A cover-up to a cover-up?
After reading The NST report yesterday, titled: No cover-up in Malacca report, says Auditor-General (PDF here), I am not convincedand and I certainly need your help -- especially help from the learned financial audit frathernity -- to guide us on this.
Please give us a crash course on creative accounting and creative auditing -- pardon me for want of better terminologies.
What's the accounting principle practised by international convention when you deal with 'assets' versus 'liabilities'?
Auditor-General Ambrin Buang was quoted in The NST as saying that "State-managed trust funds financed by the government are 'assets' while those using public and private sector contributions are 'liabilities'".
The Auditor-General was commenting on DAP secretary-general Lim Guan Eng’s allegation (NST, September 9) of a "cover-up" in the audit of the Malacca state accounts last year involving the "omitting" of RM194.57 million in liabilities.
The crux of the matter is that, the same items declared as 'liabilities' in 2004 was declared as 'assets' in 2005.
Must consistency in accounting principles be a ground rule to good, accountable governance?
'Malacca government bankrupt'
Guan Eng says, going by the Auditor-General's Report 2004 and Report 2005, the Malacca state government should have been insolvent and bankrupt if not for a shift in accounting and auditing principles adopted in the 2005 Report.
In a letter to the Auditor-General dated September 11, and a related press statement dated September 12, Guan Eng quoted Lembaran Imbangan dan Penyata Akaun Memorandum of the Auditor-General's Report 2005 to indicate the financial status of the Malacca state government.
In Paragraph 3.3.2 (Page 3), the state's asset has been reduced by RM19.03 million from RM221.76 million to RM202.73 million.
However, it is noted that the RM202.73 million asset cited has exceeded short-term liabilities by RM83.47 million, whioch gives, as recorded in the Auditor-General's Report 2005, a surplus of RM119.26 million
Guan Eng is of the opinion that this surplus asset of RM119.26 million in 2005 was amiracle if it were tobe compared with a deficit of RM35.76 million recorded in the previous year. (See Auditor-General's Report 2004, Paragraph 3.3.2.)
So, which one between the Auditor-General's Reports 2004 and 2005 is actually accurate, Guan Eng asks.
"With a deficit of RM35.76 million in 2004, which indicates the Malacca was indeed in an insolvent and bankrupt status, and it has now been changed to an asset surplus of RM119.26million in 2005, then, this must have been a magnificient "turnaround" totalling RM155.02 million within a year," Guan Eng says.
But was it really the case that Malacca has made an actual turnaround from a RM35.76 million deficit to asset surplus RM119.26 within one year, Guan Eng asks further.
He scrutinises the both the Auditor-General's Reports 2004 and 2005 and discovers that there has been a significant diference in the way Kumpulan Wang Amanah Awam (KWAA), totalling RM194.57 million, has been considered for Report 2005, and it differs from Report 2004.
"If the sum of RM194.57 million were to be considered as 'liabilities', then the state government's asset in 2005 will not be a surplus of RM119.26 million," says Guan Eng. "It should have been a deficit of RM75.31 million."
"In other words, the Malacca state government was equally insolvent and bankrupt in 2005 as it was in 2004."
"In other words, too, that the accounting priciples have been inconsistent 2004 versus 2005, and Malacca's declared asset surplus of RM119.26 million for 2005 is questionable, because the KWAA totalling RM194.57 million was now declared as 'asset' and not as 'liabilities' as declared in 2004," Guan Eng says.
Assets -- 3 major trust accounts
The Auditor-General subsequently went to press, as reported by The NST yesterday, by saying that "the crux of the matter is the treatment of trust funds".
"Trust funds with contributions from the government should be referred to as assets and not liabilities," Auditor-General Ambrin emphasised. Quote:
Auditor-General Tan Sri Ambrin Buang said a directive to standardise ways of treating such trust funds would be issued soon to avoid misunderstandings over state accounts.
"The crux of the matter is the treatment of trust funds. Trust funds with contributions from the government should be referred to as assets and not liabilities... liabilities have to be repaid. Examples of funds categorised as assets are grants meant for specific purposes."
Ambrin said states must rectify this problem and not do what Malacca had been doing.
Screenshots was informed that the Auditor-General has since clarified the matter with Guan Eng September 18.
Screenshots was made to understand that there was no cover up on the part of the Auditor-General Report 2005 on Malacca State Liabilities as reported by the newspaper.
"Instead, what was reported In the Auditor General Report of Malacca for the year 2005 was to reflect the actual financial position of the state government," Auditor-General Ambrin said.
He also clarified that,
"...prior to 2005, in carrying out an analysis to ascertain the financial position, my State Audit Office of Malacca treated the Trust Funds and Trust Accounts of the state as current liabilities.
However in the year 2005. the State Audit Office has carried out a review and found that it is not proper to treat all the Trust Funds and Trust Accounts amounting to RM194.57 million as liabilities due to the fact that the source of the funds being put Into these accounts are mainly from government's contributions and not from the public.
In 2005, the 3 major accounts namely Kumpulan Wang Pembangunan Tanah, Kumpulan Wang Penyelenggaraan Jalan and Tabung Amanah Melaka amounting to RM175.75 million constituted 90% of the total Trust Fund and Trust Accounts shown in the 2005 accounts of the Malacca state.
The source of funds for these 3 trust accounts as well as the others came from the State Government Itself. in our view they should not be treated as liabilities.
Screenshots was also made to understand that the Auditor-General has assured Guan Eng that the auditing done by his Office "was carried out In compliance with the International Audltlng Standards and supplemented adequately with our official Audit Manual and Guideilnes."
Ambrin, however, did not disclose which was the International Auditing Standards he benchmarked with.
In case you don't already know, the Malacca state government is run by Abdullah Ahmad Badawi's Vice President in Umno, Mohd Ali Rustam.
Comments
"State-managed trust funds financed by the government are 'assets' while those using public and private sector contributions are 'liabilities'".
It sounds like a bank, deposits from accounts holders are liabilities to the bank, while those contributed by shareholders are assets.
Do we have the financial statements of the unconvincing state accounts of Malacca?
Posted by: whling![[TypeKey Profile Page]](http://www.jeffooi.com/nav-commenters.gif)
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September 21, 2006 09:44 AM
creative accounting designed to dupe the investing public are nothing new. It is a worldwide phenomena. That is why you will often see accountants and lawyers wheeling and dealing in corporate affairs or corporations designed to enrich them and their clients, but seldom the investing public.
Posted by: sydput![[TypeKey Profile Page]](http://www.jeffooi.com/nav-commenters.gif)
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September 21, 2006 10:05 AM
Just my two cents of opinion...
"However in the year 2005. the State Audit Office has carried out a review and found that it is not proper to treat all the Trust Funds and Trust Accounts amounting to RM194.57 million as liabilities due to the fact that the source of the funds being put Into these accounts are mainly from government's contributions and not from the public."
Firstly, it was mentioned mainly, what does mainly means? 60%? 70%? 90%? So there are still some liabilities in the account? If the word mainly can be used to justify that the entire trusts account is an asset, then I guess the accounting standards they are referencing to are rubbish.
If the funds was 100% gov moneys, then I think it is acceptable that the trusts account is considered asset because it's the gov moneys anyway.
Posted by: streetz![[TypeKey Profile Page]](http://www.jeffooi.com/nav-commenters.gif)
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September 21, 2006 11:59 AM
A liability represents an obligation of an enterprise (in this context, the State of Melaka) to act or perform in a certain way. The settlement of such obligation usually involves the State giving up resources embodying economic benefits in order to satisfy the claim of the other party. In most cases, the obligation is settled by payment of cash.
Every accounting transaction requires a debit and a credit entry. In respect of trust funds, when the State banked in the monies, the sum is debited into the bank account i.e. an asset. The corresponding entry has to be credited to the specific fund account. When the monies are spent, such spending is booked either as expenses in the profit & loss account or (if the monies are spent for capital expenditure) as a property, plant and equipment.
The question is whether the State is obligated to pay back those monies. If the answer is yes, then the trust fund should be classified as a liability. If no, then it remains in the balance sheet as quasi capital and when the monies are spent, be transferred to the Accumulated Fund (much like the Retained Earnings of a Sdn Bhd or a Berhad company).
It could be that the Trust Fund has been classified under current liabilities in the previous year. Supposing the State is not obligated to pay the monies to the giver, then it is wrong to treat the item as a liability. The financial statements should present clearly the accounting treatment for those trust funds in the notes on significant accounting policies.
Accounting is the language of money. It tells how transactions are recorded which end up as financial statements .Like other reports, things can be presented in various ways. It is actually up to the preparer of the financial statements whether to present things in straight forward manner or by camouflaging, colouring or even altering certain parts of the accounts.
Being creative is not wrong but when the financial statements failed to reveal its substance or its true and fair situation then such financial statements should be qualified for its inadequacies.
By the way, from certain news reports,I noted that the Auditor General has been made out to be the person who prepared the accounts of the State. That is not right as the Auditor General is responsible to present his report and opinion on the financial statements i.e he is not the book keeper or thee accountant. It is the State’s executive who are the parties responsible for the preparation of the accounts.
Without having the chance to actually read the financial statements in question, we can’t tell for sure whether the Auditor General has done proper job or not.
Posted by: wuzz![[TypeKey Profile Page]](http://www.jeffooi.com/nav-commenters.gif)
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September 21, 2006 03:38 PM