Accountants PricewaterhouseCoopers and KPMG have been embroiled in a scandal over collapsed Brazilian retailer Americanas after internal communications revealed how the company hid billions of dollars in debt.
Americanas’ new management told the Financial Times it was looking for “context” to explain correspondence between a former executive and two audit firms amid an independent investigation into nearly $4bn in accounting irregularities The violations, discovered in the 2019-2019 report, led to the company’s bankruptcy in January.
The retailer said for the first time last week that fraud was the main reason for the collapse. While it blames former executives, the development also raises the stakes for the company’s advisers.
KPMG audited the accounts from 2016 to mid-2019 and redrafted an internal report so that the final version downplayed concerns about the company’s financial controls, a congressional investigation on Tuesday revealed.
PwC worked as an auditor before and after KPMG took the role, and in 2016 advised Americaas executives on how to describe the company’s complex supply chain financial arrangements. Americanas’ current chief executive, Leonardo Coelho, told lawmakers that the proposals were allegedly used to hide its liabilities and that the proposals obscured key features.
The collapse of Americanas has shocked corporate Brazil and could cast a shadow over investment in the country. The century-old retailer is a staple of Brazil’s high street and its largest shareholders – billionaires Jorge Paulo Lehmann, Marcel Thales and Carlos Alberto Sicuppi La – both the most famous businessmen in the country.
The trio, who said they were unaware of the breaches, are helping orchestrate a financial bailout with an infusion of fresh cash.
The collapse has led to finger-pointing between investors and creditors and the company’s bankers and advisers, as well as among current and former management. Americanas said last week that an independent investigation it launched found evidence of falsely advertised contracts and unapproved use of supply chain financing.
Coelho told Congress that the former executive hid the financial irregularities from the board. Advice from PwC and changes made by KPMG helped them do that, according to his testimony.
In successive drafts of Americanas’ 2016 accounts report, KPMG removed references to “material deficiencies” in the company’s financial reporting and ultimately agreed that the issues needed to be addressed only by management, not at the board level, it said. slideshow Introduced by Coelho.
He also showed a 2016 email from a PwC partner in which she suggested alternative wording to describe supply chain financing arrangements, which he said blurred whether they should be counted as debt.
The partners “are giving instructions on how to write the text of the subject in the final audit letter . . . it’s not clear to all involved,” Coelho said.
Americanas said it will take appropriate legal action against all those responsible for the fraud.
“Regarding the audit firm, the analysis is preliminary and more background information is needed as the report (has been) generated from falsified documents,” Americanas said. “Americanas reiterates that the authorities are investigating and reiterates that the company is most interested in clarifying the facts.”
Thaynara Rocha, a lawyer representing Daniel Gerber Advogados, a group of minority shareholders, said the two audit firms “have the means to investigate inconsistencies and have a duty to disclose them to the nation’s financial system and capital markets”.
“If these frauds were easily detected (by an independent investigation) in a very short period of time, why didn’t PwC and KPMG detect them?” she said.
KPMG said it stood by its audit opinion on Americanas, which “has been prepared in accordance with professional standards.” PwC declined to comment in Brazil or its global headquarters.
According to local reports, Americanas’ three billionaire shareholders and creditors have been negotiating the terms of a financial bailout, which would include a capital injection of up to 12 billion reais ($2.5 billion), while creditors would accept a debt-for-equity swap.
The company also said it was selling some businesses, including its fruit and vegetable business, and considering selling others, such as its financing unit.
Additional reporting by Beatriz Langella