If a commercial establishment in the course of its business made payments, linked to bribery or corruption or incurred wasteful and unrelated expenses, in acquiring property, plant and equipment, can these unlawful payments be capitalized as a part of the value of the relevant asset s in the balance sheet of the company?
These payments could have been made in the process of securing project approval, license for a project, getting tax and other concessions for the project, in securing land grant or lease of land, in securing special concessions from usual project precedent environmental and socio economic value based outcomes linked evaluations and justification, having a supportive policy framework that yields undue competitive advantages and/ or have advantageous legal and regulatory structure in place.
Some would argue that these payments being unlawful in nature, though actually incurred, cannot be capitalized in the balance sheet of an entity. Others would however argue that these payments are
1. essential for the project or activity to be initiated, and
2. normal in the prevailing external governance environment, and
3. are actually professional facilitation fees, and
4. are acceptable pre operating expenses in starting the project or in acquiring the assets
and therefore the shareholders of the entity and / or the ultimate stakeholders of the state enterprise must accept them as such; and thus it will be in order to be capitalized in the balance sheet. Those who argue in this way will further adduce that additional future profits and incremental net cash flows arising as a consequence, will only be possible with such payments and thus it is a part of the project or asset investment and in order to be so capitalized in the balance sheet. This latter group will even argue that it is a legitimate cost component to be amortized and included legitimately in the product / services costs and thereafter on charged to the customers along with a further profit margin. This group will not hesitate to so argue, even before national pricing authorities and any public utilities commission, in justifying pricing computations inclusive of amortized costs of bribery, corruption and waste linked payments capitalized and included as a part of the net asset values shown in the balance sheets.
The million dollar question is as to which of these arguments are correct and acceptable in terms of best practices of good governance and applicable accounting and auditing standards.
“The common law offence of bribery has developed over many centuries. There is no conclusive definition, but the following points are commonly accepted as constituting it:
— Offering, giving or receiving
— Any undue reward
— By or to any person whatsoever in a public office
— In order to influence his behaviour in office and incline him to act contrary to the known rules of honesty and integrity”. A Guide to bribery and corruption offences in England & Wales-CMS Cameron Mckenna
The following are, only a few of the ways in which, the costs of bribery or corruption or incurred wasteful and unrelated expenses find its way to be capitalized in the balance sheets as a part of the value of property, plant and equipment;
Asset values as invoiced are inflated with the assistance of the suppliers or services providers to include the unlawful payments channeled via such suppliers and services providers to recipients of undue rewards
Payments are made as professional services fees directly associated with the supply and unlawful payments channeled via such services providers to recipients of undue rewards
Unlawful payments are made by the promoters and directors who receive due reimbursement via 1 and 2 above or as inflated values of land and other assets transferred by them to the project
Freight and insurance costs are inflated to include life or pension insurance costs, of policies assigned to recipients of undue rewards
Account in the balance sheet as legitimate items of land, property, equipment and vehicles of the project ,but in effect these are given for the personal use of the recipients of undue rewards
Declare a spurious foreign or local supply agent, who handles the unlawful payments to recipients of undue rewards and recovers same via the legitimate supply agency commission recovered via the supply of equipment to the project
Items of equipment invoiced as supplied are said to include 3-5 years of essential initial spare parts, which are in fact not supplied, but such cost components are channeled to recipients of undue rewards
Unlawful payments and transfer of assets and giving of benefits are handled by the foreign promoters who receive reimbursement via any of the above actions
Civil Society, Transparency and Anti Corruption Agencies and Professionals, with commitment to transparent good governance and known rules of honesty and integrity, are of one mind in this matter. They hold with the former argument that these payments, being unlawful in nature, though actually incurred, cannot be capitalized in the balance sheet of an entity. International Accounting and Auditing Standards too are single mindedly and specifically clear that any such unrelated and unlawful payments cannot find its way in to the balance sheets, as a part of the capitalized costs of any item of property, plant and equipment.
It is to the credit of the Institute of Chartered Accountants of Sri Lanka, that they too, after an initial attempt to avoid such clarity, have now clearly pronounced that payments, linked to bribery or corruption or wasteful and unrelated expenses incurred, in acquiring property, plant and equipment cannot be capitalized as a part of the value of the relevant asset s in the balance sheet, and if there are such values already included they need to be written off and not continued to be a part of the balance sheet values of property, plant and equipment.
In a recent clarification, the Institute of Chartered Accountants of Sri Lanka, has accepted the following;
All costs not covered by the paragraphs 16 and 17 of the Sri Lanka Accounting Standards- LKAS 16, whether linked to corrupt practice or otherwise, cannot be capitalized as a part of an item of property, plant and equipment and need to be written off in the Statement of Comprehensive Income, and
If an entity identifies any expense subsequently, that cannot be concluded as elements of cost of such an item of property plant and equipment in terms of the Standards referred to in 1 above, including payments relating to corrupt practices, such an expense need to be charged to the Statement of Comprehensive Income, and
In line with the Accounting Standards dealing with impairment of property plant and equipment, where the estimated recoverable amount of an asset is less than its carrying amount, the carrying value of the asset should be reduced to its recoverable amount, and
Directors, Officers and Accountants are bound by applicable law to prepare financial statements that conform to Accounting Standards, and
Auditors are similarly required by law and applicable Auditing Standards to ensure that there are no material misstatement and express an opinion on the financial statements giving a true and fair view
All those stakeholders of society who may have argued otherwise, may therefore be satisfied that the;
Balance sheet valuations of Property, Plant & Equipment and Other Assets should not include any items of costs incurred by an entity as payments linked to corruption and waste, and
Where balance sheet valuations of Property, Plant & Equipment and Other Assets include any such payments linked to corruption and waste such amounts must be written off to the to the Statement of Comprehensive Income, and
where the estimated recoverable amount of an asset is less than its carrying amount, the carrying value of the asset should be reduced to its recoverable amount, and
Directors, Officers, Accountants and Auditors of commercial entities are legally duty bound to ensure compliance with 1 and 2 above
The aforesaid position has now been formally affirmed by a written clarification issued by the Institute of Chartered Accountants of Sri Lanka.
In the light of the above, the undernoted stakeholders of society, must with commitment to transparent good governance and known rules of honesty and integrity, now take the following steps;
The Ministry of Finance and Planning, through,
the Director General Department of Public Enterprises, and
Strategic Enterprise Management Agency (SEMA), and
Public Utilities Commission
to take leadership action to require all state owned and managed public enterprises , supervised/regulated by them, and their directors, officers, accountants and auditors, to ensure that all financial statements of such entities strictly conform to the Accounting Standards as clarified above, in relation to the valuation of Property, Plant & Equipment and Other Assets. They should further direct that in the determination of applicable tariffs approved to be charged to consumers by these enterprises, based on pricing formulae adopted, these computations must ensure that only financial statements which strictly conform to the above accounting standards are used by the said enterprises.
The Auditor General to take leadership action to direct and guide all members of the Department, to ensure that all financial statements of government departments and state enterprises audited by them or audited under their directions by private auditors, conform to the Accounting Standards as clarified above in relation to the valuation of Property, Plant & Equipment and Other Assets and where failing to take steps to qualify such financial statements.
The Securities Exchange Commission, the Colombo Stock Exchange and the Accounting and Auditing Standards Monitoring Board to issue written directives to all listed companies and covered institutions, and their directors, officers, accountants and auditors, to strictly conform to the Accounting Standards as clarified above, in relation to the valuation of Property, Plant & Equipment and Other Assets.
All Chambers of Commerce and Affiliated Associations to promote all member companies and their directors, officers, accountants and auditors, to ensure that all financial statements of such entities, strictly conform to the Accounting Standards as clarified above, in relation to the valuation of Property, Plant & Equipment and Other Assets.
The Parliament, its Committees responsible for Public Finance and Good Governance, as well as elected representatives, to ensure that all financial statements of government departments and state enterprises placed before them strictly conform to the Accounting Standards as clarified above in relation to the valuation of Property, Plant & Equipment and Other Assets.
Ultimately it is up to the stakeholders of society, in their own interest and in the interest of socio- economic development of the nation and the prosperity of the people, that all of above recommendations are effectively enforced with commitment.
By Chandra Jayaratne.