awarded to private contractors financed out of government revenues and loans require that the country receive proper value for money; every level of society must be concerned at the quality of work done by some of these contractors including the Charity Wharf, roads, bridges and buildings that require re-work sometimes within months of their completion; and finally for years the AG has been drawing attention to these failures and there have been repeated calls in and out of Parliament for a complete re-organisation of the operations of the Central Tender Board to reflect membership from outside the Public Service e.g. the professional engineering bodies, trade unions, the Consumers' Association and the University of Guyana.

Several years ago, with the assistance of consultants, draft legislation on public procurement was prepared and the issue was also addressed by the Constitution Reform Commission. In his 1999 Report, the AG noted that at the time of the audit, despite an assurance that this would be done, there was no evidence of action taken to reform the tendering procedures by way of legislation. No doubt, with no action taken since that time, the AG will again report on the lack of progress. Here are some of the specific cases reported on by the AG in his 1999 Report:

1. The tender documents relating to the award of a significant number of contracts by the Central Tender Board (CTB) were not made available during the course of the audit. The minutes kept of meetings held were also found to be deficient. As a result, the basis of the award of these contracts could not be determined. The reasons advanced by the manager of the CTB for the state of affairs were as tenuous if not as ludicrous as those offered by The Public Accounts Committee for the late consideration of the AG's Reports for 1995-8. The manager of the CTB attributed this state of affairs to: (a) the fire which destroyed the Ministry of Finance Building in 1998; (b) the lack of a computerised database and (c) resource constraints; having regard to the large number of contracts required to be adjudicated upon. The Auditor General is clearly a patient person for he would be fully aware that copies of the relevant documents would have been available elsewhere.

2. Simplistic ploys utilised by ministries and departments include the absence of a system of competitive bidding and numerous instances of contract splitting to avoid adjudication of the Central Tender Board. In particular the minutes of the meetings of the GDF Departmental Tender Board did not make reference to other bidders or the basis of the award of the contracts, raising doubts as to whether a system of competitive bidding was followed before contracts were awarded.

3. In one particular case, the Guyana Defence Force awarded five contracts valued at $4.3 million to the same contractor on the same day for work of the same description. The GDF must understand that no one, however powerful, is above the law. Numerous cases of contract-splitting were also reported at the Supreme Court of Judicature and the high-spending Ministry of Public Works. Another ploy is the award of contracts to low-balling bidders and the subsequent payment of huge sums as variations. At the Ministry of Home Affairs no vouchers and supporting documents were produced to substantiate payments totalling $171.6 million, and $48 million in the case of the Ministry of Education. At this ministry there were three BCM accounts without authority and no supporting documents were produced to verify the transactions relating to those accounts.

Walking on the edge of the law

The report indicates that the manipulation of the voted provisions at several ministries to exhaust the budgetary allocations is more a rule than an exception and several instances were noted where cheques were drawn in January 2000, but were backdated to December 31, 1999 in complete violation of Section 36 of the FAA Act which provides that all appropriations lapse on the 31 December and unexpended balances are to be surrendered to the Consolidated Fund. A number of statutory bodies in receipt of subventions were also significantly in arrears in terms of financial reporting.

A related issue raised by the AG is the non-compliance with the statutory requirement that all unspent amounts released to the ministries, regions and departments be refunded into the Consolidated Fund at the end of the year. According to the Auditor General 'the main reason for this most unsatisfactory state of affairs, indeed a serious breach of the Law, was the general failure to effect reconciliation of the bank accounts so as to be able to establish accurate balances at the end of the year for the purpose of effecting such transfers.'

Even the IDB has been fingered for criticism in the report. The Auditor General points out that contrary to the legal requirement that the balance on the Agriculture Research Project Account be paid into the Consolidated Fund, the IDB signed a Memorandum of Understanding with the government and the Bank of Guyana that the funds be retained in the Account. During 1997, five amounts totalling $1.107 billion were withdrawn from the account to meet expenditure relating to road rehabilitation but contrary to the MOU no amounts were paid over to the Consolidated Fund.

In December 1997, quite incredibly, the IDB approved the 'temporary transfer' of US$2 million to facilitate the rehabilitation of the Georgetown roads which as the Auditor general noted was not an IDB project. Up to the time of his Report in November 2000, 'this temporary transfer' had not been reimbursed.

Surely the IDB owes the people of Guyana an explanation for its conduct particularly given that the transactions would be associated with general elections held that year.

Contributions to local organisations

The AG reports that payments totaling $266.9 millionwere made in respect of departments within the Ministry of Finance and therefore ought to have been accounted for in the ordinary manner of categorisation. These include $16.4 million for BASS, $10.7 million for COMU, $55 million for CANU, $84 million for the long defunct State Secretariat and $58 million for the Statistical Bureau. The government must be aware of concerns about the legality of some of these bodies and recognise that by these allocations it is actually reinforcing those concerns.

Conclusion

It is clear that the national accounts are in a serious state and that taxpayers do not get value for money. Considerably greater efforts need to be demonstrated by the government, Parliament and the Public Accounts Committee for anyone to take them seriously. Grave as the findings are, the Auditor General noted for our benefit that his report should not be relied upon to reflect the results of a comprehensive review of the financial operations of the government. He considers such a review desirable and indeed sees this as the 'intention of the Law'. However, in view of the depleted staff situation in the Audit Office, that Office could adopt only a selective approach in view of the timeframe within which it has to report to the National Assembly.

There is no question that the government, probably more than any other employer in Guyana is faced with the losing battle of recruiting and retaining adequate numbers of suitably qualified staff. The ministries, departments and agencies need such staff not only to perform routine accounting functions but also to facilitate proper internal controls and the execution of the internal audit functions in these bodies. As the AG points out the absence of internal audit departments in large ministries continue to militate against an effective system of internal control and has contributed significantly over the years to the deterioration in financial management at both the ministry and central levels.

Next week we will make specific recommendations to address at least some of the problems.

Introduction

This week we conclude the series began two weeks ago examining the state of the central governmental accounting and financial information systems. Over the decades central and local government accounting had deteriorated to the point where the books were unauditable. At least since 1992, we can look forward annually to the report of the Auditor General which is delivered to the Minister of Finance around October/November for tabling in Parliament. As a consequence of some recent constitutional amendments, future reports are likely to be delivered to the National Assembly, a sign of the growing independence of the Office of the Auditor General. These all point to improvements and must therefore be welcome.

In the first two parts we identified some egregious examples of bad financial management, poor accounting and indeed some transactions which are clearly in contravention of the law. As a country committed to accounting and accountability we must recognise that while the progress under the PPP/C since 1992 cannot be ignored there is a very long way to go before Guyanese can be satisfied that our books are up to standard.

Cause for optimism

While this column has expressed grave concern about the state of affairs, there is still cause for optimism. The appointments of Mr Neermal Rekha as Secretary to the Treasury and Dr Ashni Singh as Budget Director have the potential for an excellent team at the Ministry of Finance which is the heart of the government accounting system. The highly experienced Winston Jordan can now concentrate on his role as Budget Advisor and help to make the budgeting process an effective tool of management. As a team they have both the energy and the professionalism to revolutionise the whole public accounting system. What they need is the necessary authority and a clear mandate from the political directorate to do the job.

Every government would like to be seen as accountable and transparent even when they use some rather unhelpful benchmarks. Some of the action the government needs to take may demand greater patience and additional resources than are now available. Other very significant and indeed symbolic action takes no more than the will and the stroke of a pen. Take the Lotto money. That money should legally go into the Consolidated Fund without any deductions or expenditure therefrom. It is to this government's discredit that despite repeated concerns from all sections of society not only is this money not paid into the Consolidated Fund but worse, it is used to make selective public expenditure without any reference to the National Assembly. The situation is the same with some of the public bodies such as the Guyana Forestry Commission which continues to operate outside of the law as far its receipts are concerned. Compliance with the law must be a non-negotiable when it comes to public finance to prevent accusations of corruption and impropriety.

Reducing the number of bank accounts

Many fraudulent transactions are done by cheques and the regular and timely reconciliation of the bank accounts is one opportunity for detecting unusual or improper banking transactions. As reported by the Auditor General there are well over eight hundred bank accounts in the name of the government, many of which are dormant and some of which have been overdrawn and are accumulating unnecessary interest. These too can be addressed as a matter of urgency, closing all those which are no longer operational and retaining only those that are necessary. Reconciling all the bank accounts that have not been done for several years may require the accounting equivalent of Hercules since for many of them the source records may simply not be there and the limited resources available could be better expended on ensuring that the newly opened accounts do not go the same route.

Strengthening the ministries/departments

Many of the ministries and departments of the government have annual budgets considerably larger than some top private sector companies. Yet the accounting resources at their disposal are way below the level in the private sector. While there are notable differences in accounting between the public and the private sectors, the higher levels of both types of organisations require expertise in financial management that are common. There is no reason why professionally qualified accountants would not be able to operate in and contribute valuably in a typical government department. Indeed it is possible that such a person is actually worth more in government than in the private sector. The chief financial officer in the larger ministries and departments should have the same role as their private sector counterpart with salaries to match.

The financial regulations provide for the surcharging of accounting officers for breaches of those regulations but the Secretary to the Treasury was quoted in the press recently as saying that no such action had been taken recently. Not only are the rules there to be observed but knowing that they will be held accountable will make accounting officers far more careful about how they discharge their duties.

The need for internal auditors

With the limited resources at its disposal, the Office of the Auditor General almost invariably begins their audit some time in the year following the transactions. Good as it might be, there is a limit to the value of an exercise that reviews a transaction that is well over one year old. Most medium to large private sector organisations have well resourced Internal Audit Departments whose staff are on site year round and whose work is planned to complement the work of the external auditors. Their presence can serve as a powerful deterrent against fraud while narrowing the lag between the dates of the transactions and their audits.

While the internal auditor does not enjoy the same degree of independence as his external counterpart, the value of the work can be no less important if the work programme of the internal auditors is planned in conjunction with that of the external auditors.

Revamping the system

While some attention has been given to the review and modernisation of the central government budgeting system, there is no indication of similar efforts with respect to the accounting system. The Public Accounts Committee has recommended the complete overhaul of the accounting system including more effective use of computers. New Zealand has a model system and no doubt could be persuaded to assist Guyana either directly or through one of the international organisations.

Tender procedures

In its report referred to earlier in this series, the Public Accounts Committee referred to the "alarming level of non-compliance with existing Tender Board Regulations." Parliament cannot ignore its own committee's recommendation for "urgent reforms by way of legislation... to ensure as far as possible greater transparency, fairness, equity and accountability in the system." It is time that these concerns be put to rest.

Equipping the Auditor General's Office

The Public Accounts Committee has echoed concerns about the staffing constraint confronting the Audit Office, one of the consequences of which is that the office is forced to contract out most of the work of public corporations and other entities. Had those fees accrued to the Audit Office, then it would be able to operate more as its private sector counterparts and while corporatising its operations. Now that the office reports direct to Parliament, it is hoped that the required resources would be made available and the Catch 22 unlocked.