On the Line: National Communications Network Inc. (2004-2006) and Guyana National Newspapers Limited (2006-2008)

Last week we sought to conclude our review of the financial statements of NCN for the three years from 2004 to 2006. Readers will recall that NCN recorded losses in each of the three years but massaged each year’s loss into a profit as a result of subventions from the state. Such operating subventions came to an abrupt end with President Ramotar’s assent to the legislation withdrawing $81 million of proposed subvention although an amount of $65 million has been approved under the Office of the President for capital expenditure for NCN.

I commented last week on the poor quality of the information contained in the audited financial statements as well as on what appears to be unacceptably poor audit quality by Mr Deodat Sharma, long acting Auditor General. NCN does not show segmented information derived from its distinct operations such as Television and Radio, and it was not therefore possible to analyse the information presented. Using the revenue numbers for 2006 and applying available television hours only, the recovery rate hovers around 20%. If, as must be the case, part of the reported revenues is derived from radio then something is seriously wrong with the marketing, management, finance and production departments of the company.

It boggles the mind that an entity that generates revenue of more than half-a-billion dollars, that enjoys very known tax concessions, that has access to all the material of the government‘s formidable information capacity and that has not had to meet any economic or commercial test, cannot make a profit. But let us move on to the Guyana National Newspapers Limited, the printers and publishers of the Guyana Chronicle which boasts on its masthead that it is the country’s most widely circulated newspaper.

In my research for today’s column I found that the company had very recently submitted to the Registrar of Companies its 2007 and 2008 financial statements and reports contained in a single good quality report that fails to identify its printer. While welcoming the apparent attempt at improved filings with a view to eventual compliance with the law, one must still wonder why the filing for 2007 was not done ever since the audit report was issued in October 2008. This comment applies too in respect of 2008, the audit report for which was issued since November 2009.

One cannot be sure why the Chairman Keith Burrowes, an advocate of accountability, would have held back on the 2007 report in which he reported on exceedingly favourable performance by the company and failed to address for 2008 some of the operational challenges facing the company, including a balance sheet that does not show a true and fair view. Surely any responsible chairman would follow the advice of his auditors and make some provision against doubtful debts.

Big loss
In his 2008 report he simply acknowledged the loss and then looked for its causes. What he failed to explain however is how in the space of one year the company can turn a profit of $26.2 million into loss of $7.3 million. To be fair, the directors do state in their report that the concept of good corporate governance has become one of the company’s cornerstones, and that it has an internal auditor who reports to the Chairman. The legal advisor is listed as Ms Jaya Manickchand who enjoys political connections with the government and who was recently made a Gecom Commissioner by the PPP/C.

Despite the welcome appointment of an internal auditor, one of the first things to note is that the audit report has moved from a clean opinion in 2006 and 2007 to an adverse opinion in 2008 in which the auditor indicates that the company’s financial statements do not give a true and fair view of the company’s financial position, its performance and its cash flows for the year. This extreme position was taken by the auditors because of the uncertainty that some $50 million shown as receivables will be collected. If these, as the auditors fear, are not recovered then some 18% of the total assets of the company will have vanished.

The Board it seems is in denial about these balances, and one must wonder how many are political debts for the 2006 elections or for the supply of newspapers to government agencies and departments, which are practically imposed. At some point the company has to bite the bullet or the auditor may have to withdraw from the engagement.

Significantly, there are no notes on related party transactions or balances making the claim of good corporate governance hollow, even by way of discussions.

Statement of income

Source: Audited financial statements

As the table above shows revenue has fallen in both 2007 and 2008 with a reduction in revenue in 2008 of $2 million per month, or roughly 7%, or 10% over the two years 2006 to 2008. In 2007 the company cushioned the $14 million fall in revenue by reducing expenditure by $20 million, as a result of which profits almost doubled. By contrast, in 2008 expenditure actually increased while sales declined, the classic double whammy.

According to Chairman Mr Keith Burrowes, the increase was due primarily to higher raw material costs which account for 23% of total expenditure, fuel and electricity 6% and labour 41%. The company must be one of the few entities that has managed to reduce their electricity/fuel costs, doing so by a whopping 18%. The company too, must be one of the first public sector entities in recent times to engage in voluntary staff reduction with the labour force declining from 117 employees in 2003 to 93 in 2008, or the equivalent of one lay-off for every five! Labour cost in the same period has shown an interesting curve dipping between 2004 and 2007 but then jumping by 15% in 2008. Average annual employment cost per person increased significantly over the period:

Source: Chairman’s report 2008

What was also noticeable was that even when the company slashed the number of staff from 102 to 92 in 2007, its salary bill declined by a mere 2.4%, suggesting that it was the low level staff who were terminated.

Statement of financial position

Source: Audited financial statements

I have already referred to the concerns of the auditors about the receivables figure which must inevitably include substantial amounts owed by government agencies. I would add another caveat and that is in relation to the level of inventories which showed a 51% increase in 2008 over 2007, from $37 million to $56.0 million. The company’s circulation is falling to what would normally be considered unsustainably low levels, and one has to speculate on the rationality of buying newsprint when the prices are at one of their historic peaks. In any case, unless the entire industry in Guyana and abroad has it wrong, the company’s inventory holding makes no commercial sense.

For a full four years, the balance sheet of the company has been carrying a dividend payable figure of $18.1 million and one must wonder why the Privatisation Unit/NICIL, which claims to consolidate GNNL’s financial statements into its own, has not taken up these dividends given that they became legally due when passed at the relevant AGM.

Falling circulation
But with all the deniability of its receivables and the uncertainty about its inventories, the real story of GNNL is best told in its circulation numbers. On page 25 of the 2008 annual report there is a chart intituled Circulation Average (2004-2008). While the directors deserve credit for this disclosure, the manner in which the time series run is misleading. The numbers on the left of the chart are the lowest and instinct would lead one to think that the upward movement to the right points to higher circulation in the later years. Alas, it is just the opposite. The reader reviewing the chart from right to left soon realizes that the circulation has in fact been falling and the bars on the left – the lowest – are the most recent, ie, up to 2008. A clearer presentation is as follows:

Chart: Circulation figures 2003 – 2008

A closer look at revenue from newspaper circulation reveals an average 33% discount on the cover price which might be considered high for the industry. To add to the effective cost, the company spends almost 25% of net circulation revenue on circulation costs and therefore incurs total costs of almost 50% on the cover price. Advertising income represents 64.9% of total income in 2008 compared to 59.9% in 2006 and no doubt a substantial proportion of that income is from government. But there is a complete lack of disclosure of related party transactions from which one would have been able to determine the exact influence on the company. These are some of the issues which Mr Burrowes chose to side-step.

This review has highlighted the many failings of the accounting and auditing of the two major commercial communication arms of the state. The fuzzy accounting at NCN was below even the most modest standard of acceptability while the financial statements of the Chronicle company have been certified as wrong and misstated.

Chronicle is heading for some real challenges, while the NCN will soon be forced to run like a business. Unfortunately, given the number of years in arrears, Guyanese will have to endure many more annual reports before we have an insight into how they cope.

On the Line – National Communications Network Inc. (2004-2006) and Guyana National Newspapers Limited 2006

Statutory framework
Business Page was able to access the annual reports of the National Communications Network Inc (NCN) for the three years from 2004 to 2006 and for Guyana National Newspapers Limited (GNNL) for 2006. These reports were obtained from the Deeds Registry where they are required to be filed no later than August 11 following the close of the year. I also did a search in the parliamentary library and was assured that there were no later filings, thus confirming that these two government companies are grossly delinquent in meeting their statutory obligations. But their responsible Minister was similarly delinquent in laying the companies’ annual reports and audited accounts in the National Assembly. I will return to this shortly.

In addition to their obligations under the Companies Act, all government companies (defined in the Companies Act as 51% government shareholding) are subject to sections 48 and 49 of the Public Corporations Act. This requires government companies, no later than six months after the end of each calendar year, to submit to the Minister a report containing:

(a) an account of its transactions throughout the preceding calendar year in such detail as the Minister may direct;

(b) a statement of the accounts of the company audited in accordance with section 345.

The Minister then has up to September 30 to lay before the National Assembly a copy of the report together with a copy of the auditor’s report. This was not done for either NCN or GNNL.

The directors of NCN as shown in the last annual return filed for the year 2006 were Ms Jennifer Webster, (Minister) and Mr Desmond Noor Mohammed, Chartered Accountant and long-time supporter of the PPP. One of the signatories of the balance sheet is Mr Winston Brassington, Executive Director of NICIL.

The directors of GNNL as shown in their annual return for 2006 are Messrs Keith Burrowes, Hydar Ally, David De Groot, Tota Mangar, Patrick Dyal, Kwame McCoy and Colin Alfred.

Despite the assertion in the audit reports on the financial statements of the two companies, both sets of financial statements are far, far away from compliance with International Financial Reporting Standards (IFRS), the basic requirements for the preparation of financial statements under the Companies Act.

Specifically, there is a complete lack of disclosures in the financial statements rendering analysis very difficult. The year 2005 was the first year of EU adoption of IFRS’s so by the end of 2006, there were substantial developments with several new standards coming into effect which would have required far more disclosure. But as we shall see the defects and deficiencies are even more basic.

NCN describes itself as a “State Owned and Operated Radio and Television Stations” with the parent company being National Industrial and Commercial Investments Limited. NCN went into operation on March 1, 2004 following the transfer to it of the assets and liabilities of the Guyana Broadcasting Corporation and the Guyana Television Company Limited. The balance sheet of NCN at December 31, 2004 shows a Share Capital (sic) of $35,000,000 and Reserves of $554,536,331, presumably the difference between the value of the assets transferred to it and the amounts of the liabilities which it was asked to assume. In ordinary language it means that the government invested more than half-a-billion dollars to get NCN started.

The liabilities it inherited included a Provision for Corporation, Property and Other Taxes of $18.834 million but by the end of 2006 that amount remained unpaid with no further charge for taxation, even though there is no evidence that NCN is exempted from taxation. Indeed, instead of making some kind of return to the country for taxpayers’ investment, the company was granted some $175 million over the period March 1, 2004 to December 31, 2006 in government subventions.

NCN Statement of Income

Source: Annual Accounts

I express reservation on the discussion that follows with the comment that the financial statements – the audit report of which is signed by someone who is not qualified to do so under the Companies Act – contain some very elementary accounting errors. At best, therefore, these financial statements are unreliable and misleading and had there been the appropriate expertise available, they would almost certainly have been rejected at the Deeds Registry and in the National Assembly.

The first point to note is that if the Revenue Subvention is excluded from the Income Statement NCN made operating losses for the ten months of 2004 and in 2005 and 2006. What is even more surprising is that in 2006 – an elections year that often brings an advertising bonanza – NCN could actually make a loss, a feat that can only be achieved under unusual managerial expertise.

The Contingencies Fund
Indeed in 2006 the Minister of Finance had to bail the company out with a $20 million advance from the Contingencies Fund. What makes the matter so nearly pathetic is that while the person signing the audit report – Deodat Sharma – is also the same person who signs the Auditor General report, NCN is showing the Contingencies Fund advance as outstanding while the report on the Public Accounts does not even acknowledge an advance, let alone a debt!

And in payables, NCN shows a liability to the Ministry of Finance, a related party, if ever there was one. The financial statements do not, however, show any related parties, compounding the difficulty in any appreciation and analysis of the statements.

Then in the Statement of Changes in Equity, there are items like capital subvention for flood relief funds (2005) and negative amounts for amortisation, the corresponding entry for which could not be traced.

Strange too is the disclosure that PAYE payable at December 31, 2006 was the same as 2005, as are the provisions for Taxation ($18,834,104), Loan Creditor – Ministry of Finance ($2,332,646) and Other Creditors $110,930). Meanwhile NCN kept racking up other debts and at December 31, 2006 NCN owed unidentified persons some $80,743,424, close to two years worth of cost of sales, while showing accrued expenses as an asset!

Old debts
And on the other side of the balance sheet, Receivables at that date amounted to $205.5 million, including some $48 million of inactive receivables for the Guyana Broadcasting Corporation (GBC) and Linden which would hardly seem to be recoverable several years later and should certainly be written off. That still leaves some $157 million in other unpaid receivables at the end of 2006, an elections year. The question to be asked is how much did NCN bill the political parties for their elections advertisements and how much was paid by the end of the year?

Apart from the GBC and Linden receivable issue there were other concerns reflected in the audit opinion. The first relates to the failure by NCN to maintain an assets register for its more than $643 million worth of fixed assets and the failure to prepare and submit tax returns.

The range and nature of deficiencies identified in this analysis would do a disservice to a cake shop. NCN makes them look good. Just by way of information, one of the two persons signing the financial statements on behalf of the Board is Mr Winston Brassington of NICIL who was in the press recently attempting to teach the nation about accounting and the Companies Act.

To be continued