Americanas: find out why fraud is not innocent at all – 06/15/2023 – André Roncaglia

Pedras do pier already knew that the Americanas case was the biggest corporate fraud ever recorded in Brazil. The financial skeleton unearthed comes close to R$50 billion.

In her book “Double Entry” (Double Entry: How the Merchants of Venice Created Modern Finance), Jane Gleeson-White tells how the Venetian method of commercial management —codified in 1494 by the Florentine friar Luca Pacioli— freed the productive forces of capitalism , but also leveraged fraud and manipulation. It is difficult, therefore, to dissociate the advance of capitalism from corporate corruption.

Adam Smith was already suspicious of corporations for separating ownership and management. In the celebrated book “The Wealth of Nations”, Smith highlighted the “negligence and exuberance” that prevailed in the management of these companies.

According to him, such agency costs would grow in line with the expansion of the market power of large corporations. Smith’s distrust was well founded.

Corporate governance was developed in the 20th century to mitigate such costs, through greater transparency and the definition of incentives that aligned the interests of managers and shareholders and, later, these with society.

Like any human institution, corporate governance is subject to design errors and opportunistic manipulation. Despite the advances, the overall result is far from satisfactory.

A recent study by Dyck, Morse and Zingales (2023) suggests that, despite the widespread practice of corporate fraud, only a third of them are discovered; and more: about 40% of listed companies systematically commit accounting violations, destroying 1.6% of their market value each year —US$ 830 billion (R$ 4 trillion) in 2021.

The study is based on the US, where there is more transparency and control. In Brazil, I suspect the problem is even greater.

The body responsible for overseeing the capital market in Brazil, the CVM (Comissão de Valores Mobiliários) had its budget reduced, in 2022, to the lowest level in 13 years, and has not held a competition to replace staff since 2010.

The body costs the public coffers about BRL 250 million annually to monitor about BRL 25 trillion in market values: it verges on the blackout of inspection of corporate conduct. Where does the ox go…

Private corruption rarely galvanizes the fury of the public and the press as it does in the state sphere.

As JK Galbraith teased in “The Economy of Innocent Fraud”, corporations do not exist in a vacuum: their actions affect the public sphere and therefore need state regulation. After all, the private audit mechanism is flawed and easily distorted by conflicts of interest.

Among the various scandals, I remember how Enron buried the audit firm Arthur Andersen, which turned a blind eye to the history of financial and accounting fraud.

In the case of Lojas Americanas, there are strong indications of omission motivated by the board of directors, PwC and KPMG audits and the banks involved. The scheme pilfered millions from its minority shareholders, employees, suppliers and creditors.

Aware of the company’s insolvency, the former board of directors and the controlling shareholders were granted an exemption from IR (income tax) on dividends distributed well above the market average, as well as the early sale of their shareholding with rising prices.

The effect goes further: the dismantling of the vast supply chain produced unemployment, spread distrust that froze the private credit market and reduced tax collection.

There is no meritocracy when private vices become recurrently socialized costs, as is the recognized practice of the Lemann-Telles-Sicupira trio from 3G Capital. Paraphrasing Fabiano, a character from “Vidas Secas”: the name of this is naughty.

PRESENT LINK: Did you like this text? Subscriber can release five free hits of any link per day. Just click the blue F below.