How are balance sheets and audits carried out in companies?

Every three months, companies listed on Stock Exchanges need to inform the market about their finances. They then release income statements, showing profits and losses for that period.

Once a year, they need to publish a complete balance sheet, detailing the assets they own, outstanding debts and how their numbers performed in the previous year.

“The balance does not detail all the ups and downs that a company had in the year, but a specific moment, like in a photo. And when we go to take a photo, we fix our hair, put on more beautiful clothes. With companies, It’s the same thing. They are trying to show good numbers at this moment, but following the rules”, analyzes Johnny Silva Mendes, professor of finance at Faap.

On Wednesday (11), Americanas shocked the market by revealing that it had approximately US$ 20 billion in debt that had not been recorded on its balance sheet.

Here’s a better understanding of how balance sheets work:



What is a balance sheet?

A document, usually annual, that shows the financial situation of a company on a given date.

The material should list the values ​​of all assets and liabilities that the company has. That is: all the wealth you own and all the debts and pending items to be paid, such as taxes, severance pay, etc.

Assets include goods such as cash, cars, facilities, real estate, amounts invested in financial investments, inventories, amounts receivable from customers, etc.

In liabilities, the debts that the company has to pay are added. It is normal for companies to make loans of high amounts, as long as they demonstrate the capacity to honor the commitments.

The analysis of the value of assets and liabilities allows us to know the net worth of a company. Thus, if a company has BRL 1 million in assets and BRL 400 thousand in liabilities, its net worth is BRL 600 thousand, for example.

In addition to the balance sheet, there is the DRE (Income Statement for the Year), which indicates whether the company made a profit (earned more money than it spent) or loss (spent more than it earned) in a given period. It is common for large companies to disclose DREs each quarter.

Who has to submit balance sheets?

Companies that are publicly traded and listed on the stock exchange. Companies in the Simples regime, for example, do not need to produce balance sheets.

In what cases are swings used?

Investors use the data to decide whether or not to buy stocks and bonds in that company. Banks and creditors see the data to approve loans or renegotiate debts.

The document is also used to determine the delivery of profit sharing to shareholders and in assessing the company’s market value in the event of a sale.

How is it crafted?

The accounting sector of companies surveys the company’s information and puts the data in a specific format, called IRFS (International Financial Reporting Standards, its acronym in English). These rules determine how assets, debts, and other items must be presented.

And how is the audit done?

Large companies hire auditing firms to certify that balance sheet data is correct. However, audits usually check by sampling, and do not verify 100% of the balance sheets.

“Audits usually take 10% of the balance sheet figures and analyze them in detail, such as checking invoices, details of debt agreements, etc. If there are inconsistencies, they can analyze more data, such as 20% or 30% of the total. audits can suggest to companies that they correct the wrong data and any problems found are mentioned in the explanatory notes, published with the balance sheets”, details Mendes.

What happens if there is any inconsistency in the balance sheet?

A company declaring values ​​different from the real ones may be sued in several instances.

In the tax sphere, you may be charged for taxes that you failed to pay when declaring a lower billing, for example. In the civil sphere, it can be sued by investors who lost money because of the error. Creditors can claim in court that they were deceived and claim damages as well.

The CVM (Securities and Exchange Commission) can also investigate the company and establish penalties.

These processes can generate millionaire fines and indemnities, which together can lead the company to bankruptcy.

Can the audit that does not identify failures be punished?

Yes. They may also be subject to legal proceedings. “Auditing companies usually reserve resources, in their own balance sheets, to pay fines on possible mistakes they may make”, explains Mendes.

The professor points out that errors also scratch the reputation of audits, something that can be difficult to recover after a major failure. In the 2000s, the Arthur Andersen audit, one of the largest in the world, went bankrupt after having endorsed reports from Enron, the American energy company, which were full of fraud. The company had hidden debts of US$ 25 billion.

How to find signs of failure on a swing?

In addition to looking at the explanatory notes, Mendes recommends analyzing the reference form, another document prepared by publicly traded companies, which details their equity, debt and other financial items in greater detail.