Theme: Corporate fraud and institutionalized corruption
In September 2014, testimonials from the Federal Police of Brazil’s Operation Car Wash brought to surface a massive corruption scandal involving politicians, company executives, and major engineering companies in Brazil. The Car Wash operation began in March of that year and shook Brazil’s politics like never before. The largest corruption investigation in the world revealed the functioning, in the period between 2004 and 2014, of a new criminal organization involving companies, contractors, shipyards, and other service providers inside Petrobras, Brazil’s oil company. The crimes practiced include a cartel among the largest contractors that participate in state events, avoiding competitiveness. What started as a small targeted investigation led to the discovery of what was believed to be the biggest corruption scandal in the country’s history. The case is set in October 2014, when PwC, Petrobras’s external auditor, refused to sign off on the company’s quarterly audited results. Statements of directors inside the company made PwC question its decision for this refusal. PwC had been the auditor of Petrobras since 2012, but the investigation was getting too big and the external auditors alleged they had no means to properly assess asset values of certain refineries.
Suitable Courses: Corporate Strategy with emphasis on Global Strategy, Business Ethics, General Management, and Strategic Challenges in Emerging Markets. In an Accounting course, the case fits well in a module of impairment of long-lived assets and the key differences in fair values between US, GAAP, and IFRS.
Bigger Picture: The case illustrates the role of external auditors in detecting corporate fraud as well as their degree of involvement in detecting malfeasance of public officials. The case questions the role of external auditors in terms of the changing accounting interpretations vis-à-vis rules. The refusal to sign off on the audited financial statements prompted a set of negative events for Petrobras, which included the triggering of bond covenants and cross-default clauses, and a lack of access to capital markets. This set of events affected the Brazilian economy. The case highlights how institutional voids, in this case lack of infrastructure, intensify to reveal systemic institutionalized corruption.