A review by a former auditor of the Bermuda Auditor-General’s Report on the Consolidated Funds of the Government of Bermuda for the years 2010, 2011, 2012. This is the fourth and final part of the series.

Reviewing a financial statement can be completely intimidating. But remember this, numbers are numbers. They tell a story that really just requires common sense to interpret.

Open the report, go to page 49 and start down the 2010 list by line. For clarification on any line item write to me, or better yet write to the Auditor-General.

If you cannot stand the thought of all those numbers, at least read the matters of special importance, audit observations and recommendations, on pages seven to 36 — they are eye openers.

Financial statements of all kinds of organisations, entities, public or private must follow a prescribed set pattern called GAAP, which stands for generally accepted accounting standards. GAAP is used so that accountants, financial analysts and anyone else with an interest can easily compare one set of financial statements to another.

Generally, financial statements are composed of four sections and will list two years side by side for a quick comparison of changes, such as increases or decreases in revenue.

1. Statement of financial position.

What we own: yes, we — the government is our organisation and is funded by us. Important line items are cash and accounts receivable (what is owed to us).

What we owe: accounts payable and long-term debt (what we owe to others) and accumulated deficit.

The bottom line is the net position calculated from these two positions.

In 2010, 2011 and 2012, cash ended in significant overdrafts that were in the millions. Accounts receivable grew (meaning taxes and revenue owed to government may not have been collected), accounts payable and long-term debt increased significantly each year along with the accumulated deficit.

Government debt, pension liabilities, and net overspend expenditures outweighed government assets each year by more than $300 million for each of the three years.

2. Statement of operations and accumulated deficit.

This is what we earned and what we spent. While revenue grew slightly, overspend expenditures increased the accumulated net deficits each year with negative numbers across the board.

3. Statement of cash flow.

A very important section because after accrual adjustments, the final bottom line states what “real money” was left at the end of each year. Answer — none.

Accrual accounting is the method whereby all transactions, whether revenue received or not, expenses spent or not, assets or liabilities, pending or otherwise, are duly recorded if they were incurred within a one year time frame. Accordingly, after backing out accrual numbers for all years 2010, 2011, 2012, there was no money left. Our government bank accounts were in negative territory — overdraft.

4. Notes to the financial statements.

These are detailed explanations about what some of these numbers represent. Notes are very illuminating, you can learn more from them than the numbers themselves.

We learn the following about a few of the significant contracts, liabilities, and issues that government incurred over this three-year period:

• Pages 64, 121, 189. Note 9. Pension and other retirement benefits liabilities for all years in the increasing amounts (millions to more than a billion) that will be needed to fund ministers’ and civil servants’ future retirement packages.

• Pages 67 and 199. Note 10. Contingent liabilities. There is a $26 million liability accrued for the Baseland clean-up.

• Page 68. Government provided a preference guarantee to Butterfield Bank for $200 million, plus guarantor for the related dividend payments on the preference shares.

• Page 74. Financial guarantee to Capital G bank for $10 million borrowed by Wedco for a new sewage treatment plant.

• Page 75. Letter of comfort to Butterfield Bank for Bermuda Housing Corporation to back-up the corporation’s programmes that do not break-even by appropriating annual grants.

• Pages 76, 78 and 211. Bank overdraft facility arranged with HSBC for $100 million to expire September 2010. Bank overdraft increased in June 2010 to $100 million at BNTB to revert later in January 2011 to $10 million. A somewhat similar arrangement occurred in June 2012 when the overdraft was increased to $170 million at HSBC.

• Page 129. In 2010, the Minister of Finance provided an irrevocable guarantee to Paget Health Services Limited on behalf of the Bermuda Hospitals Board in relation to the new hospital wing project and annual service payments over 30 years. Design and construction related costs were estimated at $247 million.

• Pages 131 and 201. Air service agreements entered into, namely: WestJet for a revenue guaranty of a minimum 10 per cent profit for air service period of six months between November 2010 and April 2011, and American Airlines for any revenue shortfall during air service period of one year, November 2010 to November 2011. Subsequently, government paid Westjet $1.3 million in 2011, and $1.45 million in 2012, while American Airlines received $361,000.

• Page 139. Government paid $536,000 toward manufactured homes purchased abroad in 2006 that needed to be reimbursed by the Consolidated Fund, but was not recorded.

• Page 140. Government sold $500 million bonds on international market with a 10-year fixed rate of 5.6 per cent. The proceeds repaid the $200 million bridge loan with HSBC.

• Page 208. Government was not in compliance with section two of the temporary loans Act (1973) when increasing overdraft facilities. The Loan Act restricts the amount the Minister of Finance can borrow for temporary loans.

• Page 208. Government borrowed $200 million at 4.95 per cent, per annum, from BNTB in order to replace existing overdraft loans.

• Page 210. In 2012, the Minister of Finance guaranteed a $36 million payment to BNTB, borrowed by Wedco for infrastructure and housing projects in Dockyard.

• In 2012, another $475 million bond issue with interest rate of 4.13 per cent. Proceeds were used to pay all short-term loans and a $200 million loan with local banks.

• Late in 2012, government guaranteed $36 million borrowed by Bermuda Housing Corporation from BNTB to purchase phase three units of the Grand Atlantic Housing Development and repay other loans advanced by the bank for phases one and two.

• Page 209. Post April 1, 2010 deferred pensioners (those individuals who left Government employment prior to retirement) who are eligible to receive a pension at retirement age have been deemed, under the law, not eligible for the benefit of GEHI [health insurance] coverage when they reach pension eligibility retirement age. This gives a saving of $34 million in accrued obligations.

Professional responsibility and accountability.

Quoted directly from the Auditor-General’s financial opinion: “The Accountant General, subject to the general direction and control of the Minister of Finance, is responsible for the preparation of the financial statements of the Consolidated Fund … in order to fulfil accounting and reporting responsibilities, the Accountant General maintains systems of financial management and internal control to provide reasonable assurance that transactions are property authorised by the Legislature, executed in accordance with prescribed regulations and properly recorded to maintain accountability of public money and safeguard the assets and pretties under Government administration.”

Ministers and civil servants have duties and responsibilities to the public. From the day a civil servant or a minister starts work with the government, he or she is bound to the civil service and ministerial codes of conduct, along with the obligation to stringently follow the Bermuda Government Financial Instructions.

Various licensing boards exist internationally and locally for the purpose of certifying accountants, while holding their professionals accountable to their ethical standards and the fiduciary duty of protecting the public.

Among these are the United States’ State Boards of Accountancy, American Institute of Certified Public Accountants, Chartered Professional Accountants of Canada, The Institute of Chartered Accountants in England and Wales, Institute of Management Accountants, Certified General Accountants Association of Canada, and the Chartered Professional Accountants of Bermuda.

Why didn’t the Auditor-General completely identify the problems commented on in the matters of special importance and the like?

Various comments have been made as to why the audit investigation did not appear to go far enough.

The explanation is simple. The mandate of Bermuda’s Auditor-General is restricted and does not have subpoena power such as that granted in other countries: the subpoena power to demand documents, subpoena bank accounts, direct witness testimony, and to forensically follow and trace money across boundaries, international if necessary, to the eventual recipient.

As an example, here is a look at the authority of the state auditor in Missouri. The auditor can examine:

• All books, accounts, records, reports, vouchers of any state agency or entity subject to audit.

• All amounts received, disbursed, or otherwise handled on behalf of the federal government.

• Examine and inspect all property, equipment, and facilities.

• All contracts or agreements entered into.

Furthermore, the state auditor has the power to subpoena witnesses, to take testimony under oath, to cause the deposition of witnesses residing within or without the state, and to take necessary action if any person refuses to comply with a subpoena.

The auditor shall seek to enforce the subpoena before a court of competent jurisdiction to require the attendance and testimony of witnesses and the production of books, papers, correspondence, memoranda, and contracts. The court will issue an order to comply to the individuals, organisations. Failure to comply with such order of the court may be punished by such court as contempt.

The Auditor-General of Bermuda should have the same authority and power. Legislation should be enacted promptly to bring our local audit standards up to global standards.

So where do we go from here? This has been an exhausting review, for all of us. What has been written over the past four weeks barely touches the surface. I could write an in-depth thesis, but then really would anyone read the result?

I remain deeply concerned that these issues are ongoing, may not be corrected and that we will hear the same litany again and again from our new Auditor-General.

Mismanagement of our government’s financial affairs hurts all of us financially, while potentially damaging our international financial centre reputation.

All the talk about good governance, laws against corruption, and other nice-sounding politically-correct phrases about protecting our people and our island’s reputation does no good when the power to misuse, misappropriate, and ignore best professional civil service and accounting practices is not controlled from top to bottom.

Know this. The money has to come from somewhere. As it is, your taxes will probably be increased to make up the shortfall. If you are not concerned about this, you should be.

Martha Harris Myron CPA PFS JSM, Masters of Law: International Tax and Financial Services. Appointed to the Professional Tax Advisory Council, American Citizens Abroad, https://americansabroad.org/. The Pondstraddler* Life™ Consultancy providing financial planning, publications, presentations for Bermuda residents, their multinational families and connections. Contact: martha@pondstraddler.com