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Respect Conventions Of Disclosure And Consistency Instead Of Indulging In Creative Accounting That Results In Differing Treatment Of Kumpulan Wang Amanah Awam (KWAA) For Different States And In Different Years Making Financial Records Non-comparable And Anomalous Such As Melaka In 2005 Being Insolvent Of RM 75.31 Million Suddently Enjoying Surpluses Of RM 119.26 Million.

Letter

by Lim Guan Eng


                                                                                                                    21 September 2006.

Y. Bhg. Tan Sri Dato' Setia Haji Ambrin bin Buang

Ketua Audit Negara,

Pejabat Ketua Audit Negara

Jabatan Audit Negara

Aras 4, Lot 2G4, Presint 2,

Pusat Pentadbiran Kerajaan Persekutuan

62518 W.P. PUTRAJAYA                                                                           BY HAND

 

 

Yang Berbahagia Tan Sri,

 

Respect Conventions Of Disclosure And Consistency Instead Of Indulging In Creative Accounting That Results In Differing Treatment Of Kumpulan Wang Amanah Awam (KWAA) For Different States And In Different Years Making Financial Records Non-comparable And Anomalous Such As Melaka In 2005 Being Insolvent Of RM 75.31 Million Suddently Enjoying Surpluses Of RM 119.26 Million.

We refer to your letter dated 18 September 2006 and express our concerns that the accounting conventions of disclosure, materiality, consistency and conservatism have not been observed. We urge that you direct all Audit Departments throughout the country to respect conventions of disclosure and consistency instead of indulging in creative accounting that results in differing treatment of Kumpulan Wang Amanah Awam (KWAA) for different states and in different years making financial records non-comparable and anomalous such as Melaka in 2005 being insolvent of RM 75.31 million suddently enjoying surpluses of RM 119.26 million.

 

In your press statement in the New Straits Times dated 19 September 2006, you responded to my query on the shocking "omission" of RM194.57 million in KWAA as liabilities. You said that ‘State-managed trust funds financed by the government are "assets" while those using public and private sector contributions are "liabilities" and that states must rectify this problem and not do what Malacca had been doing.’

 

It is unusual for trust accounts to be treated as an asset when trust accounts are by nature an obligation to deliver cash or another financial asset to another entity. (See Malaysian Accounting Standards Board attached).  In your letter you added that prior to 2005, KWAA was treated as liabilities. However in 2005, this practice was stopped to take in cognizance that the source of funds of KWAA came not from the public but from state government’s contributions. KWAA was not treated as a liability in 2005 even though there was no explanatory note of the change in accounting treatment.

 

Consistency requires the same Generally Accepted Accounting Principles (GAAP) and procedures to be followed for every period. Auditors no longer have to refer to consistent application of GAAP unless changes between periods have had a material effect on the comparability of a firm's financial statements.

If it is necessary to change, then auditors are required to add an explanatory paragraph to the auditor's report on the effects it is having on the results to the accounts being presented. Only then can financial reports be comparable between different periods. This was clearly not done.

 

Further the conventions of disclosure to allow financial statements to be easily understood were not complied with. If the Audit Department had made a mistake prior to 2005, then all the financial reports from Merdeka in 1957 until 2004 are possibly false and unreliable. A responsible Audit Department would admit such mistakes and publish a corrected financial report that treated KWAA as an asset for each and every year before 2005. This was also not done.


More serious is the national ramifications as at least 3 other states of Kedah, Negeri Sembilan and Selangor still continue to treat KWAA as a liability in their 2005 Audit reports. This gives rise to a peculiar situation of states like Melaka not treating KWAA as a liability whilst other states continue to treat KWAA as a liability. Where is the consistency to allow comparability between states?

 

In other words, in in the interests of accountability and transparency, the Auditor-General should announce how many and which states’ financial reports out of the other 13 states in Malaysia are wrong. And as for Melaka which year’s reports are wrong? And then correct and republish the corrected ones. Failure to do so is unacceptable and not in compliance with GAAP.

 

The consequences are far reaching for the sudden change in accounting treatment omitting KWAA of RM 194.57 million as a liability has turned what should be an ‘insolvent’ deficit for the Melaka State Government of RM 75.31 million into a surplus of RM 119.26 million. Such a turnaround would be miraculous were it not for the fact that it was carried out under such dubious circumstances and even false pretences.

 

Good governance depends on good auditing. Auditors can only perform its role of giving a reasonable assurance of the truth and fairness of financial reports based on its compliance with GAAP in material respects. Any suspicion or doubts raised would only question the veracity of the auditor’s evaluation and by extension the reliability and credibility of accounting procedures employed by government departments throughout Malaysia. For this reason the Audit Department must provide clarity and truthful reporting without fear or favour on actual performance.

 

We regret that these clarifications would not have been made if we had not raised them. In the interests of accountability and transparency, we hope that you can give a full detailed explanation and make the necessary corrections to restore public and investor confidence.

 

 

Yours faithfully,

 

 

LIM GUAN ENG

SECRETARY-GENERAL


* Lim Guan Eng,  Secretary-General of DAP

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