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On
the Line –
Guyana Public Service Credit Union
Introduction
Today’s
Business Page for the first time reviews the financial statements of an
entity that would generally but incorrectly not be considered falling within
the definition of a business entity. The Credit Union which was the subject
of considerable adverse publicity and court action recently held its Annual
General Meeting on Sunday on July 11, 2004 at which the financial statements
for the years 1995 – 2001 were presented to members. This was the first
Annual General Meeting held since 1999 and the Chairman sought to address
the years 1999 – 2003 without as he said ‘trying to make excuses.’ The
Report was presented on behalf of the Management Committee with a membership
of approximately twelve persons the PSU President Mr. Patrick Yarde.
There
is also a Supervisors’ Report which seeks to highlight the activities and
functioning of the Credit Union. That Report reflected adversely on the
current Management Committee which is blamed ‘fully for the tardiness’ in
submitting the Annual Report. The Supervisors Correll Jackson, Michael Brown
and Grace McKend also highlighted a number of deficiencies including the
failure to implement ‘credible Accounting Tender Board procedures on a
particular situation, the issuing of loans contrary to Loans Policy; and the
improper drawing up of employment contracts. Incredibly, the Supervisors
reported that its offer to train staff was never even acknowledged.
While
the Committee must be commended for the accelerated pace with which it
addressed the backlog of annual accounting reports and while the accounts
were audited, members should have been cautioned that the financial
statements presented to the auditors were in effect unauditable and the
auditors rightly refused to give an opinion on them. Here are some of the
principal reasons:
Ø
Management did not carry out an evaluation
of loans – the largest item in the balance sheet - that are inadequately
secured or not secured at all to determine possible bad and doubtful debts
for the years 1995 to 2001. Indeed, there are no provisions for bad and
doubtful debts which render the financial statements almost meaningless.
Ø
The auditors were unable to verify the
amounts shown as Capital, the second largest item in the balance sheet.
Ø
The auditors could only verify 8% of the
$59n. shown as Cash and Bank at December 31, 2001, usually the easiest item
to audit.
The
Credit Union is by far the largest in the country with total assets at
December 31, 2001 of close to G$1Bn. but it is difficult from the report to
ascertain the number of members at the end of each year. However, the
downsizing of the public service and migration has resulted in a fall in
membership of over one thousand members. However, despite its size and the
value and volume of transactions, the Credit Union is registered and
regulated under the Co-operative Societies Act, Chapter 88:01. This Act is
clearly unsuitable for this entity which as its Chairman says would have
‘outgrown the dreams of its founders.’
Income Statement
The
statements show a steep rise in net income over the seven year period.
Interest income which is taken up only on a cash basis has increased by 578%
while expenses have increased from $10M in 19995 to $30M in 2001 – a more
modest 200%.
But
this has to be considered illusory because of the failure to recognize one
of the major costs in a savings and loans entity – bad debts. The cumulative
amount of retained income is shown as $154Mn., but this could be easily
wiped out by any provisioning exercise, particularly if the provisioning
Guideline under the Financial Institutions Act was applied.
Balance Sheet
Total
assets have also risen substantially from $127M in 1995 to $881M in 2001 –
an increase of 594%. Loans to members increased from $124M in 1995 to $849M
in 2001 (584%) but there must be considerable doubts about the
collectibility of this amount since there is no provision against these
debts.
Indeed
the audit report raises questions about the existence and correctness of the
balance shown as cash and bank of $59M!
This
condition should make any investor nervous but the capital contributed by
members continues to grow – again by close to 600%, perhaps attracted by
unsustainably high rates of interest.
Cash Flow
Under
normal conditions, a cash flow statement is usually a reliable indicator of
the strength and financial well-being but with the closing bank balance
being the subject of major audit reservation, assessment of the cash flow
statement is risky.
Loans
disbursed have exceeded loan repayments in every year since 1994. This has
been made possible by the continued confidence shown by those willing to
invest in the share capital of the company. For example, in 2001, loans
disbursed amounted to $481Mn. while loan repayments were $318Mn.
Conclusion
While
there are genuine attempts to resolve some of the problems facing the Credit
Unions over the past several years, the Report is evidence of the absence of
proper governance in the past which is still not being adequately addressed.
Attendance at meetings by some members of the Management Committee is poor
while the accounting policies are clearly archaic and inadequate.
The
conflict between the Credit Union and the Regulator appears to have left a
bitter taste while the appropriateness of a credit union controlling such
large sums is highly questionable.
This column has repeatedly argued for credit unions over a certain threshold
should be designated as a “financial institution” under the Financial
Institutions Act and regulated by the Bank of Guyana. The financial
statements for the year 2002 we are told will be presented to the Annual
General Meeting in 2005. But can the Committee not have statements for 2002
and 2003 presented at a special meeting this year. Members have a right to
more timely reporting and a better
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