SAN JUAN – While the fiscal team in Gov. Wanda Vázquez administration has blamed the Covid-19 emergency for delays in the completion of the Puerto Rico government's audited financial statements as far back as 2017, the island's Financial Oversight and Management Board (FOMB) says the government has not addressed “underlying procedural weaknesses” in its auditing and accounting processes, particularly at agencies and departments that are holding up the reports.
During a meeting of the oversight board on Tuesday, FOMB Executive Director Natalie Jaresko and several board members expressed disappointment over a plan submitted by the administration to complete and issue the government's comprehensive annual financial reports (CAFRs) corresponding to fiscal years 2017, 2018 and 2019 by Jan. 31, 2022, which is well beyond the Dec. 31 deadline set by FOMB. The government plan makes no mention of scheduled issue dates for the 2020 and 2021 CAFRs.
FOMB officials said during the meeting that the reports are crucial in achieving sound government finances and exiting the bankruptcy process begun in 2017, which would facilitate the commonwealth’s return to the capital markets — a source of funds for key infrastructure and operational projects.
The commonwealth government has been unable to resort to the bond market for financing since it started defaulting on its debt in 2015. The following year, the U.S. Congress passed and President Obama signed into law the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa), which created the FOMB to restructure the island’s more than $ 120 billion in debt and liabilities, and repair its troubled finances.
The oversight board has stated that “best practices” call for CAFRs for a given fiscal year to be issued no later than six months after the close of the fiscal year on June 30.
“When we met a month ago , we agreed that you would identify what had to change in order for this to happen. The proposal we received from you fails to meet the expectations of the board's request in terms of timing, specific changes in the process so you can obtain a different result or consequences for the responsible agencies and instrumentalities that do not deliver the financial statements in the required timelines, ”said oversight board member Carlos García, who presided over Tuesday's meeting in the absence of FOMB Chairman José B. Carrión. He said that the administration’s plan was “not ambitious enough.”
Jaresko said during the meeting that the administration’s plan failed to address “underlying procedural weaknesses within the agencies and component units.”
“The proposal accelerates the process but does not put us on a path to best practices in issuing CAFRs within six months of the closing of the fiscal year,” she said. "That is not an acceptable outcome."
Jaresko said that the proposal presented by the Puerto Rico Treasury Department to complete the CAFRs “does not provide a sufficient set of remedies to resolve the unreasonable continuing delays in issuance of the statements.”
García called on the administration to provide a “precise actionable plan” within the next 15 days “without any further delay.”
Jaresko said that such a plan would have to ensure that the CAFRs are completed by the following dates: the fiscal year 2017 report by Aug. 31, the fiscal 2018 report by Nov. 30, and the fiscal 2019 report by Dec. 31. She said the fiscal 2020 report should be finalized and issued by March 31, while the fiscal 2021 report is due by Dec. 31.
Treasury: Covid-19 throws wrench in process
Treasury Secretary Francisco Parés Alicea said during the meeting that a combination of factors have led to delays in work on the CAFRs, including Treasury understaffing in accounting and auditing areas, as well as noncompliance of agencies and departments in timely financial reporting. The effort has been especially hampered by the current Covid-19 pandemic emergency, he said.
Parés said that many Treasury employees have had to go into quarantine because they tested positive for Covid-19, noting this has affected operations at central accounting and other areas at the agency.
“It has been a challenge from an operational standpoint,” he said, noting that measures have been implemented to control the spread of the coronavirus, but which have hobbled work activity.
Moreover, Parés said, external auditors have not been able to do their work at each of the commonwealth agencies and departments because many government offices have closed due to virus lockdown measures. He said that had it not been for the Covid-19 emergency, the financial statements would have been finalized in April.
“It is more than the Department of Treasury; we are talking about external auditors facing administrative lockdowns that do not allow them to do field work, ”he said.
Root causes for reporting delays
However, oversight board members brought up broader structural issues within the government that have kept it from issuing timely audited financial reports for several consecutive years.
Board member José R. González— who announced during the meeting that he was stepping down from the panel —noted that banks and other private companies have complied with the U.S. Securities Exchange Commission (SEC) filings during the pandemic, developing procedures to do remote work with external auditors and audit reviews.
Jaresko had suggested that the Treasury create two work streams to simultaneously work on the financial statements, involving the use of “external resources” to complete the outstanding fiscal 2018 and 2019 reports, and “internal resources” to work on the fiscal 2020 and 2021 reports.
“You need to hire contractors that are focused solely completing and driving the 2018, 2019 audits to completion. And the work must be done simultaneously, not waiting to do them consecutively, ”she said.
But Parés said that given Treasury’s lack of resources, staffing and proper technology, carrying out simultaneous CAFR preparations would be “difficult.”
“There are many entities, particularly from the private sector, that can issue their corresponding financial information, audited and reviewed, in a timely fashion,” he said. "But they were better prepared to face the Covid-19 challenges due to technology – technology we don't have in place here at the Treasury Department or at the agencies and departments."
Parés acknowledged that a major problem hobbling the CAFR process is centered at the individual agencies and departments, which are “very behind in the accounting aspects” and often do not meet financial reporting deadlines. He said that Treasury’s central accounting area lacks the staff to “monitor the process on a timely faction with respect to the corresponding unit.”
The Treasury chief attributed this situation to “a policy decision that was made back in the mid-1990s, when the accounting process was decentralized.”
Parés said that while the law does give Treasury the power to levy administrative fines at each agency accounting office for noncompliance, I have noted that there are concerns over the “due process” of financial department heads.
Parés ’proposal to the oversight board included requested funding to hire an additional 115 Treasury employees to provide support to 75 government units. Jaresko requested that Parés justify this in the next report due in two weeks so “that it is clear what the job scope of these officials would be and how this would help the CAFRs to be issued on time.”
Moreover, the FOMB executive director said that the current fiscal 2021 commonwealth budget includes an additional $ 2 million to hire staff accountants at the Treasury central accounting office. She also called on Parés to justify his proposal to create a Project Management Office (PMO) to oversee this audit process while setting up a financial reporting unit within Treasury.
“It is not clear how this unit would work or if it would have authority over the PMO, such as there is no duplication of efforts,” she said.
Jaresko delineated the “root causes” of the delay in issuing the financial reports, saying that, in fact, there are too many auditors – “over 26 auditors of major components” – a number that “needs to be reduced for the sake of reducing the coordination time required. ” She said that planned medium-to-long term agency consolidations would address this problem by reducing the number of financial statements to be processed by the Treasury.
Moreover, Jaresko pointed out that the commonwealth government is working with six different accounting systems "that don't speak to one another," complicating the process further.
She agreed that the lack of proper technology and the “manual process requirement for financial statement preparation” is slowing down the CAFR process, including an “overreliance on contractors that has left internal [Treasury] resources without the competencies necessary for audit preparation . "
Jaresko said that individual agencies and departments must “immediately” start to do financial closings, including bank account reconciliations, on a monthly basis, which will “reduce the time-consuming process at year’s end.”
“Much stricter monitoring must be required, with regularly published schedules noting any delays, published so that transparency to the public is clear of who is causing delays and what type of delay they are causing,” she said. "We have to be very specific to find consequences for failure to meet defined key performance indicators."
Jaresko called for legislation to create a permanent office of the commonwealth Chief Financial Officer, which she said should have “centralized authority over the CAFR process, over all the units and their accounting, as well as the necessary resources to make this happen . "
“You would have to strengthen internal staff capacity and the technical competencies to align with updated policies and procedures in light of the ERP [Enterprise Resource Planning] system,” she told Parés, noting that this would involve the implementation of “multiyear master audit contracts, with pre-qualified contractors selected through a competitive bidding process. ”
A pledge to 'ramp up' process
Omar J. Marrero, executive director of the Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym) and the governor's liaison to the oversight board, pledged to work with the Treasury Department to "ramp up monitoring and reporting, not necessarily in a reactive fashion."
“We are looking to do procedural monitoring, similar to what we do at COR3 [Central Office of Recovery, Reconstruction and Resilience],” he said.
Marrero said the government is weighing enforcement mechanisms for financial reporting compliance at each agency and department, including having liaisons at each agency responsible for that information. The commonwealth Office of Management and Budget could also “retain budgetary items… even taking control of the finance department of that agency,” he said.
“In the end, we are in a fiscal emergency and we have to take extreme measures,” the Aafaf chief said.
“We can even consider appointing a receiver at any government agency that does not fulfill its obligations,” I added, noting that this has been done at the Puerto Rico Electric Power Authority (Prepa) when “it did not fulfil its procurement obligation. ”
Still, García said that while I have acknowledged the administration’s fiscal team’s “commitment” to complete the CAFRs, I have stressed that it has yet to “put the process in place.”
“We have heard a lot of those promises before and I think that the board and the people of Puerto Rico are a little bit tired of just waiting for things to happen,” said the banking executive and former commonwealth Government Development bank head , who announced last month that he was resigning from the board effective Oct. 5.
García added: “Everyone wants this board to go away and give back a lot of the things the government of Puerto Rico should be doing. If the government of Puerto Rico continues to delay three years or more providing the financial statements, this board is never going to go away. ”