What Is Delaying Puerto Rico’s Audited Statements?
SAN JUAN — Two months ago, Alejandro García Padilla administration officials anticipated that Puerto Rico’s audited financial statements for fiscal year 2014 would finally be delivered by the beginning of April. Now, there is yet another setback, as this will no longer be the case, as first reported by Caribbean Business two weeks ago.
As of Thursday, La Fortaleza still did not know when the commonwealth’s long-awaited Comprehensive Annual Financial Report (CAFR) for the year ended June 30, 2014, would be released. The fiscal 2014 CAFR was due nearly a year ago, in May 2015.
KPMG, the independent auditors tasked with the process, said it would take the firm another eight to nine weeks to complete the audit once they receive all pending information. Since early this year, administration officials have stated the government has handed in everything on their end.
But they have also acknowledged that some commonwealth components have yet to finish certain processes related to the external audit, including the cash-strapped Government Development Bank (GDB) and two of the commonwealth’s retirement systems. At this writing, these pending processes had yet to be completed.
When asked by Caribbean Business earlier this week about the pending items—without which KPMG cannot sign off on the document—Treasury Secretary Juan Zaragoza said assessments on the teachers and commonwealth-employees retirement systems were expected to be delivered by the end of this week.
As for the GDB, a person with knowledge of negotiations told Caribbean Business there were no contentious issues, but rather too much uncertainty in figuring out the troubled bank’s loan reserve.
“It’s a matter of perception—the perception of the government’s ability to pay its loans and lines of credit with the GDB,” said the source who chose to remain nameless.
Meanwhile, two Caribbean Business sources believe a final decision will soon be made, but it is impossible to say for certain because any changes require final certification from KPMG’s headquarters.
The commonwealth’s cash crunch has certainly taken its toll on the GDB, as the central government and its instrumentalities have failed to repay for years the money the bank has loaned to them.
“Add to that uncertainty; if the government can restructure its debt, then there would be more money on hand; if the government isn’t able to restructure, then there is less money. There’s a bunch of uncertainty and assumptions tied to the central government that are tough to nail down,” the source added, while insisting that completing the work has taken more time because of this.
Indeed, the island’s quickly changing fiscal developments, so-called “subsequent events” in the auditing jargon, have ultimately affected the CAFR’s final delivery. But there needs to be a cutoff at some point, if the report is ever to be released.
Progress has been made since first putting together information that shows most central government entities cannot guarantee business-as-usual operations throughout the year, as they continue to struggle to honor all their obligations.
Weekly meetings between all sides have been held for months to discuss the matter, led by La Fortaleza Chief of Staff Grace Santana.
Most recently, both sides have been going over the island’s most recent fiscal developments and how these could affect the workplan that had been drawn up. The administration enacted last week legislation authorizing the governor to suspend debt-service payments across commonwealth entities, followed by an executive order placing restrictions on cash outflows at the financially battered bank, aiming to stabilize dwindling liquidity levels.
A long-awaited document
On April 1, La Fortaleza told Caribbean Business that given the commonwealth’s fiscal situation, the latest snag on the statements’ delivery did not constitute a “material deviation” from the original timeline. They tentatively targeted April 11 as the final release date.
While originally due May 2015, government officials have pointed to a number of reasons that have delayed the statements’ release, chief among them the island’s fiscal woes, which have prompted KPMG to ask for additional projections and disclosures.
In times when the Republican-led Congress insists on the delivery of the audited reports before granting the island with access to any debt-restructuring tools, the latest setback affects the commonwealth’s prospects of achieving timely and favorable federal legislation to address its fiscal woes.
The Puerto Rico Oversight, Management & Economic Stability Act, or PROMESA—a House bill being worked by GOP members in response to the commonwealth issue—conditions access to debt-restructuring tools on first completing the independent audit process.
“[The fiscal 2014 CAFR] must be ready before the bill is approved,” Gov. García Padilla said last month.
In mid-February, the P.R. Treasury Department released a draft of the commonwealth’s financial statements for fiscal 2014—a 370-page document of unaudited and preliminary financial information showing bleak fiscal prospects across commonwealth entities.
“We are not hiding anything. The situation is as bad as we are explaining,” GDB Chairwoman & President Melba Acosta told congressional staff in February. “Trust me, they are not going to be beautiful financial statements. They haven’t been for I don’t know how many years.”
During the past decade, and without taking into consideration the fiscal 2014 report that is now almost a year late, Puerto Rico has been late in delivering the CAFR an average 70 days, or a little over two months, according to municipal market records. Since 2005, the commonwealth has met the market’s deadline four times, in 2005 (fiscal 2003 statements), 2006 (fiscal 2004), 2011 (fiscal 2009) and 2012 (fiscal 2010).
Executive Editor Philipe Schoene Roura contributed to this story.