• Wed. Apr 17th, 2024

$4 Billion Accounting Scandal Exposes Supplier Finance Risks (1)

The accounting scandal that led to a $4 billion hole in the balance sheet of major Brazilian retailer Americanas SA centers on a common funding tool with notoriously opaque reporting: supplier finance.

Americanas, which nosedived into bankruptcy protection last week, is an extreme example of how the arcane practice, also called supply-chain finance or reverse factoring, can take advantage of loose accounting rules to flatter a company’s balance sheet. The process involves a bank or third party paying a buyer’s suppliers at a discount earlier than they would be otherwise.

Americanas hasn’t revealed much detail of how it used supplier financing to mask its indebtedness, and its financial statements offer few clues. The company did not return multiple requests for comment. But what’s clear is that the practice played at least some part in masking more than 20 billion reais ($3.9 billion) of debt.

“We see the nature of that supplier finance is more of bank debt nature,” former Chief Executive Officer Sergio Rial told investors on Jan. 11. “So I have more debt than I had originally thought.”

Regulators, credit rating providers, and some investors have warned for years about the lack of accounting rules for these supplier-finance arrangements. Companies following US-based accounting rules must start disclosing this year that they use the financing.

The International Accounting Standards Board, which sets the financial reporting guidelines used by Americanas, is mulling similar disclosures. The board met Wednesday to vote on when to make new disclosures mandatory, but put off the decision for another month.

“If this is something that makes the headlines, I think we just are sending a very bad signal,” IASB’s Chair Andreas Barckow said of delaying the disclosures.

This isn’t the first time that supplier finance has played a role in major corporate financial collapses. Carillion Plc became one of the UK’s largest corporate failures in 2018, with the defunct contractor using reverse factoring to label almost half a billion pounds of debt as “other payables.” Abengoa, a Spanish energy company, was brought close to insolvency in 2015, with supply-chain finance once again playing a large part.

Lack of Clarity

In a supplier finance transaction, banks provide what’s essentially a short-term loan to help companies pay suppliers quickly. A company then pays the lender back later, sometimes 90 days or more. The retailer frees up cash by doing so.

Such arrangements between investment-grade companies and suppliers are considered low risk, but regulators and credit rating providers worry about companies on shaky footing using these tools to mask indebtedness – out of the sight of investors and analysts.

Even as some have sounded warnings about a proliferation of supply-chain finance, the practice continues to grow. Issuance in 2022 hit $2.2 trillion worldwide, according to an estimate from BCR Publishing’s World Supply Chain Finance Report published on Tuesday.

Supplier financing itself isn’t necessarily a problem, and suppliers sometimes prefer to get paid sooner even at a discount. The issue is a lack of clarity as to what companies actually have to disclose about their financing arrangements with suppliers, according to Peter Parry, who is on the policy team for the UK Shareholders Association.

“Because companies are not obliged to disclose this, they’re able to hide the fact that there is a major cash-flow problem,” Parry said. “It’s utterly opaque.”

Some Progress

Accounting bodies have made some progress in attempting to improve transparency. The Financial Accounting Standards Board, which don’t govern Americanas’s reporting published rules in September that come into effect this month forcing companies to disclose that they use supplier finance programs and how much is at stake.

New disclosure requirements would make it harder for blow ups like Americanas and others happen, but it could take years for changes to be made.

“Definitely the new disclosures would solve that problem — there’d be no chance of having supply chain financing and investors not knowing about it,” said Steve Cooper, author of The Footnotes Analyst blog and a member of the IASB from 2007 to 2017. “This is exactly the type of situation here where the disclosures are important.”

(Adds details of IASB meeting on Wednesday from paragraph six.)

To contact the reporters on this story:
Lucca de Paoli in London at [email protected];
Nicola M. White in Arlington at [email protected]

To contact the editors responsible for this story:
Luca Casiraghi at [email protected]

Michael B. Marois, Boris Korby

© 2023 Bloomberg L.P. All rights reserved. Used with permission.

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