The Case of Ram & McRae & Republic Bank (Guyana) Limited.

KEY HIGHLIGHTS

 Ram and McRae has been the external auditor of RBGL for at least more than 16 years. This, however, is a desecration of one the codes of conduct set out by the International Accounting and Auditing Standards Board (IAASB), which requires that “key audit partners of public interest entities to change (or “rotate”) after seven (7) years.

 With respect to RBGL’s provisions for bad and doubtful loans, the Independent Auditor ought to, in their “Independent Auditor’s Report”, make certain disclosures, which is evidently badly lacking.

 It was found that the Independent Auditor may have overlooked the FIA Act (Supervision Guideline No. 5) in relation to the treatment of restructured / modified loans.

Altogether, the findings derived from the review conducted herein by this author, revealed a number of alarming issues of concern in relation to the Independent Audit―such that the objective quality of the audit is demonstrably poor. Further, the independence of the Auditor, Ram & McRae is seriously questioned in view of the gross violation of the IAASB code of ethics which states that “key audit partners of public interest entities to change (or “rotate”) after seven (7) years (maximum). With these in mind, discernibly there are a number of unethical considerations that have emerged. It is imperative, therefore, that RBGL seeks to bring the institution in compliance with the IAASB code of ethics as regards the rotation of Independent Auditors, to not exceed more than seven years.

INTRODUCTION

Readers would recall that this author challenged chartered accountant, Mr. Lalbachan Chris Ram, on many occasions, such that he was described as a once prominent public commentator, who is now discredited and controversial. In this essay, this author presents reasonably compelling evidence to corroborate the view that his professional credibility as an auditor, is now highly questionable. This is a serious cause for concern for many public stakeholder groups and entities, particularly considering that he (Ram) enjoys discharging all sorts of careless, reckless, irresponsible, and dangerous public commentary or aspersions in some cases―that often have no basis in fact. Yet, no one holds him accountable, neither does he subject himself to any degree of public scrutiny and accountability.

DISCUSSION AND ANALYSIS

In this exposition, a critical analysis of Republic Bank (Guyana) Limited (hereinafter “RBGL”) audited financial statements for the period 2007-2023, focusing specifically on the Independent Auditor’s Report. In so doing, a number of concerns and issues were identified in respect of the quality of the audit conducted by the external auditor, Ram and McRae, a firm principally owned and operated by Mr. Lalbachan Christopher Ram. The review of RBGL’s 2023 Annual Report revealed the hereunder mentioned findings.

The “independence” of the external auditor (Ram and McRae) is questionable. In this regard, it was found that Ram and McRae has been the external auditor of RBGL for at least more than 16 years. The precise date/year of appointment by RBGL is unclear because the annual reports that are publicly available on the bank’s website are only for the period 2007-2023. As such, it is likely that Ram and McRae may have been serving as RBGL’s external auditor prior to 2007. This, however, is a desecration of one the codes of conduct set out by the International Accounting and Auditing Standards Board (IAASB), which requires that “key audit partners of public interest entities to change (or “rotate”) after seven years. The IAASB is the body that issues the International Standards on Auditing (ISA), which is the standard adopted by the Institute of Chartered Accountants of Guyana (ICAG), that governs the external auditing standards in Guyana. This is an important requirement as its intent is to avoid the potential loss of objective quality and/or independence of the audit, which appears to be the case involving RBGL and Ram and McRae.

A key audit matter highlighted in relation to taxation noted that the bank received Notices of Assessments from the Guyana Revenue Authority (GRA) in respect of disallowed provisions for bad and doubtful debts for years of assessments 2011-2022. It was reported that RBGL filed an appeal to the High Court challenging those assessments. Notwithstanding the bank’s confidence of a favorable outcome in the appeal, it has made the full provision for the taxes in dispute.

Nevertheless, it is this author’s considered view that the GRA may well have a more favorable or stronger position despite the bank’s expressed confidence of a favorable outcome. This may be attributed to the weakened quality of the audit conducted by the external auditor over the years (as discussed hereunder).

Licensed Financial Institutions (LFIs) are required to maintain provisions to absorb losses associated with the credit portfolio. The provisioning requirements are to be made in accordance with the Financial Institutions Act No.1 1995 (FIA Act), inter alia, Supervision Guideline No.5 issued under the Authority of Part IX, Section 61 of the Financial Institutions Act (1995); and the International Financial Reporting Standards (IFRS) 9. Under the IFRS 9 requirements, institutions are to consider past events, current conditions and forecasts of future economic conditions when measuring expected credit losses (ECL), in order to adequately provide for the risk undertaken.

With respect to RBGL’s provisions for bad and doubtful loans, the external auditor ought to, in their “Independent Auditor’s Report”, make certain disclosures, which is evidently badly lacking. To this end, the external auditor only reported on the provisions for ECL pursuant to the IFRS 9 requirements. There was no report on the provisioning requirements made in accordance with the Financial Institutions Act 1995, which is the principal Act. This lack of disclosure on the part of RBGL―and―more so the Independent Auditor since it is the auditor’s responsibility is alarming.

The mandatory compliance with two different reporting requirements in respect of the bank’s provisioning for bad and doubtful loans, naturally necessitates variances when applied. Recognising this, the FIA Act, viz-á-viz, Supervision Guideline No. 5 (Guideline # 33) establishes that… “the amount of provisions booked shall at all times cover the regulatory provisioning requirements. If the provisioning on the books is less than the regulatory provisioning requirements, the institution shall immediately book the deficiency”. This means that the regulatory provisioning requirements precedes the IFRS 9 requirement, simply because the regulatory requirement is in accordance with the law as against the IFRS 9, which is not.

Noteworthily, unlike the regulatory provisioning requirement which is “prescriptive”, the IFRS 9 requirement enables more flexibility on the part of the LFI. In other words, IFRS 9 allows the institution to exercise judgement in their provisioning as opposed to a prescribed formula pursuant to the FIA Act. This is why it is especially important that the “Independent Auditors” report on both the IFRS 9, as well as the regulatory provisioning requirement. For the reason that, under the IFRS 9, there is room to either deliberately overstate or understate the provisioning requirements. This, in turn, exposes the institution (in this case RBGL) to potentially a tax implication or a regulatory implication. Accordingly, an over-provision implies a tax implication, whereas an under-provision implies a regulatory implication. In strict accounting terms, this practice is referred to as “window dressing”, an unethical practice often designed to accommodate “tax avoidance”.

In RBGL’s 2023 Annual Report, it was reported that the total impaired loan portfolio stood at $2 billion, with a total provision for ECL of $638 million. However, it is impossible to determine whether the allowances for ECL were in compliance with the FIA Act. This is attributable to, in part, the Independent Auditor’s failure to report on the disaggregated portfolio as per the FIA Act Supervision Guidelines. For ease of reference, the prescribed provisioning requirements as per the FIA Act, inter alia, Supervision Guideline No.5, are stated as follows:

Classification Provision
Pass 0%
Special Mention 0%

Sub-standard:
– Secured portion 0%
– Others 20%

Doubtful:
– Secured portion 20%
– Unsecured portion 50%

Loss:
– Secured portion
Year 1 20%
Year 2 40%
Year 3 100%
– unsecured 100%

Restructured/modified loans. Citing note (e) of the audited financial statements, it is stated that… “the Bank occasionally makes modifications to the original terms of large commercial and corporate loans as a response to the borrowers financial difficulties…”. This note is a cause for concern as it suggests that the Independent Auditor may have overlooked the FIA Act (Supervision Guideline No. 5) in relation to the treatment of restructured / modified loans. In this respect, the regulation expressly states that “a commercial credit shall not be renegotiated more than twice over the life of the original loan, and mortgage or personal loan not more than twice in a five-year period”. Therefore, to state that the bank “occasionally” makes modifications or restructure facilities does not provide the necessary comfort to external stakeholders, in terms of whether RBGL is practicing strict adherence to the regulatory requirements therefor.

CONCLUSION

The findings derived from the review conducted herein by this author, revealed a number of alarming issues of concern in relation to the Independent Audit―such that the objective quality of the audit is demonstrably poor. Further, the independence of the Auditor, Ram & McRae is seriously questioned in view of the gross violation of the IAASB code of ethics which states that “key audit partners of public interest entities to change (or “rotate”) after seven (7) years (maximum). With these in mind, discernibly there are a number of unethical considerations that have emerged. It is imperative, therefore, that RBGL seeks to bring the institution in compliance with the IAASB code of ethics as regards the rotation of Independent Auditor, to not exceed more than seven years.