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German banking error shows importance of standardized accounting

A German bank realized its debt was actually billions of euros lower than perceived.

A recently discovered accounting gaff at a "bad bank" in Germany has led to a reduction in the country's national debt but has also created an embarrassing situation for those involved - the bank, its overseer and the auditing firm - the Financial Times reports.

The incident, in which the bank's debt burden was overstated by €55.5 billion, was allegedly due to the process by which FMS Wert-management calculated its balance sheet, the source says, proving the importance of following standard procedures in accounting. The bad bank explained the miscalculation happened "because full account had not been taken of changes in the value of collateral held in relation to a portfolio of derivative products," according to the Times.

The bank, created to take on unwanted and toxic assets from Hypo Real Estate, is owned by the German government and could potentially be a source of more issues, since it holds Greek debt and government bonds, the newspaper says.

The Associated Press reports that the discovery means Germany's debt level will decrease from 83.7 percent of gross domestic product to just 81.1 percent.  

Comments

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Unfortunately, this area of accounting is very complex and involves use of significant "off-line" data. Errors are easy to make and hard to find, and comparison bases limited. Very sophisticated financial types are needed, and may not be available to a "bad bank" operation.

Topic Expert
Barrett Peterson
Title: Senior Manager, Actg Stnds & Analysis
Company: TTX
(Senior Manager, Actg Stnds & Analysis, TTX) |

Unfortunately, this area of accounting is very complex and involves use of significant "off-line" data. Errors are easy to make and hard to find, and comparison bases limited. Very sophisticated financial types are needed, and may not be available to a "bad bank" operation.

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