Grand Cayman, 25 June 2013

The Auditor General, Alastair Swarbrick, made public today his General Report on Financial and Performance Reporting in Statutory Authorities and Government Companies for the year ended 30 June 2011. The report provides an overview of the results of the audits conducted of the financial statements and discusses the significant findings that have been reported to the various entities.

Due to the work by these entities to clear the backlog of financial statement audits over the last three years, this is the first time the Auditor General has been able to provide a report like this since 2004 when the new Public Management and Finance Law (PMFL) was introduced. Mr. Swarbrick reports that he has seen continued progress in the timeliness and quality of the financial statements his auditors have been getting from the 26 government owned entities. For the year ended 30 June 2011, he reported that 8 entities had their financial statements completed and audited by the deadline provided in the law while audits of four entities are still outstanding. While the Auditor General is clear that progress is being made, he makes a point of saying that more needs to be done to provide timely reporting to the Legislative Assembly.

In his report, Mr. Swarbrick also includes the details of concerns regarding the internal controls and governance frameworks in these government entities. Of significance, he included a number of findings about how Boards of Directors are mismanaging the activities of these organizations. For example, at the Cayman Islands Airport Authority, he highlights concerns about how the Board operated beyond their capacity while not complying with conflict of interest reporting requirements.

“Statutory authorities and government companies still have a long way to go before I will be satisfied that the Legislative Assembly is getting the accountability it needs for the public funds being spent by these entities ,” said Mr. Swarbrick. “My auditors will continue to work with these entities by identifying the issues and supporting management with their responsibilities to bring the level of reporting up to a reasonable level.”

The Auditor General also expressed concerns around the information being provided by the Government to the Legislative Assembly required by the PMFL. He reported that only 15 of the 26 entities have so far tabled annual reports for the year ended 30 June 2011 and in most cases those reports still don’t measure up to what the Law requires, including being tabled far too late to be of use and not having the information required to inform Legislators about how their moneys were spent.

The report is available in PDF format at www.auditorgeneral.gov.ky. More information about this report can be obtained by contacting Martin Ruben at the Office of the Auditor General at (345) 244-3206

END

The following are excerpts taken from “General Report on Financial and Performance Reporting in Statutory Authorities and Government Companies”

EXECUTIVE SUMMARY

The annual reports and financial statements of the individual entities of government are the key documents that enable the Legislative Assembly and the citizens of the Cayman Islands to hold ministries, portfolios, statutory authorities and government companies accountable for their use of public resources. In December 2010, I delivered my first report on the preparation and tabling of financial reports and over the subsequent two and half years I have provided the Legislative Assembly with reports on the progress that government and its related entities  have made in preparing and tabling these fundamental accountability documents. A significant amount of time and resources was devoted by government and my Office to clear the backlog of prior year financial statements while undertaking audits of more current financial statements.

We have now reached a position where it is possible to begin reporting effectively  in more detail on the outcomes of the audits at individual entities. This report is the first step in producing general reports  each year on the outcomes of the most recent fiscal year. Whilst this report  is focused on the SAGCs for the fiscal year ending 30 June 2011,I intend to issue a similar report for the ministries and portfolios in due course. Similar reports  will be produced in future fiscal years and as the completion of entity  financial statements continues to be more timely, I will be able to issue these reports to the Legislative Assembly closer to the fiscal year end.

With respect to the SAGC financial reports  for the fiscal year ending 30 June 2011,I saw improvements in both timeliness and quality. However, whilst the story is one of progress, there is still a significant way to go before accountability as envisioned in the Public Management and Finance Law (PMFL) is effectively achieved. The picture across the individual entities is varied, with some performing very well while others are still struggling.  In this report, I highlight some general concerns regarding the timely completion and publication of credible financial and performance information highlighted by finding that:

•          the financial statements for only 8 of the 26 entities were completed in line with the statutory timetable, and 4 entities have still to be completed nearly two years after the fiscal year end;

•          whilst a significant number of annual reports and financial statements have recently been tabled in the Legislative Assembly, there have been significant delays in tabling by the responsible ministries;

•          a number of entities have only been tabling their financial statements in the Legislative Assembly and not annual reports discussing their wider performance as required under the PMFL; and

•          significant weaknesses in the internal control environments and governance arrangements of certain entities.

Therefore,for progress to continue being made towards the ultimate objective of restoring accountability,I believe the Legislative Assembly has an important role to play to hold the administration to account by ensuring entities continue to improve  the quality of their financial statement submissions and underlying information,and strengthen their internal control environments and overall governance arrangements. This report and future updates can provide Members of the Legislative Assembly with the means to do that.

I look forward to working with government and the individual entities as they continue on the path of improving financial reporting and restoring accountability for the use of public funds.

RESULTS OF THE 2010/11 AUDITS

INTRODUCTION

At the date of this report,the audits of the 2010/11financialstatements for 22 statutory authorities and government companies (SAGCs) have been completed  with four still outstanding.The four outstanding entities are:

•          Cayman Islands National Museum;

•          Cayman National Cultural Foundation;

•          Children and Youth Services Foundation; and

•          Sister Islands Affordable Housing Development Corporation.

Of the 22 audits completed, ten have received unqualified opinions, while the other twelve have received qualifications. Appendix 1provides the detail of the audit opinions issued, the date they were signed and the date they were tabled in the Legislative Assembly if that has occurred. Appendix B provides definitions of the types of audit opinions I can give according to the International Standards on Auditing we follow.

QUALITY OF THE FINANCIAL STATEMENTS

The overall quality of the financial statements of the SAGCs continues to show improvements with respect to presenting fairly the financial results of the entities in line with the relevant accounting standards. I continue to see improved accounting practices, better supporting information and increased presentational quality.

Exhibit 1(attached) examines the trend in the opinions that my Office has issued since the introduction of the PMFL in 2004/05.

As shown in Exhibit 1,very few entities have received adverse opinions or disclaimers of opinion, with a general trend over time toward more unqualified audit reports. For 2010/11,there are no adverse opinions or disclaimers of opinion issued so far, with two of the entities that had previously been disclaimed (Health Services Authority and the Tourism Attraction Board) receiving a qualified opinion in 2010/11.  There has been a decrease in the number of unqualified audits, with a corresponding increase in the number  of qualified reports, caused by some specific technical issues which have been identified for compliance with accounting standards rather than a general decline in the quality of financial statements.

I continue to see a decline in the number and significance of the issues on which financial statements are being qualified. With respect to the 12 financial statements that were qualified, in eight instances the audit reports contained just one qualification. In most instances the qualifications were due to the lack of appropriate supporting information, not enabling me to reach a conclusion on a specific material balance or transactions. In two instances the qualifications related to disagreement on the classification of specific items. Exhibit 2 provides an analysis across the 12 entities of the qualifications on their audit reports.

The exhibit demonstrates that there are a variety of reasons for the qualifications, and further detail on the qualifications for each individual entity are discussed in the next section of the report. However it is worth noting that three qualification matters are more prevalent: past pension service liabilities; related party transactions; and completeness of revenues.

Past Pension Service Liabilities: SAGCs are required to recognize an amount for past service pension liability in their financial statements. However we were not able to quantify the liability as at 30 June 2011as an actuarial valuation had not been completed for this date.  As a result, for the five entities where this liability was material I was unable to determine if the amounts that were established as a past service pension liability were fairly stated in their financial statements and qualified my opinions accordingly. For three entities, this was the only qualification in their financial statements.

Related Parties/Conflicts of Interest: Accounting standards require the identification of transactions with related parties including the total amount of related party transactions and any outstanding balances at year end.  This is to ensure that the entity’s financial statements contain the disclosure necessary to draw attention to the possibility that its financial position and financial performance may have been affected by such parties.

 

We found that most entities did not have systems in place to effectively identify, account for and disclose related party relationships including transactions for board members and senior management  in order to support compliance with the requirements of the accounting standards.

In addition, the lack of transparency around these transactions goes against the principles of good governance for managing conflicts of interests, and in some cases legislation, that require the proactive declaration of conflicts of interest.

In response to raising this issue during our audits, most entities requested board members and senior managers to declare related party interests for the reporting period, and put in place the requirements for annual declarations. However, in a few instances, board members refused to declare their interests resulting in a qualification of the audit opinions and raising concerns about potential business conflicts.

We will be following up on this significant issue in future audits to encourage entities to put into practice effective arrangements for the declaration and management of interests.

Completeness of Revenues: A number of entities derive a significant portion of their revenue through cash receipts (donations) that are not subject to the kind of controls that permit independent audit verification. Accordingly, the audits of these revenues w ere limited to the amount recorded in the accounts and I could not opine on how much should have been recorded.

I continue to see improvements in the timeliness of the provision of draft financial statements for audit and the related supporting information, which in turn is leading to improvements in the completion and certification of the financial statements.

TABLING OF ANNUAL REPORTS

The final link in the accountability chain for the use of public resources from the initial approval of the budget in Legislative Assembly is the tabling of each SAGCs annual report, including their financial statements in the Legislative Assembly. It is only at this stage that the stakeholders, Legislators and citizens, can see how public resources have been used and hold Government and public bodies accountable.

As at the date of this report, the annual reports for only 15 entities have been tabled for the year ending 30 June 2011. 17 SAGC reports for prior years have also still to be tabled. This position is a significant improvement since my previous reports. However, in most cases where an annual report has been tabled for 2010/11or the prior years, it is just the financial statements rather than the full annual report as required by the PMFL, and in all cases this has occurred, a significant amount of time after the financial statements were signed off.

The timely production and tabling of an annual report in the Legislative Assembly is probably the most fundamental element in the accountability framework for a public sector entity. Without this, the accountability of these entities for their performance and use of public resources is undermined. In effect, all the effort by the entities to produce and issue timely financial statements has little or no value if there is no way for legislators and the general public to understand what they mean and to assess how well the entity has performed.

In the future, as financial statements are signed off within the statutory time frames, it is important that entities ensure that they are in a position to prepare an annual report which talks more widely about their operational and financial performance, as well as including their financial statements, and that these are tabled in Legislative Assembly in accordance with the timescales required in the PMFL.

ENTITY QUALIFICATIONS

EDITOR: A list of the entities with qualifications followed and we have only selected only a few with the Aud Gen comments. Please go to complete PDF version to read all.

CAYMAN ISLANDS AIRPORT AUTHORITY (CIAA)

CIAA’s opinion was qualified in respect of past service pension liability and related party transactions.

Past Service Pension Liability: Pension contributions for eligible employees of CIAA are paid to the Public Service Pensions Fund which is administered by the Public Service Pensions Board.  CIAA is required to recognize its own portion of the past service pension liability from the date of incorporation. However, it was not able to quantify the liability as at 30 June 2011as an actuarial valuation had not been completed for this date.  As a result, it could not be determined if the amount of $4,706,000 that CIAA has established as a past service pension liability in their financial statements was fairly stated.

CAYMAN TURTLE  FARM (1983)  LTD. (CTF)

For the year ending 30 June 2011,the CTF’s financial statements received a qualified opinion on 26 October 2011. The opinion was qualified on three matters:

•          impairment of assets;

•          pension payable;and,

•          the treatment of insurance premium  paid on behalf of the CTF

A matter of emphasis was also included regarding the CTF’s ability to continue operating as a going concern because of the funding arrangement with the owner, the Cayman Islands Government.

Impairment of Assets: Accounting standards require the disclosure of assets that may be impaired (i.e. subject to loss or devaluation).Due to the nature, size and complexity of the CTF’s property, plant, equipment and exhibits, management could not estimate whether there was any indication of impairment to be recorded in the financial statements at 30 June 2011.

HEALTH SERVICES AUTHORITY (HSA)

52. Ineffective internal controls over the completeness of patient revenues: To ensure that all revenue is properly identified, invoiced and collected by the HAS, management is required to put in place appropriate systems, practices and internal controls. In doing so, management can be assured that all the revenues are recorded in the financial statements. We found that the internal controls to ensure the complete recording of patient revenues were not properly designed.  As a result, management does not have assurance that all revenues are properly accounted for and were unable to demonstrate to my auditors, by way of the records being maintained, that the revenue amount of $68.5 million was fairly presented because management could not tell us they were complete.

Completeness and valuation of accounts receivable: Iwas unable to determine the completeness and valuation  of patient-related accounts receivable reported on the balance sheet for similar reasons as reported for patient revenues.

Inability to audit  year-end inventory: When conducting an audit of the amount recorded as inventory in the financial statements, my auditors have to ensure that management can support the amount by a physical count of the assets themselves and appropriate documentation to support the valuation of the items. The inventory amount of $6.8m in the financial statements at 30 June 2011 could not be audited because HSA could not provide sufficient and appropriate information regarding the individual items included in inventory and how much they are worth.

Effect of issues related to prior year’s financial statements: For the five years leading up to the audit of the financial statements for 30 June 2011,my Office had not been able to conduct a full audit of the accounts resulting in the issuance of a disclaimer of audit opinion. As a result, I was unable to determine the accuracy of the accumulated deficit as reported in the balance sheet and the statement of changes in net worth.

The audit report also included an “emphasis of matter” discussing note 22 to the financial statements that describes the uncertainty of the valuation related to the HSA’s post-employment health benefits. Starting in April 2010,the HSA has been paying the medical expenses for employees who retired and whose medical coverage was dropped by the Portfolio of the Civil Service (POCS). The continued payment of these medical bills constitutes what is known as a constructive obligation whereby the HSA may be liable for future medical bills of these retirees even though there is no decision by Government as to who should be liable for the medical costs of these retirees. There has been no liability estimated or recognized in the financial statements and the HSA is trying to engage an insurance company to provide coverage for the retirees’ medical benefits. Subsequent to issuance of the financial statements, the Board made a policy decision that all new employees hired after 1November 2010 would no longer be provided lifetime medical benefits.

Given the potential significance of this liability and its impact on the future operations of the HSA, we believe this situation should be resolved as soon as possible providing an opportunity to report an accurate liability amount on the financial statements.

NATIONAL HOUSING DEVELOPMENT TRUST (NHDT)

Whilst I did not the qualify opinion of NHDT, I highlighted two matters in my report:

Impairment losses: The notes to the financial statements refer to a legal opinion regarding housing units held by the Trust that do not comply with the Land Registration Legislation. As a result, NHDT had sold and rented unregistered properties which were deemed unfit  for habitation. This necessitated the evacuation and demolition of the housing units and a consequent reduction in the assets’ value of $5.8m.

Procurement:  A total of 41 houses were constructed in East End and West Bay during 2010/11at a cost of $4.2 million. The Trust issued 41 individual contracts with the work being shared between 25 different contractors. The Financial Regulations prescribe that any contract with a value of $250,000 or more should be reviewed and approved by a Tender Committee in the entity and submitted through the Central Tenders Committee. These construction projects were not submitted to the Central Tenders Committee for evaluation as breaking the project into multiple contracts resulted in the individual cost of each contract falling below the two hundred and fifty thousand dollars threshold.

PUBLIC SERVICE PENSIONS BOARD  {PSPB)

I qualified the opinion of the PSPB as I was unable to effectively audit the overpaid contributions by members. In conducting my audit I was unable to verify the amount reported for overpaid contributions amounting to approximately $1.7 million due to a general lack of evidence including the absence of an adequate subsidiary ledger showing the amounts attributable to individual participants. As I was unable to perform alternative audit procedures to verify the amount reported which is material to the financial statements, I qualified my opinion.

Whilst my opinion  was not qualified for any other  matters, I also highlighted two matters  for the readers of the financial statements in my audit report.

Actuarial Valuation Report:  The notes to the financial statements indicate that the 2011and 2008 actuarial valuation reports completed on April2012  and March 2009 respectively were submitted to the Financial Secretary in April 2012 and April 2009.  Neither report had been accepted and approved as at the date of the audit report and used by PSPB for reporting in its 2010/11financial statements. This contravenes Public Service Pensions (Amendment) Law, 2004 which states that:

“After receiving a report under subsection {3) the Financial Secretary shall submit the report to the Governor and the Governor, shall either accept the report and approve, by regulations, the changes to the contribution rates recommended by the Board; or within 90 days of receiving the report, cause its own actuarial valuation to be carried out if it determines that there is good reason to do so.”

We have been informed that both the 2011and 2008 actuarial valuation reports have been taken to Cabinet for approval. However Cabinet deferred the relevant Cabinet papers and thus the reports have not been sent to the Legislative Assembly.

Separate Accounting of Pension Funds: The Public Service Pensions Law {2004 Revision), Parliamentary Pensions Law, 2004 and The Judges’ Emoluments and Allowances Order, 2005 each state that

“…the Board shall prepare and submit to the Auditor General in respect of that year a balance sheet and a statement of revenue and expenditure by the Board during the year; and such other financial statements  as may be required…”

The PSPB pooled the funds for each of the plans into one set of financial statements and did not identify or disclose the investments and administrative expenses for each Fund. In response to our concerns raised with PSPB, management stated that:  “the Passage of the Parliamentary Pensions Law in 2004 created the unintended effect of requiring the Board to prepare and maintain a distinct and separate set of financial statements for the Parliamentary Pensions Fund.”

TOURISM ATTRACTIONS BOARD (TAB)

I issued a qualified opinion on 6 March 2013. In the previous four years’ I had issued disclaimers of opinion as I was unable to obtain sufficient information to audit and on which to base my opinion. The opinion was qualified in respect of six issues.

Cash & Cash Equivalents: Based on the omission oftwo bank accounts from the TAB’s records as well as lack of supporting documentation related to these two bank accounts,my verification of cash was limited to the amounts recorded in the records of TAB. As a result,I was unable to opine on the completeness and accuracy of the cash and cash equivalents balance of $1,332,367 at 30 June 2011.

Property, Plant & Equipment and Depreciation: No adjustments were made to the carrying value of the TAB’s properties at 30 June 2011to reflect the results of a revaluation conducted subsequent to the year end.  Based on the valuation carried out, the potential understated differences to property values are in excess of $1,000,000.  Due to the significant differences noted, property, plant and equipment of $9,323,386 are not fairly stated at 30 June 2011and I was unable to opine on the accuracy of the associated depreciation expense of $241,772.

Equity: Due to the significant unadjusted balances noted during the current year which impact on the accuracy of equity, the equity balance of $10,055,634 was not fairly stated at 30 June 2011.

Revenue: Due to the lack of adequate controls over revenue transaction noted at Pirates Week and the Botanic Park as well as some revenue transactions not being recorded in the financial statements as a result of the omission of two bank accounts, I did not opine on the completeness and accuracy of gross revenues totaling $683,957,out of the overall revenue balance of $2,792,340 as at 30 June 2011.

Receivables: Based on differences noted of $20,491in addition to the control issues noted with revenue, I was unable to opine on the accuracy of the receivables balance of $102,207 at 30 June 2011.

OTHER SIGNIFICANT ISSUES

GOVERNANCE – UNCLEAR ROLE OF BOARDS AND MANAGEMENT

For entities to function effectively and be well governed, boards and executive management need to have a good working relationship based on clearly delineated roles and responsibilities. The quality of the financial statements and its underlying transactions depends heavily on an organization having a good governance framework.

In our audits, we found there was an unclear understanding between the role of the board and executive management. Boards should provide strategic direction, approve policy, provide effective oversight, and hold management to account for the efficient and effective operation of the entity. Executive management, on the other hand, is responsible for managing the operations of the entities respecting the established policies and being accountable to the board for their actions.

We found examples where the boards are getting involved in the day-to-day operations of the entities, rather than letting the executive management run the business for which they are remunerated, or instances where the working relationship between the board and management are strained. These kinds of issues have a negative impact on entities and their ability to deliver effective and efficient services/activities.

I also have significant concerns about how boards are appointed and members are chosen for various roles that they are required to perform. While these issues undermine the fundamental ability for SAGCs to operate effectively, and in compliance with their legal and fiduciary duties I will be discussing these concerns in other reports on governance.

The lack of clarity between the roles of boards and management is a key indicator of poor governance of the SAGCs which can lead to higher risks of mismanagement (including fraud and corruption), poor internal controls, and lower quality external reporting including substandard financial reporting.

 

IINTERNAL CONTROL WEAKNESSES

A robust internal control environment is a critical component in organizations that ensures management can provide assurance to their boards regarding the:

•          effectiveness and efficiency of operations;

•          responsibility to safeguard assets;

•          reliability of information in financial reports; and

•          compliance with applicable laws and regulations.

SIGNIFICANT ISSUES AT INDIVIDUAL ENTITIES

CAYMAN AIRWAYS LIMITED (CAL)

The report to those charged with governance identified material weaknesses in the internal control environment that need to be addressed. Whilst the audit identified a significant number of individual internal control issues, I have summarized them into two main concerns.

Material weaknesses related to financial controls: We found a significant number of internal control weaknesses across nearly all financial systems, including:

•          reconciliations, including basic bank reconciliations, not being performed on a regular or timely basis. Many reconciliations were performed because the auditors requested them, whereas they should be prepared regularly to provide management with assurance that the systems and practices operated by the entity are working effectively;

•          a lack of segregation of duties relating to the processing of journal entries, expenses or certain aspects of the payroll process; and

•          general lack of evidence of monitoring and review by senior management that the internal controls of the organization  are working effectively.

The totality of these individual weaknesses equates to a material weakness in the processing of financial transactions. The pervasive nature of these weaknesses resulted in one large audit adjustment and a number of unresolved accounting differences partly due to issues in prior periods. In addition to the risks of losses due to fraud and error, there is also the risk that management reports  used for decision making by senior management, the board and legislators may contain  erroneous information and that inappropriate decisions are taken.

CAL management has indicated that it has subsequently taken action to address these issues and there have been notable improvements in the control environment, in particular around the lack of reconciliations and the monitoring and review of the financial reporting controls by management. Work from the 2012 audit is also indicative of internal control improvements and this will be reported on in due course.

Material weaknesses concerning the establishment of information technology (IT) governance, and IT related policies, controls and procedures: For an entity with the size and complexity of CAL, we would expect that there be a comprehensive risk assessment done for the operations of its IT environment and that the risks identified are effectively managed and monitored on a regular basis. CAL has not done this. As a result, the required policies, controls and procedures  related to its IT control environment have not been fully developed and implemented.

We also found a multitude of weaknesses related to the IT control environment that could result in significant errors occurring in the processing of financial and non-financial transactions. Examples of findings include:

•          programming changes to information systems are not formally documented, properly tested , or approved by management  prior to being implemented.  This increases the risk that any programming changes could have a negative impact on system operations resulting in problems with data integrity; and

•          an appropriate segregation of duties has not been established for the operations of the IT systems. We found that in many cases, individuals were given access to IT systems that would increase the risk of fraudulent, inappropriate or unauthorised transactions being processed.

The failure to identify and manage IT risks and the resulting lack of IT policies, controls and procedures significantly increases the risk that the transactions processed and the data stored by information systems is inaccurate and unreliable. In addition, there is a high risk of fraudulent transactions being processed by the entity or data being fraudulently manipulated.

For an organization with such a large number of significant business risks to manage, I am concerned about the issues identified. I do note, however, that the airline’s operations are regulated and audited by the Civil Aviation Authority of the Cayman Islands, the United States Department for Transportation, the United States Federal Aviation Authority, the United States Transportation Safety Authority and other international regulators. Nonetheless, I have taken note of these matters for a more in-depth performance audit of the operations of CAL in the future.

CAYMAN ISLANDS AIRPORT AUTHORITY (CIAA)

Governance: CIAA’s Board of Directors (“the Board”) is responsible for the organization’s operations and its results. Our expectation is that, in line with good governance practices, that the board would be responsible for assessing the risks of the organization, setting the strategic direction, approving plans and policies and providing effective oversight of the executive management and holding them to account. Executive management, on the other hand, should be responsible for the operational activities and report to the Board.

We found that the Board was operating in a capacity beyond the oversight role described above.

For example:

•          board members sitting on an interview panel to recruit employees at a grade level below senior management;

•          board members participating on project  evaluation committees for procurement;

•          approving application(s) for businesses to operate at the airports;and

•          approving decisions for the disposal of equipment and the hiring of personnel.

The actions noted put at risk the efficient and effective operations  of the entity and provide a significant opportunity for corrupt practices to exist.

Furthermore, I have identified issues regarding the appointment of board members and the lack of procedures in place to ensure the effective management of conflicts of interest.  I am concerned that an entity with such significant legislative responsibilities as the CIAA has been operating outside the realm of acceptable governance practices.

Non Compliance with Financial Regulations: We identified two instances of non-compliance with the Financial Regulations relating to procurement. They were:

•          a project  for the installation of a card access system with a value of $78K was awarded  without being tendered; and

•          an emergency project  was undertaken were a contract  was entered into with a sole source supplier due to exceptional circumstances after one of the two companies contacted declined verbally. The Financial Regulations  require that a copy of the contract be forwarded to the Director of Internal Audit and the Auditor General, which did not happen.

Leases: A number of lease agreements relating to office/shop rentals at the Owen Roberts International Airport were not properly put in place, exposing the CIAA to the risk of lost revenues.

CAYMAN ISLANDS DEVELOPMENT BANK  (CIDB)

Board of Directors acting in an administrative role: In 2009/10,the Chairman of the Board approved a Financial Stimulus Loan in the amount of $131K that had a shortfall in the life insurance coverage of 62%. The loan was not supported by the General Manager as the customer had a poor payment history. During 2010/11,the loan was converted to a business loan and increased to $329K to facilitate a payout to other financial institutions of $170K (consolidating external loans), despite the former loan being 5 months in arrears. This was approved by the Chairman. The total debt service ratio of the new loan was 53%,which is 8% in excess of the CIDB normal lending ratio of 45% and a credit reference check also revealed poor credit worthiness. The conditions stated on the appraisal form were also waived by the Chairman on the offer letter.

A charge of $136K was registered on a property with value of only $132K. The CIDB standard  official practice is to register a maximum charge of 90% of property value.  As at May 2012,the loan was 183 days in arrears.

The overrides by the Board chairman were not in line with CIDB policy and resulted in CIDB being exposed to a significant loss.

Political interference in the operations of CIDB:  A customer that did not meet CIDB’s credit criteria, was granted a loan in the amount of $232,500 as a result of requests made by several Members of the Legislative Assembly and the Chairman of the Board that “the loan be favorably considered”.

Breaches of the CIDB’s credit policies: The Bank’s credit policies, approved by the Board of Directors, are designed to ensure that loans are only disbursed to customers who are credit worthy. When a breach occurs this exposes CIDB to increased risk of losses due to delinquency. We identified a number loan disbursements where the Bank’s credit policy was breached. The following examples were noted:

•          the established credit policy for the granting of loans with maximum “Total Debt Service Ratio” of 45% was disregarded on a number of occasions without documentation of rationale;

•          while credit checks revealed that a customer had a loan at another financial institution that was 78 days in arrears at the time the loan application was being considered and was found to have had negative net worth, a loan in the amount of $36,000 was still granted on a customer’s verbal statement that he could repay the loan;

•          incremental loan granted to a customer  without any corresponding increase in collateral held as security ;and

•          missing documentation on two loan files including applications and offer letters

Management have subsequently indicated that policies have been established to mitigate against the issues identified, and the results from our 2012 audit, which will be reported in due course, indicate that similar issues have not been identified during the course of our work.

NATIONAL HOUSING DEVELOPMENT TRUST (NHDT)

Directors Fees: Directors fees rose to $110,000 during 2010/11from $49,000 a year earlier with meetings conducted more than four times a month. The amount paid to directors was increased by 100% to $800, $400 and $300 per meeting respectively for the Chairman, Deputy Chairman  and other Directors by way of a resolution of the Board.

During our audit, we identified directors were overpaid in the amount of $18,700 due to payment of fees at an incorrect rate. This amount included overpayment subsequent to the audit year and related to fees paid to the former Chairman and Deputy Chairman.

Management of Accounts Receivable: As at 30 June 2011,the NHDT had outstanding receivables of $1.1million,the majority of which related to outstanding rental and mortgage payments. During the year, management reviewed the provision for doubtful accounts and increased the amount by $284,000 to $607,000. On this basis, the net amount that NHDT expects to recover on these outstanding receivables is only $499,000,which is a recovery rate of 45%. There were no receivables written-off during the year, however in the prior year the Trust wrote off nearly $300,000 in outstanding debts.

Segregation of duties: We found that the same person prepares, reviews and approves the bank reconciliation statements.  Likewise the same individual was responsible for taking cash receipts, making the deposits and accessing the accounting records. The lack of segregation of duties for these key activities unnecessarily increases the risk of employee fraud significantly.

NHDT management has indicated that it has recently taken action to address the issues in its control environment and this will be reported on in due course as the audits for 2012 and 2013 are completed.

PORT AUTHORITY OF THE CAYMAN ISLANDS  (PACI)

Hiring of employees: Two employees were documented as being hired as a result of instructions from the then Premier, Hon. McKeeva Bush. The employees were initially hired in January 2004 under his instruction at a time when he was Chairman of the Board of Directors.  Their duties were to install and maintain a buoy system used to control access of boats on top of the North Sound Stingray Sandbar, as well as to monitor the activities of boaters in the area and report on non­ compliance with rules. In 2005, the two employees were terminated. In June 2009, the Premier verbally instructed the Port Director to reinstate the arrangements  with the same two individuals at a rate of pay of $1,000 per month. Up to February 2012,a total of $90,000 had been paid to these individuals without any evidence of work being done.

Senior management informed my auditors that the installation of the buoys was never completed and no report of any kind has ever been filed.

Management is responsible for the employment practices of PACI. Board members and politicians should have no role to play.  The action identified above is a clear example of undue political influence and override that undermines the ability of an organization such as PACI to operate effectively.

Compliance with the Port Authority Law {1999 Revision) and Regulations {2011 Revision):  The Port Authority Law needs to be amended and brought in line with current day practices.  For example: the fiscal year being used is not consistent with the Law. Other examples include the accounting for and remittance of profits to core government, the activities related to the development of real estate and commercial activity, and several fees being charged.

Management of commercial leases: There is a lack of policies and procedures regarding how tenants are contracted. In addition, we noted several discrepancies in how rental agreements are managed and the enforcement of the contractual terms and conditions.

Board members involved in contract negotiations: We noted instances where members of the Board of Directors acted as agents in contract negotiations.  In one instance, for example, we noted that the Chairman of the Board signed a Service Level Agreement  (SLA) for the repairs of the Port Authority’s facility and then directed it to the Port Director who signed it a day later.  We reported to PACI that the practice of having Board members involved in the operations of the entity is inappropriate and creates considerable additional unmanaged reputational risks for this important public sector organization.

Procurement of goods and services: We found that PACI purchases most of its parts and supplies through sole source contracts without going through appropriate tendering processes.

CONCLUSION

This report provides a summary of the outcomes from our audits of the statutory authorities and government companies of the Cayman Islands Government for 2010/11.

Whilst I continue to see improvements in the quality and timeliness of the financial statements for the SAGC’s a lot more work is required before effective financial accountability for the use of public resources is restored across all entities. In particular I have ongoing concerns about a number of the smaller entities that continue to struggle to present reliable and credible financial statements for audit.

There is also still considerable room for improvement in the governance, internal controls and financial management of most entities. I believe there is key role for officials in core government to provide leadership across the entire public sector around these matters, and support the effective management of the public resources made available for the operations of these entities.

A number of matters I have raised in the conduct of my audits, such as the breakdown of governance, are very significant. I believe the Legislative Assembly should act to ensure SAGCs take action to mitigate the risks and opportunities for loss or abuse in the use of public resources.

Alastair Swarbrick MA (Hons), CPFA          11 June 2013