The accounting scandal at Americanas – a household retail name in Brazil – shows how ESG, when implemented correctly, can play a key role in helping businesses walk the talk of corporate responsibility. Professor Ligia Maura Costa, FGV EAESP, coordinator of FGVethics and lawyer, explores.
A Brazilian Enron? The inconsistencies of Americanas by Ligia Maura Costa.
There is a mystery about the 43 billion of Brazilian Reals (R$) – almost 8 billion euros – “accounting inconsistency” of Americanas, a true icon of Brazilian retail. Whether the “accounting inconsistencies” in the balance sheet resulted from error or fraud, we will only know when the investigations are over. Accounting error or fraud, everything points to a “very serious mistake” in corporate governance.
The Americanas accounting scandal recalls the Enron case, where illicit accounting practices fraudulently inflated the company’s revenues. And the question worth 43 billion: how come the board of directors did not see the “inconsistencies”?
Did the supervisory board see nothing in the company’s balance sheet? And the external auditors, who signed off the balance sheet, could not glimpse anything? Not even investment funds were able to spot a red flag? Not to mention the regulatory agencies and Americanas own executive board, recently dismissed after the scandal.
From nothing over 2,000 Reals to everything over 32.2 billion
Founded in Rio de Janeiro in 1929, by four North-Americans and one Austrian, the first Americanas shop had the slogan “Nothing Over 2 Thousand Reals”, inspired in the successful North-American model “Five and Ten Cents”, which was unknown in the Brazilian market at the time. Around 1940, Americanas went public on the Stock Exchange, expanding its product offer.
In 1982, Jorge Paulo Lemann, Carlos Alberto Sicupira and Marcel Telles, today controllers of the largest brewery in the world, InBev, bought Americanas’ stock control, being considered as the reference shareholder for the retail group. With 44,000 employees, with almost 1,800 physical shops spread throughout all 26 Brazilian states plus the Federal District, in 2022 Americanas had an annual turnover of R$ 32.2 billion – approximately 6 billion euros.
Moreover, Americanas is part of the Novo Mercado, a select list of benchmark companies on B3 that have a differentiated standard of corporate governance, as well as the Corporate Sustainability Index (ISE), a performance indicator of good ESG practices. The reference shareholders, Lemann, Sicupira and Telles, are on the top of the Forbes list of Brazilian Billionaires, Lemann being considered the richest man in Brazil.
Can corporates be responsible? What’s in ESG?
The responsibility of enterprises to society goes beyond the production of goods, provision of services and the generation of dividends for shareholders. A strong culture of integrity is expected of companies to respond to the legitimate expectations of contemporary society. The acronym ESG has become fashionable in the business world, for the abbreviation in English of “environmental, social and governance”. Corporate governance, the G in ESG, is how a company organises and provides transparency in its decision-making and administrative processes. Companies that represent good governance practices are those that ensure the correctness of their activities, guaranteeing the independence of their control bodies and the transparency of their accountability mechanisms.
The accounting inconsistencies revealed by Americanas did not diminish the credibility of the companies listed on the Novo Mercado, nor the ISE nor the ESG practices, as all of these play a fundamental role in encouraging good governance and sustainability practices in the private sector. Americanas apparently understood that being part of the Novo Mercado, the ISE and ESG practices were nothing more than a “nice to have” certificate on the wall. It is certain that the obsession for profit spoke much louder than good corporate governance practices, which should be seen as a “must have” and not as a “nice to have”.
How to regain legitimacy after a scandal?
Governance-washing happens when companies want their stakeholders, and their investors in particular, to think that their governance policies are more diverse, inclusive, transparent and oriented towards ESG practices than they really are. Americanas used to buy products on credit from suppliers, the bank would advance payment to the suppliers and Americanas would pay the amount to the bank with interest. This operation is known as “drawn risk” (“risco sacado” in Portuguese).
The accounting entries of the “drawn risk” operation were made in the Americanas balance sheet in the suppliers account, when they should have been entered as debts with financial institutions. The result: with this accounting method, the profit is increased because the financial expense is not shown in the P&L while there is an artificial reduction in the supplier liability in the balance sheet. Thus, Americanas is the biggest case of governance-washing in Brazil. The billions revealed in “accounting inconsistencies” shocked clients, suppliers, employees, shareholders, financial institutions, market agents, in short, all the stakeholders. Society has become intolerant to scandals of non-compliance with ESG criteria. How to recover the legitimacy of a company after a governance-washing scandal?
The role of ESG
ESG has a role – and it can be effective. The ESG approach brings about a new kind of capitalism that is more sustainable, diverse, and inclusive. ESG goals must be clearly defined, communicated and measured to serve as a path and a solution for the company. Achieving ESG goals is not a sprint, a 100-metre race, but a long marathon. Creating governance control mechanisms requires medium and long-term incentives, linked to the monetary interests of investors. The obsession for financial results, as one of the main values, will sooner or later lead the company to serious ethical and integrity problems, and this story of Americanas can tell you that.
An ESG policy must be fully integrated into the business strategy and become part of the corporate culture and play a full role. It is the best remedy against governance-washing, or greenwashing (environmental), or bluewashing/social-washing (social). ESG does not need to be saved. It only needs to be fully implemented. What is important, however, is not necessarily easy to achieve.
The Americanas scandal should be looked at from two different perspectives. One is to understand how Americanas was responsible for an unprecedented scandal that lasted for a decade and without anyone noticing what was happening. The other is to see Americanas as part of a much larger mechanism, of a systemic risk in the private sector.
At this point, the role of regulators is fundamental. How are other companies accounting for the “drawn risk” operation? It is common practice for companies to use “drawn risk” to improve their cash flow management. The “inconsistencies” at Americanas were due to the concealment of interest and the incorrect classification of the loans. Is it high time for a Brazilian Sarbanes Oxley law (SOx) to protect stakeholders from accounting errors and fraudulent corporate practices?
Useful links:
- Link up with Prof. Ligia Costa on LinkedIn
- Read a related article: Ethics & Compliance in Firms: How to make it effective
- Discover FGV-EAESP and its center for ethics FGVethics
- Apply for the FGV-EAESP OneMBA.
Learn more about the Council on Business & Society
The Council on Business & Society (The CoBS), visionary in its conception and purpose, was created in 2011, and is dedicated to promoting responsible leadership and tackling issues at the crossroads of business and society including sustainability, diversity, ethical leadership and the place responsible business has to play in contributing to the common good.
Member schools are all “Triple Crown” accredited AACSB, EQUIS and AMBA and leaders in their respective countries.
- ESSEC Business School, France-Singapore-Morocco
- FGV-EAESP, Brazil
- School of Management Fudan University, China
- IE Business School, Spain
- Keio Business School, Japan
- Smith School of Business, Canada
- Stellenbosch Business School, South Africa
- Trinity Business School, Trinity College Dublin, Ireland
- Warwick Business School, United Kingdom.
