MP Harsha de Silva highlights national accounting fraud

To evaluate this claim, FactCheck consulted the Annual Reports of the Central Bank of Sri Lanka of 2019 and 2020, and the Annual Report of the Ministry of Finance 2019. 

The Central Bank Annual Report of 2020 states, “Government expenditure and net lending in 2020 were adjusted by the Ministry of Finance by shifting a sum of Rs

. 422.6 billion to 2019 in view of accounting for the payment of arrears spilled over from 2019” (p. 155).
This shift in the presentation of accounts would only be acceptable under an “Accrual Accounting” method where expenditure or revenue is recorded when the transaction occurs as opposed to when cash is paid or received. However: 

(i) The Annual Report of the Ministry of Finance 2019 states that Sri Lanka’s national accounting system uses the “Modified Cash-based Accounting” method (p. 196). Under this method of accounting, expenditure and revenue is only recognised when cash is paid or received, and unspent budget allocations are cancelled at the end of the financial year.

(ii) Even if accrual accounting had been used, it is necessary to apply the same accounting treatment for revenue as well as expenditure in arriving at the budget deficit.  However, revenue for 2019 was unchanged in the 2020 accounts, indicating that accrual accounting was only applied to expenditure, and not applied to revenue.  
Taking (i) and (ii) into consideration, the shift in expenditure of Rs. 422.6 billion made in 2020 to the accounts of 2019 cannot be validated by an accounting standard. Therefore, the resulting misrepresentation fits the definition of accounting fraud, as claimed by the MP in his tweet thread.

FactCheck calculated expenditure for 2020 by adding back the Rs. 422.6 billion that had been improperly shifted to the 2019 accounts. Doing so resulted in a budget deficit of LKR 2,091 billion which amounts to 14% of GDP
in 2020.

Therefore, we classify the MP’s claim as TRUE.

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