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Bermuda’s audit reports and why they matter

I have been reviewing the latest Auditor-General report on the Audits of the Financial Statements of the Consolidated Fund of the Government of Bermuda for period between April 2012 and the end of March 2016, as tabled in February.

Readers, my sincere apologies for the tardy review of this important report.

Most of us, including yours truly, don't really enjoy delving into myriad pages of numbers and statistics, particularly when the tome is 343 pages long. Financial reports of any kind are generally tedious, confusing, frustrate our ability for math comprehension and conveniently (or not) are not relevant to our everyday lives. Heck, most of us have trouble just keeping a routine monthly budget on track.

So, because I do have a modest financial background it is my responsibility to you to read these reports with an outside observer's jaundiced eye in order to provide you with a summary and relevant commentary on the financial state of our country.

People often question why anyone has to go through having some auditor and staff dig through a company, quango, municipality, or a government's internal and external financial statements. While not minimising this incredibly important role, the perception often is that rehashing old numbers is a waste of time.

The reason for any audit is simple. Truth in facts. The auditor needs to know the truth of the facts composing these financial statements. Why? Because every one places trust in these statements when making financial judgments: to invest, to loan, to build, to implement policy, to develop budgets, and to have full confidence in the outcome of any financial strategy.

Truth is verifiable, reliable, quantifiable, and tangible. A country and its government's reputation rises or falls based on the auditor's independent opinion on a set of financial statements.

Thus, the Auditor-General does not answer to, nor can be influenced by anyone who is within the purview of the audit of these financial statements. They must conduct this mission with the highest ethical, professional standards. The Auditor-General must always, without question: be independent, free of internal and external conflicts, biases, intimidation, coercion, and restrictions. The Auditor-General 's clean report on a set of financial statements is absolutely crucial to the credit quality, transparency, and reputation of the entity under audit, in this case — our country.

What is truth? The word itself is bandied about so much these days, it has almost become a misnomer. One former politician in the United States recently stated that “truth isn't truth.” However bizarre that comment was, we know that it is not our definition of truth.

Truth means that you mean what you said, you can be relied upon, you take responsibility for your actions, you are authentic, you do the right thing.

Truth is trust. When you know where you stand, physically, financially, spiritually, emotionally, you can proceed with any event in life with confidence.

Truth can be a destroyer. Nothing is worse than an individual, or entity, who lies, obfuscates, cheats, betrays confidences and is so “loose” with their version of truth that no honest person ever completely trusts them.

Truth in auditing, What is contained within an audit report?

The report is divided into four sections:

1. The auditor's introduction and opinion of the financial statements;

2. Matters of special importance;

3. Auditor's observations and recommendations;

4. Various key indicators, statistics, and supporting documents.

The good news is that for the years listed above, our Auditor-General, Heather Thomas, gave the Consolidated Fund an unqualified — that is a clean — opinion. This was a stark contrast to the qualified Bermuda Government Consolidated Fund Report of 2010, 2011, and 2012 issued by the former Auditor-General, Heather Jacobs Matthews.

Unqualified versus qualified opinions are in themselves confusing. The general interpretation is that a qualified opinion from a qualified expert is the best most desirable opinion. It is not — the reverse is actually the best result.

An unqualified audit opinion is the only clean bill of health, but even then, the opinion is rendered with the following terminology.

“For each financial year covered by this report, the audit of the Consolidated Fund financial statements was conducted in accordance with auditing standards generally accepted in Bermuda and Canada.

“Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance that the financial statements are free from material misstatement.

“Reasonable assurance is neither absolute assurance nor a guarantee that the financial statements are completely free from material error. Due to the inherent limitations of an audit, there is an unavoidable risk that some misstatements of the financial statements will not be detected (particularly intentional misstatements concealed through collusion), even though the audit is properly planned and performed.”

Reasonable assurance does not specify that the audit contains a perfect set of numbers, as in reality, it is impossible for any auditor to review every single transaction contained within a document, contract, acquisition, sale, inventory, wire transfer, bank accounts, employees and their backgrounds, insurance, investments, IT, pension structures, and thousands more items.

The audit implements hundreds of procedures, some are as follows/review of:

• patterns of department behaviour in handling documents,

• unusual or repetitive transactions, wire transfers, etc

• no verification of payment invoices and numerical tracking,

• no correlating data from third party inquiries,

• accounting and book entries have supporting documentation,

• IT and software programme authenticity,

• cash and investment balances not balanced to bank/investment firms,

• non-confirmation of physical assets on inspection,

• multiple corrections of obvious errors,

• internal controls within the audited organisation such as segregation of duties, back-up data, flowthrough support channels, appropriate training for specific positions, and so on.

Even with the multitude of audit procedures to review, analyse, verify, and investigate financial data, it is extraordinarily difficult to detect fraud and collusion when accountability is lacking and diverted from top management.

Historically, the most astute global audit firms failed to detect fraud initiated at an organisation's top hierarchy. Remember Enron, WorldCom, Tyco? See the ten worst accounting scandals of all time at this website: http://www.accounting-degree.org/scandals/

The Auditor-General's independent role with responsibility for our entire government's financial statements is absolute critical to our financial viability. Everyone must have assurance that our financial affairs are in order, our governance is conducted in accordance with the most impeccable standards, and that our reputation as a premier international finance centre is credible.

Next week: Auditor — Matters of importance, observations and recommendations.

Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Finance columnist to The Royal Gazette, Bermuda. All proceeds earned from this column go to The Reading Clinic. Contact: martha.myron@gmail.com

Keeping track: Martha Harris Myron has been taking a look at the Auditor-General report on the audits of the Financial Statements for the Bermuda Government's Consolidated Fund covering the period from 2012 to 2016

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Published September 08, 2018 at 9:00 am (Updated September 07, 2018 at 9:09 pm)

Bermuda’s audit reports and why they matter

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