By Abdiwali (Qarboobe) Mohamed, CPA, MST
I would like start by saying that it was a long overdue accomplishment for the Auditor General, Mr. Ali Afgoi to conduct the first audited financial statements of the Federal Government of Somalia (FGS) in 30 years. This is a historic step forward concerning accountability in the use of public finances and delivery of services to the citizens of the FGS. I will also like to applaud the FGS and its ministries and departments for participating and accepting this constitutionally required act.
Today, the Somali people are able to review and see how their resources and the resources provided by the international community are spent. It is this strong desire by the public that led to this report, as well as Mr. Afgoi’s press conference were trending the last couple of days. I admit I was one of the individuals who participated in the debate on social media. However, while engaging in the online debates, I noticed that many individuals were not knowledgeable of the types of audit opinions and accounting basics used to prepare financial statements.
To give you context, I was the appointed Accountant General of the FGS in 2014, but the opportunity to lead the Office of Accountant General never fully materialized, unfortunately. As a Certified Public Accountant (CPA) for the past 16 years who not only prepares financial statements for annual audits, but also participates in financial statements audits directly and indirectly; I share skills and experience with Mr. Afgoi as we are both accountants by profession. It is this skill and experience that gives me the privilege to provide an opinion on the report.
As the Independent Auditor General of the FGS, Mr. Afgoi’s objective was to highlight the significant results of the audit and bring attention to the internal control weaknesses that are prevalent across ministries, agencies, and departments. It is also worth acknowledging that these ministries, agencies, and departments may not have the capacity and human resources to prepare their own internal financial statements that can be integrated with the larger financial statements of the government. Governments have many departments and agencies and as decentralized as they are, each department is responsible for managing its budget allocated by parliament and preparing financial statements monthly, quarterly, and annually.
This analysis provides a summary of the report as well as my views on the report. After you finish reading this article, you will hopefully realize that an examination of financial records and providing an opinion on those records is complex. I ask that you read this analysis with an open mind and hope you are in agreement with the points I make. If that is not the case, I welcome your thoughts on this matter. More importantly, my hope is that my analysis does not come across as biased toward the institution that Mr. Afgoi has been entrusted to independently audit.
What is an audit?
An audit is an examination of an organization’s records. These records can be both financial and non-financial such as counting number of soldiers or testing if an entity is following internal controls put in place. Depending on the region or professional organization that an entity is a member, that entity will need to be audited in accordance with the auditing standards generally accepted in that region or country. Moreover, the standards may be applicable to the financial audits issued by the Comptroller of that region or country. These standards will require the Auditor General to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. In other words, reasonable assurance is having confidence that the entity’s financial statements are free from material misstatements. In the context of a financial audit, material misstatement means untrue information in a financial statement that could affect the financial decisions of the one who relies on the statement. For example, if I am a citizen or a resident of local municipality and want to buy a bond that is going to fund the building of new schools in my local school district, I will rely on the financial statements of the school district to make a decision on whether to buy the bond and receive the promised dividends in the future. If the school district intentionallyoverstates or projects a future budget that is unreasonable and/or uncollectable, the information contained in the financial statement is considered materially misstated.
According to the Auditor General, the audit resulted in a “failure to comply legislation, revenue collected and used at source contrary to the law, weaknesses in internal controls, some bank accounts of the FGS not being part of financial statements, failure to enforce ministries, departments and agencies to submit annual accounts for audit among others.” Page four of the report is basis of the Auditor General’s audit opinion.
Before I provide a summary of the Auditor General’s opinion, I will like to explain the different types of audit opinions. This will provide more context on how the Auditor General reached the audit opinion of adverse opinion. There are four types of audit opinions:
- Unqualified Opinion: An expression of opinion by the independent auditor that they believe the financial statements follow generally accepted accounting principles (GAAP) and there are no major issues such as lack of internal controls over financial transactions and the accounting system. This does not judge the financial transactions of the organization or interpret but rather an indication that as of result of the testing and evidence gathered during the audit, the independent auditor has enough information to issue an unqualified opinion.
- Qualified Opinion: Another expression of opinion by the independent auditor that they believe the financial statements are not pervasive and do not misrepresent the actual financial position of the entity. It is a reflection of the auditor’s inability to give an unqualified opinion (clean audit).
- Disclaimer Opinion:Expression given by the auditor that they were not allowed or unable to complete all of the planned audit procedures. In other words, it is a statement made by an auditor that no opinion is being given regarding the financial statements of a client.
- Adverse Opinion: Expression of opinion and one that no organization would like to get. It is an indication that an organization’s financial statements are misrepresented, misstated, and do not accurately reflect its financial health.
The Auditor General indicated that the financial statements “do not fairly or show true and fair view in all material respects the (a) the receipts and payments, (b) cash flows, and the budget comparison and actual amounts for the year ended 31 December 2018 in accordance with the Cash Basis IPSAS (2017 edition).”
If the procedures of IPSAS were followed and the Auditor General discovered above issues, then an adverse opinion is warranted. Two key questions that I will like the Auditor General to answer are:
- Whether the issues listed on pages four through six were the only issues that warranted an adverse opinion or were there additional findings that were resolved before the audit was issued?
- Were one of the provisions of ISA violated by failing to communicate to the management (government) before issuing the report? If not, if communication was provided, could the results of the opinion be different?
I am asking these questions because the press conference of the auditor general was viewed as a public relations campaign to further explain the cash and cash equivalents understatement. I hope the Auditor General reads this article and provides explanation.
What is behind the basis of the $18,386,732 cash and cash equivalents understatement?
I know that some of you would have preferred that I address this question at the beginning of this article. However, it would be unfair to both the FGS and Auditor General if I did not provide some context on how the audit was performed. I will address the “mysterious amount” that vanished from the FGS bank account shortly.
It is worth noting that the Executive Branch of the government (management) is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in Somalia or association it is member of. These standards include the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. The key words here are FRAUD or ERROR. Before I go into detail about these two terms, let us review the accounting methodologies widely used to fairly prepare financial statements. The average person who may not have an accounting background may think, understandably, that there is only one way that organizations can record transactions. What if I was to tell you that the same government, in the same set of financial statements can record a transaction in three different ways? Welcome to governmental accounting! Governments can use the following accounting basis:
- Cash Basis of Accounting: This is a simple basis that most people are familiar with – incoming cash is recorded when received. Think of your semi-monthly paycheck – you earned it, but you can use it only on payday. Outgoing cash is recorded when expense is paid-out.
- Accrual Basis of Accounting: Under this basis, transactions are recorded when they occur, irrespective of when cash is received or paid. Revenues or incoming resources are recorded when earned or when the government has the right to receive the revenue. A good example of this is if you are seller and you are selling your goods on credit. You have not received a payment from the customer, but the goods are no longer in your possession hence you record revenue and expected receivable known as accounts receivable.
- Modified Accrual Basis of Accounting: This method is hybrid method; falling somewhere between the cash basis of accounting and the accrual basis of accounting. The major difference is timing of the revenue. The transaction must be both measurable and available. A good government example is property taxes and utility billings. The government has assessed the fee, but the citizen may or may not pay. This assessment is both measurable and possibly available unless defaulted.
As a professional CPA, the most appropriate basis of reporting for a particular government is a matter of making a decision based on the needs, activities and resources of that government. Each method has advantages and disadvantages. I would have advised the FGS to prepare its financial statements using the economic measurements focus and the accrual basis of accounting. This will bring more accountability and revenues, expenses, gains, losses, assets, liabilities, deferred outflows of resources, and deferred inflows of resources resulting from exchange and exchange-like transactions are recognized when the exchange takes place rather than recording when cash is in and out.
Page 25 of the report states that the financial statements have been prepared in accordance with the requirements of the Cash Basis of Accounting IPSAS. The Auditor General’s references are based on his audit sample of the reporting entities; the following resources from three organizations have been understated:
- External assistance from the Kingdom of Saudi Arabia $13,929,132
- External assistance from the European Union 3,738,149
- External assistance from UNOPS 719,451
Since the cash basis of accounting was used and receipts of above-mentioned assistance were disbursed and controlled by the FGS, the cash and cash equivalents are understated. An understatement of an asset account can significantly impact the presentation of financial statement materially. However, it is not fair to say that $18.3M of funds are missing, rather an error was made to record the difference. The Auditor General himself stated that the “financial statements are only for bank accounts which are in the Treasury Single Account.” In my opinion, the Auditor General should have added additional emphasis on why the cash and cash equivalents were understated and state if the funds are readily available for usage. On the other hand, if the government willfully concealed this cash balance from its citizens, than an error did not take place but a misappropriation of funds took place, with the intent to illegally use public funds for one’s own use or other unauthorized purpose. It is fair to say that fraudulent activity has taken place.
DISCLOSURE: FGS (management) responded to this specific audit matter. FGS response was “we are in agreement with the recommendation presented; that all bank accounts of the Federal Government of Somalia whether in the Treasury Single Account or not, should be set up in the SFMIS, including the off-shore bank accounts and ensure that all transactions through these accounts are properly recorded and reconciled. Follow up shall be made with the Central Bank of Somalia to ensure that all transactions in the bank statements are also recorded gross so as to facilitate the reconciliations.” Page 15 of the Audit Report.
Another key opportunity that the media and journalists missed to question was the lack of presentation Statement of Assets and Liabilities (balance sheet). This is very important financial statement that should have been presented.
All organizations, private and public, government, and non-governmental are audited. The audit report can indicate many findings ranging from deficiency to significant deficiency, weakness to material weakness. Some of these issues are addressed between management and the independent auditor and are summarized in a management letter hence not part of the overall audit findings. I was once a part of an audit that the local newspaper headliner was “department played fast and loose with millions of dollars in federal grants.” What the newspaper failed to mention was the funds were adequately spent and auditor’s office did not find any evidence of malfeasance by the department. It is easy and a good headline as Somalia is still the world’s most corrupt country. However, let us not forget about the improvements that the current and former FGSs have made the last several years.
I urge the Somali citizens and their international allies not to rush to judgement and allow the Executive Branch of the FGS to respond to this report. The auditee will have an opportunity to respond via a Corrective Action Plan (CAP), and either categorially deny the findings or provide plan forward to strengthen its internal controls.
Abdiwali (Qarboobe) Mohamed, CPA, MST is a Certified Public Accountant based in Seattle, United States of America. He can be reached at
E-mail: [email protected]
For more information about his practice, please visit www.abdiwalicpa.com
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