By Gil Hall firstname.lastname@example.org @gillamhall
San Juan, Puerto Rico.
Updated substantially 20160205 1128 AST
The KPMG partner responsible for Puerto Rico’s 2014 audit, Ernesto Aponte, testified for nearly three hours Wednesday afternoon in federal court in San Juan about the auditing firm’s experiences with Commonwealth officials.
Contradicting months of public statements made by Puerto Rico’s governor Alejandro García Padilla and members of his senior staff that suggest KPMG was to blame for the delay, Aponte indicated that, in fact, the audit was at a standstill because the Commonwealth had not provided needed data and documents in their final form.
While other documents were discussed, the two documents that Aponte cited repeatedly as missing were: the final version of the financials themselves; and the non-draft version of “going concern memorandum”.
The client being audited (in this case, Puerto Rico) is required to produce such a “going concern memorandum” (AKA GASB-56) if requested by the auditor, according to rules written by the Governmental Accounting Standards Board.
Aponte indicated that the draft version of the going concern letter KPMG received on January 11, 2016 from the government did not meet KMPG’s minimum guidelines. He did say, however, that as drafted it cast significant doubt on the Commonwealth’s ability to continue as a going concern.
One of Walmart’s attorneys, Shawn J. Rabin, asked Aponte, rhetorically: “One of the reasons [that KPMG cannot proceed with the audit] is that KPMG still has not received all of the documents it needs?”
Aponte answered “correct”.
Federal Judge Jose Fusté later directly questioned the witness, asking if he could say how long it would be before the audit is complete.
Fusté: “one month, two months, three months?
Aponte: “We have provided management a timetable that indicates that from the date we receive the final draft of the financial statements it will take us eight or nine weeks to finish the audit.”
Walmart’s attorney Rabin asked if Aponte was aware that Puerto Rico’s governor Alejandro García Padilla has made public comments blaming KPMG for not having completed and released the audit.
Aponte answered “That is correct”.
Rabin then asked Aponte about an email that Aponte sent to two senior members of the Commonwealth government & another KPMG employee.
In the November 30, 2015 email to Juan Zaragoza (Puerto Rico’s Treasury Secretary), Juan Flores Galarza (Puerto Rico’s Undersecretary of the Treasury) and Miguel Venta (KPMG’s managing partner in San Juan), Aponte expressed concern regarding public statements made by Puerto Rican officials blaming KPMG for not having produced the audited financials.
“We are evaluating what effect such expressions may have on the 2014 audit,” Aponte wrote (as quoted by Rabin).
Rabin asked Aponte if he believed the government’s statement (blaming KPMG) was “outright false.” Aponte replied that the government’s statement “was not accurate.” Rabin rephrased and asked if the government’s information was false. “Yes,” the witness replied.
Aponte explained that, subsequent to García Padilla’s public comments, KPMG requested a meeting in December 2015 with Zaragoza and Flores to discuss the matter. KMPG requested that other senior government officials, such as Melba Acosta, head of the Government Development Bank of Puerto Rico, attend.
Aponte testified that when he arrived for the meeting he was kept waiting for two hours, and that, once the meeting convened, none of the other senior officials he had requested to attend were present.
Aponte explained that two main messages were conveyed during the meeting:
1. KPMG disagrees and considers unacceptable the government’s public statements
2. KPMG cannot complete the audit until the government of Puerto Rico provides crucial missing documents.
Following the meeting, Aponte was disquieted enough about how the meeting had gone that he wrote a memo for the audit files concerning “certain public statements”.
Rabin asked if this was a normal practice.
Aponte: “In certain circumstances.”
Rabin asked if this was such a case.
Rabin summed it up this part of his questioning by asking Aponte if he would say the 2014 audit is not complete because the Commonwealth has not provided all the information necessary to complete the audit?
Aponte: “That’s partially correct.”
Rabin: “What else? [is missing and needed to complete the audit]”
Aponte answered: “Things that happen at the end of an audit, like representation letters,” referring to the document a client is required to sign verifying that the information it has provided to its auditor is correct.
A discussion about the importance of trust between a client and the auditor followed. Aponte agreed with Rabin’s assertion that the auditor must have some degree of faith in management since the auditor relies heavily on documents and data produced by those very leaders.
Rabin: “On one hand, you want to finish the audit you were hired to do, but on the other the customer is slandering you.”
Aponte didn’t directly answer the question.
Judge Fusté addressed the witness, asking if, in fact, wasn’t the good name of the auditing company itself on the line.
In the loudest answer of his entire testimony, Aponte said “YES.”
Judge Fusté then asked if Aponte had any knowledge of false testimony given before Congress. The witness cited an instance (unspecified) in García Padilla’s testimony Aponte seemed to regard as at least evasion of the question asked.
Rabin wrapped up his examination of the witness with a two-part question: 1. If anyone gave testimony solely blaming KPMG for the lack of audited financial, would that be incorrect?; and 2. Isn’t it true that the audit has NOT been completed because you haven’t been given the documents you need.
Aponte confirmed the statements.
Walmart is expected to wrap up its case Thursday morning after it calls Treasury Secretary Zaragoza as its final witness.