THE AIR SEYCHELLES INVESTIGATION”

(Part 3: “The Other half of the Picture”)

Following on last week’s conclusion in investment in a company, we now look at some implications of events within Air Seychelles.  In a letter to the Editor, a reader disclosed that Air Seychelles has a debt in the region of SR. 350,000.00 (Three hundred and fifty thousand).  This arose through legal judgment against the airline in favour of an ex-employee.  The accounts as audited by A J Shah and Associates do not disclose this debt.  In fact there is no contingent liability disclosed in the accounts [ in paragraph (f), page 71 and also paragraph 18, page 82 of the Annual Report 2005-2006 provided for such liabilities to be disclosed].  Conversely, the Auditors state that the accounts express “A true and fair view of the state of affairs” of Air Seychelles.  This lie means that the Board of Directors of Air Seychelles, in turn you the people of Seychelles, are being misled as to the state of affairs of Air Seychelles.  Who is to face the consequences of such professional irresponsibility? 

It should be noted that decisions are only as good as the information upon which the decision is based.  Bad Information Means Bad Decisions!  Auditors – A J Shah – have a duty of care when undertaking the audit of Air Seychelles.  The duty of care is an established common law fiduciary duty most simply described as an obligation to dutifully and diligently perform the functions of a position.  Preserving the duty of care involves little more than making a good faith effort to do a job well and doing just that.

The Board of Directors, sanctioned at the AGM, appoints the auditors - the board relies on information, opinions, or reports of the auditors as the basis for a formal board action.  However, the auditors remain responsible for the work they execute.  The duty of care must be discharged diligently and in good faith.  Auditors must act with knowledge and after deliberation, and should carefully establish policy and regularly oversee its implementation and administration by a competent staff.

A director who is present at a meeting when an action is approved by the entire board is presumed to have agreed to the action unless the director objects to the meeting because it was not lawfully called or convened and doesn’t participate in the meeting, or unless the director votes against the action or is prohibited from voting on the action because of a conflict of interest. 

Impermissible conflicts of interests are characterized as interests of a financial or fiduciary nature that divest some profit or benefit to someone other than the organisation.  For instance, an impermissible conflict and, therefore, a breach of the duty of loyalty occurs when a board member official contracts with the organisation that the public official serves. A clear instance of this being when Air Seychelles CEO David Ralph Savy, contracted with  Air Seychelles through a special subsidiary Veiling for the onward lease of an Air Seychelles plane to Air Sahara of India.  The Air Seychelles Annual Report 2005 – 2006 remains horrifyingly silent on this issue. 

The above instance of conflict of interest makes the CEO’s words

     “Air Seychelles has always been a steadfast advocate of good corporate governance and sound business ethics…They are guiding principles of integrity, professionalism, honesty and transparency, which we cannot afford to fail…”

sound surprisingly hollow and senseless as also he goes on to say

“…we all swear by the Parastatal Code of Ethics and Conduct…”

Was the Air Seychelles CEO, by acting on information obtained during the course of his employment and putting this information to his personal benefit, acting within the boundaries of Duty of Care to Air Seychelles?  Were the results of the transaction fully disclosed to other board members? Were the other board members in full agreement to this action? What are the auditors and Auditor General’s stance on this issue?  Are the stakeholders (the General Public) in agreement with this line of action?  What direction does the Attorney General have on this issue with concern to the “Parastatal Code of Ethics and Conduct”?

Interestingly, another question we now raise is that of the role of the audit within this scenario.  If the auditor is to report “that the accounts give a true and fair” on the state of affairs of the company; what do they view as a breach of the duty of loyalty?  In continuance of these if the Auditor fails to see the conflict of interest in such transactions, is the auditor fit to assume the responsibility given by the Audit Mandate?

 

Another case of conflict of interest arises with particular relevance to the keeping and management of accounting records by Air Seychelles and the auditor’s role vis-à-vis the same.

Books and Records

An auditor needs to have general knowledge of the books and records of the organization and its general operation. The organization’s articles of incorporation, bylaws, accounting records, voting agreements, minutes, and list of voting members must be made available to auditors, members and directors who wish to inspect them for the proper purpose of accountability, transparency and good governance.

Accurate Record Keeping

The Board of directors needs to be familiar with the content of the books and records to ensure that the organization’s records and accounts are accurate. This may mean the director must take steps to require regular audits by an independent certified public accountant.  Under the Companies Act 1972 registered organizations are required to be audited by an independent certified public accountant.  At the very least, the director needs to be aware of what the financial records disclose and take appropriate action to make sure there are proper internal controls.

The above picture becomes an even uglier sight when regarded in the light of credit management ratios: The Net working capital ratio, The Current Ratio, and The Quick ratio.  The liquidity ratio is primarily concerned with the ability of a business to pay its debts as they fall due.  As such, the focus is on the current assets and liabilities, which are due within one year.

It may be argued that the liquidity ratios are the most important measures for credit managers, because they demonstrate the ability of a business to meet its debts. If the annual accounts show that the business is unable to meet its current debts it is doubtful whether this is a business to which credit should be extended. However, a balanced view will be achieved by using the three ratio groups collectively.

Net working capital

Net working capital is current assets less current liabilities. For most financially healthy businesses, this should be a positive number. In Air Seychelles case it is (6101) a negative showing that the business is not financially healthy.

Current ratio

The current ratio is current assets divided by current liabilities. It should be at least one (1.0), and preferably higher:  In Air Seychelles case it is 0.81:1.  This demonstrates Air Seychelles inability to meet its current debts.

Quick ratio

The quick ratio is current assets, less inventory, divided by current liabilities. Since inventories can sometimes be difficult to liquidate, the quick ratio is considered by some to be a better measurement of a business’s ability to pay its bills than the current ratio. The quick ratio is sometimes called the “acid test” ratio.  Again The Air Seychelles ratio of 0.73:1 does not augur a positive future. 

  The importance of liquidity is that if a business is unable to meet its debts as they fall due, irrespective of its profitability; its ultimate fate is one of death, otherwise known as liquidation.  Has this news been conveyed to the Board of Directors, The people of Seychelles and other parties concerned by the Auditor?  If not, why not? Who again is responsible for this gross negligence?  What remedies does the Airlines and the Government of Seychelles have against them?  What do the Auditor General, the Minister of Finance, The Public Accounts Committee and the Registrar General have to say about this state of affairs?  Are the commercial institutions dealing with Air Seychelles aware of the above?

In conclusion we take a look at the “Seychelles Nation” of Wednesday 21 February 2007.  The front page article is “Local Airline Praised for High Level of Safety”.  Following this article we extend an invitation for the right of reply to the African Airlines Association to comment on the above.  Again the same offer is made to the Emirates Printing Press who received for Air Seychelles the “Gold Award” for best annual report in the Middle East, as reported in the “Seychelles Nation” of Friday 23 February 2007 [“Do not judge a book by its cover” goes the old saying!!!] Lastly, the invitation also extends to the firm of Chartered Accountants A J Shah and Associates, whom we believe might have a lot to inform us on.

March 2, 2007
Copyright 2007: Seychelles Weekly, Victoria, Mahe, Seychelles