Wednesday, July 5, 2017

The 2 Largest Brazilian Companies Reporting in US$s With the US SEC (Petrobras and Vale) Generated Audited IFRS Total Earnings From Continuing Operations For the Most Recent Five Years 2012 to 2016 of Only $2 Bil ........................................................................................ On the Other Hand, These Same Total Earnings Were $160 Bil For the Previous Five Years 2007 to 2011 ........................................................................................ Given This Horrific Earnings Downturn, Coupled With Oil & Gas Giant Petrobras Footnote #3 "The Lava Jato (Car Wash) Operation", It's Easy For Me to Understand Why Brazilian Citizens Took to the Streets ........................................................................................ On the Positive Side, the Total Losses of These Two Companies of $21.041 Bil in 2015 Turned Around in 2016 With Total Earnings of $0.854 Bil

From a review of the fine Google Finance Website and financial statements filed in the US SEC website, I found 2 Companies headquartered in Brazil with Stock Market Capitalizations now of more than Brazil Reals (BRs) 150 bil and which filed their financial statements in US$s.

Below here are the reported IFRS Audited Earnings (Losses) From Continuing Operations for each of these 2 large Brazilian Companies for all years reported from 2007 through 2016:

2016 2015 2014 2013 2012 2011 2010 2009 2008 2007

Most Audited Audited Audited Audited Audited Audited Audited Audited Audited Audited
Largest Brazilian Companies Recent Net Net Net Net Net Net Net Net Net Net
Reporting With US SEC 2016 Income Income Income Income Income Income Income Income Income Income
Reporting in mil US$s FYE (Loss) (Loss) (Loss) (Loss) (Loss) (Loss) (Loss) (Loss) (Loss) (Loss)

mil US$s mil US$s mil US$s mil US$s mil US$s mil US$s mil US$s mil US$s mil US$s mil US$s

Petroleo Brasileiro Petrobras SA Dec     (4,349)     (8,611)     (7,503)     10,832     10,931     19,992     20,449     16,823     17,733     13,411
Vale SA Dec       5,203   (12,430)       1,191       2,944       4,067     22,648     17,580       5,456     13,476     12,627

Total of both Reporting in US$s
         854   (21,041)     (6,312)     13,776     14,998     42,640     38,029     22,279     31,209     26,038

Five-Year Total Earnings:

….. 2012-2016

….. 2007-2011

Let me copy below Petrobras Footnote #3 to its most recent filing to its 2016 financial statements:

"3. The “Lava Jato (Car Wash) Operation” and its effects on the Company
Petróleo Brasileiro S.A. – Petrobras
Notes to the financial statements
(Expressed in millions of US Dollars, unless otherwise indicated)
In 2009, the Brazilian Federal Police (Polícia Federal) began an investigation called “Lava Jato” (Car Wash) aimed at criminal organizations engaged in money laundering in several Brazilian states. The Lava Jato investigation is extremely broad and involves numerous investigations into several criminal practices focusing on crimes committed by individuals in different parts of the country and sectors of the Brazilian economy.
Beginning in 2014, the Brazilian Federal Prosecutor’s Office focused part of its investigation on irregularities involving Petrobras’s contractors and suppliers and uncovered a broad payment scheme that involved a wide range of participants, including former Petrobras personnel. Based on the information available to Petrobras, the payment scheme involved a group of companies that, between 2004 and April 2012, colluded to obtain contracts with Petrobras, overcharge the Company under those contracts and use the overpayment received under the contracts to fund improper payments to political parties, elected officials or other public officials, individual contractors and suppliers personnel, former Petrobras personnel and other individuals involved in the scheme. Petrobras refers to this scheme as the “payment scheme” and to the companies involved in the scheme as “cartel members”. The Company did not make any improper payment.
In addition to the payment scheme, the investigations identified specific instances of other contractors and suppliers that overcharged Petrobras and allegedly used the overpayment received from their contracts with the Company to fund improper payments, unrelated to the payment scheme, to certain former Petrobras personnel. Those contractors and suppliers are not cartel members and acted individually. Petrobras refers to these specific cases as the “unrelated payments.”
Certain former executives of Petrobras were arrested and/or charged for certain crimes such as money-laundering and passive corruption. Other former executives of the Company as well as executives of Petrobras contractors and suppliers were or may be charged as a result of the investigation. 

The amounts paid by Petrobras related to contracts with contractors and suppliers involved in the payment scheme were included in historical costs of its property, plant and equipment. However, the Company believes that, under International Accounting Standard IAS 16 – Property, Plant and Equipment, the portion of the payments made to these companies and used by them to make improper payments, which represents additional charges incurred as a result of the payments scheme, should not have been capitalized. Thus, in the third quarter of 2014, the Company wrote off US$2,527 of capitalized costs representing amounts that Petrobras overpaid for the acquisition of property, plant and equipment in prior years.
The Company has continuously monitored the investigations for additional information and to assess any potential impact on the adjustments made. No additional information has been identified that impacted the adopted calculation methodology and the recorded adjustment in 2014 for the preparation of the financial statements for the year ended December 31, 2016.
Petrobras will continue to monitor the results of the investigations and the availability of other information concerning the payment scheme. If information becomes available that indicates with sufficient precision that the estimate described above should be adjusted, Petrobras will evaluate whether the adjustment is material and, if so, recognize it."
I think the moral to this story is that if a crook wants to best cover up accounting fraud, not infrequently he buries it in the largest dollar asset category "Property, Plant and Equipment PPE".  And when doing an investigation anywhere in the world, you should make sure you analyze PPE and you shouldn't assume that just because a company has a clean audit opinion, that in all cases PPE is properly stated.