Financial reporting woes

Cayman’s government entities are doing a much better job of turning in financial records in a timely manner over the past two years.  

However, the statements – to use the words of one local legislator – often “aren’t worth the bus ticket they’re written on”.  

According to a report released in October by the auditor general’s office, of the 265 financial statements required to be completed between the 2004/05 and 2010/11 government budget years, the audit office has “issued” (finalised and reported) 236 opinions on those records. Another five audits have been finalised and seven other statements were exempted from audit due to changes in the law.  

“There remains only 17 audits to be completed for the period between 2004/05 and 2010/11,” Auditor General Alastair Swarbrick noted in his report.  

However, the majority of the data from the backlogged years; particularly those issued by government ministries and portfolios – the central government service – are incomplete or useless for any public accountability function.  

Of 67 audits completed for ministries and portfolios between 2004/05 and 2009/10, only eight were issued with “unqualified opinions”, meaning the information could be considered reliable. For 32 of those reports, about 47 per cent, auditors had to issue a “disclaimer of opinion”. That means the statements could not be considered reliable or useful.  

For statutory authorities and government companies, the situation gets a bit better.  

For 142 completed and issued audit reports between 2004/05 and 2009/10, 73 (51 per cent) were issued with unqualified opinions and another 54 (38 per cent) were issued with qualified opinions, meaning most of the information was reliable except for certain areas specifically identified by auditors in their reports. Fifteen audits over those years received a disclaimer of opinion.  

“[This situation] should worry anybody,” Mr. Swarbrick said in October.  

Figures for the 2011/12 financial year statements have not yet been released and audit office officials said they won’t be until the May elections are held and a new Legislative Assembly is put in place.  

Audits of the 2010/11 budget year financial statements, the most recent that were available, were submitted in a more timely fashion and the information was generally more reliable, auditors said.  

Of the nine completed audits for government ministries and portfolios during 2010/11, two entities received unqualified opinions and another six got qualified opinions. One opinion, for the Ministry of District Administration, was disclaimed.  

Three audits remained outstanding as of 30 September. Those were the Portfolio of Internal and External Affairs, the Ministry of Education and the Ministry of Finance, Tourism and Development. Auditors said the Ministry of Education and Portfolio of Internal and External Affairs financial statements were 
“substantially complete’.  

There were some delays with financial statements from the Ministry of Finance, Tourism and Development, which are apparently being presented as three separate entities, according to auditors. Mr. Swarbrick noted that annual budget statements for that ministry were presented as one entity and that it was standard practice for the financial statements to be presented in the same way.  

However, auditors stated they would undertake audits of the financial statements for the three separate entities of tourism, finance and development.  

“The audit opinion will be modified to indicate that the financial statements were not prepared in accordance with the [annual budget statements] as required by the [Public Management and Finance Law],” auditors stated. “A reconciliation with the [annual budget statements] is included in the financial statements.”  

For the 18 audits completed for statutory authorities and government companies for 2010/11, nine received unqualified opinions and the other nine received qualified opinions.  

 

Concerns remain   

When the 14 ministries and portfolios are completed for the 2010/11 budget year, auditors said it was likely that 12 of those will have presented information “that has a reasonable degree of reliability and credibility”. Between 2009/10 and 2010/11, auditors noted a “continuous improvement” in the quality of the financial statements being presented.  

However, Mr. Swarbrick noted that underlying systems and internal controls that support production of government financial statements were not “sufficiently robust”. “There is still a way to go before it can be said that financial accountability has been restored,” auditors said.  

Another major area of concern was with the Entire Public Sector consolidated financial statements. Those reports consolidate all government entity financial statements and include executive transactions and balances of government. Executive transactions and balances are not included in the individual financial statements from government entities.  

Executive transactions do represent “a significant element of the government’s financial transactions”, according to auditors.  

“At the date of this report, the audit has reached a point that without further significant information, it is not possible to reach an opinion on the financial statements,” Mr. Swarbrick said. A “disclaimer of opinion” on the statements from the Entire Public Sector for the 2010/11 year would likely have to issued, he said.  

Key issues that led to the failure with the Entire Public Sector statements were:  

Disclaimers of opinion on some of the underlying financial statements that are used to produce the Entire Public Sector statements;  

Health care liabilities were not stated or information provided;  

There was also difficulty with representations from government regarding the “completeness of revenue”.  

“Until we get the Entire Public Sector [report] tabled in the House in a timely fashion, we will not have accountability restored,” Mr. Swarbrick said.  

 

Property values   

One area that government does not yet have a clear picture of is what its property, buildings and other assets are worth, according to Mr. Swarbrick.  

This was one area of concern mentioned in the auditor general’s report released last week on the state of Cayman’s public financial reporting.  

“I couldn’t give you a view … whether [government assets are] undervalued or overvalued because they haven’t done a valuation since 2001 of their fixed assets,” the auditor general said. Mr. Swarbrick said such an effort has been under way within government for about the past year now and that his office expects to see something soon.  

“A valuation impacts on your balance sheet and also on your depreciation,” he said. “If there’s been a significant increase in valuation, the balance sheet could improve. These are important questions when you’re looking at the finances of government.”  

Former Auditor General Dan Duguay also noted the problem when he reported on it back in 2007. Mr. Duguay claimed the last valuation of government properties was done in 2000, and stated his concern that government assets might be significantly under insured.  

At the time, Mr. Duguay noted that after the 2000 valuation on government assets, there had been one scheduled for October 2004; however Hurricane Ivan came in September 2004.  

When the government obtained new insurance in April 2006, it did so at a value of CI$400 million.  

“These values were determined based on input from the insurance broker and attempted to include adjustments for estimated increases in property values,” Mr. Duguay wrote in the report.  

 

Debts   

Mr. Swarbrick also raised concerns in his report about the accuracy of government’s “doubtful accounts”. Doubtful accounts, according to auditors, are receivables for which government says it is owed money, but which it believes may or may not be paid.  

“There’s a general issue around the accuracy of these accounts,” Mr. Swarbrick said, adding that a later report from his office would address the issue in more detail.  

Asked whether lack of documentation for money owed under certain accounts could lead to the government losing out on money owed, auditors responded that there was a potential for that to happen in some cases.  

Another potentially massive financial issue for government that isn’t being recorded on yearly financial statements is the projected healthcare liability for civil servants and pensioners.  

“It’s not immediately realisable, but for the future it is an issue,” Mr. Swarbrick said. “Cayman is not alone in having issues around this.”  

Mr. Swarbrick said he is aware of views from the government that recording future healthcare liabilities on the government’s balance sheet isn’t done in large countries throughout the world including in the United States, the United Kingdom and Canada. However, he said that doesn’t mean the Cayman Islands shouldn’t do it.  

“Even if it’s not included in the financials, they need to have the information for effective planning and use of their resources going forward,” he said. “You can’t operate in a vacuum.”  

In 2010, the Caymanian Compass reported that a 2009 bond offering memorandum made an estimate of US$798 million (CI$654 million) in unfunded liabilities for healthcare coverage due to Cayman Islands civil servants. The figure was based on an actuarial estimate done in 2004.  

The projections are essentially accountants’ best guesses at what the government will owe for the total benefit package at civil servants’ expected retirement dates – which can be up to 40 years in the future.  

A senior civil servant who asked not to be named said that government “felt obliged” to make the estimate because there was an expectation that it would be done as part of the 2009 bond offering.  

If the CI$654 million liability for healthcare services – which was calculated in 2004 – was added to the 2012/13 budget, the government’s overall net worth would plunge into negative territory. The government’s stated net worth in the current budget is $637.7 million.  

0
0

1 COMMENT

  1. The country’s priorities start with getting its financial house in order and they can’t do that without a benchmark on what is coming in and going out. Both parties have failed on this very issue and voters should hold them accountable for this failure. The independents are the right choice on this issue alone to get our country on the right track and moving forward. Country First is the right choice for the right reasons at the right time and thinking people will respond affirmatively. The others have had their shot and look where we are at today.

    0

    0

Comments are closed.