Harry Greaves’ Response To Francis K. Zazay: A Rejoinder

A Letter From Francis K. Zazay

The Perspective
Atlanta, Georgia
January 10, 2007


Dear Editor,

Let me first of all express my appreciation to your news organ for publishing my analysis of the Third Quarter report of the Liberian Petroleum Refinery Corporation, (LPRC), which was published in your December 29th edition. In view of the fact that Mr. Harry Greaves, Managing Director of LPRC has rejected the merits of my conclusion, as published in the January 4, 2007 edition of The Perspective, it behooves me to again request that you kindly publish my response to his reaction. Being mindful of not taking up your time, particularly due to your task to satisfy other editorial matters, I will strive to make this my last comment on this issue except if my action is, otherwise, compromised as a result of the emergence of new facts that would warrant my clarity.

Before discussing the virtues of my purpose, I would also like to thank Mr. Greaves for the time he took to read and respond to my article because this gesture on his part would have been an impossible venture in the old days. His move is therefore a demonstration that the dawn of a new day has truly come for Liberia; a dawning which is a driving force that characterized the reasons for my analysis. Further more, because of my conviction that it is only a government, such as an Ellen led administration that would impose integrity on management to respond, I again took up time to reply to his attempt to discredit my analysis.

Now with respect to the basis of the Managing Director’s comments, it is important to establish some parameters, regarding this discussion. The primary issue here is the management’s failure to disclose information used by them to arrive at a balance sheet and income statement, when in fact, a statement of cash flows derived using the same information provided in the report does not agree with their balance sheet. This is the basis for the full disclosure requirement. To meet this requirement, Statement of Financial Accounting Concept (SFAC no. 5) paragraph 63 maintains that an item of financial statement must be measured with sufficient degree of certainty, relevance and reliability. Is the MD therefore stating that his report meets this requirement by suggesting that I review my class room, financial statements of news papers in the US and other statements in Britain? It does not!

In spite of my doubts, however, as to why the managing director of a fuel company could refer me to a newspaper company to validate the virtue of his financial report, I did follow his instruction to visit the sites of the Securities and Exchange Commission to view the statements of two news papers (Washington Post and New York Times, just as he suggested). Interestingly, there were no correlation for disclosure requirement between a newspaper house and a refinery or fuel company. According to the Securities and Exchange Commission, these are two different industries that do not have similar accounting standards, to some extent. One aspect that is, however, found in common was the fact that the two News Papers do have exemption sections of their income statement to arrive at gross income or operation income. The exemption is cost incurred to generate particular revenue. Without this exemption of cost, taxable income for businesses would be significantly high. This is why regardless of the nature of business (except for certain partnerships or LLC where partners or shareholders enjoy flow through) cost of sales is a reduction of sales figure on the income statement. The fact that cost of sales may come in varying forms and names doesn’t mean it does not exist.

The MD further suggested that I check with the LBDI bank to validate the solvency of LPRC. Although at no time did my analysis state that LPRC was insolvent, I certainly do not see this suggestion necessary because it is not a justified accounting approach. The qualitative characteristic of accounting information, as established in the Financial Accounting Standards Board (FASB) No. 2 suggests that one should not have to look outside of a financial statement, other than information provided by it, for validation. By this assertion, information about the reliability and relevance of a financial statement must be included in the body of the financial statement, notes to the financial statements and supplementary information. It is the provision of this information that meets the primary qualities to make accounting information useful and that distinguishes better information from inferior ones. The basis of my initial analysis was therefore intended to asserting as to whether the financial report of LPRC satisfies these objectives: full disclosure. However, the absence of the Statement of Cash Flows and the resulting difference between cash flows balance and the balance sheet cash suggests that it does not meet this requirement.

I will admit, just as LPRC has admitted, that it attempted to satisfy all of these requirements by providing their report, except it fell short to provide a statement of cash flows, which they pledged to provide in the “future”. But should we wait for the future just to view a statement of cash flows? As stated in my previous communication, the fact that management did not provide one does not mean it cannot be derived based on the information provided by them. On the basis of LPRC’s information provided, I proceeded to derive a Statement of Cash Flows, consistent with FASB no. 95. FASB 95 ‘requires that a statement of cash flows classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities’. I concluded on the basis of my analysis that the cash balance reported in the amount of $1,666,105, as of 3rd Q Balance Sheet was overstated by about $124,716. I subsequently informed the reading public, that my analysis revealed that LPRC did not offer all information necessary that would allow others to arrive at the same conclusions reached by management. What is then the source and legitimacy of MD’s doubt regarding my findings, particularly, where the LPRC could not provide one to isolate my claim?

One best ways LPRC could counter my assertion, in my opinion, is for them to go to work and prepare a statement of cash flows, and then come back to inform this body if their finding is otherwise. I am sure and based on the information provided, that if their findings should ever prove otherwise, it will include that of a conciliatory statement, replete with vague rationalizations and justifications.

The Managing Director also asserts that the fact that his company pays and transacts in US dollars does not justify his reporting in another currency, in this case, the Liberian dollar. This statement only makes one to believe that financial folks in Liberia seek not to follow the antitrust laws of Liberia but the transactional factors that serve their interest. The MD must know that a reporting entity is required by standards to translate financial results to the standards of its home country. All nations, including the G 8, follow this practice. I am sure that the Liberian legislature made no mistake when it enacted Part V. Article 19 section 1 of the act that established the central bank. Why then does the MD find it so difficult to follow this law, or simply disclose in the financial report, the reasons and justification for his departure, if any!

By the MD’s assertion above, is he implying that the fact that several nations operate in Liberia is a justification that financial statements be reported in the many foreign currencies that dominate their transactional practices? I maintain that the absence of clarities of this nature in the financial report, as to the justification for reporting in foreign currency, appears to make the LPRC’s report illegal in its foreign currency status. The making of this and many other reports in foreign currency and the acceptance of such reports by authorities is a demonstration of a lack of will to stabilize the money market. This lack of will power would only tent to dampen any hope for efficient accountability and promote capital flight, just as it was in the 80s. Moreover, should it not be a professional and moral obligation of the MD to advise authorities in Liberia as to the impact of dual or multi currency in Liberia? I however will not bore you with the currency issue at this time because it is another argument that will come to you soon.

You will recall that the major issue of my argument has been the lack of full disclosure on the part of management, particularly in view of the fact that the statement of cash flows did not reconcile with the balance sheet that was provided by management. While I may not intend to pass judgment, I think the managing director has an obligation to disclose:

• The information used to derive the balance sheet and the income statement so that the conclusion reached by the statement of cash flows can be validated.

• The cost incurred by LPRC to generate the revenue for which expenses were taken. In order words, what is the exclusion amount that secured the revenue that was reported by Mr. Greaves' LPRC?

• How did Mr. Greaves arrive at the conclusion that only retail and manufacturing businesses incur cost of sales on their income statement, when this is not supported by any accounting authority?

The MD also stated that my article opined that $500,000 mentioned in my analysis represented cost. I can only state that it is important to maintain integrity in initiatives such as these. Creating distortions to make a point compromises integrity and impedes the importance of full disclosure. While I will not dignify the definition of the source of dividend, at no time did my prior communication state that the amount at issue was a cost. Because such information will come in the 4th Q report, as promised, I will wait for that report.

Finally, I have no doubt that the MD had worked for the publishing industry in the US and probably have some vast knowledge in that industry. One has to however understand that Newspaper businesses basically deal with accrual and/or cash: a hybrid system in most cases. Consequently, if the receivables out weight the cash collection, the cost of such sales becomes negligible. So rather than ranger on the internet, why shouldn’t the LPRC take that time to provide us the information used by LPRC to come up with a balance sheet and income statement for the sake of full disclosure! This is all I ask of the LPRC, and I wish they would comply in the interest of the reconstruction of accounting process of Liberia. Subject to the provision of such information, the 3rd Q financial report does not reflect the true and fair value of the LPRC.

Thanks for your time

Francis K. Zazay

Note: The author, Mr. Francis K. Zazay is a University of Liberia trained accountant by profession. He earned an MBA with concentration in Corporate Finance from Clark Atlanta University in 2000. He is also a current candidate of the Master of Business Taxation of the Carlson School of Management of the University of Minnesota. The author can be contacted at fzazay@aol.com.

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