Whilst Cayman Islands Auditor General, Alastair Swarbrick, in his latest report on the government’s finances has found some improvements in accounting and efforts to produce them on time for audit the quality was still not good enough. What is worse is that his improvement note was judged against previous audits when nearly all the ministries failed to produce any accounts.

“There remains considerable room for improvement in the governance, internal controls and financial management of most entities,” he said. “Senior management across government is responsible for the financial management of their entities and putting in place control systems to enable the effective stewardship of public resources and protect them from waste and abuse. There continues to be a lack of due regard by senior officials for ensuring that appropriate systems are in place exposing public funds to risks of waste and misuse.

“The government needs to seriously consider how it organises itself to effectively manage its financial resources, and provide strong and effective leadership to the financial function. A number of matters I have raised in the conduct of my audits are very significant and could effectively undermine the credibility of the government.”

Only six ministries received an “unqualified” Audit Opinion meaning “The information contained in the financial statements can be relied upon” out of a total of 15. One ministry, Tourism and Development, received an “adverse” Audit Opinion meaning “There are such significant deficiencies with the information in the financial statements they should be considered unreliable for the user and the information contained therein is not trustworthy”. If anything could be worse there was. The Ministry of District Administration, Works, Lands and Agriculture received the lowest Opinion possible – “Disclaimed”! This means “I was not provided with sufficient information to conduct an audit”.

Even the word “appalling” is not a good enough adjective to describe either of these.

Ex- premier, McKeeva Bush, and civil servants Stran Bodden, Sonia McLaughlin and Kenneth Jefferson headed up Tourism and Development during the period of the audit.

Ex-premier and now Speaker Juliana O’Connor Connolly’s and civil servants Kearney Gomez and Alan Jones headed up District Administration.

This is what Swarbrick had to say about these two ministries:

MINISTRY OF DISTRICT ADMINISTRATION, WORKS, LANDS AND AGRICULTURE

AUDIT REPORT

3. For the years ended 30 June 2011and 2012,I issued disclaimers of opinion on the Ministry’s financial statements. We were not able to obtain sufficient and appropriate evidence to reach an opinion due to significant limitations in supporting documentation as well as material deficiencies in the internal control environment. There are a significant number of issues that led to this position. In the audit report we reported that we were unable to:

• obtain sufficient and appropriate audit evidence to determine whether the total account balances for trade payables, other payables and accruals disclosed in the financial statements were free of material misstatements. Due to the absence of this information, we were unable to satisfactorily confirm that the amount reported was fairly stated;
• satisfactorily confirm that the property, plant and equipment were fairly stated in the financial statements as the Ministry had not revalued its buildings in the last five years in accordance with the Financial Regulations and International Public Sector Accounting Standards. As a result we were also unable to determine whether the related depreciation (2011-12: $2.4m) reflected in the financial statements was fairly stated;
• verify the completeness of the accounts receivable due to the inadequacies of the internal controls, which did not facilitate the sequential numbering of invoices and receipts;
• obtain assurance on the completeness of other revenues (2011-12: $15.2m) due to system flaws which did not facilitate the sequential numbering of invoices; and
• to determine the accuracy and completeness of the net worth balance (30 June 2012: $39.3m) due to the lack of supporting evidence as well as the other issues reported in the previous paragraphs which directly impact the net worth balance.

TOURISM AND DEVELOPMENT

8. For the years ended 30 June 2011and 30 June 2012 the Tourism and Development’s financial statements received an adverse opinion. In my opinion for both years, because of the significance of the matters identified in our audits, the financial statements did not present fairly the financial position of Tourism and Development as at 30 June 2011and 30 June 2012, and their financial performance and their cash flows for the year then ended in accordance with International Public Sector Accounting Standards. The adverse opinions for both years were based on eleven issues identified in the areas detailed in the following paragraphs.

9. The cash and cash equivalents balance presented in the financial statements includes bank accounts held locally and overseas. During the audit, I was unable to confirm the accuracy of the overseas imprest account cash balances of$ 1.424 million.

1. I was unable to satisfactorily confirm that property, plant and equipment was fairly stated as Tourism and Development had not revalued its buildings and leasehold improvements for the previous five years in accordance with the Financial Regulations and International Public Sector Accounting Standards.

1. Furthermore for the year ended 30 June 2011,I received representations from management prior to the commencement of my audit to the effect that they could not provide the supporting documentation required to audit the property, plant and equipment account.

2. Due to the above noted issues, I could not determine if property, plant and equipment was fairly stated as at June 30, 2012 and June 30, 2011. As a result I was also unable to verify the amount of depreciation expense reported.

3. I was unable to confirm the prepayments balance was fairly presented in the entity’s financial statements for 30 June 2012,due to transactions amounting to $679,000 not being properly accounted for on an accrual basis as required by accounting standards, resulting in the understatement of the prepayments reported.

4. For the year ended 30 June 2011,I received representations from management prior to the commencement of our audit to the effect that they could not provide the supporting documentation required to audit the balances and transactions included in the entity’s financial statements relating to prepayments of $414,000.

5. I identified that amounts reported for the accruals and other accounts payable balance did not satisfy the criteria to be included as an accrual as required under accounting standards. Approximately $587,000 for the year ended 30 June 2012 (30 June 2011: $811,000) was not supported. In most cases, these accruals were done at year end for services yet to be delivered to the entity. As a result I concluded that the account balance was not fairly stated.

6. Included in the entity’s s1upplies and consumables expenses were amounts which had not been properly accounted for on an accrual basis as required by accounting standards. I identified amounts totaling approximately $1.626 million for the year ended 30 June 2012 (30 June 2011: $1.1million) were not accounted for correctly. As a result I was unable to confirm that the overall balance was fairly stated.

7. Tourism and Development recorded a foreign exchange gain of $207,000 for the year ended 30 June 2012 (30 June 2011: $204,000). Accounting standards require that statement of financial performance items be translated at the prevailing exchange rate at the time of the transaction. However, the entity recorded expenses from the London and Canadian departments using the month end rates while the closing cash balances were not revalued. I did not receive an analysis to support the potential error in the accounts ,as the total expenses recorded for the London and Canadian departments amounted to approximately $3.4m for the year ended 30 June 2012 (30 June2011:$3.3m).

8. I was unable to confirm that the entity’s financial statements contain the disclosure necessary to draw attention to the possibility that its financial position and financial performance may have been affected by the existence of related parties transactions.

9. I was unable to verify the cash flows reported on the Statement of Cash Flows as I was not able to obtain sufficient and appropriate support in order to validate the cash flows reported.

10.Management did not include a surplus payable in the accounts as required by accounting               standards.

Furthermore, due to the qualifications issued on the other areas I would also not have been able to conclude on the accuracy of any amount reported.

1. There were numerous matters concerning the net worth balance reported in the accounts which did not enable me to conclude as to whether the net worth was fairly stated. These included:

• the revaluation surplus had not been updated with the effects of revaluation;
• the contributed capital balance for the year ended 30 June 2012 ,which represents the equity investments into the entity by the Cayman Islands Government was reported on the statement of financial position in a negative amount of $(8,345,000); and
• the entity was unable to provide supporting work papers to fully support contributed capital balance for the year ended 30 June 2011.

2. In addition to the above matters the adverse opinion for the for the year ended 30 June 2011was also based on the following matters:

• Tourism and Development did not properly disclose its prior year comparative figures within its financial statements as required by accounting standards;
• included in the trade receivables at year end was an amount of $8.4m,which was subsequently reversed in the 2012 fiscal year. This amount was not a valid receivable as at 30 June 2011; and
• prior to the commencement of our audit, I received representations from management that they could not provide the supporting documentation required to audit the balances and transactions included in the entity’s financial statements relating to other receivables and trade payables. Included in the other receivables balance were amounts that were outstanding for a significant period of time mainly from t1ravel related claims which amounted to $85,000. These balances were written off in the subsequent year. For trade payables supporting documentation could not be provided for the open purchase orders account balance of $470,267.

GOVERNANCE REPORT

3. Our reports to those charged with governance for each of the three entities in MFTD catalogue a significant number of issues apart from those which were the basis for the respective qualified and adverse audit opinions highlighted above. The significance and sheer volume of the matters identified provide clear evidence of significant weaknesses in the internal control environment providing opportunities for mismanagement and abuse of public funds. We have summarized the internal control issues identified under a number of broad headings.

4. Material financial control weaknesses: We found a significant number of internal control weaknesses in nearly all the financial systems, including:

• poorly performed bank reconciliations;
• lack of segregation of duties for the processing of financial transactions e.g. purchase orders;
• inconsistent approval of invoices for payment with instances where there was no evidence of approval for payment, or where approval was made by unauthorized officials;
• poor cut-off procedures at period ends e.g. accruals recorded in the incorrect financial period;
• incorrect calculation of foreign exchange gains and losses;
• account balances not reconciled, reviewed or managed effectively;
• large write-offs of account balances without approval;
• significant unexplained variances for financial results; and
• general lack of evidence of monitoring and review by senior management that the internal controls of the organization are working effectively.

5. The totality of these individual weaknesses equates to a material weakness in the processing of financial transactions. The pervasive nature of these weaknesses resulted in a number of unresolved accounting differences across the MFTD entities. In addition to the risks of losses due to fraud and error,there is also a significant risk that management is using erroneous information for decision making and that inappropriate decisions are taken.

6. Poor management of travel and hospitality expenditures: We identified significant deficiencies in the management of travel and hospitality expenditures. These included:

• insufficient documentation to support travel expenses;
• unexplained expenditures in relation to travel and Miami ground transport;
• significant unsettled and unmanaged travel advances;
• no clear business cases for undertaking official travel;
• lack of support for credit card expenses; and
• a lack of, or poor policies in regards to travel and hospitality expenses.

7. Apart from the fact that the information available to senior management is likely to be erroneous, the nature of these weaknesses results in a significant risk of losses due to fraud and error.

8. Procurement rules disregarded: We found significant weaknesses in how MFTD carried out procurement as well a number of instances of non-compliance with the financial regulations leading to a significant risk of fraud and abuse of public funds. We found the following instances of non­compliance:

• awarding of material contracts without any tendering;
• evidence of break-up of contracts to avoid tendering;
• the award of sole source contracts without appropriate business case or justification or support of value for money considerations; and
• payment to contractors without signed contracts in place.

 

9. Mismanagement of overseas tourism offices: We found material weaknesses in the management of overseas tourism offices. Apart from the issues regarding overseas imprest accounts of the Tourism Department as reported above, we found the following significant internal control problems:

• bank accounts not effectively reconciled or reviewed;
• a lack of segregation of duties relating to the processing of financial transactions;
• significant number of accounting errors;
• invoices paid without appropriate authorization;
• lack of supporting documentation for transactions; and
• lack of effective oversight by senior management of the activities in overseas offices.
• 10.The level of issues identified during our audit relating to the management of overseas tourism offices raises significant concerns about senior management in meeting their duties and responsibilities as set out in the PMFL and PSML.
• 11.As a result of the audit work performed by my Office in this entity, I have concluded that there is a serious deficiency in financial management and accounting capabilities and would hope that the current staffing situation be addressed on a priority basis.
• 12.Management has failed to carry out its public duty – The lack of due regard for the implementation and operation of reasonable controls across MFTD and the number of transgressions of the laws has led me to conclude that management has failed in its role to protect public funds and that they have disregarded their responsibility to uphold the Laws of the Cayman Islands.

END

“The lack of due regard for the implementation and operation of reasonable controls across MFTD and the number of transgressions of the laws has led me to conclude that management has failed in its role to protect public funds and that they have disregarded their responsibility to uphold the Laws of the Cayman Islands.”

No. The word ‘appalling’ is not a good enough adjective.

And how many heads will roll? I only need one hand to count and I will still have too many fingers to use. That in itself will be ‘appalling’.