The Auditor General, Alastair Swarbrick, released the following Press Release on Tuesday, 25 June 2013

Release

The Auditor General, Alastair Swarbrick, made public today a report called “Restoring Financial Accountability. A time for change?” In this report to the Legislative Assembly, Mr. Swarbrick discusses several concerns he has regarding how the Government currently manages and reports on its use of public funds and how senior managers could benefit from taking a fresh look at how they manage public finances.

Mr. Swarbrick provides a number of general recommendations for Government to consider to get its house in order. For example, with the Government’s current review of its primary legislation for managing Government’s finances, the Auditor General offers up a number of suggestions for how it could simplify the accounting systems and financial reports while providing greater accountability. Generally, he says that the current laws and practices are too complex for the Government and that there are opportunities to make it simpler for Members of the Legislative Assembly to hold senior government administrators accountable.

“While it is not my role to recommend changes to the public finance laws, I have provided a number of suggestions that the Government should consider when they look at amending the current laws and regulations,” said Mr. Swarbrick. “With almost ten years of experience with the current law and a better understanding of what is needed to provide accountability for the use of government funds, I hope that my suggestions will be helpful for legislators and government leaders alike.”

He indicated this is not a typical audit report that normally comes out of the Office of the Auditor General. After the Government has struggled to provide timely and credible financial statements and annual reports to the Legislative Assembly for the three years he has been on the job, Mr. Swarbrick has taken the time to provide a number of ways to simplify the current processes that he believes will lead to greater accountability if implemented.

“I hope the Government uses this opportunity to make the necessary changes to its financial laws and procedures to provide accountability for its activities and outcomes. The Government should recognize that the way it does business has not been working,” said the Auditor General.

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

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The following is an edited transcript of the “Restoring Financial Accountability. A time for change?” report:

EXECUTIVE SUMMARY

Since the introduction of the Public Management and Finance Law (the “PMFL”) in 2004 the Government and the wider public service has struggled to meet its requirements to provide accountability for the management of its financial resources. Whilst budgets have continued to be set and authorised by the Legislative Assembly every year, reporting the achievement of results against those budgets has never been effectively achieved in nine years leading to a breakdown in accountability to the Legislative Assembly, the residents of the Cayman Islands and other international interests. Without having the ability to report credible financial and operational information on a timely basis, the basic principles of public financial management are ultimately undermined.

Whilst there has been progress in the last couple of years, there are still significant challenges for the Government to establish a regime that will provide effective accountability, let alone what was envisioned under the PMFL. The results of the work we have been performing over the last nine years and outcomes from other reports prepared for Government have clearly indicated to me that there is a need for change to the financial framework that supports the principles in the PMFL ,and to consider what the framework should look like to:

•          enable sustainable financial and performance management, accountability and transparency for the use of public resources; and

•          provide this in an economic and efficient manner for a jurisdiction the size of the Cayman Islands.

In my view the Government’s financial and performance management framework needs to be fundamentally revised with a more straightforward and less complex model. Ultimately it is up to Government to review and consider what the framework should look like and ensure it meets the needs of its stakeholders. This report provides my considered opinions on actions that I believe Government should consider taking to deliver a more sustainable framework for the management of public resources.

These considerations include:

•          simplifying the financial and performance reporting framework for core government;

•          simplifying the budgeting framework;

•          developing a practical performance reporting framework;

•          providing leadership, clear roles and accountability for the implementation of an effective financial and performance reporting framework across the public service;

•          implementing shared services across core government and the wider  public sector;

•          strengthening accountability and responsibility across government for complying with the financial and performance reporting framework; and

•          implementing additional transparency measures around the use of public resources.

Since being appointed Auditor General, it is evident that restoring trust in Government and the public services is important to the people of the Cayman Islands. I believe that the recommendations made in this report would help Government to achieve that outcome.

BACKGROUND

The PMFL was introduced in 2004 with the objective of advancing management of public resources and accountability by introducing an improved budgeting and accounting framework linked to a performance management system.

The need for improvement in financial management was identified in the late 1990’s when it was realized that separate initiatives for change had not been successful and a more holistic approach was necessary. At that time a number of problems were identified with the central one being that the management system was not focused on performance. In addition the strategic policy priorities of government were not clearly outlined, the budget process was poor and there was no top down direction given to departments. There was little fiscal discipline and supplementary appropriations were commonplace.

In response to these problems and others identified at the time, the PMFL was enacted. In summary the Law had four main objectives:

•          redefine performance to focus on results;

•          develop stronger strategic processes linked to the budget;

•          clarify roles; and

•          establish effective accountability mechanisms.

The PMFL included clear roles and responsibilities for government officials, who could then be held accountable for the management of public resources. It also provided a means for government entities to operate more business-like, and it introduced modern public sector financial management concepts that would lead to significant changes for organisations, skills and management capacity.

The introduction of the PMFL required significant changes for a new financial framework including:

•          all financial statements  produced in line with internationally recognized accounting and reporting standards, on a full accruals basis;

•          individual annual ministry/portfolio financial statements;

•          quarterly reporting of results to the Legislative Assembly;

•          budgeting and reporting on the basis of outputs; and

•          increased need for accounting expertise within government.

Prior to the introduction of the PMFL, core government produced one set of financial statements on a cash basis. Whilst straightforward to prepare and understand, and not requiring the same level and quality of professional accounting resources, cash accounting does not provide a holistic view of the financial condition of an entity. The information in cash based financial statements is easy to manipulate and provides incentives for politicians to ignore medium to long term liabilities while focusing on short term cash outlays, thus potentially creating the illusion of current solvency while not reporting on future financial challenges. The sovereign debt crisis of recent years, and the exposure of governments, can be attributed to a significant degree to their archaic cash accounting practices and inability to understand their true financial condition. The benefits of an accruals based public sector accounting system include:

•          providing complete financial information;

•          enabling better planning, management and decision-making;

•          providing an ability to change behaviours; and

•          enabling an assessment of financial resilience.

Prior to 2004, the Government prepared 16 sets of financial statements, including SAGC’s. Since the introduction of the PMFL in 2004, the number has now increased to 43.

THE OBJECTIVES OF THE PMFL HAVE NOT BEEN ACHIEVED

I believe that most stakeholders agree that the objectives behind and the principles underpinning the PMFL are essential for delivering effective financial and performance management of Government and ensuring there is strong accountability for the management of  public resources. If its objectives had been achieved, it would have put the Cayman Islands at the forefront of public financial management, with many G20 countries still struggling with the move from cash to accruals based accounting.

However, over the past nine years, my Office has reported that the PMFL has not delivered the benefits it was designed to in the management and accountability for Government resources. The evidence of this has been plain to see with entities struggling to present reliable, credible and timely financial and performance information. Whilst the intent of this report is not to discuss all the issues that have been identified, some of the clear examples that effectively demonstrate that the system has not worked include:

•          Audited entire public sector financial statements have not been presented to Legislative Assembly since the enactment of the PMFL.

•          Ongoing delays and quality issues with entity financial statements.

•          Quarterly reporting of financial results as required by the PMFL was never implemented (and has now been suspended).

•          There have been significant delays in tabling annual reports or annual financial statements in the Legislative Assembly once audited. In most cases, annual reports have not even been prepared.

•          The links between the Strategic Policy Statements and the outcomes desired by the Government and the outputs included in the budget statements are unclear and disjointed.

•          The output budgeting process is cumbersome, time consuming and complex.

•          Reporting on the basis of outputs was never effectively implemented and has not been achieved in any meaningful way.

•          For budgeting and management purposes, there are a large number outputs and associated measures that aren’t focused on the key outcomes and deliverables of the Government. A large number of the output measures also do not report on results of what has been delivered to citizens, but more on the activities of government.

•          There has been little or no attempt to report on outcomes; the information needed to demonstrate that the Government’s programs and initiatives are delivering the results promised and that demonstrate their effectiveness (for example reporting on indicators that demonstrate the desired outcome of “improved public health”).

•          A sizable increase in the cost of human resources to manage the financial function in government entities, with no clear tangible benefits so far.

•          Significant internal control weaknesses in many entities of Government resulting in risks of error and loss of public resources.

Therefore the key questions that I believe need to be considered are:

•          whether sustainable financial and performance management and accountability is truly achievable under the current PMFL framework;

•          is the PMFL financial management and reporting framework the right one for the Cayman Islands; and

•          if it can provide effective accountability and transparency for the use of public resources in an economic and efficient manner.

Whilst poor implementation, leadership and management have been contributors to the absence of accountability over the last nine years, it is my view that the PMFL is too complex for the Cayman Islands Government to deliver effective accountability and transparency for the use of resources.

In my opinion, the financial and performance management framework needs to be fundamentally revised with a more straightforward and less complex model that addresses the following basic principles:

•          meets the needs for effective management of the Cayman Islands Government;

•          enables sustainable financial and performance management and reporting;

•          operates efficiently and effectively; and

•          implementable by Finance officials within a reasonable timeframe.

The Report then makes various recommendations under the following headings and sub-headings:

SIMPLIFY THE FINANCIAL AND REPORTING FRAMEWORK

STREAMLINE FINANCIAL REPORTING

STRENGTHEN MAMAGEMENT ACCOUNTING AND REPORTING

SIMPLIFY THE BUDGETING FRAMEWORK

DEVELOP A PROPORTIONATE PERFORMANCE REPORTING FRAMEWORK

DO NOT SEPARATELY MANAGE AND CLASSIFY EXECUTIVE AND ENTITY TRANSACTIONS

RESTRUCTURE GOVERNMENT FINANCIAL FUNCTIONS

LEADERSHIP OF THE FINANCIAL FUNCTION

STRENGTHEN THE CENTRAL FINANCIAL FUNCTION

SHARED SERVICES

STRENGTHEN ACCOUNTABILITY

RESPONSIBILITIES AND ACCOUNTABILITIES

STRENGTHEN THE ROLE OF INTERNAL AUDIT AND ESTABLISH AN AUDIT COMMITTEE

IMPROVED TRANSPARENCY FOR FINANCIAL INFORMATION AND TRANSACTIONS

FINANCIAL ACCOUNTING SYSTEMS NEED TO BE IMPROVED

CONCLUSION

In my first report as Auditor General in December 2010 I indicated that it was time to review whether all the provisions within the PMFL financial framework were appropriate for the needs of the Cayman Islands Government and ensuring effective accountability. At that time I raised a number of questions that I thought Government needed to consider about the financial framework­

(See attached Appendix A for details)

While my Office continues to support the intent and principles behind the PMFL, it is my opinion that the financial framework needs to be fundamentally changed, and a more straightforward and less complex model implemented. My experience over the last three years has reinforced and strengthened my initial views presented in December 2010. I believe the evidence of the last nine years when accountability has been effectively lost demonstrates a need for this. Through undertaking such a review and implementing a revised framework, I believe there are significant opportunities for the Government to:

•          enhance accountability and transparency;

•          support more effective decision making;

•          reduce the bureaucratic burden and generate efficiencies;

•          achieve better results for the use of public resources; and

•          ultimately, increase public trust in Government.

I have made a number of suggestions or recommendations in this report that I believe would support the Government of the Cayman Islands in ensuring the effective management of public resources. However, my primary recommendation to the Government is to immediately commence a far reaching and comprehensive review of the Public Management and Finance Law and consider seriously what kind of financial management, performance management and accountability reporting framework it needs, and the organizational structure it would require to deliver it effectively and efficiently.

Any decisions, investments and activities around changes to financial management policies, practices and systems should await the outcome of this review.

In this report I have identified a number of areas which the Government should examine and fundamentally revise. I have prepared it with the intention of helping the Government move forward with the delivery of an effective financial framework and I look forward to assisting the senior officials involved achieve this objective.

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