Photo: Eduardo P/AAUP/Creative Commons/edited by autoevolution
When Tesla claims massive profits per car in each quarter, the only independent element backing that up is PwC (PricewaterhouseCoopers). The external auditing company verifies the accounting and tells the stock market and its regulators if everything is fine. When it discovers any issue, it must make that public in reports. What if it doesn't? This is precisely what is getting PwC in hot waters in Brazil after a recent financial scandal.
Lojas Americanas is a massive retail store chain in that country, with more than 3,000 stores. It recently hired two new executives, Sergio Rial and André Covre, respectively, as its new CEO and CFO. They spend only nine days in their jobs before discovering an “accounting inconsistency” of R$20 billion ($3.9 billion at the current exchange rate).
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.
PwC’s involvement with the story comes from it approving the accountability of Lojas Americanas in 2021 without observations. So much so that Rial and Covre had no idea about the issue. If they kept their jobs without warning the stock market about it, they could face civil and criminal liabilities for that.
Minor shareholders congregated by Abradin (Associação Brasileira de Investidores – or Brazilian Investors Association) have now denounced the retailer to CVM – Comissão de Valores Mobiliários, the Brazilian equivalent of the Securities and Exchange Commission. They also asked the entity to investigate PwC, qualifying what the auditors did there “absolute ineptitude.” After all, it should have warned them about how troublesome the situation was.
The association also refuses to use the word “inconsistencies” to name what happened. According to Abradin, that’s an “attempt to use a euphemism for a multi-billion fraud that destroyed shareholders’ savings and mines the credibility of the Brazilian stock market.”
This is not the first situation in which PwC signed off financial statements that later proved problematic. The most significant case probably relates to Evergrande, a Chinese property developer with $300 billion in liabilities. PwC never pointed out any problems with this company. The Hong Kong-based accounting research firm GMT Research warned about issues with Evergrande in 2016, asking if its auditors were asleep.
The second massive miss for the external auditing company was also in Brazil. PwC approved the accountability for Petrobras, the state-owned oil company, from 2012 until 2014, when it refused to do so after the Lava Jato scandal erupted. Petrobras later recognized it lost R$ 6.2 billion in bribes to politicians.
Luis Inacio Lula da Silva went to jail after two judgments because of his involvement with this bribery scheme. Despite that, his lawyers paid PwC to generate a report denying corruption involving Petrobras, which was presented to the first judge in charge of his case. Lula was released after the Brazilian Supreme Court changed the law interpretation by 6 votes against 5 to only allow prisons after no more appeals were possible. Until that point, arresting anyone after a higher court confirmed their conviction was the rule. Lula recently managed to win a third term as president. Sergio Moro, the judge who first sentenced Lula to jail, is now a Senator.
As for PwC, CVM absolved it from liabilities for signing off Petrobras’s financial statements. The company refused to comment on the Evergrande case and also the Lojas Americanas situation with the same excuse: confidentiality due to live client engagement. With such problems in its curriculum, questioning the financial statements PwC approves may become more common.
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.
PwC’s involvement with the story comes from it approving the accountability of Lojas Americanas in 2021 without observations. So much so that Rial and Covre had no idea about the issue. If they kept their jobs without warning the stock market about it, they could face civil and criminal liabilities for that.
Minor shareholders congregated by Abradin (Associação Brasileira de Investidores – or Brazilian Investors Association) have now denounced the retailer to CVM – Comissão de Valores Mobiliários, the Brazilian equivalent of the Securities and Exchange Commission. They also asked the entity to investigate PwC, qualifying what the auditors did there “absolute ineptitude.” After all, it should have warned them about how troublesome the situation was.
The association also refuses to use the word “inconsistencies” to name what happened. According to Abradin, that’s an “attempt to use a euphemism for a multi-billion fraud that destroyed shareholders’ savings and mines the credibility of the Brazilian stock market.”
This is not the first situation in which PwC signed off financial statements that later proved problematic. The most significant case probably relates to Evergrande, a Chinese property developer with $300 billion in liabilities. PwC never pointed out any problems with this company. The Hong Kong-based accounting research firm GMT Research warned about issues with Evergrande in 2016, asking if its auditors were asleep.
The second massive miss for the external auditing company was also in Brazil. PwC approved the accountability for Petrobras, the state-owned oil company, from 2012 until 2014, when it refused to do so after the Lava Jato scandal erupted. Petrobras later recognized it lost R$ 6.2 billion in bribes to politicians.
Luis Inacio Lula da Silva went to jail after two judgments because of his involvement with this bribery scheme. Despite that, his lawyers paid PwC to generate a report denying corruption involving Petrobras, which was presented to the first judge in charge of his case. Lula was released after the Brazilian Supreme Court changed the law interpretation by 6 votes against 5 to only allow prisons after no more appeals were possible. Until that point, arresting anyone after a higher court confirmed their conviction was the rule. Lula recently managed to win a third term as president. Sergio Moro, the judge who first sentenced Lula to jail, is now a Senator.
As for PwC, CVM absolved it from liabilities for signing off Petrobras’s financial statements. The company refused to comment on the Evergrande case and also the Lojas Americanas situation with the same excuse: confidentiality due to live client engagement. With such problems in its curriculum, questioning the financial statements PwC approves may become more common.
Google News