This is part two of a commentary by a former auditor on the Bermuda Auditor-General’s report on the Consolidated Fund of the Government of Bermuda for 2010, 2011, 2012 released to Parliament in December 2014.

Have you ever tried to wade through an auditor report? Or been curious about how a publicly traded company, or a government manages their financial affairs?

If you own shares in a company, perhaps you’ve taken a look at their audited financial results (eg Argus Insurance’s clean audit opinion). Or, perhaps, you haven’t bothered.

You own shares in a country where every Bermuda taxpaying resident is fully invested in the financial success of our country — yes, you should bother. Why not start with the most recent set of audited consolidated fund reports from our Bermuda Auditor-General?

At only 315 pages long, the audited report is a timeless piece of financial literature. You will discover that, currently, your investment is not returning any dividends at all to the people of Bermuda. The report certainly is not good bedtime reading for those sleep-challenged. Or maybe it is, if you find math and research on strange nomenclature such as “material misstatements and defalcations” as relaxing as counting sheep.

However, the Consolidated Fund 2010, 2011, 2012 audited report is not fiction, but real time reporting on real financial results.

So, what is an audit? It is an in-depth financial, accounting, forensic analysis and verification (in the best possible results) of an entity’s set of financial statements for a given period, usually for one year. It is conducted by a highly-qualified experienced auditor (generally, with serious financial background established in a globally pre-eminent accounting and auditing firm). The auditor is an ethical expert in accounting, forensic science, intuitive reasoning, finance, and statistics.

The outside auditor must be independent of all persuasive (possibly corruptible) influences and inherent conflicts of interest. The examination results and auditor’s opinion is always reported directly to an independent, oversight committee, such as the board of directors of a publicly-traded company.

In Bermuda’s case this means the Governor who, as the representative of Britain is independent of the operations of the Bermuda Government. The independent auditor never reports audited results, initially, to a chief executive officer, premier, prime minister, cabinet or other governing body of a country in order to avoid possible influence over or interference with audit results.

The financial statements to be audited are provided by the civil service finance staff, supervised by the accountant general, along with the finance permanent secretary and the Minister of Finance.

The accountant general is expected to follow all Financial Instructions and international accounting standards for preparations of financial statements as well as adhering to the professional fiduciary standards of care as required by their qualifying licensing boards.

The accountant general’s duty is to protect the public purse by training staff, implementing and monitoring financial processes, as well as verifying that all financial matters related to the financial statements have reliable, appropriate supporting and corroborating evidence.

Why on earth do we have to go through hearing about this auditing process?

We must have the ‘truth in all things,’ including our country’s financial matters. No financial decision can be made by anyone, whether they are an individual, family, business, non-profit, government or international body, without reliable verifiable data derived from financial statements.

The independent audit function is the most important component of conducting public financial business.

The Bermuda Government consolidated report auditor opinion was released in December 2014. I certainly knew what to expect, but was still unprepared for the discouraging, damaging scale of this dismal audited report.

There was carelessness, obfuscation, indifference, negligence, implied bias, conflicts of interest, and denial/refusal to provide information. There was misuse of public funds, arbitrary decision overrides, complete disregard of Financial Instructions, non-adherence to professional codes of conduct, and just blatant fiscal irresponsibility.

It is utterly incomprehensible to me that any experienced financial professional could, in pride and good conscience, submit such drivel to be audited. I was, and still am, disgusted.

For me, the five most appalling items are those I have listed below. And gosh, there were only 33-plus more matters of special importance and audit observations listed as major problem areas.

Readers, keep in mind that the Auditor-General is only able to review statistical samplings of financial statement items given the enormity of the scale of financial transactions follow-through in one year. I will refer to percentage sampling throughout this analysis as a reminder the auditor observations do not represent the entire picture of that particular issue. If the sampling of transactions is say only 10 per cent, you will have to multiply mentally those results by ten.

1. Page 28 — Inability to balance bank statements. I bet your family knows exactly how much is in your bank accounts? Evidently our government does not.

2. Page 16 — Basic budgets skills woefully lacking. Bermuda families across the Island must focus every day to keep their budgets in line, and most of us are certainly not finance professionals.

3. Page 20-23 — No supporting documentation or purchasing standards for more than $65 million in capital project, while more than 69 per cent of major capital projects and major (above $50,000) departmental expenditures in sampling transactions reviewed did not have Cabinet approval.

4. Page 32 — There were 267 adjusting entries to the 2010 financial statements submitted by the Accountant General in the 2010 fiscal year alone. In fiscal year 2011, it took 193 adjusting entries and in 2012, some 84, to bring the financial statements to standards. An adjusting entry is generally made at year end to clarify, restate, recategorise, and bring financial statements to the level of general accepted accounting standard principles. Each adjusting entry can take as much as, or more than, 20 hours of accounting work. And you wondered why the Auditor-General could not get work completed.

5. Pages 53, 113, 179 — No operating cash at each year end for four years running. Multiple millions of dollars in negative cash deficits at banks. At the end of 2009 negative $128 million, 2010 negative $78 million, 2011 negative $46 million, and 2012 negative $96 million. Still think government has tons of available cash to fix every problem?

Is our trust obliterated?

In the Madoff disaster, the firm “purportedly” invested billions of dollars on behalf of thousands of trusting investors. The firm’s financial statements were audited by a tiny firm in New York, yet no one was sceptical of financial results or questioned the competence of Madoff until an independent commonsense individual started questioning the numbers. You know the rest. Trust obliterated, financial losses in the billions and lives ruined.

The independent auditor function is the most important component of conducting public financial business.

Part three of this commentary will be published next week.

If you missed part one, entitled ‘Understanding the audit process’, which was published on December 19, you can read it at this link: www.royalgazette.com/article/20151219/COLUMN07/151219663

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