Business Page – September 8th, 2002

Backward Capitalism

(PART 1)


That a large number of Dr. Clive Thomas’ columns in 2002 focus not on his main field of economics and development but on that more arcane and dry subject of accounting must be a clear indication that it is more than the shenanigans in the profession that is worthy of such attention. Accountants have been identified as being in the forefront of the groups which have conspired with the rest of the financial community to bring off some of the most shameless frauds in the annals of the corporate world. In their defence, Business Page must say that accountants are not the only architects or accomplices in these economic crimes and that the self-proclaimed learned profession has been right up there, first helping to devise schemes to exploit loopholes and when the crooks are caught to provide shameless defence. There is no single group whether directors, lawyers, accountants, stock analysts or indeed shareholders which can consider itself untarnished by the scandals which have rocked corporate America since the lid came off Enron, blowing its auditors Andersen into infamy and oblivion.

Morbid Fascination

The rest of the world watched with morbid fascination as one company after another admitted to financial improprieties in sums that appeared ever larger. There was the expectation that a greater number of corporate executives, members of the financial community and professionals would have been hauled before the courts and placed behind bars. What has been equally fascinating is the rapid response from all corners of the globe to the developments in the USA. Dr. Thomas sees in the remedial action taken in the USA a lesson in the “remarkable flexibility and responsiveness that capitalism, as a social mode of economic organisation so frequently displays at times of crisis”.

His column of September 1, referred to the political flexibility displayed by the US establishment which included an about face by President George Bush from a fundamentalist anti-regulation, anti-state intervention position to one where he was prepared to sign into law the most far-reaching and comprehensive piece of financial legislation for several decades. While some of the action taken by President Bush may have been influenced by personal and political considerations given that both he and Vice President Cheney have been personally fingered with indiscretions in past financial dealings and the imperative of the November mid-term elections, the response is real and practical and places some distance between the Republican administration and its natural constituency.

Despite his own political leanings, Dr. Thomas came across as praising the flexibility of capitalism when he notes that “there is no doubt that, when it works at its best, the market system is an engine of efficiency.” Dr. Thomas concedes however that this comes at a price: the system offers a natural haven for scoundrels, robbers and crooks of every possible hue and kind; and that the market’s drive for efficiency causes it to ignore considerations of equity and fairness.

Competition and Efficiency

Dr. Thomas contrasts the US response with what he describes as backward undeveloped market economies like Guyana where there is no efficiency imperative in economic performance or political performance. The successful performance of any country is directly linked to the efficiency brought about by competition and responsiveness, and countries such as Guyana where competition and responsiveness are absent, have serious problems. As if that were not enough, Guyana still has the same limitations which its more proactive counterparts possess: crooks and scoundrels both in politics and business flourish despite all the evidence of misdeeds while considerations of equity and fairness are alien concepts. But it does not end there. There are a number of features of backward capitalism which are patently obvious in Guyana but the very backwardness prevents any desire or pressure to address them. Tragically this is not a theoretical issue but one which goes to the very existence of the country’s development since in order to lift ourselves out of the poverty in which we are mired, we must have greater efficiency whether it is politically or economically driven.

There are many symptoms of backward capitalism some of which are plain and simple corporate lawlessness while others have to do with weak regulations, ineffective governance, an uninformed and timid press, unresponsive governments, self-serving rather than self regulating professionals, inappropriate or poorly enforced laws and a populace that considers that the way things are is the way they will always be.

Corporate Lawlessness

This patent disregard for the rules takes many forms and is manifest in abuses against the laws and best practice. Sometimes such lawlessness is actually encouraged by a tolerant government and society when things are done under the label of investment. Recently there was the report in the Stabroek News of a returning “investor” who had spent two million Guyana dollars and in the process had cleared trees and exposed to environmental risks the lifeline of not only individuals but the operations of a nearby budding eco-resort. We have witnessed too a case of the Ministry of Housing resettling residents for an airport expansion project which is yet to receive clearance from the Environmental Protection Agency. Interestingly, not only the State-owned media but society as a whole has shown no interest in such issues. Progressive capitalism recognises that good environmental practice is essential for the long term sustainability of the business and the country.

It is surely no exaggeration to say that tax evasion is thought to be universal among taxpayers in Guyana and even the courts have demonstrated the most benign forbearance no doubt because it would be like opening Pandora’s Box. One feature of tax evasion in Guyana is its sheer crudeness – figures are concocted and books are fiddled with the complicity of accountants and tax consultants who are granted tax practice certificates by the very Revenue Authority which they help to defraud! Worse still is the anecdotal evidence that many of the gamekeepers are working with the poachers introducing into the system a level of corruption that is cancerous. Running the business with tax evasion as one of its core strategies – sometimes euphemistically referred to as tax-minimisation - is hardly progressive capitalism and has to be distinguished from tax planning which includes structuring the business and particular transactions in a tax efficient manner. Capitalism operates by certain tenets which punish inefficiencies mercilessly and it is small wonder that so many businesses with tax evasion as their core strategy ending up in the dust heap of failure.

As far back as 1991, the Hoyte administration passed a modern Companies Act to replace the one that had its roots in the nineteenth century. However before it could put that Act into effect, it lost the elections and it took three years and pressure from the international financial institutions before the Act was finally made effective. Despite the fact that some of our leading businesspersons and professionals were involved in the preparation of the Act and the long lead time for planning for compliance therewith, some of our top companies and accounting firms are still to meet the requirements of the law in critical matters of disclosure and governance. The government has failed to ensure the necessary monitoring and enforcement mechanisms at the registry of companies and I estimate that a staggering 90% of our companies including the public companies and their subsidiaries are in breach of one or more requirements of the laws. Very recently one of these very top public companies was persisting in holding its AGM without the adequate notice and documentation and only changed course after some nudging from a shareholder. That same company however has failed to respond to a shareholder’s questions six weeks after they were raised.

The Companies Act provides that financial statements of companies be prepared in accordance with pronouncements of the Institute of Chartered Accountants of Guyana (ICAG). Well, the ICAG has prescribed that financial statements should be prepared in accordance with International Accounting Standards, a principles-based versus the rules-based type of accounting standards used in the USA. Even the most cursory review of some of the published financial statements of companies including commercial banks will show that these standards are not universally observed year after year. Clearly the accounting profession is either unwilling or unable to enforce its own pronouncements while the regulators including the Bank of Guyana are too tolerant of such omissions. 


The current spate of receiverships now taking place in the country has unveiled some rather brazen acts of corporate lawlessness. There were at least two companies which in anticipation of action by their bank creditors engaged in literal asset stripping while all the banks could do was look on in utter amazement and helplessness at the sheer boldness of the perpetrators. The same commercial banks continue to experience painful frustration in seeking to realise their security on loans which have gone sour and many of which are now being challenged in the courts by the borrowers on some rather spurious grounds. In few other jurisdictions would such abuse be entertained but then we seem to possess a tolerance for corporate malfeasance that is unique among Caricom countries. Many of the banks have themselves contributed to this level of lawlessness by their failure to insist that their customers comply with the country’s laws in return for bank financing. Should the tax authorities pursue the tax evasion which many companies have engaged in over the years, the banks may find that the value of their security is considerably reduced.

Conflicts of Interest

Another common area of corporate lawlessness is the issue of conflict of interest in transactions involving mainly executive directors of the entity. Many of these directors and senior executives trade with the entities of which they are directors in breach of their fiduciary duties to the company. Corporate law and rules of accounting require that any such transactions be fully disclosed in the financial statements but compliance is more the exception than the rule. In this way profits are siphoned off from the company which provides a tax front to the director who then files as an employee while ignoring his business income which is lost in purchases in the company’s financial statements.

Not to be labour the point but it is precisely this type of activity riddled with conflicts that brought down once mighty Enron where officers made millions through off the books “special” partnerships in which they were principal players and beneficiaries. The regulators in Guyana, (sometimes one is forced to wonder who they are) and the accounting profession should take note and move vigorously to prevent abuses of this nature. Guyana’s financial system has often been justifiably referred to as unsophisticated and fragile and the current approach to financial regulation does nothing to remove that stigma. This is an issue of development because any country that is desirous of making serious economic progress must have a credible financial system in which people are prepared to invest with full confidence that they are only assuming normal business risk. It is inconceivable that capital will find its way into a system that is fraught with the abuses that are tolerated by regulators or the profession charged with stewardship responsibility.

To be continued