Professional Development Week
Keynote Speech delivered by

Hon. Marco Archer,
Minister for Finance & Economic Development

18th November 2015

“Success Starts Here”

Opening

Honourable Deputy Governor, Honourable Ministers, Members of the Legislative Assembly, Other Keynote Speakers, Ladies and Gentlemen, Good Morning!

I am pleased to be able to contribute to the 2015 Professional Development Week and I thank the Cayman Islands Society of Professional Accountants (“CISPA”) for inviting me as a Keynote Speaker.

I commend the collaboration between CISPA, the Office of the Auditor General and the Civil Service College for providing these training sessions as it allows professionals to keep current with best practices as well as provide opportunities for networking.

Unfortunately, I will not be able to stay and attend any of the Professional Development sessions as the Legislative Assembly is opening at 10:00 am this morning and I am required to attend its opening.

One of the key items on the Agenda for this Meeting of the Legislative Assembly is the Tabling, and debate thereon, of the Government’s 2016/17 Strategic Policy Statement, the SPS.

The SPS, as you may know, sets out the economic forecasts, Government’s financial targets, forecast financial statements and medium-term fiscal plans and policy priorities for the 2016/17 Budget which will take effect on 1st July 2016.

This SPS is different than previous documents in that it reflects the Government’s move to a financial year that ends on 31st December as opposed to the current year end of 30th June.

The SPS covers a forecast period of three and a half (3½) years where there will firstly be an 18-month financial period which starts on 1st July 2016 and ends on 31st December 2017.
Thereafter the financial years will be on 31st December – the first of which will end on 31st December 2018.

Restoring Fiscal Responsibility and Accountability

As part of the commitment to achieving fiscal sustainability and success, the Legislative Assembly recently approved amendments to the Public Management and Finance Law (“the Law”) that will improve the financial management regime that exists in the Public Sector. The amendments to the Law included:

1. As I mentioned previously, changing the financial year from a 1st July to 30th June period, to a 1st January to 31st December period;

2. Adopting Multi-Year Budgets and Multi-Year Appropriations;

3. Changing the deadline for the Tabling of the SPS in the Legislative Assembly and, changing the date by which the timing of the budget is to be published in the Government’s Gazette;

4. Prohibiting Ministries and Portfolios from Waiving Government Revenue; and

5. Changing the Holding-Period for Trust Assets from six (6) years to four (4) years.

Changing the 30th June Financial Year-End to a 31st December Year-End

The Government’s current financial year encompasses a 12-month period from 1st July to 30th June.

A significant portion of Government’s revenue is earned between January and March of each year. Currently, January to March is the third quarter of our financial year.

Revenues earned during January to March are mainly with respect to financial services. If there is significant reduction in such revenues, this would not become known to Government until late in the financial year. The Government would then have very little ability to make meaningful mitigating reductions to expenditures between April and June, the last quarter of the present financial year.

During the world-wide economic recession that started in late 2007, there were significant shortfalls in forecast revenues that did not manifest until the third quarter of the Government’s financial year; this left very little time and opportunity to implement meaningful expenditure-reduction measures to mitigate the shortfall in forecast revenues.

Changing the financial year end to 31st December will mean that financial services revenues received during January to March, would be earned in the first quarter of a fiscal year ending on 31st December – thereby giving the Government nine (9) months to mitigate any revenue shortfalls in the January to March first quarter.

Moving the financial year-end to 31st December, allows the Government greater time and, therefore, greater ability to take measures to mitigate the impact of any revenue shortfalls.

In addition, a General Election takes place in May every four (4) years within five (5) to six (6) weeks of the 30th June year-end. An incoming Government would have insufficient time to prepare and approve a credible full-year Budget for a financial year that started on 1st July.

Because of this, Government was forced to have an interim Budget of up to four (4) months, during which time a full-year Budget was to be prepared and approved by the Legislative Assembly. This is a short period of time to deal with a matter as important as the national budget. Moving the financial year-end to 31st December allows an incoming Government from a May General Election, sufficient time to develop a budget in a timely and considered manner.

The move to a financial year that ends on 31st December will firstly involve an 18-month financial period which will start on 1st July 2016 and end on 31st December 2017. Thereafter each financial year will end on 31st December – the first of which will be in 2018.

Adopting Multi-Year Budgets and Multi-Year Appropriations

The Government’s annual Budget currently covers the period 1st July to 30th June. The Government has recently passed an amendment to the Law which will permit multi-year Budgets that encompass a two (2) year period. Multi-Year Appropriations naturally follow on from Multi-Year Budgeting. The benefits arising from a move to Multi-Year Budgets are as follows:

1. greater discipline is brought to the Budget process since the timeframe for the consideration of the impact of budgetary requests is greater and, this is turn, causes the Government to have a longer view and focus on strategic policy and matters of national importance;

2. the focus of budgeting is shifted to a medium-term outlook rather than the current one-year and this medium-term outlook makes it more consistent with the SPS document which has a multi-year outlook;

3. the Government is better able to manage its capital projects over a longer period of time and to present more meaningful and comprehensive information to the Legislative Assembly on capital expenditures;
4. the Government is better able to predict its spending and resource needs; and

5. the Government is afforded additional time to devote to strategic planning of the country’s affairs.

It is also important to note that Multi-Year Budgeting and a single Appropriation Law that provides more than one (1) year of budgetary-cover, is well established and practised. As an example, Jersey, in the Channel Islands, has for many years been producing Multi-Year Budgets that are encompassed within a single Appropriation Law.

During the recent process to amend the Law, although appropriations would be established for a two (2) year period, Government agreed that the Finance Committee process be held annually to review expenditures already approved and included in an Appropriation Law, in order to determine whether any adjustments are required to such approved amounts.

Changing the Deadline for the Tabling of the SPS in the Legislative Assembly and for the SPS to cover a period of multiple years

Prior to the amendment of the Law in October 2015, the Government was required to prepare its SPS by 1st December of each year, as will be done soon.

In order to change the financial year to the calendar year and transition to a two (2) year Budget period, the Law was amended so that in a non-General Election year, the SPS will be Tabled in the Legislative Assembly not later than 1st May immediately prior to each Budget period.

In a General Election year, the SPS will be Tabled not later than three (3) months after the date of the General Election.
Therefore in 2017, the year in which the next General Election will be held, the SPS for the two (2) year Budget period that will start on 1st January 2018, is due by late August 2017 which is three (3) months after the May 2017 General Election.

Changing the Tabling date of the SPS means that the Government will not prepare an SPS for December 2016. The SPS that is scheduled to be Tabled during the Legislative Assembly Meeting that starts today will be the last SPS prepared before the May 2017 General Election.

Although the Government will be adopting a two (2) year Budget, the Government will continue to prepare its financial statements on an annual basis. As stated previously, Finance Committee will meet annually to determine the continued relevance and validity of appropriated expenditures.

These financial statements will be examined by the Auditor General’s Office and Tabled in the Legislative Assembly, annually. This ensures that transparency and accountability will continue.

Prohibiting Ministries and Portfolios from Waiving Government Revenue

The Law was also amended to explicitly prohibit a Ministry or Portfolio – via its Chief Officer – from waiving revenue. Previously, the Law implied that agencies could waive revenue without the approval of Cabinet.

Government agencies earn revenue from the production of outputs and from the provision of services directly to the public.

The Law was therefore amended to explicitly prohibit the waiving of any form of revenue by Government agencies. Cabinet’s approval is now required to waive revenue.

Prohibiting the waiving of Government Revenue by Chief Officers will allow the Government to properly monitor the amount of revenue that is being waived. This enables Government to have greater control over its financial performance, thereby improving such performance.

Changing the Holding-Period for Trust Assets from six (6) years to four (4) years

Section 74(1) of the Law requires the Government to hold trust assets for six (6) years.

Trust assets are those assets that are transferred or paid to the Government, in trust, on behalf of any person and include assets that:

(a) are being held pending the completion of a transaction or dispute; or
(b) belong or are due to any person and are collected under any agreement with that person.

If the trust assets remain unclaimed after six (6) years having been received by or transferred to the Government, the assets then belong to the Government.

The Law was amended to reduce this six (6) year holding period for trust assets to four (4) years.

Although the holding period is reduced to four (4) years, a person or a business entity can claim the asset and seek repayment up to ten (10) years after the asset was first received by, or transferred to, the Government.

With the amendment to the Law, the Government will be able to transfer any available cash into its operating bank account and record the amount as operating revenue. The cash would further improve the Government’s Cash Reserves as it has the advantage of enhancing the financial performance of the Government.

Audited Entire Public Sector Consolidated Financial Statements

The Government recognises that there is merit to having a fully informed public that is provided with the necessary information to enable Public Sector finances to be fully understood.

The Office of the Auditor General recently issued an adverse opinion on the 2013/14 Entire Public Sector (“EPS”) consolidated financial statements.

In an October 28, 2015 press briefing, the Office of the Auditor General stated that the year ended 30th June 2014 was the first time that it had been provided with sufficient information to conduct an audit of the consolidated financial statements of the EPS in the Cayman Islands. The Government sees this as a significant attestation that its financial performance has improved and evidence exists to substantiate this improvement.

The 2013/14 audit opinion, on the EPS consolidated financial statements, is the first audit opinion that has been issued on the EPS since the Law was introduced in 2004. Prior to the 2013/14 EPS consolidated financial statements, such earlier years were given a “disclaimer” of opinion by the Auditor General’s Office, which meant that it was not possible to reach an opinion on years prior to 2013/14.

Although an adverse opinion is not the opinion we desire to achieve, the Government will use this opportunity to address the issues that caused the issuance of an adverse opinion and, aim to achieve greater accountability and transparency.

The issues contributing to the adverse opinion on the 2013/14 EPS consolidated financial statements include:

• Consolidation Integrity Issues;
• Erroneous Opening and Closing Balances;
• Revenue and Related Receivables Completeness;
• Property Plant and Equipment Valuation and Completeness; and
• Material Omissions.

Consolidation Integrity Issues

The Auditor General found that there was no formal reconciliation of inter-agency transactions and balances between Public Sector entities. The Ministry of Finance currently makes judgments and elimination entries for thousands of inter-agency transactions. This approach is not robust enough to ensure that all inter-agency transactions are fully eliminated. Ministries, Portfolios, Offices, Statutory Authorities and Government Companies should confirm and agree inter-agency transactions and balances amongst themselves. Implications of not doing so could be that receivables, payables, revenues and expenses are overstated or understated in the financial statements.

Public Sector entities will now be required to confirm and agree inter-agency charges. Transactions that are not substantiated will be written-off. The Audit Office will undoubtedly find that in auditing the 2014/15 financial year disagreements of inter-agency charges are substantially reduced. This is another example of progress being made.

The Ministry of Finance will also implement the inter-agency module, Advanced Global Inter-company System (“AGIS”), in the Government’s financial reporting system by 30th June 2016.

The use of AGIS will reduce inter-agency mismatches as these transactions will require agreement by both counterparties prior to recognition in the respective ledgers.

It is also intended that the Law will be amended further in 2016 to strengthen the powers of the Ministry of Finance in order to enforce compliance with the Law and Financial Regulations, to hold Chief Officers accountable and prescribe sanctions which will improve the quality of information and the timeliness of reporting, particularly as it relates to the consolidation of the EPS consolidated financial statements.

It is intended that finance functions will be centralised within the Ministry of Finance to improve compliance with the Law and consistency in the application of generally accepted accounting principles (“GAAP”). Currently, each Ministry, Portfolio and Office has its own separate CFO and finance function. Suffice it to say, the Audit Office has said what it thinks of this approach ar least 10 times.

The Ministry of Finance will produce a Public Finance Manual, which is in accordance with best practices and GAAP. The Manual will be disseminated to all Public Sector entities and will serve to improve the consistency in the application of GAAP. It is expected that the Manual will be completed 30th April 2016.

Erroneous Opening and Closing Balances

Currently, the audits of Ministries, Portfolios and Offices are often completed after the 31 October each year which is the October statutory deadline for the submission of the EPS consolidated financial statements. The EPS consolidated financial statements therefore are unable to reflect any material audit adjustments of these entities upon first submission to the Audit Office. An element of the improvement to Public Sector financial reporting has to be the completion of audits for Ministries, Portfolios and Offices by their statutory deadline dates.

It is envisaged that the Audit Office will complete its audits within the legislated two-month timeframe for entity audits (by 31st October each year) and any audit adjustments will then be reflected in the Entire Public Sector consolidated financial statements.

Revenue and Related Receivables Completeness

The Audit Office reported that there is no system in place to ensure that the Government is collecting and reporting all revenues and related receivables.

The Ministry of Finance intends to conduct a review of Government revenue items to determine which items can be assessed for completeness. Going forward, revenue completeness should then be assessed by respective agencies at the end of each quarterly reporting period.

Property, Plant and Equipment Valuation and Completeness

IPSAS requires that consistent accounting policies are applied across all entities in the Entire Public Sector. However, not all of Government’s assets are reported at their revalued amounts, and most Statutory Authorities and Government Companies have yet to complete a revaluation of their fixed assets. Public Sector entities with significant fixed assets, report such assets at cost as opposed to their revalued amounts.

The Ministry of Finance will ensure that fixed asset revaluations are conducted on a 5-year cycle similar to that of Central Government in order to ensure consistency of accounting policies across the Entire Public Sector.

Additionally, the Audit Office is doubtful with respect to the completeness of the road network, which is currently valued at approximately $1.1 billion.

The Ministry of Finance has already engaged the National Roads Authority to compile a complete roads inventory for valuation.

It is envisaged that the roads inventory list will be completed by early 2016.

Material Omissions

The Audit Office identified that both post-retirement benefits (health care and pension) and the accounting of the Public Service Pensions Board were omitted from the Entire Public Sector consolidated financial statements.
The post-retirement health care and pension liabilities, of approximately $1.2 billion, were not included on the face of the primary statements in the 2013/14 EPS consolidated financial statements, but are referenced as disclosures in Notes to the financial statements.

Public Sector financial statements disclose, in the Notes to those financial statements, details of the post-retirement healthcare liabilities and expenses. This approach is similar to the accounting practices in countries such as the United States, the United Kingdom and Canada.

Such disclosure in Notes to the financial statements is effectively adopting a modified version of IPSAS 25 – and the Law is expected to be amended to permit the use of a modified version of IPSAS 25.

The Ministry of Finance will present an amending Bill to the Legislative Assembly in order to effect this change in 2016.
Pension obligation liabilities have been stated on the face of the Balance Sheet for many years and further details relating thereto are provided in the Notes to the financial statements.

The Government is examining options to reduce the pension and post-retirement healthcare obligations by: increasing the retirement age of Civil Servants from 60 to 65 years; exploring the possibility of introducing health insurance premium co-pay for Civil Servants and reducing the currently CI$5.0 million “cap” on the maximum lifetime medical benefits for Civil Servants. In the private sector, for the supplemental benefit plans, the maximum lifetime medical benefits “cap” averages CI$2.5 million. The latter two points of co-pay and lifetime medical benefits are significant and any change thereto will require time for education and discussion with the Civil Service. Consequently, it is expected that any such change will not occur until 2018 and not for political expedience as speculated by some media outlets. If anyone knows of an approach that is more viable, palatable and less inflammatory or financially damaging to middle and low income Civil Servants, I am inviting them to make it known to all.

Appointments to the Public Service Pensions Board are determined by statute, which the Government can change and because of this degree of influence by Government, the Board’s activities should be included in the Entire Public Sector consolidated financial statements.

However, the assets of the Board are comingled with those of the three Public Sector Pension Plans (the “Plans”). The assets of the Plans are for the direct benefit of current and retired Public Servants and therefore the Ministry of Finance is of the opinion that the assets of the Plans should not be included in the Government’s accounts because the money in those Plans belongs to Cavil Servants and retirees; the CIG via the PSP Board only manages these funds. This is a very conservative and prudent approach to adopt. The Audit Office disagrees with this treatment and, this disagreement is one of the factors that has led to an Adverse audit opinion being issued because the magnitude of the assets in the Plans are significant, approximately $0.5 billion.

The Government intends to review the Public Sector Pension Laws with the view of segregating the assets of the Public Service Pensions Board and those of the Plans and, mandating separate reporting.

Conclusion

I trust that I have been able to demonstrate that the Ministry of Finance, with the support of the Government, is taking steps to address the matters that have led to an Adverse audit opinion being issued with respect to the 2013/14 Entire Public Sector consolidated financial statements.

Addressing the qualification factors will be done via further changes proposed to the Law in 2016 and, by administrative means such as the Ministry of Finance providing enhanced guidance in required areas.

I also trust that having outlined the reasons for an Adverse audit opinion being issued, it is realised that Public Sector accounting treatments in the Cayman Islands are not significantly different from those adopted in more advanced economies.

It is also important to note that these are “macro” or national factors whilst the underlying individual accounting agencies that make-up central Government, increasingly are receiving unqualified or clean audit opinions – signifying a material improvement in their financial evidence retention. With respect to the financial year that ended 30th June 2015, a further two Ministries within central Government received unqualified audit opinions. The Ministry for Finance and Economic Development is one such Ministry.

Nonetheless, the factors leading to an Adverse opinion on the 2013/14 Entire Public Sector consolidated financial statements, will be addressed.

With the forecast uptrend in economic prospects, fiscal sustainability over the SPS forecast period ending 31st December 2019 and the additional planned amendments to the Law before June 2016, the Government will strive to further improve the management of the country’s financial resources and cope with the increasing demands for services, accountability, transparency and, of course, overall success.

Thank you.