The Sunday Times of Malta Finance and Insurance Supplement June 9, 1974 NATIONAL BANK OF MALTAS CONSOLIDATED ACCOUNTS

The Consolidated Accounts and Report of the National Bank of Malta group have recently been published and I have been asked to state my views on them. The accounts have been prepared to comply with the requirements of the Commercial Partnerships Ordinance 1962 and with the Banking Act 1970. Both the Ordinance and the Act above-mentioned stipulate that the Auditors shall state, inter alia, with regard to the Accounts certified by them:Whether in their opinion, and to the best of their knowledge and according to the explanations given them, the said Accounts give the information required by law in the manner so required, and give a fiar view, in the case of the Balance Sheet, of the Banks affairs at the end of its financial year and, in the case of the profit and loss account, of the profit and loss for the financial year. The auditors are therefore provided with clear enough guidance in the performance of their duties and shareholders and the public are provided sufficient protection if such duties are properly carried out. It is generally accepted that if auditors just certify company or bank accounts by signing this certificate in the form laid down by law they are stating in effect that there is nothing of an extgraordinary nature tht they feel is not apparent from the Accounts. If this is not the case the auditors are expected to qualify their Report and /or accompany the Accounts with sufficient Notes to bring out relevant elements that are necessary to show both the state of affairs and the profit and loss in their true light. Going back, first of all, to the form of the certificate we read that the Balance Sheet is supposed to show the state of affairs of the Bank as at the date of the closing of its financial year in the case of the National Bank of Malta Limited, December 31, 1973. In view of this it is most significant that Deloitte & Company should state under 1(a) of their Notes to the Accounts including Group Accounts for the year ended December 31, 1973 that The Accounts reflect the transfer on March 22, 1974, of the banking business carried on by the Group. No reason for change in procedure Having made this rather extraordinary statement the auditors proceed to list the various instances where the treatment of the Accounts in 1973 ostensibly differs from that for previous years but never give the reason for this change in procedure or their views thereon. This would have puzzled the reader considerably were it not for the introduction to the Notes quoted above.

It would seem that the auditors, for some inexplicable reason, saw fit to take the transfer of the shares of the National Bank of Malta for a nil consideration as a starting point and then worked back, using unprecedented procedure, to prove that this was done because the shares were defector worthless. In this connection it should be stressed that the auditors had been appointed by the shareholders and remunerated by them and not by the transferees of the bank shareholdings so that their action becomes even more inexplicable. The auditors may have felt or at least wished to convey the impression that by stating the procedure followed by them to the public they were covering themselves against any possible reproach. Most will not accept this attitude too readily. It is now worthwhile to go through the Notes to the Accounts which, as I said, are noted, but not explained, in order to bring out the more glaring anomalies. Note 1(b) It is interesting to note that notwithstanding the considerable losses arrived at by the auditors, the Inland Revenue will still be receiving its cut on table profits. It is of course accepted accountancy procedure to adjust the profit and loss account in such a way as to produce a result which will be acceptable by the Commissioner of Inland Revenue in terms of the law. In this case, however, the loss was a colossal one of M3,182,000, and the shareholders are entitled, one would have thought, to some explanation as to why losses exceeding this figure may not be acceptable to the Departmet, but seem acceptable enough to the bank auditors. While agreeing that the provisions made this year are considerably higher than those for previous years and that the Inland revenue accepts actual losses rather than provisions, why, the eternal question arises, did the auditors write down the Company assets so drastically this year whne the shareholders were fighting for survival? Note 1(d) It is not at all clear why, under this paragraph, we are told Income from investments is included on a cash received basis. Is this in part explanation of the statement re company taxability immediately preceding it? Whatever the reason it would seem quite unorthodox to adopt this procedure for income from investment more so when we are told later that revaluation of investments has been broiugh in to the Profit and Loss A/C as from January 1, 1973 (Note 1 (d)) and that a total loss on sale of investments of 627,000 suffered after December 31, 1973 has been brought into the Accounts (Note 7); and that as from January 1, 1973,profits less losses on disposal and revaluation of investments have been transferred to profit and loss account. Without going into the reasons for the change of procedure in 1973, it is not clear how profits and losses on revaluation can in effect be continually transferred to the Profit and Loss Account as they arise during the year; and, if this is the case, what was the necessity to state also that they are shown in the balance sheet at market value.

Note 1(e) Here again the provision made for doubtful debts were far in excess of those in previous years. While the provision on advances considered to be partly unrecoverable is understandable, it is not quite clear how the groups liquid assets are being maintained by the additional general provision to cover possible losses. ... The note about no account being taken of taxation relief on these and other losses that would have been available to the Group is pregnant with meaning as reference is again made to the transfer of business mentioned in Note 1(a). It would seem that the buyers of the Bank of Valletta shares will have a lot to be thankful for. Note 1(f) In view of the wholesale mutilation of the companys loans, one would have expected that where, as in the case of the bak premises in Kingsway, there is bound to be an appreciation in value this would have been brought in for good measure. Note 2 The sharp reduction in the directors remuneration as against the rise in the auditors is not explained in any way. Note 3 It is not stated why the deferred taxation item of M188,000, has been written off even though its size would seem to warrant it. Note 7 No explanation is given as to why a loss of M627,000 made on a sale of foreign investments after December 31, 1973 was brought in to the 1973 Accounts. The auditors are curiously silent on the reason why the major part of the banks foreign investments were sold at a loss. It was probably to achieve the liquidity so sorely needed by the bank and not obtained through foreign investment. It is not possible in this article to go into great detail on the Banks consolidated accounts as the material in my possession is a summarized report. My purpose has been to point out the more glaring anomalies arising from the auditors Report. It seems pretty obvious that this Report was produced in unusual circumstances. This being so, it would be reasonable to suppose that any intelligent shareholder would have expected the auditors either to refrain from carrying on their assignment or to make a concerted effort to communicate with shareholders at a time when guidance and information from the auditors was very much required. -ends-