I’ve been writing about the Spanish bank crisis (“Spanish Non Sequitur” and ”Followup to the Spanish Non Sequitur“) because it is related to mainstream financial reporting and auditing. How so?
The Spanish government recently hired all of the Big 4 (still don’t know from which countries) to tidy up the financial statements from many banks in the industry. I’ve written about how this is a novel strategy to cleaning up faulty financial statements.
In addition, this is related to the push for global accounting standards. If IFRS doesn’t work well in a mid-size European country, then how can it work as the primary tool for regulating banks world wide?
Nathalie Tadena, of the Wall Street Journal, wrote yesterday on “Moody’s Cuts Ratings on 28 Spanish Banks.” Moody’s has downgraded bank ratings to one notch above junk. Ouch. In part, this is because of Spain’s sovereign debt crisis, and in part this is because “banks … have been hollowed out by a five-year property slump that has left them exposed to hundreds of billions of dollars in loans to builders and developers.”
The U.S. has experience in dealing with bank difficulties caused by economy shaking issues in real estate. The 1980s Savings & Loan Crisis and 2008 Subprime Financial Securities Crisis come to mind. Both American crises showed that banks easily succumb to temptation in hiding losses from investors, and that auditors are loathe to alert investors to going concern difficulties.
Spain, welcome to the club. It is dealing with its bank crisis by hiring Big 4 audit firms to clean up the financial statements of larger banks in its banking industry. Undiscussed, though, is why Spain is hiring the same audit firms which previously had been a party to issuing unflagged misleading financial statements.
I’m glued to the newswire looking for the next development in this story.
Debit and credit – - David Albrecht
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We should have a nationalised audit firm (that comprises of independent professionals) to audit the Big 4 audit firms to make sure that they are indeed auditing their clients properly and appropriately without being disrupted by conflict of interest or any other potential threats.
Dave:
Your reporting on this is excellent.
Dick Schroeder