The Cayman Islands Government embarked on its own financial reform project in 1997 – the Financial Management Initiative (FMI). A firm of consultants was hired in mid 1998 and by mid 1999 the Government had produced a Detailed Design and Implementation Strategy. This process culminated in the Public Management and Finance Law (PMFL) that became effective for the financial year starting July 1, 2004.

The FMI set out a new method of budgeting and reporting, which had many consequences. Key among them was a new method of accounting (from cash to accrual) and much improved requirements for providing the Legislative Assembly with financial accountability information (output reporting).

Significant changes included the requirement for each Ministry and Portfolio of Government to provide a financial statement that details not only their assets, liabilities, revenues and expenditures but also to what extent they had completed outputs agreed with the Legislative Assembly during the budget process.

Government Statutory Authorities and Companies also had significant changes to their reporting regime. They were required to prepare financial statements within a very specific time frame and were also required to prepare semi-annual and annual reports for presentation to the Legislative Assembly.

The reporting system as designed is a good one. If it were working as contemplated in the Law, the Cayman Islands would be at the very forefront of financial accountability reporting among governments of the world.

Unfortunately, it is not operating as contemplated. The first set of government Ministry and Portfolio financial statements were due to be tabled in the Legislative Assembly by mid December 2005. At the end of April 2008, the audits have not yet been completed although it is hoped that they would be done soon. This means that the first set of statements are now nearly two and a half years late.

The situation is no better in the Statutory Authorities and Government Companies. Of the 25 entities, not one is in total compliance with the requirements of the PMFL. Many financial statements are two or more years late. And even when financial statements are done on time, in most cases the information is not being sent to the Legislative Assembly by way of an annual report as contemplated under the PMFL.

As a result, information that should be publicly available remains confidential. As a result of these problems, I believe that the Legislative Assembly has not been provided the tools necessary to achieve its vital function of financial oversight. Because of this, I believe that the Legislative Assembly has lost effective control of the public purse.

I find the current situation deplorable. It needs to be rectified immediately.

I call on Chief Officers (COs) and Chief Financial Officers (CFOs) of the various entities to make financial reporting a priority. I also call on members of the Legislative Assembly to take all possible actions to ensure that they receive accurate and timely accountability information.

The Office of the Auditor General will continue to actively monitor this situation. I intend to provide an annual update on the state of financial reporting within government with the hope of being able to report substantial progress in the coming years.

Cost Timing and Client Review

The Public Accounts Committee has been charged $49,569 for this report as of the end of June 2008. There will be minimal extra cost associated with the finalization and distribution of this report but these costs should be minimal.

Readers should note that the date of this Report is April 30, 2008. This was the date that the Report was substantially complete. Readers should also note that there may be some changes in the information in the almost three months since that date. The cause for this delay is due to the client review process as outlined below.

The task of client review is a challenge with many Special Reports of the Auditor General. The goal of this process is to have interested parties to review a draft report and make suggestions for improvement. This Office has found that having different points of view to be an important part of the review and approval process.

This report was particularly challenging in this regard. The first task was to write to the Chief Officers of each of the Statutory Authorities and Government Companies to verify the information in Appendix 1. I also confirmed the tabling of annual reports with the Clerk of the Legislative Assembly to ensure the accuracy of the information. In addition, I reviewed paragraphs 9.03 to 9.06 with officials with the three entities mentioned. I believe that this process insured that the information contained in this Report relating to Statutory Authorities and Government Companies was accurate.

I also attempted to obtain a review of the Report by the Financial Secretary. To do that, I met with the Financial Secretary on May 06, 2008 to broadly review the Report and to request his comments. He made a commitment at that time to have comments back to this Office within two weeks, i.e. by May 20, 2008.

I did not receive any response from the Financial Secretary for six weeks. On June 23, 2008, I wrote to the Financial Secretary and requested any suggestions by the end of the week, i.e. June 27, 2008. The Financial Secretary wrote back and indicated that he would like to prepare a response. However, I did not hear from him by week end.

On July 08, 2008, I received an e-mail from officials in the Financial Secretary’s Office indicating that a response would be made available to this Office on July 09, 2008. However, this deadline was not met and officials asked for additional time. A response was finally received on July 15, 2008.

This six page response was immediately reviewed by this Office. Although it contained minor suggestions for improvement of the Report, the vast majority of the response appeared to be the official response of the Portfolio of Finance and Economics relating to the Report itself. I immediately asked for a meeting with senior officials to discuss the response.

At that meeting, it was agreed that there were only minor suggestions for improvements. Officials stated that they would need another three weeks to prepare a detailed comments relating to the Report. Reluctantly, I agreed to the additional time.

However, on July 18, 2008, the Financial Secretary issued a press release presenting his comments relating to the Report. This now means that we have an official response to a report that has not even been issued yet.

Given the current situation, I believe that it is imperative that this Report be released immediately. I regret that I was unable to give the Portfolio of Finance and Economics the opportunity to suggest changes to this Report. However, I believe that they have been given more than enough time to do so. More importantly, I believe that this Report should be given to all members of the Legislative Assembly so that we can focus on how to improve the current deplorable situation regarding governmental financial reporting in this country.

Dan Duguay, MBA, FCGA

Auditor General

George Town, Grand Cayman

Cayman Islands 22 July 2