The Chinese authorities have suspended PwC Zhong Tian LLP for six months and have imposed of 441 million yuan (US$62 million) over the firm’s audit of the failed property developer, China Evergrande Group. PwC Zhong Tian is a branch of one of the Big Four accounting and auditing firms operating in China. Investigations revealed that the auditors turned a blind eye to and even condoned Evergrande’s US$78 billion fraud during the 2019 and 2020 audit of the accounts of the developer. According to the regulators, ‘PwC’s behaviour goes beyond mere auditing failure. It, to a certain extent, covered up and even condoned the developer’s fraudulent issue of corporate bonds’. China’s Ministry of Finance stated that the auditors were aware of material misstatements in the financial statements of the developer for the years 2018 to 2020 but failed to point them out, and even issued false audit reports.
PwC, which have been the auditors of Evergrande for the past 14 years, acknowledged that its work fell below accepted standards of auditing. Last year, another of the Big Four accounting and auditing firms, Deloitte’s Beijing branch in China, was fined 211.9 million yuan and suspended for three months after serious deficiencies were found in its audit of China Huarong Asset Management.
The above raises the important issue of auditors’ independence which is fundamental to any form of auditing. The appointment of the same auditing firms for extended periods can and does allow for cozy relationships to be developed with clients, thereby eroding their independence and consequently compromising the quality of the audit. Another issue relates to auditing firms providing non-audit services at the same time, such as accounting, taxation and management consulting, which form the bulk of their income. A serious conflict of interest can arise from this arrangement in that the auditors are “auditing” the very accounts they assist in preparing! The Enron and WorldCom accounting scandals of the early 2000s were the direct result of the cozy relationships with directors and top management that led to the passing of the Sarbanes-Oxley Act of 2002, providing for improved financial reporting, avoidance of conflicts of interest, oversight of the work of auditors, and enhanced standards for audit independence, among others.
In Guyana, the problem was recognized as early as 1993, as a result of which the Financial Administration and Audit (Amendment) Act was passed to, among others, preclude Chartered Accountants in public practice from rendering consulting and other non-audit services for State-owned/controlled entities while serving as auditors at the same time. There is also provision for the rotation of auditors after serving six consecutive years. After 21 years, there have been no issues pertaining to this arrangement, and more than a dozen auditing firms are currently undertaking audits on behalf of the Auditor General, compared with the pre-1993 period where one auditing firm held the monopoly over the audit of public corporations and other entities in which controlling interest vests in the State. These entities were deteriorating financially, and despite this, they were given a clean bill of health by the auditors. The passing of the Act was, however, not without its challenges.
Recap of last week’s article
Last week we began to take a closer look at the 2024 Mid-Year Report that was released late last month. So far, we have looked at the GDP growth rate, inflation, and the execution of the National Budget. We stated that one has to be cautious in interpreting the total growth of 49.7 percent in the first half of the year, considering that for every 100 barrels of oil produced, Guyana gets only 12.5 barrels. We then suggested that a more appropriate measure of economic and social progress could be to include only Guyana’s share of the growth in oil production to which is added the non-oil growth, as follows: (37.1 x 12.5%) + 12.6% = 16.2 percent. This is more in line with the computation of the Gross National Income (GNI), as known as Gross National Product (GNP), that measures the total income earned by citizens and residents, including money received from sources outside the country. On the other hand, GDP measures the value of all goods and services produced within a country. To compute GNI, one has to first calculate the GDP to which is added income earned from a country’s nationals from abroad, then subtracting income earned by foreigners within the country.
We stated that the reported rate of inflation of 4.0 percent for the 12-month ended 30 June 2024, and more especially the increase in consumer price index of 1.6 percent over the same period, appear to bear little or no relationship to the situation on the ground, especially when one takes into account the spiraling cost of living.
We noted that at the end of the first half of the year, only 32.8 percent of the expenditure on the National Budget was incurred, with capital expenditure accounting for only 24.5 percent. At this rate, by the end of the year, only two-thirds of the total budget will be executed, unless there is an acceleration of expenditure in the latter half of the year. It would, however, appear that the annual budget of $1.146 trillion is an act of over-ambition and beyond our capacity to execute in an efficient and cost-effective manner.
In this regard, we warned against any acceleration of expenditure of expenditure in the last quarter of the year for the sole purpose of exhausting budgetary allocations, as has happened in the past where there was evidence of contracts being entered into in late December and in some cases on the last working day of December, and cash books being kept open well into the new year to facilitate the issuing of cheques. This is a clear breach of the Fiscal Management and Accountability Act that requires all unspent balances on appropriations at the end of the fiscal year to be refunded to the Consolidated Fund. Because of this violation of the Act, all sorts of irregularities have occurred in the past, including significant breaches in the tendering procedures relating to the procurement of goods/services and the execution of works; defective work performed; and overpayments to suppliers/contractors, goods/services not delivered for which payments have been made.
In terms of current revenue, there was a 31.7 percent achievement on the amount of $717.8 billion budgeted to be collected. At this rate, only 63.4 percent of the estimated collections will be achieved unless there is an intensification of efforts. As regards the Natural Resource Fund (NRF), we continue to argue that the amounts withdrawn should not be treated as current revenue but rather capital revenue to be matched with corresponding capital expenditure. The NRF Act specifically states that all such withdrawals are to be made to finance: (i) national development priorities including any initiative aimed at realizing an inclusive green economy; and (ii) essential projects that are directly related to ameliorating the effect of a major disaster. This implies that clearly defined projects to be financed by withdrawals from the NRF should be identified in the Estimates of Revenue and Expenditure and details reflected in the Capital Profile (Volume III).
Gross international reserves
The gross international reserve held at the Bank of Guyana at the end of the first half year was US$711.8 million. According to the International Monetary Fund, the traditional approach in determining the minimum reserve requirements is to use the value of 100 percent of short-term debt or the equivalent of 3 months’ worth of imports. (See IMF Survey: Assessing the Need for Foreign Currency Reserves). At the end of 2022, Guyana’s foreign exchange reserve stood at US$929.2 million, representing the value of 1.2 months of imports. It is therefore not difficult to consider that Guyana’s foreign exchange reserve at the end of June 2024 was less than one month’s worth of imports, considering the acceleration of activities following the discovery and extraction of crude oil.
Over the last several months, there has been a shortage of foreign currencies in Guyana. According to Oxford Analytica:
The significant presence of major Trinidadian companies in Guyana will continue to put pressure on foreign currency availability. Rising imports of goods and services, fueled by the oil boom, will drive demand for US dollars. Purchases by the central bank risk becoming a further drain on the foreign currency available’. (Foreign exchange shortages will persist in Guyana | Emerald Insight.)
The public debt
The public debt has increased from US$3,916.9 million at the end of 2023 to US$5,063.3 million, or 29.3 percent. External debts from loans from overseas borrowing have increased by 18.0 percent, while the internal debt stood at G$654.5 billion, an increase of 37.3 percent mainly through the issuance of new Treasury Bills to finance the National Budget. One would have thought that with the flow of oil revenues, there would have been a reduction of the public debt and consequent reduction in interest charges. According to the 2022 Auditor General’s report, interest charges on both external and internal borrowings for that year amounted to G$8.726 billion, equivalent to US$41.853 million.
That apart, media reports indicate that the Gas-to-Energy Project is being partially financed by ExxonMobil’s subsidiaries and repayment will be made via a deduction from Guyana’s share of profit oil over a 20-year period. If this is indeed so, there are four main concerns that need to be addressed. The first is that Section 25 of the NRF Act prohibits the financial assets of the Fund from being encumbered by any person or entity. The Act goes on to state that: (i) the Government shall not borrow or lend from the Fund, or hold a financial instrument that places or may place a liability or contingent liability on the Fund; and (ii) any contract, agreement or arrangement that encumbers any financial assets of the Fund, or future petroleum revenues, shall, to the extent of such encumbrance, be null and void.
The second concern is that it is not clear whether a loan agreement has been entered into between the Government and the U.S. oil giant and what are the terms and conditions of such an agreement. Section 3(6) of the External Loans Act requires all loan agreements to be laid before the National Assembly as soon as practicable after the execution of such agreements. There is, however, no evidence that this was done, assuming an agreement is in place.
Third, the NRF Act establishes the NRF Account ‘to manage the natural resource wealth of Guyana for the present and future benefit of the people and for the sustainable development of the country…’. By Section 15(2), petroleum revenues are to include, among others, all revenues from: (i) royalties, whether paid in cash or in kind, due and payable by the holder of a petroleum licence; and (ii) the Government’s share of profit oil received under the terms of a production sharing agreement or any other agreement. There is no provision for the holder of a petroleum licence to incur expenditure on behalf of the Government and deduct it from the revenues due to the Government.
The fourth concern is that to the extent that Exxon’s subsidiaries have incurred expenditure on the Gas-to-Energy Project on behalf of the Government, the public debt would have been understated by the amount expended. That apart, the Project is clearly in the nature of ‘national development priorities including any initiative aimed at realizing an inclusive green economy’, as outlined in Section 16(2) of the Act. It therefore should be financed out of withdrawals from the NRF Account and reflected in the Estimates of Revenue and Expenditure, in combination with any form of external financing. An examination of Volume III (Capital Profile) of the 2024 Estimates shows that an amount of G$80 billion has been budgeted for the Project – G$40 billion by way of a loan from the EXIM Bank of the USA: the remainder being financed by Central Government. There is no evidence of financing from ExxonMobil’s subsidiaries, which, it must be noted.
Next week, we will take a closer look at the Gas-to-Energy Project.
