Earlier this month I wrote, “Spanish Non Sequitur.” Non sequitur is Latin for, “it does not follow.”
As is commonly reported, Spain is experiencing a sovereign debt crisis. Sovereign debt is when a government borrows to finance spending in excess of tax collections. A sovereign debt crisis comes about when said government cannot make timely payments to those from whom it has borrowed.
As Spanish banks have invested in Spanish sovereign debt, and Spanish banks are still not fully recovered from the financial crisis of the past few years, it is widely thought that many are in extreme financial distress. How much financial distress is unknown, because it is widely thought that Spanish banks have been less than candid when issuing financial statements.
Earlier this month I wrote about a Spanish government announcement (actually, an authorized leak) about the first two parts of a three part plan to deal with the sovereign debt crisis. First, two consultants had been hired to evaluate how close to insolvency are the banks. Second, all of the Big 4 audit firms had been hired to perform audits to clean up the bank financial statements so that the government would have accurate information. The third part of the plan was unveiled a few days later when Spain appealed for a large bailout to pay off debt about to come due.
The second part of the plan is a non sequitur because the large audit firms are part of the problem. Previously, they had issued clean audit opinions for bank financial statements that didn’t deserve them. There is no way for government officials to know for certain that the information provided this time by the audit firms is any better than their earlier audit opinions. Unless, of course, the audit firms have been threatened with a return of the Spanish inquisition.
Earlier today two conflicting reports have appeared in the press. First, David Roman of The Wall Street Journal writes in, “Spain Delays Full Bank Audit Amid Rise in Yields,“ that, “The deadline for a group of auditors to present full reports on the capital needs of Spain’s financial sector has been postponed to September from July 31, a person close to the situation said Tuesday.”
Second, a Reuters report says,
A [Big 4] detailed audit of Spanish banks will remain on schedule and release its findings on July 31, a spokesman for Spain’s economy ministry said on Tuesday, denying an early report the assessment would be pushed back to September.
“There won’t be any delay in completing the audit of Spain’s banks,” the spokesman said.
Earlier, a source at the Bank of Spain had told Reuters the second audit would be delayed to September to give organizers more time to gather information on each bank’s loan books.
I don’t know for sure what is happening in Spain, because insufficient disclosures have been made public. Therefore everything I say is a guess. However, I think it is the most interesting development in years to arise in the accounting/auditing world.
Debit and credit – - David Albrecht