Brazil’s securities market watchdog wants to know if the accounting problem is restricted to Americanas

01/24/2023

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There is a risk that this is not Americanas fraud only, but an accounting method used by other companies, expert says — Foto: Gustavo Minas/Bloomberg

Brazil’s Securities and Exchange Commission (CVM) is questioning at least nine publicly traded retail companies to understand how they deal with a practice that is at the center of the issues involving the “accounting inconsistencies” of retail giant Americanas. The companies were consulted by the securities market authority. In the experts’ view, the goal is to understand what the market’s practices are and if the problem could repeat itself, even if in smaller proportions.

The so-called “risco sacado,” also known as forfait in Brazil, in general result from a triangulation between the company (buyer), suppliers, and banks. These operations use customer receivables to leverage the company with bank financing and with the company’s guarantee, without necessarily being represented as financial liabilities due to the specificity of each operation format. This practice is typically accepted by the market and is not restricted to retail companies.

In a note, CVM confirms that it has sent questions to companies on the matter and says that whenever necessary it interacts with capital market participants to request important information for analysis and supervision work.

One company questioned was Via. The company spontaneously manifested itself on the matter the day after Americanas disclosed accounting inconsistencies of R$20 billion that motivated the exit of CEO Sergio Rial and chief financial officer André Covre. The company said in a note, on January 12, that all these operations are recorded in its financial statements under international accounting standards and that it details the operation in the financial report. The operation is detailed in an explanatory note and the interest expenses are registered in the company’s results as a financial expense. Sought, the company declined to comment.

In 2016, CVM pronounced itself on the subject through a circular letter. The regulator warned about the need for companies to evaluate these operations and shows that the concern is not new. The capital market regulator recommended that if there was an understanding that the operation was a bank debt, it should be reclassified in the financial report as such. This point of attention has been repeated annually in the document since then. “The 2016 circular letter was not prescriptive. It may be that CVM will have clearer guidelines starting with the next circular, and will ask for classification criteria for companies. I think they will be more explicit in the way they want these operations to be treated,” said Luciana Dias, a lawyer and professor at Fundação Getulio Vargas.

More recently, in November 2021, the International Accounting Standards Board (IASB) requested, via public hearing, that companies give more details on such operations. IASB is the organization that publishes and updates the International Financial Reporting Standards (IFRS). There is also an understanding by IFRIC, the committee that interprets the IFRS standards, that it is necessary to assess the substance of the transaction when recording it in the financial report.

There is still a regulatory gray area, in the view of Ahmed El Khatib, a professor at Fecap. “This undefined question makes everyone understand their own way of doing things,” he said. If the company does not classify the financial expenses correctly, there would be a generalized distortion: the profit may be higher than it really is, which has an impact on the distribution of higher dividends, cash flow, and equity.

“There is a risk that this is not Americanas fraud only, but an accounting method used by other companies. If so, more companies may have built-in losses that nobody knows about. The CVM wants to have a snapshot of the market to show that the companies’ financial reports are reliable,” said Alexandre Chaia, a professor at business school Insper.

There was an analogous situation in the United States in 2000. In that year, the Enron financial scandal generated insecurity concerning the accounting of operations with derivatives and subsidiaries. As a response, two years later the Sarbanes-Oxley Act (also known as SOX) was created, aimed at protecting mainly investors from accounting errors and fraud. “Enron did what everyone else did. SOX is a consequence of the distrust of the market. This law serves as a reference for any company that operates in the international market,” said Mr. Chaia.

*By Juliana Schincariol — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/