Liberia's Lack of Adequate Accounting, Financial Reporting, and Auditing Standards:
- Compromises National Income Tax Policies
- Disenfranchise the Public Accounting Profession (CPAs)

By: Robert Llewellyn Kilby, CPA, CITP
Senior Partner, Independent Software Certification, LLP
www.isci.com

Summary:

Generally, when a host country does not have a comprehensive set of accounting and financials reporting standards, foreign companies doing business in that country apply the accounting and financial reporting standards adopted by their respective home countries. Application of multiple foreign standards in Liberia compromises national income tax policies. Consequently, it becomes difficult if not impossible to determine whether companies are paying their fair share of taxes.

The purpose of this article is to discuss how government tax policies are impacted when foreign companies operating in Liberia apply accounting and financials reporting standards adopted by their respective home countries and how taxable income reported by these companies is determined on a subjective basis.

This article also discusses the roles and responsibilities of the CPA profession in Liberia and the risk involved when financial statements are not certified by accounting professionals that are licensed to practice public accounting in Liberia.

Accounting, Financial Reporting, and Auditing Standards

A comprehensive set of Accounting Standards establishes the basis for a company to determine its revenues, expenses, and income on a periodic and consistent basis.

Financial Reporting Standards provide guidance for reporting financial information about a company's financial position, the performance of the company's operations, and changes in the company's financial position. This information is useful to the government, lenders, and the public. The government relies on the information reported in the company's financial statements to verify whether the company has computed and reported taxes based on applicable tax laws (a.k.a tax policies).

Auditing Standards provide guidance for Independent Auditors (Certified Public Accountants) to express an opinion on the fairness of the financial position of a company, the results of the company's operations, and the company's cash flow in conformity with the Accounting and Financial Reporting Standards prescribed by the country. Auditing standards also impose due diligence responsibilities on licensed public accountants. Auditors are expected to conduct audits with the highest degree of integrity and professionalism. The audit report is the medium by which the auditor expresses his or her opinion on the fairness of a company's financial report. The government relies on audited financial statements to determine whether the company's financial information is accurate and whether the taxes are adequate in keeping with the tax laws of Liberia.

Liberia Current Tax Laws

Liberia's current tax policies are based on tax laws established several decades ago. These tax laws are not suitable for today's economic conditions and business operating environment. For example, the emergence of new business models in the telecommunications industry, new industries such as bio-energy production, and sale of goods and services over the Internet introduce new methods of resource allocation and reporting of corporate income.

Numerous accounting transactions culminate into the determination of a company's taxable income. A company's income or (loss) before income tax for a given period is determined first, then the tax laws are applied to determine taxable income and ultimately the net profit of the company. It is of utmost importance that companies consistently apply the same set of accounting standards from one reporting period to the next so that the tax policies can be consistently verifiable by independent sources.

Tax laws are designed to generate national income for the country. These laws are specifically designed to:
(a) grant tax credits as incentives for businesses to allocate and target their resources
(b) provide investment incentives for companies operating in a specific industry
(c) impose penalties when companies disinvest in certain committed resources
(d) penalize companies for under reporting taxable income
(e) grant provision for deferred tax liabilities. Deferred tax liability is the amount of income taxes payable in future periods related to taxable temporary differences.

Because tax laws are set by legislative enactment and tax policies form the basis for national income determination, the Liberian Legislature - by recommendations of the Finance Committee with input from accounting professionals- should enact tax laws that create revenue streams to meet the funding goals of the country. Liberia's tax laws should target specific business activities and should be implemented on an industry by industry basis.

Liberia's tax policies should be based on objective and measurable criteria to enable an independent third-party (i.e. a Certified Public Accountant) to be able to determine compliance with the applicable tax laws. As an input to the national taxation process, business and individual income and financial data from prior years' tax filings and audited financial statements should be used to establish new tax policies. Absent these basic tenants of national income generation, Liberia's national budgetary process will become suspect.

Corporate Due Diligence Responsibilities

Due to the current lack of an updated set of Accounting and Financial Reporting Standards in Liberia, each foreign corporation should be required to state its specific accounting standards that it uses to derive the company's tax liability. The company's tax return should be signed by the highest level of the company's management under penalty of perjury. The company's accounting records should be subject to review by an authoritative board of the government, for example, Liberia Public Corporation Accounting Oversight Board. This board should play a similar role as the PCAOB in the United States. The company should disclose whether its auditors are foreign CPAs or accountants, and whether an auditor is licensed to practice public accounting in Liberia. The government should determine the degree to which foreign accounting, financial reporting and auditing standards are being applied in Liberia and whether these standards are acceptable.

The CPA Audit and Reporting Responsibilities

CPAs are accounting professionals licensed by the state to issue opinion on financial statements and other information that the public relies on; hence the term "Public Accountant". When a company disseminates information for public utilization, a CPA's opinion should be required. When a CPA firm is engaged to issue an opinion on the financial statements of a company, the CPA firm:

1. should disclose any financial interest that any of its members have in a client company

2. should state whether the accounting and financial reporting standards that the client company is using is relevant for that business model

3. should issue an opinion as to whether the client company's financial statement fairly and accurately states the company's financial position, results of operations and cash flow in conformity with the Accounting and Financial Reporting Standards acceptable by Liberia

4. should document and retain documentation about the audit techniques and methods used to derive the conclusion reflected in the "Opinion Section" of the audit report. The CPA's "working papers" should be subject to review by the Liberia Public Corporation Accounting Oversight Board. The audit report should state any violation of laws that the auditors discovered during the period of the engagement.

Recommendations

Corporate Tax Policies:

As is the case with most Western countries, a significant revenue stream comes from Corporate Income Taxes. The factors used to derive the Corporate Income Tax Revenue projection reflected in the National Budget should be based on prior years' tax data adjusted by (a) changes in economic conditions (b) registration of new companies (c) changes in corporation resource allocation targets, (d) etc.

The basis, methods, and calculations used to derive each revenue stream in the budgets should be disclosed in supplemental schedules and notes. Monitoring controls should be put in place to ensure that companies operating in Liberia are reporting and paying their fair share of taxes.

Because Liberia currently lacks adequate Accounting and Financial Reporting Standards, the interim cure is to require companies (foreign and domestic) operating in Liberia to file informational reports showing the accounting principles used in deriving income before the application of income tax policies.

In the future, foreign and domestic corporations should be required to file their audited financial statements with the appropriate authorities (Ministry of Finance) in Liberia. A bureau should be established in Liberia within the Ministry of Finance to enforce tax policies and compliance with tax laws. In the interim, while standards are being developed, foreign companies should be allowed to use only internationally accepted standards that are comprehensive in nature and are verifiable.

Certified Public Accountant Professional Responsibilities:

Today, foreign CPA firms are engaged to practice public accounting in Liberia. I recently came across several articles on the Internet indicating that the Central Bank, LPRC, and General Auditing Commission engaged foreign accountants to practice Public Accounting in Liberia. The hiring of foreign firms from Ghana and other countries that are not licensed to practice public accounting in Liberia is unacceptable in view of what is being depicted in this article. In most, if not all other countries only citizens are allow to audit government agencies. By allowing foreign accountants who are not licensed in Liberia to audit companies in Liberia exposes our country to the following risks:

" The firm's due diligence responsibilities can not be enforced in Liberia due to the lack of oversight authority and legal jurisdiction

" It is difficult to impose penalties for negligence and malpractice when a foreign non-registered firm is operating in Liberia

"Certified Public Accountants" in Liberia should organize themselves and seek a charter through legislative enactment to be recognized as the premier public accountant association in Liberia. A CPA Oversight Board (a not-for-profit organization) should be established to monitor and conduct periodic review of public accounting firm licensed to practice public accounting in Liberia.

The board should consist of representation from academia, the Certified Public Accounting (CPA) organization, the Ministry of Finance, the business community and the General Auditing Commission.

The CPA audit report should contain an opinion statement about the accuracy of the accounting data, fair presentation of the company's financial position, the performance of the company's operations, and the cash flows in conformity with the Accounting and Financial Reporting Standards prescribed by Liberia.

CPA firms that are found in violation of the Accounting Oversight Board rules and regulations risk revocation of their license to practice public accounting in Liberia.

In closing, I further recommend the following interim solution for corporate tax policies enforcement:

1. A commission should be established that will be responsible for auditing the books of foreign companies operating in Liberia.

2. The commission should be responsible for documenting the current standards and methods used by each company in determining its taxable income. This information will be vital to the board that will be established to set these standards.

3. Companies should also document the methods used for capitalization of the country's natural resource on the company books.

4. The foreign companies should fund the Corporation Tax Compliance Commission. It is only fair that these companies incur the cost of the Corporation Tax Commission operations, in lieu of fact that these companies are not being audited by CPA firms licensed to practice public accounting in Liberia. At present, these companies pay foreign auditors for their services.

Part II of this discussion will follow within the next several weeks. Meanwhile, a website is being developed to enable accountants, financials, and tax professional to use to contribute positive ideas that will be germane to the issues that are set forth in this article.