“Listed companies provide a lot of useless information which only confuses investors”

Carlos Fernández

Q. As Madrid Stock Exchange ombudsman, what is your opinion about the abundance of stock scandals like Bankia or Spanish fishing company Pescanova? Do you think that the investor is protected in Spain?

A. What I can say is that in Spain, whenever there has been a scandal, a solution has been created to avoid it in the future: in the case of financial scam Gescartera it was the creation of the Investment Guarantee Fund; the Olivencia Commission in Banesto’s case, and the Aldama Commission in order to resolve transparency issues.

Q. But these scandals reveal that there is still a great lack of transparency regarding the real situation of companies. What do you think?

A. There has been a lot of work. We have gone from very limited information and publicity to having brochures now, a  continuous flow of information through audited data from all the companies. We also have continuous and daily communication with the CNMV on all cross-market operations, which centralises all this data. So the CNMV is immediately aware of every relevant market operation.

Q. I was referring primarily to transparency in companies’ accounts, for example, the Pescanova affair…

A. I’m sure this case will also lead to the creation of another commission. Not for the moment, but the problems which have been detected will be the subject of some new commission that will be set up.

Q. For the moment, those irregularities occurred and nothing happened…

A. Yes, but something will happen. The consequences of such situations in Spain take time to be corrected. In the US, an issue like Madoff’s was resolved, and the people compensated, within six months. Here we also take longer due to the slowness of the Spanish courts which causes delays, but in the end they will have to face the consequences of what they did. I am convinced the council that worked on the Pescanova case will rule there is criminal liability.

Q. Do auditors, who play a crucial role, really ensure that the accounts they approve correspond to reality?

In the Aldama Commission there was already a chapter dedicated to auditors (and to ratings agencies), so it is an issue that authorities are trying to overcome. What we cannot leave out is that in any human work there are actions and perversion. This is always present everywhere. I recognise that the principle of a true and fair view of companies continues to be a desideratum rather than a fact.

Q. Do you not think that when chartered accountants existed, we were able to trust companies’ accounts more than we can now?

A. The same thing may have happened here as with the rating agencies, namely that there are three at the global level. There are also three or four auditing firms which have become a kind of monopoly or oligopoly. And, what is worse, these firms do not only do audits: they also do tax consulting, consultancy, etc., generating continuous conflicts of interest.

Q. We have been told that the problem of conflicts of interest was resolved,  and that the different businesses had been separated in different firms.

A. This has not been resolved. Human malice resists any regulation. And breaks it.

Q. Even in the Anglo-Saxon countries?

A. Even in those countries. I would say more so. The biggest financial scandals do not usually happen in Latin countries, but in the US or UK.  Going against principles is often more extensive there than here.

Q. They are an oligopoly, but why do these companies continue being used if, in fact, it is hard to trust them? There are many other firms in the market.

A. Yes, there are more auditors but these big companies monopolise the market of large listed companies, perhaps because they offer other services, or because they are cheaper. I do not know. Coming back to the fact they also provide tax or legal services, I believe it should be established that there is an absolute incompatibility between the audit office and those services, and this has not been achieved. One good example is that Arthur Andersen, which disappeared after the Enron scandal, was then incorporated as Accenture.

Q. In the US it is clear that they have not succeeded in solving this, but can we not solve it at the national or EU level?

A. I see this as difficult. These accounting firms’ lobbies are very strong and are operating at the US and Brussels level. In Spain we can do little because the regulation for the stock market is imposed by rules of first European range. These are applicable here directly or through directives, which must then be transposed. In short, the framework is imposed from outside. Moreover, we cannot forget that these accounting firms have an enormous preponderance in the ICAC, the Institute of Accounting and Auditing (‘Instituto de Contabilidad y Auditoría de Cuentas’, in Spanish), which is the body that should regulate their activity.

Q. And which is not regulating, I suppose.

A. Somehow those who are regulating are the ones who should be regulated.

Q. I ask you, isn’t it a problem if the auditors have to show the flaws of the company that pays them? Shouldn’t we have found another solution?

A. In some countries they have found it. For example, the banks in Switzerland pay their audits, but the central bank is the one who hires the auditors.

Q. Don’t you think that in the end all this makes investing in the stock market too risky?

A. No, no. Not at all. The scandals are few and in a minority. But I do recognise that you have to take preventive measures in order to invest. The first one is that when you invest in the stock market you must use your own resources and not get into debt. And also, if possible, use spare resources not required for any other specific potential need. It should also be a well thought out investment, not a crazy one, and it is crucial not to put all your eggs in one basket. Finally I would say that we should not trust anyone when we are making an investment. Before signing any contract, read it carefully.

Q. I remind you that Pescanova was a company with a great reputation and a very sound image.

A. The same prestige that Lehman Brothers had when it failed.  But what attracted my attention about Pescanova was the existence of more than one hundred subsidiaries. Such situations always end up creating confusion and a lack of clarity. In the end, the operations of a company with one hundred subsidiaries, mostly abroad, are less transparent. Many of these transactions, tucked away in affiliated companies, are difficult to detect. And it complicates the accounting, which should be clear.

Q. I guess that is also affecting the stock information.

A. I think the stock information has become overly complicated. Before, a balance sheet clearly showed the state of the company, accurately determined its situation and you knew about its net assets, profits etc. Nowadays, and particularly in the case of a company with so many subsidiaries in several countries, with different currencies, accounting systems and laws, it is difficult to coordinate that and provide a true and fair view. That was precisely the case of companies like Enron or Worldcom, in which its major operations were off the books! as happened with Lehman.

Q. How was it possible to take all that information out of the balance sheet and put it in the “shadow” as they call it? It seems a bit outrageous.

A. Of course. An essential principle of accounting is measuring all operations, in greater or less detail. And what is evident is that the absence of balance or exclusion of entire areas of activity from the balance sheet generates a lack of transparency, confusion and doubts. Everything that is removed from the balance sheet is an attack against the loyalty which governs the accounting regulation.

Q. What matters is whether these problems are indeed addressed or are still there…

R. We must continually monitor this. It is an ongoing problem. All this has been complicated unnecessarily. It happens, for example, with the prospectuses. Right now, an experienced investor reads a prospectus and cannot really know what the earnings per share of the company are or its book value. They send out huge 100-page  brochures, with an excess of useless information, which only confuses investors. The more they write the more they deceive. In my opinion, a prospectus should not exceed 10 pages and should explain the fundamentals.

 

Carlos Fernández González

Born in Seville in 1935, Carlos Fernández has always been involved in the stock market and investment worlds. After graduating with honour in law in 1957 from the University of Seville, Fernández, who is the current ombudsman of  the Madrid Stock Exchange, joined the Corps of state’s attorneys in 1960. In 1973 he became stockbroker and in 1989 he founded the company Mediación Bursátil S.V., S.A. He is a member of the stock market operator  BME’s board since 2014.

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