My Views on LPRC’s Third Quarter Financial Results

By: Eric S. Kaba, CPA

The Perspective
Atlanta, Georgia
February 2, 2007


I wrote this article sometime ago but decided that I was not going to publish it because I thought a lot had been said about the subject already. However, after having talked to a few people during the past week about this subject, I thought I should go ahead and make my views available through this medium for others to read. Another reason why I decided to publish this article is the level of arrogance and combativeness Mr. Harry Greaves displayed in his letter published on web page on January 4, 2007 under the title “Harry Greaves' Response To Francis K. Zazay”. I was especially struck by the tone of Mr. Greaves’ response which implied the feeling of a person who does not think he is accountable to anyone as head of a publicly owned entity. In Mr. Greaves’ response to Mr. Zazay he stated that he was in the newspaper business in the United States for 10 years. This information brought a hypothetical scenario and question to my mind. Let me first state that I am fully aware that newspaper companies are not normally taxpayer-owned in the US. This is just to illustrate a case and make a point.

Let’s assume that Mr. Greaves managed the newspaper in the United States of America (which he probably did) and that the company was taxpayer-owned (which probably was not). If a taxpayer or for that matter any party in the United States had raised questions or concerns of any kind about the newspaper Mr. Greaves managed, would he have given the same arrogant and combative response? I seriously doubt it because Mr. Greaves would be doubly aware that such behavior would raise the ire of the American taxpaying public. And he would not want to risk the possibility of losing his job. While I will not dwell on this aspect of the subject, I will like to remind Mr. Greaves and all others who serve in similar capacities in Liberia that the heat they feel from questions, criticisms, and suggestions about how they conduct the duties of their offices is a necessary consequence of their decision to hold those offices. If an individual feels that he or she does not owe it to the Liberian people and nation to answer questions, respond to criticisms or give explanation in a calm, coherent and professional manner then that person should not hold public office. Indeed, I am amply aware of how equally combative and seemingly arrogant some of the questioners and critics can be but that is what distinguishes a democratic society from a totalitarian one. In a democratic society people have a right to know and by no strange measure they often try to know by asking questions and by sometimes even criticizing the people who represent them and/or their interests.

Part of the reason why a lot of people continue to ask questions and have reservations about how LPRC is conducting business lies with the unexplained and therefore dubious conditions surrounding the crude oil contract the Corporation said it entered into with the Nigerian government and Addax Ltd. The lack of clarity and information about the contract leaves one no choice but to have questions about what it is and what is its nature. For example, could it be that the Nigerian National Petroleum Corporation (NNPC) produces the crude oil under the contract with LPRC and Addax refines and transports the product(s) to Liberia? Or is it that NNPC gave permission to Addax (in accordance with bilateral arrangements between the Liberian and Nigerian governments) to sell refined petroleum products to LPRC? But if this is the case then why does LPRC say it buys 10,000 barrels of crude oil a day as opposed to saying it buys a number of gallons of refined products (such as various grades of gasoline)?

If LPRC entered into a one-year contract with the Nigerian National Petroleum Corporation to buy 3,650,000 barrels of crude oil then how is it that LPRC had to enter into another contract with Addax Ltd. to “manage and operate the NNPC contract”? Note that Addax Ltd. is said to be the largest independent oil producer in Nigeria, according to LPRC, not a crude oil contract management entity. Even though it is possible that Addax could also be a crude oil contract management firm in addition to whatever else it does as a business entity, the explanation given to the public does not make mention of Addax Ltd. as a crude oil contract management entity. Or does “manage” as used in the LPRC report have a different meaning from the ordinary definition of the word?

And then there is the difference between crude oil and the products that are extracted from it, from the production and consumption point of view. A barrel of crude oil is equal to about 42 gallons of crude oil. Here are some of the by-products of a barrel of crude oil, per data from the American Petroleum Industry (API):

19.5 gallons of 87 octane (regular unleaded) gas
11.50 gallons of distillate and residual fuel oil
4.1 gallons of jet fuel
3.80 gallons of liquefied and still gases
0.2 gallon of kerosene
1.3 gallons of asphalt/road oil
0.5 gallon of lubricants
1.2 gallons of feedstock (used mainly for making plastic products).

It should be noted that according to the API data, total by-product yield per a 42-gallon barrel of crude oil can exceed 44 gallons due to what is referred to as “processing gain”. This means that a refining process that starts with 42 gallons of crude oil and may end up with 44 gallons of refined products of various types as mentioned above. I guess by now you are wondering why I am bothering you with all this information. According to the narrative that accompanied LPRC’s third quarter 2006 financial statements, the company “buys” 10,000 barrels of crude oil a day. Note the emphasis on the word BUY. Here is the specific language:

“In its quest to find additional sources of revenue, the corporation’s board authorized the management to enter into a one-year contract with the Nigerian National Petroleum Corporation (NNPC) to buy 10,000 barrels per day of crude oil.”

Since LPRC said it buys 10,000 barrels of crude oil a day, the following questions are appropriate: (1) Who refines the crude oil? (2) Is it NNPC or Addax? (3) Where is the oil refined? The information I have about Nigeria’s capacity and ability to refine crude oil is that such capacity and the attendant technology are so limited that the country relies on refineries in countries as far away as Holland to provide refinery services and/or refined petroleum products; (4) Does LPRC own all the by-products that are produced through the refining process? (5) If yes, where are those other products (beside gasoline, fuel oil and kerosene) sold and was any revenue from their sale or exchange reported on the third quarter 2006 financial statements? I ask this question because clearly Liberia, given its current economic and industrial state, cannot fully utilize all of the by-products that the crude oil refining process yields; (6) Since the LPRC Board of Directors authorized the purchase of 3,650,000 barrels of crude oil as a means to “find additional sources of revenue”, according to the information LPRC published, what are the principal sources of revenue for the Corporation beside the revenue that is expected from the 3,650,00 barrels of crude oil transaction? And (7) where on the income statement is this revenue reported?

Even though the narrative to the Corporation’s financial statements states that the company buys barrels of crude oil, the income statement does not show revenue from the sale of a product or cost of sales. Were it not for the use of the word BUY in the entity’s report the obvious reason would have been that LPRC does not incur production costs (because it does not produce anything) nor does it purchase the petroleum products (as would be under a merchandise-for-sale scheme). Even though the company is called the Liberian Petroleum Refining Company, it apparently does not do any refining, at least not under present conditions. It is both puzzling and ironic that a business entity BUYS an item (crude oil) and yet does not show revenue from sales nor does it show cost of sales. What happens after LPRC “buys” the crude oil? Is it that the Corporation merely has the right to purchase 10,000 barrels of crude oil a day but that this right is in fact exercised by another business entity (perhaps Addax Ltd.)? The information from the financial statements and other sources seems to imply that LPRC merely provides services: perhaps unloading of refined petroleum products, transportation services (from the point of unloading to storage tanks) and storage facilities. The “revenue” LPRC earns appears to come principally from the fees it charges to handle and store the refined petroleum products. It also seems like the items (which can be referred to as inventories of petroleum products) stored in LPRC’s tanks are there on consignment. This would mean that Addax Ltd. ships and stores refined petroleum products in LPRC’s storage tanks over which it (Addax Ltd.) retains ownership; LPRC sells the consigned “goods” to local and other merchants who in turn sell the products to consumers. The evidence of this is found in the fact that (1) the Corporation does not list any inventories on it balance sheet and (2) it does not show cost of sales (as mentioned earlier); cost of sales normally includes both beginning and ending inventories, if there are any.

A useful and complete professional analysis of LPRC’s third quarter 2006 financial statements is nearly impossible for a number of reasons. Among them is one very significant one, namely the absence of footnote disclosures. [NOTE: I did not see any footnotes when I downloaded the document from web site. Perhaps they are somewhere there but I did not and still do not see them.] Here is a brief look at why footnotes would have helped a lot, especially since LPRC chose to publish its financial statements in the forum and manner it did.

As other people have indicated before, footnotes help provide additional information and disclosures about key items and amounts reported on a set of financial statements because such information is normally not evident from the numbers on the statements. For example, a footnote about an accounts receivable on the balance sheet may disclose the portion that is receivable from government agencies and the portion that is receivable from the public at large. The absence of footnote disclosures cannot be excused or explained away on account of the fact that the financial statements are quarterly reports. When a business entity undertakes to publish its financial statements, like LPRC did, it has (at the very least) a moral responsibility to provide the reading public and other interested parties the information and disclosures they need to gain a meaningful understanding of the information contained in those financial statements. In the event an entity is unable to provide accompanying footnotes to its financial statements, it is - at the minimum - desirable that the entity clearly states so and gives a brief explanation of its inability to disclose information in footnotes.

Had LPRC provided footnotes the reading public would have been able to gain a better understanding of such items as accounts receivable (as mentioned above), fixed assets, short and long-term liabilities, “other revenue” and “other operating expense”. For example, the Corporation reported accounts receivable in the amount of $1,546,705 but there was no indication on the balance sheet (via reference to a note to explain) that this amount was net of an allowance for uncollectible accounts. Even if LPRC thinks it will collect every penny owed to it on those accounts, the accounting concept of conservatism requires that receivables be reduced to account for the likelihood that a portion of the receivables will not be realized; and the matching concept ensures that uncollectible accounts expense is properly matched to revenues in the period in which those revenues are earned.

Perhaps LPRC employs the direct write-off method of treating accounts receivable. However, because this method does not port well with the concepts of conservatism and matching, the allowance method is more widely used and preferred. Another reason why the direct write-off method lacks appeal among both financial and accounting professionals is that it can be used to manipulate the presentation of financial information. For example, an entity that wants to show a good balance sheet and higher net earnings on its income statement can very conveniently employ the direct write-off method. The reason is that it can report inflated receivables on the balance sheet (and correspondingly inflated earnings on the income statement because of the absence of a deduction for uncollectible accounts expense). In the interest of fairness, one could assume that the accounts receivable figure reported on LPRC’s balance sheet is in fact net of an allowance for bad debts and that the corresponding uncollectible accounts expense is buried in (perhaps) “Other Operating Expense” on the income statement”. But the absence of relevant footnotes to convey this information makes this assumption almost irrelevant.

The absence of footnotes also presents a meaningful disclosure problem for a very important item on LPRC’s balance sheet, namely “Other Fixed Assets” in the amount of $9,005,318. “Other Fixed Assets” account for 74 percent of the Corporation’s assets. A footnote disclosure for this item would have shown to readers and others the cost incurred to acquire the assets, the types of fixed assets, their estimated useful lives and perhaps more importantly the method or methods of depreciation used to amortize the acquisition cost of those fixed assets. Assets useful lives are also very important and can affect financial statement presentation. However, I will not go into that for the mere fact that the asset useful lives that companies use for depreciation purposes generally tend to be in line with the type of assets involved and the established precedents their industry follows. I will instead elaborate on the method or methods used to depreciate fixed assets.

Why is the method used to write-off the cost of fixed assets important? Well, again we go back to the possibility of or inclination to manipulate information that is presented in financial statements. Some depreciation methods allow for a slower write-off or amortization of acquisition costs while others permit a faster approach. If a company wants to present a good and appealing balance sheet and income statement, it will employ the slower method(s) of depreciating its fixed assets. From the income statement point of view, the reason is that the amount of depreciation expense will be smaller and therefore net profits will be higher (or net losses will be smaller). On the balance sheet, the higher net profits (or smaller net losses) will boost equity through their effect on retained earnings or cumulative results of operations. Also, a slower (as opposed to an accelerated) method of depreciation results in higher net fixed asset carrying values on the balance sheet because accumulated depreciation figures are smaller or low.

Does the management of LPRC employ accounting methods that are specifically targeted to make for an attractive set of financial statements? I do not know the true answer to this question but I do know that the Corporation could have done a lot better to provide information necessary to give readers (and doubters) little or no reason to believe that its third quarter 2006 financial statements appeared or might have been unreliable. Also, from the professional point of view, good managers try to avoid the appearance of impropriety in both the functions of their business entities and in the acts they personally engage in as they represent those entities. One good way to avoid situations where it looks like something improper has happened or is happening is to provide as much clarity and transparency about business transactions and activities as possible. Managing Director Harry Greaves had the opportunity to provide a measure of clarity and transparency relative to LPRC’s third quarter 2006 financial results when he responded to Mr. Francis K. Zazay’s article but he instead chose to let it be known that he is not accountable to anyone and that he can put up a fight. One wonders whether Mr. Greaves is (a) an incompetent public servant and manager as evidenced in part by his lack of willingness to accept criticisms from the public whose interest he is supposed to serve and represent, (b) is hiding something or (c) a combination of these two vices.

© 2007 by The Perspective

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