Another Supply Chain Finance-Enabled Crisis Hits, This Time in Brazil

“Discovery” of multi-billion dollar “inconsistencies” on Brazilian retail giant’s balance sheet is a timely reminder of the risks posed by supply chain finance, especially in a heavily weakened business environment such as today.

On the second day of this fledgling year, the Brazilian seasoned business executive Sergio Rial was appointed as the new CEO of Americanas, the parent company of one of Brazil’s largest grocery chains, Lojas Americanas. Alongside him, André Covre took over as chief financial officer. But their stay was to be exceedingly short. Just ten days later, both had resigned after discovering accounting “inconsistencies” on the company’s balance sheets to the tune of no less than 20 billion real (US$ 3.87 billion).

No “Material” Impact

In a statement cited by Reuters, Americanas said the inconsistencies were a result of “supplier financing operations” that were not adequately reflected in its accounting. It described the cash impact of those “inconsistencies” as “not material” — a curious choice of words given the amount involved not only dwarfs the company’s net equity (US$2.9 billion), but was almost twice the size of its market value (US$2 billion) at the time the statement was made, on Wednesday afternoon.

Following the news, the company’s bonds plunged 38 cents on the dollar in trading on Thursday, according to Bloomberg. By the end of trading, Americanas’ shares had slumped by a whopping 77%. That’s after falling by around two-thirds last year, despite posting its highest net sales since 2013. The company’s entire market value is now roughly a tenth the size of the so-called “inconsistencies” on its balance sheets.

The company’s cash flow situation is now “much more delicate than anticipated,” said analysts at JP Morgan. Other banks including Morgan Stanley, Bradesco BBI and Itau BBA scrambled to place their forecasts for Rio de Janeiro-based Americanas under review. A group of lawyers representing minority shareholders has filed a complaint against Americanas for what it called a “multi-billion fraud,” while also asking regulator CVM to investigate the retailer’s auditor, PwC.

Americanas’ new management has called for an internal inquiry and work by independent auditors to determine the impact of the “inconsistencies” on the company’s financial statements (just in case it isn’t immaterial, presumably), which begs the [largely rhetorical] question: what has the auditor, in this case PwC, been doing until now?

In every high-profile business collapse caused (or at least exacerbated) by supply chain finance issues, auditors have failed to spot (or at least report) any of the glaring irregularities, until it is too late. In the case of Spanish green energy giant Abengoa, a 17-year old student in Barcelona who chose Abengoa as the subject of his high school economics project noticed serious flaws in the company’s accounting — a full year before Deloitte’s auditors finally blew the whistle.

“The big surprise was that negative profits were being converted into positives,” Baltá told the Spanish daily El Mundo.

It was a similar story at the now-defunct UK outsourcing firm Carillion. In its last ever annual report, the firm’s auditor, KPMG, approved Carillion’s viability statement, certifying it as strong enough to survive for “at least three more years.” Within less than three months, Carillion’s management was forced to admit it had significantly overestimated revenues, cash and assets, prompting a stunning stock market meltdown from which it would never recover.

A scathing letter to the Financial Times at the time called for Carillion’s directors and KPMG to be investigated for the company’s collapse. Martin White, of the UK Shareholders Association, and Natasha Landell-Mills, of Sarasin & Partners, wrote:

Although fingers are being pointed in all directions, most are missing the real culprit: faulty accounts appear to have allowed Carillion to overstate profits and capital, thereby permitting them to load up on debt while paying out cash dividends and bonuses.

All of it on KPMG’s watch.

Now, back to the present. And Brazil.

Lojas Americanas boasts around 1,950 stores across Brazil and employs 40,000 workers. For decades the retail chain was controlled by three of the billionaire co-founders of the Brazilian-US investment fund 3G Capital, including Jorge Paulo Lemann, the world’s 72nd richest man. 3G Capital owns (among other things) food and beverage conglomerate AB InBev whose holdings include Budweiser, Stella Artois, Corona and Becks; Big Food behemoth Kraft Heinz and Restaurant Brands International (Burger King, Popeyes, and Tim Hortons).

In 2021, the three billionaires reduced their stake in Americanas as part of a merger/restructuring to 31%. But they have told the board they plan to keep supporting the company, and they certainly have the money to do so. Rial said he’ll work with the trio of longtime investors to help steady the ship and said he has a “moral obligation” to lend his support while apologizing to investors.

Supply Chain Finance Strikes Again

Right now, this story is young and the details are still coming to light. But the story forms part of a much broader saga that has been unfolding for years, with disastrous consequences for companies, their employees and investors across at least three continents (Europe, Australia and now the Americas). It has the potential to magnify corporate debt crises, particularly in a weakened business environment such as today’s…

Read the full article on Naked Capitalism

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