Is Marfrig the Brazilian version of Enron? Many believe so. Research firm Empiricus, who just a couple days ago alleged fraud on Marfrig’s results, has just published a second letter with more questioning and promised another five addenda in the next few days. As it attacks Marfrig and its auditor KPMG, the company stock dives like there is no tomorrow.
Below, the second letter. 

Addendum I to our original Marfrig letter:

In recent months, we went on a “tour de force” in trying to understand in which industry sector Marfrig belongs to. The letter we sent to our clients, which was widely discussed in the press, reflects only part of the questioning of Marfrig’s balance sheet that still remain unanswered. There are others, like this one, which will continue to exhaust our internal capacity to understand the company. If we could choose, we would like the company to answer the questions asked by Empiricus in the same way that they were prepared: in writing and in detail. Here it follows: 
In 3Q, the improvement in Marfrig’s working capital occurred, largely due to the variation of an item called “payable notes”, which changed from R$73.5M to R$345.4M on a quarterly base. If we add the standard accounts of working capital, there is no significant variation whatsoever, despite arguments on exchange rates and exports. R$345.4 MM is relevant to the carrying amount of the balance of Marfrig, and must be fleshed out. Since it was not, we might assume it may have to do with (reverse) hedging (which loses money as the dollar appreciates against the Real: an extraordinary expense of R$215mm, compatible with the difference quarter-on-quarter), as indicated in the company’s Q&A;. If it was a hedge account it is not working capital. If it is something else, it must be specified.

Anyway, in our opinion, the questions we ask here, in writing, can not be answered fairly by the company without falling into a self-judgment. If it really is fraud, there will be no confession. We want to avoid this possibility. But perhaps all these questions can be answered by its auditors. And I must confess: I’m dying to see the promised response from KPMG, item by item, in detail. The Marfrig account was BDO’s, but wasn’t it KPMG who bought it? KPMG: we are in waiting.

We are Empiricus.PS. Over the next few days, we will post other 5 addenda, derived from our studies of the Marfrig case.

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