Bank of Portugal and KPMG – all is not well

There is no more collaborative harmony between the Bank of Portugal and KPMG - Banco Espírito Santo’s auditors as the bank tries to implicate the auditor in the BES enquiry .

The relationship between the Bank of Portugal and KPMG started to break down when in late July the Bank’s governor Carlos Costa was up before Parliament to explain what on earth had gone wrong at BES, one of Portugal's biggest banks.

Costa said then that it would be necessary to look carefully at the role of BES’s auditors KPMG which recently had signed off the half-year accounts recording surprise multi-billion euro losses.

KPMG refused to give an opinion on the BES interim accounts as the management would not take responsibility for the financial information given to the auditor. Hence, the first half accounts are signed by KPMG but with a clear disclaimer which should have sent clear warning signals to the Bank of Portugal.

KPMG explained its decision as it was reporting at a time when it knew already that BES was to be divided into a good and a bad bank, with uncertain futures for BES assets and liabilities. KPMG stated that it did not know how and if the BES business could carry on, mainly due to massive exposure in Angola.

The National Bank of Angola revealed in July that Banco Espírito Santo Angola needed a capital injection of €2.7 billion, and that if the shareholders did not subscribe to a capital increase, the Angolan government would take over the bank.

The auditor claims not to have received a key letter from BES management confirming the accuracy of the information supplied to be incorporated into the financial statements as at the end of June which caused “significant limitation to the scope of our work."

In summary, KPMG refused to give an opinion. "We are not able to express, and we do not express an opinion on the consolidated interim financial statements for BES relating to June 30, 2014."

KPMG now does not appreciate the Bank of Portugal’s attempt to drag it into the enquiry when it has made the position clear but the tension between the two bodies has increased as Costa looks to divert blame from his failure as financial overseer. His claim is that KPMG should have warned him of BES’s management practices in addition to advising him of the dire trading figures about to hit the market.

MPs also want to know how and when KPMG warned the Bank of Portugal of the real state of BES’s finances. The Commission of Inquiry into the BES case is looking closely at the timeline and the exact date that the Bank of Portugal realised that BES was collapsing.

Suspicions that the Bank of Portugal did not have a grip on BES were confirmed when Costa revealed that he had thought it a good and sound idea to inject €3.5 billion into BES when he knew of BES Angola's dire financial state, and just days before his rescue plan was implimented that saw BES divided into the ‘good bank - bad bank’ structure.

While the Bank of Portugal was being urged by Parliament to find a solution to the BES implosion, the country's central bank already had made a multi billion transfer from the Emergency Liquidity Assistance fund to the failing BES, leaving taxpayers with the liability despite government assertions ot the contrary.

At the time, Carlos Costa was not keen to release information about this taxpayer-backed loan and the reason for his actions remain deeply suspect.

When the Bank of Portugal has a governor who knows what he or she is doing, the better Portugal’s financial community and it citizens will be served.

In the meantime, the taxpayer, the media and the Troika look forward to hearing how and when the €10 billion in loans made so far to save BES will be repaid.

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