Valor Economico has recently written about how an “accounting bubble” has allowed the Brazilian homebuilders to show profits in a struggling market. The main question is: are all these companies really solvent?

Here is an excerpt of the article:

“It’s still unknown whether there’s a bubble in Brazil’s real-estate industry, but one thing is certain: There was an accounting bubble, it has burst and the contents are not looking good.

Rossi, which released its second-quarter earnings (net profit of R$51.3 million on R$795.3 million in revenues) on Thursday with a 49-day delay, is only the most recent bad news coming from the industry, which massively flocked to the market when another bubble was in full swing, the capital markets one, in 2007 (Real-estate development is today the second-largest industry in number of companies on BM&FBovespa.)

Investors’ minds are probably swirling with questions, but they shouldn’t expect any answers.

Let’s study Rossi’s case. A phenomenal delay in delivering figures and they still come with the auditor “abstaining.” It’s not one qualification, or two or three, something that would already be very serious for any company, especially one on Novo Mercado, BM&FBovespa’s market supposedly populated by companies with stricter governance standards. One qualification, despite indicating something has run afoul of regulations, is still only an opinion.

An auditor usually abstains from issuing an opinion when there’s not enough information on which to base the opinion. It means that after almost 50 days, Deloitte still didn’t know what to do with Rossi’s figures.

One can list the usual excuses related to changes in accounting standards, the industry’s idiosyncrasies and other byzantine discussions. Is it justifiable? No.

Rossi’s CFO said in a conference call with analysts that auditors had already finalized “98% to 99% of work,” adding that the company kept a “proactive” and transparent stance by reporting data as soon as it’s available and with “parties comfortable” in assuring the figures divulged. (Comfortable parties? Let’s just skip that part.)

In a more poetic way, the company declared in a message from its management included in the earnings report that this time there was “a yearning [an urgent longing, according to Merriam-Webster] for a more conservative vision that is more aligned with the real-estate industry’s environment.”

The company didn’t say what the previous vision would be. Would it be liberal? Daring? It only added that it decided to accept the recommendations of the new auditor and change some “accounting practices” (R$715.3 million’s worth of adjustments). Does that statement say something about the work of the company’s previous auditor, Ernst & Young Terco, or does it simply suggest that times, opinions and customs change? What if current auditors had already concluded 99% of work, why not wait for a couple more days and arrive with a “clean” balance sheet, if that’s even possible?

We don’t know. And it’s no use seeking answers in the stock market, the CVM [Brazil’s securities and exchange commission], in the Committee of Accounting Practices, in the Institute of Independent Auditors, in the Housing Union, in the Foundation to Protect and Defend Consumers. That’s why we’ll be happy enough in knowing that the bubble has burst. The accounting party of Brazil’s real-estate industry has reached an end.”

Source: Valor Economico

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