A Worldcom of Our Own

Maltastar 

 

Corporate accounting scandals have shaken the USA. What was projected to be a swift recovery from a shallow recession has turned out to be a slippery slope which throws back the economy to the bottom each time it attempts to recover.

The main culprit of this is the shaken consumer confidence following the asset value losses resulting from disclosure of corporate accounting scandals.

“The NSO press release states ‘The part-privatisation of MIA has yielded Lm21.0 million in capital gains, duty on documents and dividends.’ ”

It started with the Enron affair. The largest energy trader in the US was misreporting profits as it was hiding huge losses in shell partnerships which were not being captured by the consolidated accounts. In so doing it was assisted by bankers, who were showing loans as advance payments for energy trades, by auditors who were turning a blind eye on the losses of the partnerships, and by investment bankers who were recommending that investors buy or hold Enron stock when they should have known better. All those helping Enron to misrepresent were on the company’s payroll through fat consultancy assignments.

 

 

Hot on the heels of Enron came Worldcom. The No 2 telephone company in the US admitted that it was misrepresenting profits by capitalising recurrent expenditure. The initial figure quoted was US$3.4 billion but this has now grown to at least US$7 billion and Worldcom had to file for Chapter 11 protection from its creditors whilst it attempts to re-structure and save its skin.

It is on this Worldcom affair that I want to dwell. The public finance figures for January to July just released by the NSO shows that what the US public was shaken and scandalised with, what the US President and Congress have roundly condemned and prepared new legislation to tighten up on corporate responsibility, here in Malta is freely and unashamedly being practised by the government itself to misrepresent its finances.

Just as Worldcom was misrepresenting its performance by capitalising recurrent expenditure which in terms of conventional accounting standards should have been written off against income thus reducing profits or increasing the losses, the Government over here is treating as ordinary revenue one off income from privatisation of the MIA. All conventional accounting standards would require this to be treated as a financing item and not as an item of ordinary revenue.

For the non-technical let me explain the difference. Ordinary revenue is revenue which could be expected to recur each and every year such as income from income tax, social security contributions, VAT collections and income from fees, licences and other excise duties.

By including Lm21 million from the privatisation of MIA as recurrent revenue government is pretending that this one-off income will recur every year when this is manifestly not so. The NSO press release states “The part-privatisation of MIA has yielded Lm21.0 million in capital gains, duty on documents and dividends.”

Technically one could argue that capital gains, duty on documents and dividends are generally classified as ordinary revenue. But in case of MIA such income has nothing ordinary about it. This revenue results from sale at a substantial profit of the airport terminal building to the government itself which resulted in a huge artificial profit for MIA which then distributed it to government in the form of dividends, capital gains tax and duty on documents.

 

 

This is an engineered transaction which for its modality challenges for ingenuity in deception even the Worldcom executives under charge of corporate irresponsibility. And to make sure that the structured deal is totally wrapped up in deception the government has paid nothing for the purchase of the Terminal Building on which so much paper profit has been made. If it had paid any funds these would have shown under the Capital Expenditure Vote. Instead this expenditure will be offset against future rental payments of the said terminal which has been leased back to the MIA.

“The truth will eventually come to the surface and those trying to take us for a ride will have to give due account of their actions”

If the government was using the accrual based accounting as it has long been promising, the transaction would have reflected negatively in the annual budget as the expenditure of buying the terminal goes in 100% this year whereas the set off against future rental payments would have to be made gradually over the long years of the lease period. But government is using the shortcomings of its cash accounting system to engineer deception on a grand scale.

But there is a strong message in this affair. The fact that the government has been forced to such scandalising accounting, in order not to wander too much off course from its planned financial targets, shows that government has no solutions. Hiding a deficit does not solve it.

Government tried this before in 1995 when it loaded VAT charges on Enemalta and TeleMalta to artificially bloat its own revenues whilst causing serious financial problems to these corporations that were deprived from passing on the VAT charges to the consumer. Now it is hiding the deficit by generating one-off privatisation revenues and technically structuring them to appear as ordinary revenue.

If we want to tolerate deception, well, we can solve the whole deficit like this. Enemalta has Lm44 million in revenue reserves why not ask it to pay them out as dividends and take also as ordinary revenue? Like Enemalta there are others!

The truth is the deficit is out of control. Adding back the Lm21 million scam to the reported deficit of Lm72.5 million brings the real deficit to Lm93.5 million in the period January to July 2002 compared to Lm68 million in the same period of last year and Lm55 million in 2000.

Taking July alone the true deficit for the month was Lm15 million compared to a deficit of Lm14.1 million in July of 2001. The true deficit is increasing!

These are hard facts. No Worldcom accounting is going to solve our deficit just as it did not solve Worldcom’s . The truth will eventually come to the surface and those trying to take us for a ride will have to give due account of their actions. And banks that assist the government to engineer such financial sham should not be surprised at having their credit rating checked and down-graded.

If the deficit is to be likened to the thermometer that measures the body temperature of the sick patient, government action in accounting the MIA proceeds may be likened to the doctor who puts ice near the thermometer so that it does not truly show the high temperature of his patient. In so doing it is risking the patient long term health by avoiding real solutions. Hope is that there will be time for a conscientious doctor to move in to administer the real cure and report the mal-practice of the current doctor to the medical council.