By NEIL HARTNELL

Tribune Business Editor

THE Government's antiquated accounting system means it is massively underestimating its true liabilities by millions of dollars, a leading accountant telling Tribune Business this means key indicators like an already-bad 56 per cent debt-to-GDP ratio, are, in reality, much worse.

Warning that this was "one of the big reforms that has to happen" in the Bahamas, Raymond Winder said converting the Government's accounting/bookkeeping system from a cash to an accrual basis was essential to developing a true picture of this nation's financial condition.

The Deloitte & Touche (Bahamas) managing partner said that to describe this shift as a major change was "an understatement", and said the situation highlighted the fact the Bahamas had been "lagging for far too long" when it came to institutional reform.

Warning that regional rivals, such as Bermuda, Barbados and Jamaica, were already ahead of the Bahamas when it came to converting government accounting to an accrual system, Mr Winder added that this nation's failure to recognise the Government's true liabilities also had implications for the investment incentives it could offer.

Explaining the difference between the two accounting methodologies, Mr Winder said that while the 'cash basis' recognised funds only as they were spent or took in, the 'accrual basis' accounted for the value of future spending commitments and guarantees.

By using the former, the Government was failing to recognise future spending it had already committed to via contracts and guarantees, and which should represent existing liabilities.

Mr Winder said this was what the debate between the FNM and PLP, over the projected $504 million GFS fiscal deficit for the 2011-2012 financial year, had revolved around, with the former claiming the new government had inflated the deficit by including in it the value of future spending commitments.

The end result, he added, was that the current $4.35 billion national debt, and $500 million-plus deficits forecast for the just-closed and current fiscal years, were likely to mask the Bahamas' true financial position, underestimating it by millions of dollars.

"One of the big reforms that has to happen in this country is that we have to convert the Government's record keeping from a cash basis to an accrual basis, so the country can be accurate as it relates to its real financial obligations," Mr Winder told Tribune Business.

"We talk about the debt-to-GDP, but that changes with the shift from a cash to an accrual basis. All those obligations not entertained previously will be entertained."

Using the current 'cash' bookkeeping method, "the Government is able to make commitments and keep it out of the debt and deficit position, because they've not paid anything on them yet.

"The Government has millions of dollars out there in commitments, but they are not recognised until it draws upon them on a cash basis," Mr Winder explained.

"That's not a proper accounting treatment. If you've made a commitment, it's an obligation. Whether you guarantee a loan, agree to provide certain services and investments and they're in a contract, it's an obligation and the fact it's not funded yet is neither here nor there. It has to be factored in going forward."

The Government's largest unfunded liability, the Deloitte & Touche (Bahamas) managing partner argued, was civil service pensions. Under the 'accrual' accounting method, these would have to be recognised, expanding public sector spending commitments to the tune of millions of dollars.

"There's no question about it," Mr Winder told Tribune Business. "The fact we're in a cash basis accounting system in government puts us in a position where we do not reflect our true obligations as a country.

"Our neighbours are much further ahead of where we are in making this [change] happen. This cannot happen overnight, and to take place fully takes a number of years. Barbados is well on the way to getting it done, Jamaica has started the process, and Trinidad is going through theirs.

"We don't even had a good cash accounting system to truly reflect the record on a cash basis. Many millions are not being recognised in the debt-to-GDP ratio."

Assessing the wider implications of all this, Mr Winder told this newspaper: "The overarching point of view is that for far too long the Bahamas has been lagging in institutional reform, and putting ourselves on a par with other developing countries in terms of what is considered best practices.

"It's time to get ahead of the curve so we can truly assess where we are, and determine what we need to do in the future."

The leading accountant said the Government's finances, and accounting methods, could impact the Bahamas' relations with other countries and its ability to borrow from international banks and capital markets, as all would realise this nation's true financial position was unknown.

As a result, the transition from a 'cash' to 'accrual' accounting system would be "required" of the Bahamas, and could not be avoided. "It won't be long before someone we ask to borrow money from asks for the accounts on an accrual, not a cash, basis," Mr Winder added.

The situation also had implications for the nature and level of investment incentives the Government could provide to the private sector, plus its ability to deliver services to the Bahamian people.

"These obligations have a tremendous impact on the ability of the country to provide incentives and future benefits for its citizens," Mr Winder told Tribune Business.

"To truly sit down and map out the incentive package put in place, one needs to be aware of these obligations and try to do a good job."