PR Draft Financials Released Following PR Senate Hearing

by: gil@prnewsroundup.com

Following the intense and somewhat antagonistic questioning of witnesses in the Walmart v. Puerto Rico case in federal court two weeks ago, the Senate of Puerto Rico held a hearing Tuesday to obtain information about the delay of Commonwealth’s 2014 financial statements.

Puerto Rico’s creditors and members of the US Congress have been waiting for the Commonwealth to share current financial information; the last audited data are for 2013. After intense pressure from two branches of the federal government and local attention, Puerto Rico’s Treasury Department released a public draft of their 2014 data Tuesday night. 

The Puerto Rico Senate’s Tax and Finance Committee hearing earlier in the day, which ran more than three hours, gave the Commonwealth’s PPD government a forum in which to respond at length–and on its own terms–to the events discussed in federal court.

The first witness called by Committee Chairman José Nadal Power was Miguel Venta, KPMG’s Office Managing Partner for the San Juan office.

Venta’s written testimony was provided in Spanish and English.

After laying out KPMG’s long history of working with the Commonwealth, Venta explained that in audits, it is the client who must provide the data.

KPMG does not prepare the Commonwealth’s financial statements. The Commonwealth does. Like any other entity, the preparation of the financial statements is the responsibility of management. For the Commonwealth, that role is fulfilled by the Treasury Department.

Puerto Rico Treasury Secretary Juan Zaragoza in his testimony later concurred with Mr. Venta’s statement: “The only function of the external auditor,” he said, “is to provide an opinion about the state of finances.”

In what was to become a recurring theme, Venta then emphasized the complexity of auditing the Commonwealth at such a tumultuous point in time.

The financial statements …  are complex. Including the required management discussion and analysis and supplemental information, they run more than 350 pages. These financial statements combine the general fund with over 70 component units and funds, including seven major component units, most of which are audited separately.

Venta also indicated that some key data were still in draft form (sub-audits for the retirement systems and the Government Development Bank of Puerto Rico [GDB] are not yet finalized, for example), but said that a significant batch of documents had been delivered to KPMG on January 31st, and that KPMG anticipated being able to complete the audit within nine weeks of that date.

As part of his closing Venta emphasized that the current working relationship with the necessary Puerto Rican government officials was acceptable:

The Commonwealth, including the Treasury and the Governor’s office, has taken measures to monitor the progress of the work on the audit of the Commonwealth and the outstanding component units… No audit can be completed without client-auditor cooperation. This is the case with our audit of the Commonwealth, where we are working effectively with our client to complete the audit.

The testimony by two KPMG officials this month in different settings (Miguel Aponte in federal court and Miguel Venta in the Puerto Rican Senate) focused on different aspects of the engagement.

Mr. Aponte, in federal court testimony, discussed the daily work, the to-and-fro between his team and government officials, whereas Mr. Venta employed the diplomatic language of an experienced manager to emphasize the points of agreement and to smooth over any differences in timing and workflow.

Melba Acosta Febo (President and Chairwoman of the GDB) and Juan Zaragoza (Secretary of the Treasury of Puerto Rico) were next to testify.

Their testimonies were also provided in written form–however only in Spanish–and appeared to be a coordinated effort; various paragraphs and sections matched word for word.

Zaragoza opened by discussing the undisputed complexity of the Puerto Rico government.

The following images (which were a part of Zaragoza’s written testimony) show the structure of the Commonwealth for financial reporting purposes:

Screen Shot 2016-02-16 at 19.41.42 Screen Shot 2016-02-16 at 19.41.26

Zaragoza’s written testimony also included a chart that compares the number of Puerto Rico’s  governmental entities with those of various states. These data were presented to show the Commonwealth’s extraordinary complexity when compared to states that are many times its size. 

Screen Shot 2016-02-17 at 08.57.48

[Note: regrettably no higher quality images are available.]

 

Zaragoza indicated that the draft documents Treasury delivered to KPMG on January 31st were substantially complete, but said that there were three areas in which information was expected to change:

  1. The valuation and marketability of the GDB’s loan portfolio;
  2. Data from the retirement systems for which the sub-audits are not complete; and
  3. The valuation of certain accounts receivable.  

Previous testimony by multiple witnesses in the Walmart trial: established that the Commonwealth was insolvent; and laid the bulk of the blame for the audit’s delay on the government. Governmental officials had repeatedly and publicly blamed KPMG.

In her testimony, Acosta discussed the GDB valuation challenges that Zaragoza mentioned. She said their valuation rested on three primary components:

  1. The budgetary appropriations from the general fund”;
  2. Access to capital markets; and
  3. The ability of public corporations to repay the GDB the principal and interest due.

Zaragoza and Acosta both referenced the imminent release of a draft of the financials, which were posted at 5:30PM.

About Gil Hall

Currently writing book on PR crises. Working title: "Los Pertrechos: the Story of an Economy". Polyglot prone to prolixity in English, German &, Spanish. Based between San Juan and North Carolina. MBA/MHA.