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Auditor General Report 2010

Introduction
I do not share the excitement of the media and the public about the revelations in the Auditor General’s 2010 report supplying further evidence of the excesses, mismanagement and improprieties which have become routine under Dr Ashni Singh’s stewardship of the Ministry of Finance. For persons who pay taxes and advise others to do likewise this is more than a titillating news story. Accordingly, I cannot be enthused to read that the Contingencies Fund continues to be abused several years after it was first pointed out. I am not at all pleased that this Auditor General cannot see the forest for the trees, and that he is more concerned about some overpayment of $1,167 than about hundreds of millions of dollars in special funds not being audited; or that he focuses on vehicle log books not maintained while scores of government vehicles cannot be accounted for or are misused.

If our financial architecture is designed to be dysfunctional, which by any measure it is, then no amount of post-transaction audit would remedy the defects. There must be concern about the placing of square pegs in round holes, persons holding positions across the arms of the state without the requisite expertise and qualifications.

Internal audit
One of the most effective tools of financial oversight is a well-resourced internal audit mechanism headed by at least one qualified accountant. Our Fiscal Management and Accountability Act bears some resemblance to the Australian Act, but with notable exceptions. That Act which goes back to 1997, six years before the Guyana Act, provides for fraud control plans and audit committees in each agency, and applies the criminal code of that country to the misapplication, improper disposal or improper use of public money. Unlike our Act, the Minister is not exempted from such sanctions.

Under the Australian Act any borrowing of money not authorized by an Act of the National Assembly is invalid. Our relevant legislation seems far more permissive and even that is being abused with several loans and other financial agreements entered into not tabled in the National Assembly. Their Parliament must be notified of any involvement in a company by the state or a prescribed body. In Guyana, Dr Singh’s NICIL (he is the Chairman of the Board with Dr Luncheon and other Cabinet members) can form companies and use them to siphon off state resources or enter into questionable transactions. Even if, as seems probable, that had been done at Mr Jagdeo’s behest, it would not exonerate the Minister nor the Auditor General from investigating these.

A financial infrastructure
No properly managed structure would allow the Audit Office to decide that it would no longer report on concessions given by the administration, in clear violation of statute. Or to accept a self-serving opinion from a cabinet member that public moneys do not have to be put in the Consolidated Fund. The least a self-respecting audit office would do is seek an independent opinion.

Nor would a proper financial infrastructure allow the offices of Accountant General and Auditor General to be held over several years by acting appointees, or require the latter to report to the executive, contrary to the constitution. I am concerned that the Public Accounts Committee has not asserted itself, content to make less than consequential statements than address the fundamental problems facing the financial administration of the country. Concerned too that the Audit Report reflects no work on the transactions of the Office of the President except to refer approvingly to the Lethem to Providence E-Government Project, one of the immediate beneficiaries. Some $846.451M was expended on that project in 2010 which is only partly completed.

Disgrace
It seems to me a national disgrace that the government can decide that it will so frustrate the establishment of the Public Procurement Commission in order for cabinet to control all significant tenders. Or use the Fiscal Management and Accountability Act as cover to bring constitutionally independent persons under the Ministry of Finance. With all the excesses, I am not aware that any public official has ever been brought before the court for breaches of the Act.

In the days of Anand Goolsarran, before we had the Act and before we had several years of training in forensic and Value For Money audits, we could rely on the Audit Office to tell us about the stone scam, the milk scam and poor public infrastructural works. Now the Audit Report is more noted for what it leaves out than what it includes. The media – both print and electronic – constantly depress the nation with stories and pictures of shoddy multi-million works that have gone bad. The Audit Office looks at the Palms but not at NICIL, Pradoville 2, or those projects that have robbed the nation of billions. For all the controversy with the Amaila road awarded by NICIL, or the many concessions valued at billions of dollars, the Audit Office has been noticeably silent.

We must not forget that whatever the 2010 Report’s significant defects, the report was delivered within the statutory deadline for the first time since the current holder has occupied the office. But to ensure that the abuses played no part in the elections, the report was not released until four months later.

PAC
What makes for a more depressing picture is that the Opposition in the National Assembly chairs the Public Accounts Committee but is overwhelmed by the executive and people like the Financial Secretary, who is the Head of Budget Agency with responsibility for compliance with the Fiscal Management and Accountability Act and the protection of public moneys and property.

The PAC too, has constitutional responsibility to nominate the members of the Public Procurement Commission, but for ten years has failed to do so. For whatever reason, the commission has not been appointed and its constitutional functions are shared between the cabinet and the National Procurement and Tender Administration. The members of the administration are appointed by the Minister of Finance who determines the salary and allowances they receive and to whom they report.

Disdain
Past reports show the continued disdain this Minister has for the Audit Office which he once served under Goolsarran. Every year we are told that the Ministry of Finance (the Minister and the Finance Secretary) did not include explanations of any significant differences between the annual estimates of revenues and out-turn of the revenues. And that the ministry did not provide explanations for the impact of (a) movements in the underlying economic assumptions and parameters used in the preparation of the annual budget proposals; (b) changes to revenue policies during the year; and (c) slippages, if any, in the delivery of the budget measures. Because of the stubbornness of the ministry we can never be certain of the completeness, accuracy and validity of the amounts shown in the Statement of End of Year Budget Outcome and Reconciliation Report (Revenue) required under Section 68(1) of the Fiscal Management and Accountability Act 2003.

Singular contempt for the Audit Office and by extension the Public Accounts Committee and the country is demonstrated with the reaction and response to the reports of abuse of the Contingencies Fund. Responsibility for this fund lies solely with the Minister of Finance and in the past five years the amounts which the National Assembly was called upon to reimburse the fund because of expenditure under the Ashni Singh Ministry of Finance was a whopping $14 billion. Yet, as Dr Singh has shown by his behaviour over Bill # 1 of 2012, both he and the Financial Secretary Mr Nirmal Rekha appear to be in a state of denial, or arrogance. Their response to the comment by the Audit Office in 2007 about the Contingencies Fund advances not meeting the criteria provided by law, was that since Parliament subsequently passed the supplementary appropriation to cover the advances, the advances could not be contrary to the Act!

Here are a couple of other cases of bad financial management.

Two loan liabilities of $51M in 2004 were allowed to grow to $211M because of the failure of Ministry of Finance to act on them. The increase is all as a result of interest on the loans.

No deposit fund account has been established as required by section 42 of the FMA Act which requires the Minister to “establish one or more Deposit Funds into which public monies shall be paid pending repayment or payment for the purpose for which the monies were deposited.” Deposits received during year 2010 were paid directly into the Consolidated Fund (Account № 407), and related payments made therefrom.

I will close this week with a reference to the state of the country’s principal bank accounts. As at December 31, 2010, there were balances of $4.4B in static and inactive accounts and other accounts that should have been transferred to the Consolidated Fund. Indications are that these are now being transferred to plug the deficits brought on by the non-arrival of the Norway funds and excessive spending by the government.

There has been no reconciliation of amounts of maybe $46 billion held in the old Consolidated Fund which the Audit Office has been recommending be closed, but only after the impossible task of completing proper bank reconciliation – the mathematical equivalent of trying to square the circle. Meanwhile the report does not make clear whether the new account for the Consolidated Fund which was opened to bring some order to the government’s bank balances has gone the same way. It certainly seems to be in overdraft.

Continued: http://www.chrisram.net/?p=859

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The Supplementary debate and the Audit Office

Introduction
In last week’s Business Page I indicated that I would be addressing the 2010 Auditor General’s report this week. It will be remembered that the report was handed over to the Speaker of the National Assembly around the time of the dissolution of the Assembly, its release delayed because of the dissolution. Before I consider the report, however, it is useful to comment on last Thursday’s sitting of the National Assembly when Bill No 1 of 2012 containing a request by Dr Ashni Singh, Minister of Finance for $5.7 billion.

Supporting the Bill were two financial papers, one for $2,240 million to replenish the Contingencies Fund and the other $3,471 million for supplementary approval under four headings. From all appearances, it was quite a contentious session during which acting Speaker Ms Deborah Backer had to offer some maternal advice to the Finance Minister who, clearly uncomfortable with the uncharted waters, appeared several times to have lost his cool. The arguments raged to such an extent that the Bill was not fully addressed in the session and the House was adjourned for another month!

From reports, it appears that save for some transactions for about two hundred million dollars, Paper 7 was approved in principle based on explanations offered by the Minister and his junior, Bishop Edghill. I learnt from one parliamentarian that the expectation is that Paper 8 would be more contentious, having a few transactions for substantial sums. There seems a fundamental misunderstanding of the two papers and how they ought to be treated under the Financial Management and Accountability Act which sets the rules for the receipts and payments of “public moneys,” a term that is much wider than actual cash.

The Fiscal Management and Accountability Act
It does not seem to me that the genesis and provisions of this Act are understood by many of the members of the National Assembly. To start with, then Minister of Finance Saisnarine Kowlessar and Prime Minister Sam Hinds resisted the pleas of Winston Murray and James McAllister for the Bill to be referred to a Select Committee because delay could cause the government to lose US$30 million. The urgency was evident in that the Act was assented to and gazetted one day later.

Our MPs on checking the Hansard of the debate on the Bill would have seen too the arguments by Murray on what constitutes qualifying expenditure from the Consolidated Fund and how he succeeded in getting the National Assembly to insert the word “urgent” before “unavoidable and unforeseen.” Many of the items in Paper 7, even if the details were submitted in accordance with the FMA Act, would not meet the strict test for payment out of the Fund. It has to be seen therefore as an act of some considerable compromise for the opposition not only to accept oral explanations in place of the written details required by the Act but also a relaxation of the criteria which the PNCR had insisted on when the Act was passed in 2003.

I can only hope that when the Bill comes up for voting, the opposition makes it clear to Dr Singh that taxpayers‘ money is not there to be dispensed at the whim of any politician.

Enhanced obligations
While the ordinary person expects all legislators to understand the law, that obligation is greater on those who have been in the National Assembly for some time, or who have served on the Public Accounts Committee, and greatest on the Minister of Finance. It seems to me that Paper 8 reflects a lack of awareness, by all these persons, of section 21 of the Act and the concept of conditional appropriation to which Mr Murray drew attention in the parliamentary debate.

Such an appropriation would have allowed for the spending of specified sums of money, conditional upon budget agency receipts being credited to the Consolidated Fund. By definition, such a case requires prior and not subsequent approval, as Dr Singh is now seeking. There is room to speculate whether his reason for not doing the right thing at that time is because he did not wish to reflect an even larger deficit, or did want to have to answer too many questions about some of the transactions.

When it comes to budgeting – an essential element of financial management – this Minister has either been ineffective or rather cavalier. He brought eight financial papers to the National Assembly for supplementary funds for 2011. The amount he sought was over $18 billion on budget heads of less than $30 billion. He came to the National Assembly twice in September 2011 and yet he did not know that GPL was bleeding, even as it was bleeding the consumers. Any responsible Minister of Finance would have sought supplementary funds at that stage rather than wait until after the end of the year. But let us not complain: the country is the beneficiary of the miscalculation by Dr Singh in thinking he would be able to get the National Assembly to vote money for him however and whenever he wishes.

The country must now wait another month – Parliament seems to work at most, only on Thursdays – to see how Paper 8 is debated and how the vote on the Bill will go. Some MPs are hoping that when the National Assembly resumes, the Minister will add some flesh to the bare details offered in Paper 8 and that such details will be explosive.

Audit report 2010 and the Audit Office
Over the past four years Business Page has had about seven columns examining the annual reports of the Audit Office on the accounts of the ministries, departments and regions of Guyana. I have noted the standard response by the press and the public to revelations of Contingencies Fund abuse, unreconciled bank accounts; single sourcing of drugs from the New Guyana Pharmaceutical Corporation; vehicle log books not maintained and improperly kept stock records. I have written that Mr Deodat Sharma who has been acting in the position as Auditor General since 2004 often turns a Nelson’s Eye to many of the serious financial improprieties and mismanagement in some of the budget agencies, including the Office of the President.

I have said on numerous occasions that NICIL seems to have audit immunity from the Registrar of Companies as well as the Audit Office. I have suggested to the Public Accounts Committee to get a professionally qualified accountant to head the Audit Office so that staff progression is not stymied and the quality of their audits brought to an acceptable standard. Along with others, I have wondered about Article 216 of the constitution in relation to the lottery funds and how then President Jagdeo ignored the basic elements of financial management to dispose of the funds as he thought fit.

The Audit Office has been reminded of the many funds around that are not being audited and its attention drawn to the continuing failure of the majority of ministers to table the annual reports and audited financial statements of the entities for which they bear ministerial responsibilities. It has regularly been reminding him that Flood 2005 money, Carifesta and World Cup remain unaudited and that there is no evidence that it carries out the audit of “tax concessions” under the Investment Act.

No change
Despite these, nothing seems to change. That the report of the Audit Office hardly offers any new insights is evident in the number of paragraphs under each budget agency that has far more “prior year matters which have not been resolved” than current year matters. In the case of the Operations of the National Procurement and Tender Administration there are only prior year issues, as is the case with the Ministry of Foreign Affairs.

But that applies to the report of the Audit Office itself. It keeps moving the goalpost on when it will have its full complement of staff, or when it will issue its next Value For Money audit. Amidst the verbiage of the developments on VFM audits, we learn that only two such audits were concluded in 3½ years, while two were promised, first in 2009 and the same two were promised by end of 2010. It is now 2012.

We should surely be expecting more from our Audit Office that includes “six officers of the unit including the Auditor General who spent 9 month in training in Canada,” and another fifty-nine who were trained locally. We learn too that the Audit Office has a Forensic Audit Office which was established in 2008 and which has “continued to be an integral part of the Office.” Let us hope they start producing some results.

To close this first part of the review of the report it may be useful to note that for several years now the post of Accountant General has been filled with acting appointees. In the last five years, the occupants of the office were Mr H Autar – 2 years; Mr G Abrams – 2 years; and Col J Persaud. Several positions below the Accountant General are also filled by acting appointees, a situation that mirrors the Audit Office where almost the entire top brass are themselves acting. That cannot make for a healthy control environment.

To be continued

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Managing the country’s finances

Introduction
“The Contingencies Fund continued to be abused with amounts totaling $550.025 M drawn from the Fund and utilized to meet expenditure that did not meet the eligibility criteria as defined in the Act.”

Even allowing for the imprecise language, these words appearing in paragraph 3 of the Executive Summary of the Report of the Auditor General 2010 must be very discomfitting to Dr Ashni Singh, Minister of Finance. Not that the sentiment is new; words to that effect have appeared in every single report since Dr Singh was appointed a senior technocratic minister in 2006. But what makes the words perilous for him is that the report, which for four months has been kept secret from MPs and public alike, was tabled in the National Assembly on the same day as were two financial papers – Nos 7 and 8 – for $5.7 billion.

In each case of reported abuse in the past, the ministry gave one stock, banal response to the finding by the Audit Office: “that the Ministry of Finance continues to ensure that there is full compliance with the requirements of the Fiscal Management and Accountability Act.” No one can accuse Dr Singh of not understanding the Act and its requirements.

But perhaps he felt, like Steve Jobs, that he could bend reality at his command, or he underestimated the commonsense of Guyanese, or he did not care, assured of the unquestioned support and vote of his parliamentary colleagues and the cover of his former authoritarian boss, President Jagdeo.

Post November 28, that attitude can be fatal. Mr Jagdeo has gone, bequeathing a diminished PPP/C government, taking with him his immunity, and seemingly inured to any embarrassment. To President Ramotar, on the day he delivered his maiden presidential speech to the National Assembly, his Finance Minister tabled two financial papers that have his opponents excited and his own supporters confused. It is the Jagdeo legacy, so faithfully carried out by his protégé and appointee Dr Singh who, faced with criticism, demonstrates misplaced bravado and accuses me of “blatant distortions and misrepresentations.”

Over the next couple of weeks this column will review the report of the Auditor General but given the topicality of the two financial papers, these are addressed in this column.

The two papers
The two papers are respectively for $2.240 B of which $2.161B is for recurrent expenditure and $79.3 M on capital expenditure; and $3.471B, classified entirely as capital expenditure, although there seems to be some element of recurrent expenditure in at least one of the headings. It is probably worth repeating the elements of an occasion that would permit the issue of a warrant by the Minister for expenditure from the Contingencies Fund. Indeed, paragraph 29 of the 2009 and 2010 Auditor General’s reports reminds the Minister that the criteria require him [the Minister] to be satisfied that “an urgent, unavoidable and unforeseen need for the expenditure has arisen (a) for which no moneys have been appropriated or for which the sum appropriated is insufficient; (b) for which moneys cannot be reallocated as provided for under this Act; or (c) which cannot be deferred without injury to the public interest…”

The report adds that “where any advance is made, a supplementary estimate must be laid before the National Assembly as soon as is practicable for the purpose of properly authorising the replacement of the amount advanced.” What the report does not state is that the Minister, when seeking the replacement of funds, must provide to the National Assembly specifics of (a) the amounts advanced; (b) to whom the amounts were paid; and (c) the purpose of the advances. It is safe to say that this Minister has never provided the required information to the National Assembly. And equally significantly, the benign Audit Office never addresses the expenditure under the respective agency programme. Surely advancing the money to the expenditure agency is not the end of the transaction; the money has to be paid out.

Let us take a couple of examples. More than $200 million was spent by way of contingencies advances on Amerindian projects in 2010. There is not a single comment on the expenditure under the ministry. Similarly, $75.5 million was spent out of the Contingencies Fund on completing the swimming pool. Again, no mention under the report’s audit findings at that ministry.

And finally, $300 million was paid out of the Contingencies Fund under Agriculture for expenses described as “to assist farmers in regions 8 and 9 affected by prolonged rainfall.“ That would normally warrant some audit attention; none is suggested in the 2010 Audit report.

Let us now turn to the 2011 advances that have generated such excitement, starting with the Contingencies Fund. Some of the main headings are as follows:

Source: Financial Papers

It is incredible that the budget for national awards should be understated by 300%. The Office of the President has so often and so long operated outside of the already lax financial system that that is now part of its culture. Maybe the October awards were an afterthought of Mr Jagdeo with elections in mind. But Dr Singh, it must be remembered, presented a mid-year report in August and went to the National Assembly for money twice in September. He ought to have known then that GPL and Lethem Power would need substantial additional funds. The same applies to the security forces and their need for supplementary funds to cover additional security duties for the elections. And predictably, the Ministry of Agriculture gets supplementary funds for Black Bush and for Mannarabisi, while two Amerindian dormitories get $18 million in food and $3 million to get the children home for Christmas. Whether it was just poor budgeting or politicking is a matter for speculation.

The second paper
Paper 8 is for $3.471 billion and is made up of four items. These are:

1. Ferries from China
The paper seeks another $2,588 million for the two ferries from China for which Budget 2011 had an initial provision of $366M. There was no comment on this by the Minister in his 2011 mid year report but the capital project profile presented at the time of the Budget had a total cost for the ferries of $3,849 million, all of it to be financed by “foreign loans/grants.” The profile shows the project ending in 2011 and the entire amount should have been taken up at the time of the Budget.

2. Education delivery
The paper seeks approval for $160 million on this $8,943 million project for institutional strengthening of hinterland schools, school facilities, textbooks and child-friendly classrooms. $800M was approved in the 2011 Budget and with pre-2011 spending of $4,063 million, the accumulated sum drawn down at end of 2011 would have been $5,023 million, leaving a large sum undrawn. The project is shown as being financed by foreign loan/grants and comes to an end in 2011.

3. East Bank Demerara Highway Improvement Project
The project profile for this IDB-funded, five year (2011-2015) lane extension from Providence to Diamond shows a total cost of $4,510 million of which $450M was approved in the 2011 budget. The paper seeks another $261 million.

4. Electrification programme
This is listed in the capital profile as a two-year project ending December 31, 2012. It consists of:

● the expansion of the transmission and distribution systems;

● seven new sub stations;

● expansion and upgrading of two sub-stations; and

● installation of a Supervisory Control and Data Acquisition (SCADA) system.

The total project cost is $8,157M of which $1,395 M was spent before 2011 and $2,791M was approved in the 2011 budget. It would seem then that there will be some $1,000 million to be spent to the end of the project in 2012.

Conclusion
There is something fundamentally wrong with the manner of budgeting at the central government level. For example, “foreign loans/grants” is a term of confusion, not clarification. The information in the capital project profiles is unhelpful, and even unusual. It seems strange that the Budget would have had only a small part of the cost of the ferry when it was known that their delivery was scheduled in 2011. The reason it seems is a calculated strategy to mask the deficit at the time of budgeting. There is no reason to budget for part of the vessel – you either take the whole cost or none.

The Minister, as usual, was less than forthcoming in his mid-year report disclosures and projections. He then had another chance when he went to the National Assembly – not once but twice in September 2011. If he knew that there would be some matters of financial significance between the dissolution of the National Assembly and the end of the year, he should have sought to have provisions for those.

A senior minister can hardly admit that he was unaware about some of the party’s elections spending plans, although with Mr Jagdeo no one can be certain. Whatever it is, this Minister’s capacity for good budgeting and responsible financial management is being increasingly questioned.

And on the issue of the Contingencies Fund, his financial papers do not meet the requirements of the Act. Not only, in the words of the Auditor General, is the Minister a serial abuser of the Fund, but he shows some disdain for the National Assembly by his failure to provide it with the details required by section 41 of the Fiscal Management and Accountability Act.

At the wider level, the Jagdeo administration had engaged in a spending extravaganza, financed by borrowings.

So while the National Assembly persuades Dr Singh to bring financial papers in accordance with the law, and to stop the abuse of the Contingencies Fund, it also needs to bring under parliamentary control, our ballooning domestic and external debts.

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Corporate lawlessness

Introduction
Over the past couple of weeks I have had cause to try obtaining some information on particular companies, information that those companies are required to file with the Registrar of Companies. Alas, in a number of cases, companies simply ignore the law, failing for several years to file what the Companies Act refers to as the Annual Return. Section 153 of the Act says that every company, at least once in every year, must file such a return in the prescribed form, made up to the date of the Annual General Meeting (AGM), and containing the particulars set out on the fifth schedule to the Act. The annual return must be signed by a director or the secretary of the company, must be accompanied by the company’s audited financial statements and must be submitted within forty-two days of the AGM.

My experience is that these violations are not limited to the small, family company but also involve some very prominent entities, some of which are connected with public companies. And it is not that the violation is about a period of weeks or months. Some of them have never filed any return, quite a courageous feat that has somehow managed to escape the Registrar’s attention.

The Registrar of Companies is the officer responsible for the regulation of companies and that office in turn reports to the Attorney General and Minister of Legal Affairs. During 2011 the Registrar of Companies in fact caused to be published in the Official Gazette seven Notices, striking off from the register of companies several for non-filing. That is indeed commendable, but how the Registrar has missed striking off NICIL, the 100% state-owned entity whose board of directors, chaired by the Finance Minister and dominated by senior ministers of the government, is a mystery.

Offences
The Companies Act prescribes many specific offences provisions as well as general offence provisions. It is the largest statute on the books and the offences provisions can be found throughout the Act. The general offence provision is found in section 522 and provides that contravention of a provision of the Act or regulations made under the Act for which no punishment is otherwise provided for that offence is liable on summary conviction to a fine of ten thousand dollars.

Contravention of specific provisions is an offence punishable on summary conviction to a fine of ten thousand dollars and imprisonment for six months. Here are some of the specific provision offences provided for under the Act:

1. failure to prevent falsification, loss or destruction of the records of the company, or to facilitate detection and correction of inaccuracies in those records;
2. misuse of the list of shareholders or debenture holders obtained from the company;
3. prohibited solicitation and failure to send management proxy circular to the Registrar;
4. failure to provide the information required by the Registrar in connection with insider trading, share registrants and proxies;
5. failure by a proxy holder to comply with the directions of the shareholder appointing him;
6. failure by a registrant to vote without having received instructions;
7. failure by an auditor to attend a meeting for which he was notified by a shareholder that his attendance was required to answer questions; and
8. failure by a director or officer of a company to act on information coming to his attention that a mistake has been detected in the financial statements previously reported on by the auditor.

If the offence is committed by a company, which is of course not a natural person, any director or officer of the company who either permitted or acquiesced in the act or omission to act, is liable to the same penalties as the company.

In the following cases the company is liable on summary conviction to a fine of $10,000:
1. failure by the company to send a form of proxy along to the notice sent to shareholders; and
2. failure to give proper notice to shareholders.

Other offences
The above are considered regulatory offences under the Companies Act. Other legislation which also provides for offences include the Anti-Money Laundering and Preventing the Financing of Terrorism Act, the Insurance Act, the Securities Industry Act and the Financial Institutions Act. The Criminal Law (Offences) Act and the Summary Jurisdiction (Offences) Act also provide for certain offences by officers of companies including fraudulent accounts, destruction of documents and fraudulent statements.

It is not that there are not many companies which have been complying with the requirements of the Act in relation to the filing of annual returns. But there are others who file an annual return without the audited financial statements, or with very limited financial statements. An explanation I have heard in justification of this limited submission is one of an interpretation which lawyers – grossly incorrectly in my view – put on the language of the relevant section of the Act. I have also heard criticisms of the annual filing requirement that the law is intrusive and that filing audited financial statements is giving away competitive information. That view seems very shortsighted and completely ill-informed about what being an incorporated entity means.

Benefits, but also obligations
As I said in last week’s column, a very important benefit of incorporation is that it creates an entity entirely separate from its shareholders. Even in a one-person company, the liabilities of the company are for the company alone and unless the shareholder or director has guaranteed any liability, the shareholder or director is insulated from suit for those debts. And that is not the only benefit of the company; there is perpetual succession, shares in companies are transferrable, and even the tax laws, or at least some of them, are more favourable to the corporate rather than the personal form.

But in return for those benefits, the promoters, directors and shareholders of the company implicitly recognise and agree to abide with the statutory obligations. Apart from the obligation to file returns annually, there are requirements to have audited financial statements, to maintain statutory records, to hold meetings, etc. No one denies that these carry with them both financial and non-financial costs. But having chosen the corporate form to obtain its considerable benefits, the directors cannot then elect to ignore the attendant obligations.

Our Companies Act is largely a one-size-fits-all model, based largely on the Canadian Business Corporations Act. And while subsequent to the introduction of the Act in 1995, the country passed legislation specific to banking, insurance and public companies, the 542-section Companies Act is still formidable for the small private company. They have a choice: de-incorporate or comply.

New AG
The new Attorney General Mr Anil Nandalall has brought some refreshing energy to his office. He needs to turn his attention to the Deeds Registry, the place where the annual returns are lodged and which by law are public records. I am sure that Mr Nandalall is aware of the several letters appearing in the press expressing serious concerns about the lawless state of the Deeds Registry, which I hasten to add has more to do with the political failings and hubris of his predecessor than with the staff of the Registry working under some challenging conditions.

Guyana continues to earn very poor ratings among the 183 countries in the World Bank annual assessment, the 2012 report of which has the sub-title Doing Business in a more transparent world. We need to lift ourselves from the lowly position of 114 and at least stand beside, if not ahead of, our Caribbean counterparts. To do so we need to fix a few things immediately. At this stage the Registry is without a Registrar, the position being held by an acting appointee. The entity needs to address a resource deficit including someone with the capacity to ensure that what is in fact filed meets fully the requirements of the law set out above. My experience suggests that the Registry has no accounting capability to assess whether proper financial statements have been submitted.

Mr Nandalall needs to raise his voice in Cabinet and let his colleagues know that the Deeds Registry will be applying the law without fear or favour and that NICIL, arguably the country’s most serious violator of the Companies Act, will be placed in the firing line. Neither he nor the President should accept a situation whereby a publicly-owned company that annually handles untold millions of public funds should be allowed to get away with such lawlessness.

The penalties for offences under the Companies Act are far too low and even if the law was enforced, they would hardly be a deterrent. They need to be increased substantially but also to be enforced vigorously. It seems desirable that the penalties be made automatic, like the penalties under the tax laws, without the rigmarole of court hearing which would be more costly than the fines collected. It is both an opportunity and a challenge.

Conclusion
But NICIL is only part of a wider, sicker culture. There are many other state-owned entities and statutory bodies that have consistently failed to meet their obligations under the Companies Act, or to have their annual accounts and reports laid before the National Assembly as required by law. Hopefully with a new Speaker of the National Assembly, the Clerk will find the courage to write those ministers who are required to lay reports in the National Assembly. The list of those entities is long and several ministers are guilty of non-compliance.

The violation of the country’s laws by ministers, state companies and statutory bodies tells the rest of the nation that if you can get away with non-compliance then good luck to you. Our private sector, so conditioned to anarchy, needs little encouragement to continue their lawless ways.

Sadly, I have to admit that the accounting and legal professions come close to aiding and abetting when it comes to their clients’ non-compliance with the law.

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If Mitt Romney was in Guyana, his 13.9% tax rate would have been lower

Introduction
If Governor Mitt Romney, a leading candidate for the Republican nomination in the US 2012 presidential elections thought that he would neutralise the attacks by his fellow candidates by publicising his 2010 tax returns, he was wrong.

In fact, the revelation that his effective tax rate – the percentage which the tax he pays bears to his total income – is a mere 13.9%, has served to internationalise a debate on what is a fair tax.

Fairness has been regarded as an indispensable ingredient of a proper tax system even before Adam Smith wrote it in stone as one of the canons of taxation.

It is now a hot topic and is the subject of three columns in last week’s Economist. It also made the editorial of the Stabroek News on January 26. The Trinidad and Tobago government too has announced another tax reform project, following a similar announcement by President Donald Ramotar. Let us return to Mr Romney for a moment.

Poor man
The poor man is worth a mere US$ quarter billion, and together with his wife paid about $3 million in federal income taxes on income of $21.7 million in 2010. His effective tax rate of 13.9 per cent is less than half the 35 per cent top rate of federal income tax applied to any annual income over $379,150 for most top earners.

It is no consolation to the fairer tax movement that the effective rate the Romneys will pay in 2011 is 15%.

Because so much of Mr Romney’s income comes from capital gains, dividends and interest on investments he holds in funds and stocks, he greatly benefits from America’s relatively low 15 per cent rate of capital gains tax (CGT).

Despite having a Swiss bank account and investments in the Caymans under a blind trust, there is no suggestion of impropriety by Mr Romney. He went to great lengths to point out that what he, or rather his trustees, were doing was all within the US tax code that has as many loopholes as our domestic cast net. Romney’s tax rate is below that of most wage-earning Americans because most of his income comes from capital gains on investments.

And that is part of the problem. The other part is Mr Romney’s insensitivity to the glaring income and wealth disparity at a time when there are fourteen million unemployed Americans; where poverty as defined in that country is on the increase, engendering the Occupy Wall Street movement that protested what its leaders consider the unfair share of the income and wealth that goes to the 1%.

Buffet by another name
The USA is a country of data: within days of the end of a month or quarter or year, figures on just about every quantitative measure are released by some department or the other. So it did not take long for Americans to learn that the top 1% of their households earned annually an average of US$1.2 million in 2011 while the national average was US$26,000; accounted for 17% of the income earned by all Americans; or that the top 0.1% earned 8% of the total income.

What accounts for some of the disparity is how the income is earned. The richest 1% receive half their income from wages, salaries and bonuses, a quarter from self-employment and the balance from dividends, interest and capital gains.

The problem lies in the tax treatment of the various sources of income with income from employment being taxed at a higher rate than investment income. And that is where the debate gets heated, philosophical and ideological.

In terms that could easily apply to Guyana, US President Barack Obama denounced that country’s bottom heavy tax system, arguing that persons whose annual income is a million and more should pay at least 30% tax, which is the rate paid by the average middle class household in employment. President Obama likes to cite the “Buffett Rule,” whereby the Omaha billionaire and third richest man in the world pays income tax at a lower effective rate than his secretary does, largely because so much of his income comes from investments. We too have our Buffet Rule except that it goes by another name.

Bush’s views on double taxation
In 1986, the US introduced tax reform measures eliminating the gap between the ordinary and capital gains rates. But while the gap began to widen again during President Bill Clinton’s second term, it became a chasm in 2003 when the George W Bush tax cuts sliced the top rate on dividends and long-term capital gains from 28 per cent to 15 per cent. As the share of income derived from investments has increased over that time, the gap has widened to a point where most persons, including Buffet but excluding the 1%, now believe that the situation is unsustainable and indefensible.

In seeking to justify the cuts, President Bush said he proposed to eliminate the US dividend tax saying that while “it’s fair to tax a company’s profits, it’s not fair to double-tax by taxing the shareholder on the same profits.” Not many people, including economists and almost all the G20 countries, agree with him. Ironically, Guyana and a number of countries in the Caribbean do and in 1994, the PPP/C government of Cheddi Jagan eliminated the tax on dividends received by residents from resident companies.

The argument that an income should not be taxed twice defies not only principle but practice as well, with Peter Ramsaroop’s 33⅓% income tax plus 16% VAT being a politically artful but technically incorrect case. Given that Guyana has a hybrid system of taxation, the income earned from employment is taxed at source on the Pay As You Earn basis and then again is subject to a range of expenditure taxes including most popularly the Value-Added Tax (VAT). Call it what you will, the income is taxed twice.

No surrogate
Those who support Bush’s argument miss the fundamental point that a company is in law a separate legal entity and not a surrogate for its members and shareholders. It can own property, enter into contracts, commit offences and sue or be sued in the courts. Indeed some companies in a single case, take up more of the court’s time than they pay in taxes. But the courts are not the only public goods a company uses: it uses the roads and other public physical and social infrastructure; it calls on the police for protection and security and has a whole department of government dedicated to serve it. It hardly seems unreasonable to expect the company, on its own, independent behalf to help pay for the availability and use of those public goods through taxes.

But apart from those monetary benefits there is another valuable benefit which a company enjoys and that is the benefit of limited liability.

The first UK Companies Act in 1844 was a transformational measure that was immediately embraced by the capitalist class, despite the fact that it came with high corporate and personal tax rates. One hundred and sixty-eight years later, despite several rounds of tax reform, dividends are taxable in the hands of the shareholder at rates varying from 10% to 42.5%.

Here in Guyana we do have statistics. The trouble is that they are not available to the general public and hardly ever feature in any public reports or pronouncements. It is a national embarrassment that we have to rely on the periodic reports by international organisations like the IMF and the World Bank to provide us with relevant information. It is illogical, and indeed immoral, that the capital gain on the disposal of a house is taxed at the rate of 20% but the gain on the shares in public companies is exempt. It is not as if the so-called incentives of no taxation of dividends has brought about a large number of companies or shares in which the average retiree can invest.

In fact, the incentives of no tax on dividends and the exemption from Capital Gains Tax of shares in public have spanned more than a decade in which none of our public companies has offered any shares to the public, nor has any private company gone public.

Budget 2012
As we approach the 2012 Budget and supplementaries for unfunded 2011 expenditure, the political parties on the opposition benches will be concretising the generous tax cut proposals in their 2011 elections manifestos. No doubt it will be a healthy and instructive exchange with Dr Ashni Singh under whose watch the VAT was introduced.

But before the parties start their tinkering and trading over some matters of percentages and detail to satisfy those who voted for them, it would be far more useful for the country, if not for them politically, to agree on some fundamental objectives of the changes and reforms they seek.

A challenge for both sides is to stem the widening deficit we experienced under the Jagdeo administration, accustomed to debt-write off, sale of public assets and ever increasing tax revenues.

The apparent endless stream of debt write-off has come to an end, and while tax collections continue to rise, they cannot compensate for the spending over-drive into which the Jagdeo-Singh team has taken us.

Conclusion
The evidence from the Reagan/Bush years to the experiences of Greece, Italy and others is that deficit reduction has to have at least an equal mix of increased taxes and spending cuts.

Tax concessions are considered in economics as a form of expenditure. They need to be re-evaluated and reduced.

We have both central and regional systems of government. We do not need the large number of ministries and ministers.

We have a number of statutory bodies charged with responsibilities which previously fell on the ministries. Some rationalisation seems inevitable.

Jagdeo, who saw himself as the country’s economist-in-chief for nearly two decades, did so much tinkering with the tax system in matters both great and small that a more comprehensive review is now overdue. Guyana is a republic committed to equality and the rule of law but with a constitution which places one person above our supreme law.

And the two leading justices who would be expected to rule on tax cases in the courts were granted exemption from tax on their emoluments during the Jagdeo administration.

There must be other and better ways to reward all our judges. We are a republic without republicans. Mr Romney may seriously consider becoming the first.