Posted on by APE (All People Equal)

Brazil, Price Waterhouse Coopers as the auditors, and $3.9 billion missing due to “inconsistencies”

CategoriesGamestop., Issue Jan'23, Site Updates & News.

Honorable ape 2600_yay writes: Eighty four years ago, I remember millions of dollars in Gamestop puts being funneled off to Brazil to avoid scrutiny under US reporting laws. (Please see the Brazilian puts links below for more info on this topic if you weren’t around in Jan 2021 when this event took place.) I only have the free newsletter as the subscription is a few hundred dollars a year, but this interesting article on shitty auditing of a Brazilian company’s books by PriceWaterhouseCoopers popped up in my inbox. I’ve pasted the truncated text from the free edition of the newsletter below (the subscription is a few hundred dollars a year). You can also view the post here: https://thedig.substack.com/p/billions-of-liabilities-missing-from . The Dig newsletter is a Substack newsletter written by Francine McKenna and it “digs into accounting, audit and corporate governance issues at public and pre-IPO companies”.

Billions of liabilities missing from the balance sheet of Brazil’s Lojas Americanas: Where was auditor PwC?

Auditors have to be either willfully blind or patently stupid to not realize billions are missing from balance sheets.

by Francine McKenna

On January 11, 2023, Americanas S.A., the parent company of Brazilian retailer Lojas Americanas announced that “inconsistencies” had been detected in the accounting entries related to amounts owed to suppliers over several years, including 2022. The company’s initial estimate is that the amounts of “inconsistencies” could be as much as BRL 20 billion (about $3.9 billion at the current exchange rate) as of September 30, 2022. The source of the “inconsistencies” appears to be, according to a statement from the company, related the existence of purchase financing where Lojas Americanas owes approximately BRL 20 billion to financial institutions but those amounts are not reflected in the company’s financial statements as of September 30, 2022.

Gustavo Henrique Ruffo at Autoevolution.com has the details:

Summing up, what happened was that the company bought from its suppliers with a 90-day deadline to pay. The suppliers sold this debt to banks at a discount in order to get their money faster. However, Lojas Americanas did not pay the banks, which turned into a snowball that reached the astronomical debt discovered by its new executives. Rial and Covre resigned immediately after finding out about the issue. The company is now worth only R$2.4 billion ($466 million), or around 12% of what it owes to banks.

On January 11, now former CEO Sérgio Rial spoke to analysts at a conference organized by Banco BTG Pactual. When one analyst asked what the ultimate impact of the “fraud” would be on the balance sheet and income statement and if there were other negative surprises looming, Rial responded that he didn’t know, however he took exception the use of the word fraud:

Some of the entries put in place over a number of years were a mistake [but] the culture is not toxic. It has not been transparent but it is not toxic… Bonuses that were paid [for incorrect results] were reinvested in Americanas stock.

Despite this admittedly lukewarm vote of confidence in prior management, Sérgio Rial and new CFO André Covre, who with Rial recently took over on January 2, also announced their resignations from the company at the conference. Rial, who holds multiple boaord seats and is the former president of Santander Brasil, was announced in August of last year to replace Miguel Gutierrez, who had been at Americanas for almost 30 years and has been in charge of the group for 20 years. As a result of this sudden upheaval, the company said that its Board of Directors had appointed João Guerra as Chief Executive Officer and Director of Investor Relations on an interim basis.

The Board of Directors also created an independent committee to “determine the circumstances that caused said accounting inconsistencies”. Rial is, however, just switching hats, and will take on a role as an advisor to billionaires Jorge Paulo Lemann, Marcel Telles, and Carlos Alberto Sicupira, founders of the Brazilian private equity firm 3G Capital, who’ve run Americanas until 2021 out of Rio de Janiero, since the 1980s. In 2021, a corporate restructuring reduced their interest from a controlling 53.3% stake to a “reference” shareholder stake of 29.2%. According to the Brazilian business magazine Folha, the trio increased this participation to 31.13% and are the main shareholders of Americanas.

3G Capital is also a major shareholder of US-listed companies AB Inbev, Kraft Heinz and Restaurant Brands International (which owns Burger King). Regular readers of The Dig will recall that in June of 2020 I wrote about a series of lawsuits filed as a result of the 2019 Kraft Heinz $15.4 billion goodwill impairment and an SEC investigation of 3G that eventually resulted in an enforcement action in September 2021 with a $62 million fine.

[… article goes on, but I don’t have the several-hundred-dollars-a-year paid plan, so I apologize for the truncated version.]

The last link there “an enforcement action in September 2021” is a link to an SEC document: https://www.sec.gov/litigation/admin/2021/33-10977.pdf

I am unsure how or if it is possible to programmatically ‘mine’ auditor’s[1] publicly filed documents, but I will eat my hat if this is the only occurence of “oopsie woopise, we ‘lost’ a few billion dollars and our auditors ‘failed to realize’ that there was a missing pile of money when the audiors were looking at our books.’

For whatever reason it seems like Brazil is a convenient country in which to engage in financial misdeeds (especially large scale financial misdeeds that amount to billions of dollars of cash). If anyone who has worked on Wall Street or in the financial services space can shed some light as to why Brazil seems to be a ‘favorite’ location for financial fuckery, I am all ear!

Some recent links regarding the Brazilian puts in case you missed them back in 2021:

Brazilian puts links

[1] As of 2023, I would consider a good ‘starter list’ of auditors / corporate accounting service companies to be: PriceWaterhouseCoopers (PwC), Accenture, KPMG, Ernst & Young and Deloitte.

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