(Bloomberg) -- A $4 billion accounting shortfall would typically raise alarm bells for an auditor. Somehow, a PricewaterhouseCoopers LLP affiliate didn’t catch it at Americanas SA.

Investor and consumer groups are calling for closer scrutiny of the accounting firm after the unveiling of balance-sheet irregularities that led 93-year-old Brazilian retailer Americanas to seek protection from creditors last month. The gap came in part from supplier financing that wasn’t reflected the right way in the company’s financial statements, which have been audited by PwC since 2019.

Consumer and corporate activism associations Abradecont and Ibrasg both filed lawsuits against PwC in the past few days, with the former requesting a freeze on the auditor’s assets. Investor association Abradin is asking local securities regulator CVM to look into PwC’s responsibilities in the case. 

Both PwC’s global arm and its local affiliate declined to comment. In a court filing, PwC Brasil said legal proceedings related to the matter will require a thorough investigation and that Abradecont’s request is “drastic” and “irrelevant,” according to O Globo newspaper.  

The key to understanding the firm’s exposure will be figuring out whether there was any way it could have spotted irregularities, according to Luciana Dias, a professor at Brazilian think tank FGV and former CVM director.

“If there’s lack of controls or problems with the accounting policy, auditors do have some responsibility,” Dias said. “But it’s hard to detect a fraud that’s committed with some coordination from the company.”

If lawsuits are successful, they could damage PwC’s Brazil business. PwC’s global network may not be willing to bail out the independently run South American affiliate, said Jim Peterson, former in-house attorney for defunct accounting firm Arthur Andersen, once the top player in the industry before it collapsed in the wake of accounting scandals involving clients WorldCom Inc. and Enron Corp.

“It would be financially devastating for PwC Brazil,” Peterson said of such an outcome.  

Billionaire Trio

Investors and creditors, including prominent Brazilian bank Banco BTG Pactual SA, have been quick to point the finger at Americanas’ management and three key shareholders, the billionaires Jorge Paulo Lemann, Marcel Telles and Carlos Alberto Sicupira. In a joint statement last month, the trio deflected the blame, saying neither Americanas’ bankers nor PwC ever reported any irregularity. 

“We were victims of a fraud,” hedge fund manager Verde Asset Management wrote in an investor note. Americanas had a long track record, counted on three key shareholders considered to be “the country’s best business managers” and had its balance sheets audited by one of the sector’s main firms, the fund said.

While Americanas hasn’t offered much detail on how problems with supplier financing covered up its indebtedness, Brazil investors had fresh in mind PwC’s role in reviewing financial statements from firms such as IRB Brasil Resseguros SA, the reinsurer that had to restate previous balance sheets in 2020 following accounting errors. 

A group of 193 investors advised by association Instituto Ibero-Americano da Empresa filed a lawsuit last month blaming PwC for failing in its auditing services with IRB. It’s now organizing investors for a potential similar action targeting PwC in the Americanas case, according to the association’s head Eduardo Silva. 

The PwC brand has recently been sullied outside Brazil as well. The firm settled with British regulators for its failed audit of the British telecom company BT Group Plc in August and is under investigation for its audit work for developer China Evergrande Group – among a string of shoddy audits in recent years that have triggered calls for tighter oversight of the industry from Japan to Europe.

In the US, regulators are gearing up for tougher audit standards and harsher penalties following a rash of ethics failures at multiple firms and a rise in the rate of audits that don’t meet basic requirements.

Petrobras Scandal

Two years ago, the auditing giant was acquitted by Brazil’s CVM of irregular practices in the auditing of Petroleo Brasileiro SA’s financial statements between 2012 to 2014. Investors in Petrobras, which was at the center of a massive money-laundering and kickback scandal, said PwC had “ignored obvious red flags.”

Americanas filed for bankruptcy protection and released a list of almost 8,000 creditors that include PwC — with claims of almost 211,000 reais ($41,000). Now, an independent committee led by Otavio Yazbek - a former director at CVM — is reviewing the inconsistencies brought to light by former Chief Executive Officer Sergio Rial and whether there were any errors. 

The independent committee is being advised by law firm Maeda, Ayres & Sarubbi and EY, and has no preset deadline to conclude its work, Yazbek told reporters on Feb. 1. 


--With assistance from Caio Rinaldi.

(Adds PwC’s comments in court filing in fourth paragraph.)

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