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Liberia: LPRC Financial Statements Deficiency
Jan 15, 2007
Robert Llewellyn Kilby, CPA, CITP
An audit of the LPRC financial statements for the period ended September 2006 would result in an disclaimer or adverse opinion based on U.S. Generally Accepted Auditing and Accounting Standards.
After reading several articles on the Perspective website commenting on as well as in support of the financial statements recently published by the Liberia Petroleum Refining Company (LPRC) for the period ended September 30, 2006, I was inspired to write this piece as my contribution to our country’s ongoing recovery process. As a Liberian and moreover a Certified Public Accountant (CPA) in the Diaspora, I feel obliged to comment at this particular time so that those who are presently charged with taking care of the Liberian people’s business can be aware of their fiduciary and professionally responsibilities.
Background
First and foremost, all financial statements presented for public consumption should be subjected to audit by an independent auditing firm. Statute should mandate that the audit of accounting and reporting records for government units be conducted by a Certified Public Accounting firm licensed by the State (Liberia in this case).
My understanding is that Liberia has adopted U.S. Generally Accepted Accounting Principles (GAAP) and Government Accounting Standards Board (GASB) standards for private enterprise as well as government accounting and reporting since its infancy. Evidently, the LPRC financial statements were developed in accordance with GAAP.
In the United States, GASB and FASB standards are used to account for the operations of various types of government units. Government units that receive funds for direct expenditure for the public well-being are required to account for their operations on the modified accrual accounting basis, which is based on G.A.S.B. pronouncements. Accounting for these units includes recording of appropriations, encumbrances, and reserve for encumbrances – just to name a few. The accounting and reporting orientation for government units that result from operations are based on income determination; which requires the usage of the full accrual accounting basis for recording transactions. Accounts reflected on the financial statements for government units with profit orientation include, Inventory, Consignment Inventory, Cost of Goods Sold, Cost of Goods Manufactured, Gross Margin, Net Profit, etc. LPRC, Telecom, and LEC are government units with profit orientation. These units are considered enterprise funds; which places them in the latter category. Generally Accepted Auditing Standards (GAAS) specifies how the quality of the independent auditor performance is measured. If LPRC is reporting on standards, an assertion should be made to that effect.
The Goals and Objectives of Financial Reporting
Financial statements are intended to provide information that is useful in making business and economic decisions. The primary characteristics for accounting and financial reporting are understandability, relevance, reliability, neutrality, verifiability, and representational faithfulness. In other words, the readers of ANY financial statements should be able to understand the result of operations and the financial position of the entity. Just as well, the financial information should be relevant to the business. The information and financial data should be reliable. The financial data should also be free from bias – no predetermined data should be reported. Additionally, the financial information should be independently verifiable by an accountant or anyone who possesses the knowledge of accounting. In this context, Representational faithfulness is self-explanatory.
The Role of the Independent Certified Public Accounting Firm
A Certified Public Accounting (CPA) firm that is engaged to audit a government agency like the LPRC should select the appropriate standards. In the conduct of an audit, the CPA firm is required to exercise professional judgment and diligence at all times.
What this means among other things is that the firm should issue an adverse opinion if the financial statement audit reveals that the financial statements are misleading. A disclaimer of opinion is rendered when records are inadequately kept or management refuses to furnish a written management representation letter. A qualified opinion means that the result of the audit shows that there are inadequate disclosures or failure to present one or more basic financial statements. If the auditors conclude that the financial statements are presented fairly in all material respects, then the CPA firm is required to issue an unqualified opinion.
Deficiency Noted in the LPRC Financial Statements
After carefully reviewing the LPRC financial statements for the period ended September 30, 2006, the following errors were noted; which I surmise would render the financial statements deficient in material respects:
1. Omission of the Statement of Cash Flows
2. Inadequate disclosures of pertinent financial information
3. Inappropriate accounting of LPRC business model
4. Lack of due diligence and fiduciary responsibilities
5. The use of an incomplete set of required financial statements for comparative financial reporting.
Basis of Accounting not Identified
If the assumption that Liberia has adopted GAAP and GASB is incorrect, LPRC Management should have “clearly” described in the financial statements the accounting standards in use. This would have enabled the Independent Auditors as well as any one else looking at the report to establish the basis for the audit or review.
Omission of the Statement of Cash Flows
The Statement of Cash Flows is a pertinent financial statement required by GAAP. The Statement of Cash Flows provides information about LPRC’s cash receipts classified by major sources and cash payments classified by major uses during the period. The Statement of Cash Flows also shows activities used in generating cash through LPRC operations, including, the financing and investing activities.
Inadequate disclosures of pertinent financial information
GAAP requires that Notes to the financial statements include disclosure of significant accounting policies. My observation is that the level of details required by GAAP is not reflected in the notes to the LPRC’s financial statements as recently published.
Inappropriate accounting of LPRC business operations
My understanding of LPRC business model is that fuel and fuel products are purchased from international suppliers for resale to retailers. Given this model, it is readily apparent that at any given point in time fuel and fuel by-products are stored in reservoirs located on LPRC facilities. This assertion is evident by the storage fees reflected in the financial statements. In order to properly account for profit and revenue under this business model, certain types of accounts are needed. For example, the financial statements should reflect asset, liabilities, consignment inventory, and inventory. The valuation methods (LIFO, FIFO, etc.) used to report the fuel and fuel by-product stored on LPRC facilities at the balance sheet date should be stated. GAAP further requires the matching of cost to revenue in determining income for the period. This is not possible when inventory and the inventory valuation method are not factored in as in the case of the financial reports under review.
Lack of due diligence and fiduciary responsibilities
LPRC management should promote transparency and accountability. In the conduct of its affairs and in the interest of the general public, LPRC should engage an independent Certified Public Accounting firm to attest to its financial statements prior to publication.
Conclusion
Financial accounting is neither abstract nor rhetorical. The application of accounting standards should be clearly stated, measurable, and understandable. All assumptions used in the accounting and reporting process should be well documented.
I urge the Board of Directors of LPRC to consider these recommendations as a recipe for improving the accounting and reporting process at LPRC. Given the severity of these issues, the Board of Directors of LPRC should discuss these points with LPRC Management team in the ensuing board meeting.
It goes without saying that in order to serve the best interest of the Liberian public and promote transparency, the standard selected for financial reporting in Liberia should be identified in accompanying notes to the financial statements and also in the independent auditor’s report.
LPRC’s management should seek professional help in the future in formulating an accounting system and implementing adequate controls in its accounting financial reporting process to lend credibility so that subsequent publication of the company’s financial statements can be taken seriously.
To its credit, though, usage of U.S. dollars in the measurement of LPRC’s financial position and results of operations is acceptable. FASB advocates the usage of a stable measurement scale in financial reporting. Since the Liberian dollar is not relatively stable and the effect of inflation is not conventionally reflected in the financial statements, the use of the U.S. dollar in the company’s financial reporting is a non-issue.
The author, Mr. Robert Llewellyn Kilby, is a Liberian Certified Public Accountant (CPA) and Certified Information Technology Professional (CITP). He’s also a senior partner of ISCI (Independent Software Certification, Inc.) based in Atlanta, Georgia. He can be reached at "Robert Llewellyn Kilby, CPA, CITP" www.isci.com/Contact Us
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