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$550M in errors, and $6B 'under-reporting': Here's what an audit of the B.C. government's financial statements turned up

$550M in errors, and $6B 'under-reporting': Here's what an audit of the B.C. government's financial statements turned up

RM_r_us

Anyone buying a woodchipper for the Legislature or the like this year?


Deep_Carpenter

It was a wood splitter which is is sad b/c a chipper would help destroy evidence. /s


One_Handed_Typing

The only thing more absurd than trying to sneak that bill through was the attempt at explaining it > [sergeant-at-arms Gary] Lenz said the wood splitter was purchased as part of an “emergency preparedness and business continuity program that the Legislative Assembly has been developing,” https://beta.ctvnews.ca/local/british-columbia/2019/2/22/1_4307068.html


buyupselldown

I new about the log splitter...now there is a woodchipper too?


Super_Toot

a 6 billion dollar woodchipper?


buyupselldown

A mistake plus Keleven gets you home by seven


JYCR85

He was home by 4:45 that day.


Super_Toot

As a CPA this was an exciting read. I was hoping for some fraud, but its not my birthday yet.


glister

So I went and looked into what is going on with that six billion dollar number and here's my take on it. Basically, the Province of BC and PSAS (the standards for Public Sector accounting) differ on when to record revenue received from other levels of government that are earmarked for specific purposes. A lot of accounting comes down to when you recognize revenue and expenditures. BC is saying "hey, because this money is earmarked for a specific purpose, we are going to wait until we use that money for a specific purpose (like building a bridge, or a subway) to recognize it as revenue (or use the money to offset amortization). Until then, we are going to hold it on our books as a liability—basically a debt owed to our future selves, while the cash is going to sit as an asset in our accounts." PSAS says "No, when the feds hand you cash, you need to mark that as dollars received". Now, BC decided to do this in 2012, so basically you've got a lot of ongoing projects where the feds (or someone else) handed money over, and BC hasn't spent the money doing the thing it is earmarked for. So, it piles up in the deferred revenue account, waiting to be spent. Now, I'm not an accountant, but both methods seem like perfectly fine ways to account, if BC were operating in a bubble. Accrual-based accounting often recognizes revenue as work is completed. The problem is when you start wanting to compare BC's books to Saskatchewan's. This is a big reason for standards—to make comparisons equivalent. BC should really do what everyone else is doing. Here's the exact wording: **Deferral of revenues** Government’s accounting treatment for funds received from other governments and for externally restricted funds received from non-government sources is to initially record them as deferred revenue (a liability) and then recognize revenue in the statement of operations either on the same basis as the related expenditures occur or, in the case of funds for the purchase or construction of capital assets, to recognize revenue on the same basis as the related assets are amortized. Under Canadian Public Sector Accounting Standards, Government’s method of accounting for contributions is only appropriate in circumstances where the funding meets the definition of a liability. Otherwise, the appropriate accounting treatment is to record contributions as revenue when they are received or receivable. In my opinion, certain contributions from others do not meet the definition of a liability, and as such Government’s method of accounting for those contributions represents a departure from Canadian Public Sector Accounting Standards.


glister

The thing I'm unclear about is: why? It wouldn't affect cash, it would show as a fat liability but offset by a large asset. Finance people of the world, why would you choose to defer revenue in this way when you could recognize it on a cash basis?


Zach983

Because you received cash and in turn you have a liability till the work is done. Think of it in simpler terms. Say I'm a plumber and someone pays me up front in 1000$ cash. That means my cash goes up 1000$ but I haven't done any work so I have a liability of 1000$ to offset that. As I complete work my liability is reduced and my revenue goes up because I've now earned that revenue. It works the same for how BC reported revenue. The government gets some cash but there hasn't been any work complete on a project. So they have a liability to balance against the cash. As work is done they then lower the liability. This is what BC did. The concept itself is unearned revenue and applies when you receive some monetary asset like cash in exchange for the expectation of something being done (like a plumber). Your liability only goes down when you've fulfilled your obligations. That's how it works for companies, the government has different standards and rules they follow. The expectation of governments is since funds are generally earmarked you just record a receipt of cash and then no liability at all, just pure revenue, irregardless of any work done.


glister

Right. I mean I get what goes on here, I defer a lot of revenue in my own business. The way BC does it seems to be in line with accrual accounting in general, on the surface at least. I know things get complicated with books this big. But what I'm trying to figure out is if there was some advantage gained by doing it this way, rather than the accepted standard of recognizing this revenue when it is received. As far as I can figure, BC chose to diverge from PSAS. So naturally, I wonder why? What is the advantage of cash versus accrual accounting in this specific case? My gut says better to recognize revenue on the books as quickly as possible. Perhaps income smoothing is a reason for this methodology?


mattikurrika

It avoids situations like this: [https://www.cbc.ca/news/canada/newfoundland-labrador/reannouncing-budget-2019-nl-1.5170542](https://www.cbc.ca/news/canada/newfoundland-labrador/reannouncing-budget-2019-nl-1.5170542) "**Budget 2019 puts the province at a $1.9-billion surplus** because it counts revenue from a decades-long Atlantic Accord deal **all at once**. Without the accord, the province would have had a $575-million deficit this year." ​ Newfoundland had a paper surplus because they had to recognize a stream of revenue in year one rather than recording the money as it came in.


glister

So income smoothing, basically.


mattikurrika

Yeah. De Jong waxed descriptive about the issue back in 2012 and every finance minister since has stuck with that method (James, Robinson). [https://bc.ctvnews.ca/b-c-gov-t-not-following-its-own-accounting-laws-auditor-general-1.1403916/comments-7.423701/comments-7.423701](https://bc.ctvnews.ca/b-c-gov-t-not-following-its-own-accounting-laws-auditor-general-1.1403916/comments-7.423701/comments-7.423701)


glister

So one thing I'm not clear on: Does the province amortize the revenue over the life of the project in terms of capital expenditures, or the life of the construction? Because if the former, this accounting method would create significant deficits compared to standard accounting practices in the first 40 or 50 years it is in place.


mattikurrika

Don't know - but if you email the comptroller general they should be able to tell you. ​ https://www2.gov.bc.ca/gov/content/governments/organizational-structure/ministries-organizations/central-government-agencies/office-of-the-comptroller-general Financial Reporting and Advisory Services: PO BOX 9413 STN PROV GOVT Victoria, B.C. V8W 9V1 Phone: 250 387-4551 Fax: 250 356-8388 Email: [email protected]


Zach983

There isnt necessarily a gain to doing it this way, income smoothing as you mentioned is the simplest answer. It's really just a rule. It's so a company doesn't just recognize a years worth of revenue in say January but instead throughout the year because technically they worked all year.


Grouchy-Insurance-56

Unless you have policy/political position that says otherwise.


kelvininyvr

Imagine you're a retail business which sells gift cards. If a customer buys $100 worth of gift cards, you can't simply account that as $100 revenue -> it's a liability until the customer spends the balance of that gift card.


glister

I too took financial accounting in university. This is the universally accepted standard in GAAP accounting for sure. But the government is not a business. The government uses Public Sector Accounting Standards. recognizing this kind of revenue on an accrued basis is not the standard used under PSAS. I'm trying to figure out why the government chose to differ from the universal standard set by accountants. Income smoothing seems to be the answer, but it's not a very good answer. Any deviation from the standard needs to be noted and qualified, as it has been done by the auditor general every single year. Makes it harder to compare provinces. Also, gift cards are not a liability until the customer spends the balance of the gift card anymore. Most companies were writing down that liability after two years. New standards allow companies to write down breakage based on historical data. The liability accounts were getting stupid, because people lose gift cards or fail to spend them, all the time.


boipinoi604

Bro, I'm an accountant and I'm impressed at how you unpacked this standard.


glister

I did better in my accounting and economics classes than any marketing class, and still became a photographer. Mistakes were made.


Felc213

>Errors made in the province's financial statements required adjustments, according to the report, but are considered to be unintentional. It is important to note that the AG's office did not identify any fraud during its audit.


snowylambeau

> $6 BILLION IN REVENUE The AG report suggests the province under-reported its revenues by $6 billion. As mentioned in the quote above, this was largely due to the way its financial statements were reported, which was not consistent with the way others in the public sector do their accounting. That’s beyond vague.


norvanfalls

First time paying attention to BC auditors report? This number has been in dispute for 12 years, and has yearly reports on it. The cliff note is that liabilities are overstated by 6 billion since it has not been converted to equity through recognizing the revenue.


glister

I don't think the reporter has a clue as to what is going on here, tbh.


norvanfalls

Oh wow, they actually managed to increase the under-reported revenue account this year. Well done. This reporting dispute has been going on long enough, across multiple parties, that the attorney generals office should feel ashamed at how they are presenting their audit opinion on it. Not even giving a comparison to last year.


HemiChgr

"That's okay, materiality is $10B."


n33bulz

Horgan and Eby got a couple of lambos stashed somewhere lol


VoteForMartinKendell

Lam-Bros


n33bulz

Horgan probably named his the Lamborghini Horgacan


Deep_Carpenter

The game is to under report revenue so there are fewer expectations of new spending.


glister

The game is to report revenue to recognize locked-in revenue as the spending occurs, rather than when it is received. It's wrong, but it's not malicious, it's a difference of opinion? It should be rectified, though.


SimpsonHomah

Heh, didn't the NDP complain nonstop about the Liberals over the same shit? Kettle, pot. Pot, kettle.


norvanfalls

NDP never complained about this. In fact, the extent they went was to say that we were better off than reported because of it. It has always been the Auditor General that complained about it, because they cannot issued a good audit opinion because of it. The extent of the 'complaint' you got from the NDP was that BC was hiding that it was not using money effectively since the surplus is understated. Which, depending on the taxpayer, is considered a good thing for governments.


Leoheart88

How much of it is from the BCLDB.


opposite_locksmith

What an obvious hit piece against the NDP. Plus, the BC Liberals were way, WAY worse.


SmackMyBoeser

"Officer why are you focusing on me for going above the speed limit when you have caught other people going much faster before?"


Fool-me-thrice

Not really a hit piece. There were some unintentional errors, no fraud. All identified and fixed through the normal and expected audit process.


captainreindeer

While I agree with you that BC Liberals are scum, that should not be an excuse to give the NDP a pass. This is our money.


Jhoblesssavage

Apparently more of it than we thought


Jhoblesssavage

Was there anywhere that showed the actual numbers? Are we in deficit or not?


glister

This is more about how they count the dollars, rather than the over-under.


Jhoblesssavage

I like to continue dollars sequentially 1,2,3,4 and occasionally I get upto 5