Why Read: Because if you understand how auditors and their clients function together, reporting delays seldom mean 'good news'.

Featured Article: A brief article this morning reports that:

• Spain's Central Bank has notified each of the (now reported as four) audit firms currently studying the books of Spain's banks that their reporting deadline has been moved from July 31 to September; and,

• later this week consultancies 'Oliver Wyman' and 'Roland Berger' are expected to report a preliminary estimate of capital needs for the entire Spanish banking sector.

The big four accounting firms - Deloitte, Ernst & Young, KPMG and PwC - are the ones reported as working on this mandate.

Commentary: I commented on the appointment of auditors, the timing of their reporting, and the problems they were likely to encounter when Spain's bank audits were announced in mid-May, suggesting then that readers consider that:

• it is likely beyond highly doubtful that if the two auditing firms are just now beginning an audit of property values underlying the bank's property loan portfolios, they will be able to reach meaningful property valuation conclusions within two weeks - simply because of the time-frame involved, and the likely complexity of their task;

• now valuation undertakings have been announced, it may be that any interested 'new equity investors' may wait until the completion of those valuations to make 'equity injection' decisions;

• property (or business) values are subjective enough, and difficult enough, to determine in normal markets. They become ever more difficult to determine and subjective the more uncertain and volatile are the markets for said properties; and,

• where property values must be determined in poor markets, the valuation concept of 'blockage' has to be considered. That is, it is one thing to put one property on a market where 'normal market conditions' prevail. It is quite another thing to opine on the value of 500 or 5,000 (or more) properties where an abnormal market prevails, and where one has to take into account what would happen if all those properties were introduced to that abnormal market at the same time - with unusual downward pressure on price.

The last point is something that not all persons opining on property or business value necessarily focus on or input into their value conclusions. This last point is also something that may have influenced the decisions made in Europe and America in 2008 - 2009 when mark-to-market accounting rules where changed. Consider carefully that changes in reporting do not impact market reality at a point in time.

The two audit firms that have been appointed to opine on the Spanish bank property values have a very difficult job. Potential arm's length lenders or equity investors likewise will have very difficult decisions to make.

(see: Spain and Spanish Bank Dilemma, May 14, 2012)

In the best of economic times:

• rendering audit and audit-type opinions is fraught with subjective decisions;

• add property and business valuation issues to the mix, both of which encompass significant 'guesswork' in those same 'best of times'; and,

• the end reporting decisions become ever more subjective and take ever more time to complete.

In uncertain and volatile economic times:

• subjectivity is (significantly) exacerbated;

• the work of 'opinion givers' is made much more difficult;

• reporting delays are common; and,

• importantly, the best-intentioned opinions become less reliable.

It can be argued that the Spanish banking problems today represent an even greater risk to the Eurozone and its continuity than does Greece.

That said:

• any delay is a bad delay; and,

• preliminary reporting may prove to be a bad idea, as greater uncertainty with respect to final reported information makes 'interim reporting' more tenuous and more dangerous.

On the balance of probabilities, this reported delay in auditor reporting tips the Spanish teeter-totter in the direction of 'not auguring well'.

Spain May Delay Bank Audit Deadline
Source: Fox Business, from Dow Jones Newswires, June 19, 2012
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