Business Page – March 31st, 2002


FIA Under The Microscope

 

Introduction

The coming week is an important week for the Financial Institutions Act, 1995. The Guyana Bar Association has placed the Act as a main item on the Programme of its Law Conference being held this weekend. And at the level of the Courts, the Chief Justice will be hearing closing arguments in the Globe Trust case in which a number of persons are challenging the decision by the Bank of Guyana to place Globe Trust in liquidation. The Bank of Guyana is of course the regulator of financial institutions under the FIA in addition to its several functions as Central Bank and the supervisory authority under the Money Laundering Act.

The Financial Institutions Act arose from the Financial Institutions Bill of 1994, replacing the thirty-year old Banking Act, Cap.85:01 as part of a wider reform of the financial sector including amendments to a number of other legislation. Financial reform had of course become a mantra after several systemic failures in a number of countries and had threatened to place the world financial system at risk. Ever conscious of its role as the self-appointed regulator and protector of the world financial system, the International Monetary Fund had been pushing countries to adopt measures with FIA characteristics to exercise stricter supervision of their financial institutions. To that extent therefore, the FIA was not a home-grown product and has been criticised as a first world imposition on a third world foundation.

These criticisms have intensified as financial institutions, which in Guyana means commercial Banks, forced into compliance in a rather short timeframe, began imposing new lending conditions on customers who had previously been courted and treated as though their character and image guaranteed them loans on demand. There is also the suspicion that many lending institutions found the FIA a useful excuse for attempting to bring existing facilities into line, or for declining applications which they did not find attractive.

The Conference will hear presentations from a number of persons, all of whom have had some experience with the FIA from different professional and practicing perspectives. Senior Counsel Robin Stoby's presentation will be on the wider issue of receivership and its implications for businesses in contemporary Guyanese society; NBIC's in-house Attorney-at-Law Toussaint Boyce will consider whether the FIA is now due for amendments; a representative from the international lending institutions will give a donor's view while Business Page's contributor will address the Act from his perspective as an independent accountant.

An Accountant's Perspective

The Act is only one of several pieces of legislation and regulations which regulate or rather dictate how the auditor should carry out his work and which therefore impose on him a range of obligations. Among the legislation and regulations are the Companies Act 1991 (CA 1991), the Financial Institutions Act (FIA) in relation to his role as the auditor of financial institutions, the various tax legislation, Generally Accepted Accounting Principles (GAAP) and Generally Accepted Auditing Standards (GAAS). On top of these, different countries may have their own versions of GAAP, companies may have special stock exchange requirements and specific legislation may apply to certain clients. The mere act of being aware of and applying all these requirements is, to the accountant, a challenge, in itself while reconciling apparent conflicts often demands the most careful professional judgment. It must be borne in mind that with just about twenty accountants in practice, no accountant can devote his limited time to becoming a specialist.

Terminology

Coming as it did some four years ago after the CA 1991, one would have expected the FIA to use the definitions and concepts of the CA 1991. These are however significant differences as the following sample shows:

FIA Companies Act

Paid up capital Stated capital Memo & Articles of Association Articles and By Laws Foreign company External company Capital base Equity

Challenges for the Accountants

The FIA poses at least three principal challenges to the Accountants:

1. It is a new legislation with new concepts which even lawyers and even possibly the judges in Guyana are only now coming to grips therewith. 

2. The FIA appears to extend the scope of the auditors' responsibilities to that required under the Companies Act and International Standards on Auditing (ISA). S23 (1) of the FIA states that the duties of an auditor shall include the following:

Ř      to make a full review of the financial institution’s internal control structure, information and loan classification and reserving systems, and procedures for financial reporting, and make a full and fair report of the same to the directors of the institutions; and

Ř      to make a full review of the financial institution’s procedures for compliance with the requirements of this Act, and to make a full report to the directors of the institution.

Under the CA 1991 and ISA, the Auditor is required to carry out procedures to provide sufficient, reliable and appropriate evidence to support their opinion on the company's financial statements. This does not necessarily encompass all the areas required to be reported under the Act. An auditor would normally include in their management letter to the client, that the principal purpose of the audit was to express an opinion on the company's financial statements and not to evaluate internal controls and that the audit would not necessarily have revealed all conditions requiring attention.

3. The FIA emphasises prudence and allows little discretion especially in areas of loans provisioning. Examples are:

Ř      Where a debt has more than one deficiency, the one which attracts the lower classification category should be applied;

Ř      Once principal and interest payments lapse for three months, no further interest can be charged in the accounts unless the debt is fully secured and collection is expected within three months;

Ř      Provision has to be retained on the books for a renegotiated debt for a minimum of one year;

Ř      Three months after a debt is provided 100%, the debt has to be written off the books unless there are prospects of recovery within six months.

Conclusion

There is no doubt that the requirements of and discipline imposed by the FIA have had a negative effect on businesses. Without the benefit of considerable economic and financial analysis it is difficult to establish whether there is any link between the FIA and the spate of business failures.

It must be noted however, that the economy started its decline long before the end of the four year transitional period for provisioning establish by the FIA. It was only in 2001 that the commercial banks sought to enforce their security not under the FIA but under the debenture signed years ago and now falling under the CA 1991.

While the FIA is no doubt extremely prudent, it has to be seen in the context of the need to protect depositors' fund in the absence of deposit insurance. The real problem lies in the underdeveloped financial architecture where there is no development banks, no stock exchange, no venture capital, high interest rates charged by the commercial banks, poor financial management on part of borrowers, inadequate policy initiative at the government level and the social and political tensions which have dogged our country for several decades. Time for amendment - yes, but not only of the FIA. Are we up to the challenge?

END