Worldcom accounting - Maltese style

The Times of Malta



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.

It started with the Enron affair. The largest energy trader is the US was misreporting profits as it was hiding huge losses in shell partnerships which were not being captured by the reported financial statements.` `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. `here in Malta is freely and unashamedly being practiced by the government itself to misrepresent its finances`

Malta now has its own Worldcom. 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 practiced 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 reasoning` 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`. ` The truth is the deficit is out of control`

Technically one could argue that capital gains, duty on documents and dividends are generally classified are 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. `No Worldcom accounting is going to solve our deficit just as it did not solve Worldcom`s`

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 it 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.`

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. Hiding a deficit does not solve it. No Worldcom accounting is going to solve our deficit just as it did not solve Worldcom`s. Like Worldcom such practices might take us to the equivalent of chapter 11.

Alfred Mifsud