It is immoral for oil and gas companies to be making record profits from this energy crisis on the backs of the poorest people and communities, at a massive cost to the climate. I urge all governments to tax these excessive profits, and use the funds to support the most vulnerable people through these difficult times.
And I urge people everywhere to send a clear message to the fossil fuel industry and their financiers: that this grotesque greed is punishing the poorest and most vulnerable people, while destroying our only common home.
Many developing countries – drowning in debt, without access to finance, and struggling to recover from the COVID-19 pandemic – could go over the brink. We are already seeing the warning signs of a wave of economic, social and political upheaval that would leave no country untouched.
United Nations Secretary-General Antonio Guterres
The above statement was made against the background of the two largest United States oil companies ExxonMobil and Chevron as well as British-based Shell and France’s Total Energies, together earning nearly US$51bn in the most recent quarter, almost double what the group earned for the entire 2021. (See https://www.aljazeera.com/news/2022/8/3/grotesque-greed-un-chief-slams-oil-and-gas-companies.) Last June, US President Joe Biden had cause to remark that Exxon and others were making “more money than God” at a time when consumer fuel prices surged to records.
Here in Guyana, we seem very much content with the pittance we are receiving from Exxon’s subsidiaries for the exploitation of our oil resources as well as the over-generous tax relief the Authorities have granted to the US oil giant. Calls from a wide cross-section of the Guyanese society for a renegotiation of the agreement have so far fallen on deaf ears despite the fact several countries have found it necessary to implement measures to ensure that they obtain a greater share of oil revenues for the benefit of their citizens. Not only that, the Authorities are urging the companies operating in Guyana to accelerate oil exploration and production before the deadline set by the Paris Accord on climate change reaches for switching to non-renewable sources of energy. This is the hope that the Treasury will be overflowing with oil revenues!
On the corruption front, Transparency International reported that for several years now, the people in the Solomon Islands in South Pacific have been uneasy about their government’s increasing alignment with China. Investigative journalists have recently uncovered secret documents suggesting that politicians received payoffs from a Chinese government slush fund. The total amount involved is over US$2 million. The Executive Director of Transparency International (TI) in the Solomon Islands stated that ‘[t]his is corruption. These are personal benefits to these listed members of parliament. We all assume that China is remotely controlling the government and Solomon Islands’ affairs’.
Corruption in the Solomon Islands remains a serious issue, as evidenced by the Global Corruption Barometer – Pacific 2021 survey. In fact, 97 per cent of people that TI spoke to stated that corruption is a big problem in government; while 84 per cent believe that ordinary people can help turn the tide. China is financing major infrastructure development projects in the Solomon Islands. It was also reported that a Chinese-owned company is negotiating the purchase of a forestry plantation with a deep water port and an air base, and concerns have been expressed that China wants to establish a military presence in the Pacific.
In today’s article, we discuss the need for the Government to accelerate the move towards accrual accounting to replace the cash-based system currently being used for accounting and financial reporting, a decision that has been taken several years ago with little or no progress so far.
Cash and accrual basis of accounting
The cash basis of accounting records transactions at the time payments are made or when moneys are received, irrespective of when the transactions occur. With its emphasis on cash, other assets, such as fixed assets, receivables and inventories, as well as liabilities are not reflected in financial reporting of the entity. The accrual basis of accounting, on the other hand, records transactions at the time they occur, irrespective of when payments are made or when moneys are received; and all income and expenditure, and assets and liabilities are officially recorded in the bookkeeping system and are reflected in financial statements of the organisation.
The cash basis of accounting is the simplest form of accounting but does not give a complete picture of the financial performance, financial condition and cash flows of the entity. There are also little or no disclosure notes for a proper understanding of the financial statements and the basis of their preparation. It is nevertheless suitable for small businesses that have just commenced operations. As the businesses develop and grow, they can use the modified cash basis before migrating towards full accrual-based accounting. The modified cash basis uses the cash basis of accounting, adjusted to include transactions relating to long-term assets on an accrual basis; while those relating to short-term assets are recognized on a cash basis. It is an intermediate step towards full accrual accounting but does not comply with the International Financial Reporting Standards (IFRS) or generally accepted accounting principles. Some small businesses can move straight to full accrual accounting from the very beginning of operations, depending on their ability to do so.
Many governments continue to use the cash basis of accounting because of its simplicity, understandability and ease of operation. It also helps legislators to monitor and control expenditure against budgetary allocations. However, it is subject to significant manipulation and abuse. For example, payments can be delayed to avoid overrunning budgetary allocations; while transactions can be accelerated, especially in the last quarter of the fiscal year, to exhaust budgetary allocations. Additionally, since budgetary allocations lapse at the end of the fiscal year, cheques can be drawn close to year-end to utilize the remaining balances although value has not been received at the time, resulting in an over-statement of expenditure. The Auditor General’s reports over the years are replete with examples of such manipulation and abuse, with little or no action taken against the defaulting officials.
The Guyana experience
According to notes to the financial statements of the public accounts of Guyana for 2020, the Government uses the cash basis of accounting for recording and reporting the financial transactions of Ministries, Departments and Regions and for the preparation of the consolidated public accounts. The relevant note reads as follows:
The financial statements have been prepared in accordance with Guyana’s Generally Accepted Accounting Standards and Principles. The modified cash basis of accounting convention is followed for determining when a financial transaction is recorded in the Government’s records. This means, only when cash is paid or received is a transaction recorded.
It is unclear what those standards and principles are since the only set of standards in use in Guyana are the IFRSs that are based on accrual accounting. There are also no official documents setting out what those standards and principles are. This is unlike the United States that uses the Federal Accounting Standards, and there is a handbook setting out in detail what those standards are. Similarly, State and local government entities use Government Accounting Standards. Both of these standards are based on generally accepted accounting principles.
The above note also appears contradictory since it refers to both the cash basis of accounting and the modified cash basis. The Auditor General’s reports, however, indicate that the Government is using the cash basis of accounting. That apart, the three forms of accounting and financial reporting – cash, modified cash, and accrual – are not accounting conventions which are certain principles used as guidelines in the accounting and financial reporting of an organization. The most important of these are consistency, conservatism, materiality and full disclosure. In general, accounting conventions serve the purpose of ensuring consistency and comparability across organisations.
The Fiscal Management and Accountability (FMA) Act sets out certain requirements as regards accounting and financial reporting of central Government activities. Section 56 requires the Minister of Finance to promulgate appropriate accounting standards to be employed by officials responsible for the maintenance of the accounts and records. Apart from the requirement to prepare individual appropriation and revenue accounts in specified formats, the Act also provides for the preparation of financial statements of the Government to include:
Statement of revenues and expenditures in the form of the End of Year Budget
Outcome and Reconciliation Report;
Receipts and payments of the Consolidated Fund;
Current assets and liabilities of the Government;
Receipts and payments of the Contingencies Fund;
Statement of contingent liabilities;
Financial reports of the Deposit Funds;
Schedule of the public debt;
Schedule of the issuance and extinguishments of all loans granted by the
Government, other levels of government and public enterprises; and
Schedule of Government guarantees.
Considering the above, it is evident the Government uses the modified cash basis of accounting in its accounting and financial reporting. The relevant note to the public accounts should therefore be revised to clearly reflect this.
International Public Sector Accounting Standards
Given the limitations of the cash basis of accounting, work began in 1986 to develop and promulgate accounting standards for governments based on the accrual system of accounting. The first of the International Public Sector Accounting Standards (IPSAS) was developed in 1997. By 2003, some 20 accrual IPSAS had been issued, including a standard on financial reporting on a cash basis for those jurisdictions that were not yet ready to implement accrual-basis reporting. To date, 42 standards have been issued.
According to the IPSAS Board, the adoption of IPSAS by governments will improve both the quality and comparability of financial information reported by public sector entities around the world. The Board nevertheless recognises the right of governments and national standard-setters to establish accounting standards and guidelines for financial reporting in their respective jurisdictions. In this regard, it encourages the harmonization of national requirements with IPSAS.
According to Andy Wynne of the University of Leicester, as of 2012, 18 countries adopted accrual accounting based on IPSAS, IFRS or national standards, including Barbados which has its own national standards. Other countries were in the process of doing so. Several inter-governmental organisations have also adopted IPSAS or are in the process of doing so. The United Nations and its Funds and Programmes have completed IPSAS implementation by 2014, following the 2006 General Assembly Resolution on the matter. The World Food Programme was the first United Nations organization to do so with effect from 2008.
Guyana’s attempts to implement IPSAS
In his 2014 report, the Auditor General noted that the Government continued to operate on a cash basis and has not adopted or implemented IPSAS. He suggested that the Authorities consider implementing this “best practice”. In his 2015 report, the Auditor General raised the issue again to which the Ministry of Finance indicated that the Government had decided to adopt IPSAS, but was still submitting financial statements using the cash basis of accounting. This is in no doubt in recognition of the fact that IPSAS implementation takes some time, perhaps requiring a phased-in approach.
In his 2016 report, the Auditor General raised the matter again, to which the Ministry responded as follows:
The adoption of IPSAS did not necessarily require the immediate implementation of the accrual basis of accounting with full consolidation of all Government Agencies. The basis of accounting under IPSAS also allows for modified cash basis of accounting as well as the modified accrual basis of accounting. It is acknowledged that the optimal aim of developing countries is to endorse the full accrual basis but this has to be undertaken in a phased manner. The Annual Consolidated Financial Statements as contained in the Fiscal Management and Accountability Act 2003 are all prepared under the cash basis of accounting. Sensitization as a first step, followed by training will also have to be undertaken before IPSAS can become a reality.
To be continue
