Faulty Government Finance!

The Daily FT reproduces below the Auditor General's qualified opinion section in the Finance Ministry Annual Report and Accounts for 2016, 2015, 2014 and 2013 during which period the Finance Ministers were former President Mahinda Rajapaksa along with Dr. P.B. Jayasundera as the Secretary and Ravi Karunanayake as Finance Minister along with Dr. R.H.S. Samaratunga as Secretary. 

2016 Annual Report/Qualified opinion from Auditor General H.M. Gamini Wijesinghe

Accounting Deficiencies

The following observations are made.

(a) Even though the balance of loans repayable by the Government as at 31 December 2016, according to the financial statements presented to Audit amounted to Rs. 8,793,959 million in view of the following matters observed during the course of test check, the said loans balance had been understated by Rs. 826,091 million. 

Details appear below.

(i) The accounting policy relating to the Treasury Bonds in the Financial Statements of the Republic had been revised during the year under review, and accordingly the Treasury Bonds issued during the year 2016 only had been brought to account under their face value. Nevertheless, the Treasury Bonds issued prior to the year 2016 but not matured as at the end of the year under review had not been brought to amount at face value, thus resulting in the understatement of the balance of the Treasury Bonds as at 31 December 2016 by Rs. 487,061 million.

(ii) The balance of the loans payable by the Government as at 31 December 2016 relating to 07 Loan agreements entered into by the Government with foreign lending institutions amounting to Rs. 332,305 million had not been included in the financial statements.

(iii) The loan of Rs. 7,550 million obtained by the Ministry of Defense from 04 State and Private Banks for the construction of the building of the Secretariat of Personal Identification had not been recognized in the financial statements. 

Further, the comparison of the closing balance of foreign loans appearing in the financial statements with the 854 - 1 Report of the Department of External Resources, revealed a difference of Rs. 1,505 million in the balances of 08 Loan Agreements

(b) According to the financial statements presented to Audit, the receipts of Foreign Loans and payments of Foreign Loans during the year under review amounted to Rs. 574,249 million and Rs. 145,119 million respectively. Nevertheless, the test check carried out in that connection revealed that the receipts of foreign loans and payments of foreign loans had been understated by Rs. 8,945 million and Rs. 5,848 million respectively. Details appear below.

(i) The foreign Borrowings relating to 7 Foreign Borrowing Agreements amounting to the 3,039 million received in the year 2016 and the foreign Borrowing amounting to Rs. 5,848 million had not been included in the financial statements.

(ii) One of the Foreign Borrowing relating to 14 Loan Agreements received during the year under review, Rs. 4,730 million and Rs. 1,176 million received in the year 2015 relating to 09 Loan Agreements totaling Rs. 5,906 million had not been included in the financial statements.

(iii) Even though a sum of Rs. 145,119 million had been shown in the financial statements on the repayment of Foreign Borrowings. According to Note 30(1) (Statement of Foreign loan Borrowing) thereof the repayment of Foreign Loan amounted to Rs. 131,427 million and a difference of Rs. 13,692 million was observed between the financial statements and the notes thereof.

(c) According to the financial statements presented to Audit, the Government had granted sub-loans amounting to Rs. 169,547 million to various Government Institutions. The test check carried out in this connection, it was observed that the value of sub-loan had been understated by a sum of Rs. 12,790 million in the financial statements.

Details appear below.

(i) Even though the sub-loans granted in the year 2016 in accordance with the financial statements amounted to Rs. 9,177 million, according to the Final Treasury Printouts (Table 33) that amounted to Rs. 16,977 million. As such a difference of Rs. 7,800 million was observed between the financial statements and the Treasury Final Printouts.

(ii) A sub-loan of Rs. 4,990 million had been granted to the Ministry of National Policies and Economic Affairs for payment to the Depositors of the Golden Key institution in accordance with a decision of the Supreme Court had not been shown as sub-loans in the financial statements.

d) According to the financial statements, the value of Government investment in the Public Enterprises amounted to Rs. 526,907 million whereas according to a test check, it was observed the net value of the investments had been understated by Rs. 29,140 million in the financial statements. Details appear below 

(i) Even though the capital contribution to the SriLankan Airlines Company had been shown as Rs. 55,388 million in the financial statements, according to the direct confirmations, that had been confirmed as Rs. 51,157 million. As such it had been overstated by Rs. 4,231 million in the financial statements.

(ii) Even though the capital contribution in the Ceylon Electricity Board had been shown in the financial statements as Rs. 269,324 million, according to the direct conformations that had been confirmed as Rs. 302,695 million. Accordingly, that had been understated by Rs. 33,371 million in the financial statements.

(e) According to the financial statements presented to audit, the liabilities of the Government (Except Public Debt) as at 31 December 2016 amounted to Rs. 207,514 million. Nevertheless, a test check in this connection revealed that the liabilities had been understated by Rs. 18,431 million in the financial statements. Even though it had been stated in the preparation of these financial statements that cash basis was followed, a test check revealed that the accrual principle had been followed in the accounting for the creditors amounting to Rs. 16,496 million under the leases. As such, it was observed that there was no uniformity in the preparation of the financial statements. Details appear below.

(i) The sum of the Rs. 7,289 million payable to various institutions including the sum of Rs. 5,611 million payable as at 31 December 2016 on account of the purchase of drugs from the Sri Lanka State Pharmaceuticals Corporation according to the Appropriation Account of the Ministry of Health, Nutrition and Indigenous Medicine had not been recognised as a liability in the financial statements as at 31 December 2016.

(ii) Even though the National Savings Bank had made a request to the General Treasury for a reimbursement of Rs. 1,115 million refunded by October 2016 out of the Accounts considered by the National Savings Bank as Dormant Accounts, that money had not been reimbursed even by 31 December 2016. But, that amount had not been recognised as a liability in the financial statements.

(iii) The Licensed Commercial Banks and the Licensed Specified Banks pay the senior citizens interest at 15% for fixed deposits up to Rs. 1 million and 12% for fixed deposits from Rs. 1 million to Rs. 2.5 million and the excess interest paid to the senior citizens should be reimbursed by the General Treasury to the relevant Banks. Even though the sum of Rs. 10,027 million payable as the additional interest had been shown as a liabilities in the Appropriation Account of the Department of Development Finance for the year 2016, that had not been recognised as a liability in the financial statements.

(f) According to the financial statements presented to Audit, the Public Revenue for the year under review amounted to Rs. 1,698,755 million, the following matters were observed during the test check carried out in this connection.

(i) In terms of the Finance Act, No. 10 of2015, every person who is engaged in the business of casino should pay a sum of Rs. 1,000 million as one off levy in respect of each casino and that it should have been paid on or before 15 November 2015. Even though Rs. 3,760 million out of Rs. 4,000 million received as at that date, had not been recovered, that had not been disclosed in the financial statements.

ii) The total arrears of Revenue of the Department of Inland Revenue as at 31 December 2016 consisting of Rs. 182,078 million being the defaulted taxes recoverable as at 31 December 2016, Rs. 113,219 million the penalty thereon, both totally Rs. 295,297 million. Similarly, the arrears of revenue as at 31 December 2016 of the Department of Excise amounted to Rs. 2,545 million. As such the total arrears of Revenue of the two institutions as at 31 December 2016 amounting to Rs. 297,842 million had not been disclosed in the financial statements.

(iii) Even though the General Treasury had paid the interest payable by the Cooperative Wholesale Establishment on the Treasury Bonds issued for the supply of capital contribution to the Co-operative Wholesale Establishment, that sum of Rs. 3,778 million had not been brought to account in the Treasury books.

(iv) Action had not been taken for the write off of the loss of Rs. 400 million in the year 2014 in the sale of 82 motor vehicles purchased for the Commonwealth Heads of Government Conference and that amount had been further included in the Suspense Account of the financial statements.

2.2.4 Non-compliance with Laws, Rules, Regulations, etc.

Non-compliance with the following laws, rules and regulations were observed.

(a) According to the financial statements of the Republic for the year under review, the estimated budget deficit amounted to Rs. 1,487,799 million and that represented an increase of Rs. 316,819 million or 27% over the preceding year. According to the financial statements for the year 2016, the actual budget deficit amounted to Rs. 666,139 million and that is a decrease of Rs. 821,660 million from the estimated budget deficit. The actual budget deficit of the year under review amounted to 5.63% of estimated Gross Domestic Product. Accordingly, the budget deficit had exceeded the 5% specified in section 3 (a) of the Fiscal Management (Responsibility) Act, No. 03 of 2003 as amended by the Fiscal Management (Responsibility) (Amendment) Act, No. 15 of2013.

(b) According to the Fiscal Management (Responsibility) Act, No. 3 of 2003 as amended by the Fiscal Management (Responsibility) (Amendment) Act, No. 15 of 2013, the total liabilities of the Government should not exceed 80% of the Gross Domestic Product. According to the financial statements for the year 2016 the total liabilities as at 31 December 2016 amounted to Rs. 9,864,512 million and that as compared with the estimated Gross Domestic Product of the year 2016 amounting to Rs. 11,839,000 million represented 83.3%. As such, it was observed as an excess on the maximum limit on the liabilities as specified in the Fiscal Management (Responsibility) Act. 

The above liabilities do not include the value of the guarantees valued at Rs. 563,337 million issued to the banks for the loans obtained by the Public Enterprises on the General Treasury guarantees.

2015 Annual Report/Qualified opinion from Auditor General H.M. Gamini Wijesinghe

Basis for Qualified Opinion

My Opinion is qualified based on the matters described below.

1. Even though loans not exceeding Rs. 1,780,000 million could have been raised whether in or outside Sri Lanka in the year 2015 for and on behalf of the Government in accordance with the applicable laws in terms of Section 2(1 )(b) of the Appropriation Act, No. 41 of 2014, according to the Financial Statements of the Republic, domestic and foreign loans amounting to Rs.3,349,805 million had been raised during the year under review.

Accordingly, the limit authorized by Parliament had been exceeded by Rs. 1,569,805 million during the year 2015. Comparatively, the limit on loans authorised by Parliament during the preceding year had been exceeded by Rs. 1,164,775 million.

2. According to the Financial Statements, the loan balance payable by the Government as at 31 December 2015 amounted to Rs. 7,684,954 million. Nevertheless, according to the impact of the following observations revealed during the course of audit test checks, that loan balance had been understated by Rs. 1,025,180 million.

(a) Even though the Department of Treasury Operations had confirmed the Face Value of the Treasury Bonds as at 31 December 2015 as Rs. 3,695,541 million, that balance had been understated by Rs. 508,763 million in the Financial Statements.

(b) Even though the Department of Treasury Operations had confirmed the Face Value of the Treasury Bills as at 31 December 2015 as Rs. 663,285 million, that balance had been understated by Rs. 30,000 million in the Financial Statements.

(c) The loan balance amounting to Rs. 338,141 million payable by the Republic as at 31 December 2015 in connection with 07 Loan Agreements entered into by the Republic with Foreign Lending Institutions had not been included in the Financial Statements.

(d) According to the information obtained from the Department of National Budget, the Financial Lease Liability as at 31 December 2015 had been confirmed as Rs. 19,376 million, the liability relating to the motorcycles purchased on financial lease system from the year 2014 had been understated by Rs. l3,807 million. 

(e) The loan balance of Rs. 7,550 million obtained by the Ministry of Defence from 04 domestic banks for the construction of the building for the Department of Registration of Persons had not been included in the Financial Statements.

(f) Sums totalling Rs. 12,031 million comprising Rs. 2,469 million as installments and Rs. 9,562 million as interest had been paid on the loans obtained by a Ministry in the year 2014 from domestic Banks on Government Guarantees. Even though the Government had paid those loans and interest, the loan balance of Rs. 126,919 million had not been included in the Financial Statements.

3. Even though Rs. 527,227 million had been paid as interest for the year under review in accordance with the Financial Statements, the net results of the following observations revealed during the course of the audit test checks carried out in that connection, Rs. 16,818 million had been overstated.

(a) The interest revenue amounting to Rs. 13,998 million earned from the issue of Treasury Bonds had been surcharged to the Interest Payment Account, and as such the interest revenue received and interest payments in the year 2015 had been understated by that amount in the Financial Statements.

(b) In the issue of the Treasury Bonds at a price less than the Face Value of the Treasury Bonds, the sale value of the Bonds only had been credited to the Bonds Account instead of crediting the Face Value of Bonds to the Bonds Account and the release of the Face Value of those Bonds in the year under review by paying cash, the Bonds discount of Rs. 40,378 million had been debited to the Interest Account, thus overstating the interest shown in the Financial Statements by Rs. 40,378 million.

(c) According to the Return 854-1 prepared by the Department of External Resources, the interest on foreign loans in respect of the year under review amounted to Rs. 83,063 million whereas according to Note No. 08 of the Financial Statements, the interest payments amounted to Rs. 77,174 million. Accordingly, the interest payments had been understated by Rs. 5,889 million in the Financial Statements.

(d) Even though interest amounting to Rs. 9,562 million had been paid on the loans obtained from Banks on Government Guarantees by a Ministry, that had been brought to account as Government Investments instead of being brought to account as payment of interest. Thus, the interest payments had been understated by Rs. 9,562 million.

4. According to the Financial Statements, the Government had paid sub-loans amounting to Rs. 174,196 million to various State Institutions. According to the net impact of the following observations revealed during the course of the audit test carried out in this connection, the value thereof had been understated by Rs. 2,682 million in the financial statements.

(a) Even though the sub-loan balance receivable as at 31 December 2015 from 14 State Institutions had been shown in the Financial Statements as Rs. 8,390 million, the institutions concerned had confirmed those loan balances as Rs. 7,215 million, thus the sub-loan balances of those 14 Institutions had been overstated by Rs. 1,175 million.

(b) According to the Financial Statements, the value of the sub-loans of 07 Institutions as at 31 December 2015 amounted to Rs. 5,726 million, and those institutions had confirmed those loan balances as Rs. 9,333 million. As such, the loan balances of those 07 Institutions had been understated by Rs. 3,607 million in the Financial Statements.

(c) The sub-loan of Rs.250 million granted at 9% interest in the year 2001 to the State Mortgage and Investment Bank and the interest amounting to Rs.337 million receivable from the year 2001 to 31 December 2015 had not been included in the Financial Statements.

5. Instead of separately recording the premium earned from the issue of bonds in the year 2015 in the Financial Statements, that had been credited to the Treasury Bonds Account. As such the value of the Treasury Bonds had been overstated by Rs. 18,846 million.

6. Even though the receipts and payments of Foreign Loans had been shown in the Financial Statements as Rs. 556,370 million and Rs. 187,113 million respectively, according to the impact of the audit observations revealed during the course of the audit test check carried out in that connection, receipts of Foreign Loans had been understated by Rs. 34,003 million and the payment of Foreign Loans had been understated by Rs. 4,605 million. 

(a) The Foreign Loans amounting to Rs. 10,697 million received in the year 2015 under 07 Foreign Loan Agreements and the payments of Foreign Loans amounting to Rs.4,605 million during the year 2015 had not been included in the Financial Statements.

(b) Out of the Foreign Loans received under 41 Loan Agreements during the year under review, a sum of Rs. 23,306 million had not been included in the Financial Statements.

(c) Even though a sum of Rs. 187,113 million had been shown in the Financial Statements as the repayments of Foreign Loans, according to the Note No. 30(i) thereof (Statement of Foreign Loan Balances) the repayments of Foreign Loans amounted to Rs.l74,800 million. As such, a difference of Rs. 12,313 million was observed.

7. The value of investment made by the Government in the Public Enterprises appearing in the Financial Statements amounted to Rs. 492, 192 million. According to the net impact of the following observations revealed during the course of the audit test check carried out in that connections, that value had been understated by Rs. 105,068 million.

(a) Even though the capitalized value of the State lands vested in the Hotels Development (Lanka) Co. Ltd amounted to Rs. 7,000 million, that value had not been disclosed in the Financial Statements.

(b) The capital contribution of Rs.100 million made by the General Treasury in the year 2011 in a private company had not been shown in the Financial Statements

(c) According to the Financial Statements, the capital contribution made by the General Treasury in 06 Enterprises out of the 129 Enterprises owned by the Government had been shown as Rs. 305, 152 million, and the Institutions concerned had shown capital contributions totalling Rs. 339,069 million. As such, the capital contributions totalling Rs. 33,917 million relating to those 06

Enterprises had beenunderstated in the accounts.

(d) According to the Financial Statements, the capital contribution made by the General Treasury in 02 Enterprises out of the 129 Enterprises owned by the Government had been shown as Rs. 349 million, the confirmation of balances had established that the General Treasury had not invested in the capital of the respective Institutions. Accordingly, a sum of Rs. 349 million had been overstated in the Financial Statements.

(e) The General Treasury had made capital contributions of Rs. 50,500 million in the Ceylon Petroleum Corporation and Rs. 13,900 million in the National Water Supply and Drainage Board in the year 2015 through the issue of Treasury Bonds. But that amount had not been shown in the Financial Statements of the Republic for the year 2015.

8. Disclosure had not been made in the Financial Statements in regard to the arrears of revenue totalling Rs. 55,408 million in respect of the year under review relating to three major revenue earning Institutions. 

9. Even though the Telecommunications Regulatory Commission of Sri Lanka had obtained

a Commercial Loan of US $ 104.3 million or Rs. 15,238 million from a company in China on the Guarantee of the Ministry of Finance for the Construction of the Lotus Tower Multifunctioning TV and Telecommunications Tower, that contingent liability had not been included in the Financial Statements of the Republic.

10. The Ministry of Irrigation and Water Management had paid advances totalling Rs. 4,011 million comprising Rs. 3,012 million in the year under review and Rs. 999 million in the preceding year to a Foreign Company in connection with the Gin Nilwala River Diversion Project. Even though provision of Rs. 40 million for this Project had been made in the year under review under the Object 198-2-3-18-2502 a sum of Rs. 3,012 million which exceeded that provision by a sum of Rs. 2,972 million had been paid.

11. A balance of Rs. 400 million existed in the Suspense Account No. 8533 in the Financial Statements of the Republic for the year under review and that balance included the expenditure incurred for the purchase of motor vehicles for the Commonwealth Conference. That balance had not been settled by the end of the year under review by obtaining provision and amounting for that expenditure. In addition to that, a credit balance existed of Rs. 1,269 million in the Suspense Account No. 8233 and action had not been taken even by the end of the year under review for the settlement of that balance.

12. According to the Revised Budget Estimates for the year under review, the Budget Deficit amounted to Rs. 1,170,980 million and that represented 10.47% of the estimated Gross Domestic Product. Even though in terms of Section 3(4) of the Fiscal Management (Responsibility) Act, No.3 of 2003, the estimated Budget Deficit should be reduced to 5% of the Gross Domestic Product, the Budget Estimates exceeding that limit had been prepared.

2014 Annual Report/Qualified Opinion by Acting Auditor General W.P.C. Wickramaratne

Basis for Qualified Opinion

My opinion is qualified based on the matters described below.

1. Even though it was stated in the financial statements that the General Treasury had contributed Rs. 323.375 million to the capital 0(08 Government Owned Enterprises, according to the direct confirmations made by those institutions to audit, the capital contribution totalled Rs.373,868 million. As such a sum of Rs. 50,493 million relating to 08 institutions had been understated in the financial statements.

2. According to the Board of Survey conducted on the Investment Certificates, the value of investments relating to 07 institutions had been understated by a sum of Rs. 19,504 million and the value of investments in 14 institutions had been overstated by a sum of Rs. 20,929 million in the financial statements.

3. In comparison of the balance of the foreign borrowings payable included in the Account No. 8243 under the liabilities in the financial statements for the year under review with the balance of borrowings shown in the Report No. 854-1 of the Department of External Resources, a sum of Rs. 2,917 million relating to 81 Loan Agreements had been overstated and a sum of Rs. 3,328 million relating to 90 Loan Agreements had been understated in the financial statements.

4. Liabilities totalling Rs. 180,182 million comprising liabilities totalling Rs. 85,321 million relating to recurrent expenditure and liabilities totalling Rs. 94,861 million relating to capital expenditure not settled as at 31 December 2014 as presented in Forms D.GS.A. 8(i), 8(ii) and 8(iii) of 206 Appropriation Accounts presented for the year under review, had not been disclosed in the financial statements.

5. The total liabilities amounting to Rs. 10,062 million committed by the General Treasury up to the end of the year under review for the purchase of24,017 motor vehicles (including 21 ,498 motor cycles) on the lease basis had not been disclosed in the financial statements.

2013 Annual Report/Qualified Opinion from Auditor General H.A.S. Samaraweera

Basis for Qualified Opinion

My opinion is qualified based on the matters described below.

1. Sums of Rs. 6,000 million and Rs. 2,000 million totalling Rs. 8,000 million received as advances from a State Bank in the years 2012 and 2013 respectively had been brought to account as revenue in the Financial Statements of the Republic for the years 2012 and 2013.

2. Foreign Loans amounting to Rs. 75,045 million had been obtained through two agreements for two specific projects of two Public Enterprises. Even though the Cabinet of Ministers had decided the transfer of the said loans and the servicing of those loans to the respective Public Enterprises, those loan balances still continue to be shown as foreign loans in the Financial Statements of the Republic.

3. A sum of Rs. 19,817 million received in connection with a land given for the development of the hotel industry shown in the Explanatory Note No.26 of the Financial Statements of the Republic for the year 2011 and the income of the 3,329 million earned from that by 01 January 2013 totalling Rs. 23,146 million had been retained in the Deposit Account without being credited to the State Revenue. A sum of Rs. 5,560 million had been spent out of that in the year under review and a balance of Rs.17,586 million remained as at 31 December 2013.

4. Even though the difference between the balance of the Foreign Borrowings, the Settlement of Development Bonds under the Domestic Borrowings and the loan balances not brought to account shown in the Financial Statements of the Republic as at 31 December 2013 and the ledgers and loan records maintained amounting to Rs. 39,054 million had been shown as the difference in exchange, the management had failed to establish that specifically.

5. The revenue earned by the Provincial Councils and the expenditure incurred therefore had not been included in the Financial Statements of the Republic.