Introduction
Brazilian Petroleum Corporation (Petrobras) is a semi-public multinational energy company headquartered in Rio De Janeiro, Brazil. It is the largest company in South America by market capitalization. It was founded in 1953 and has since then remained an important oil producer, with a “production capacity of more than two million barrels of oil per day” (Bamato, 2015, para. 10). By November 2014, it was ranked the sixth-largest energy company in the world in value (Bamato, 2015). In addition, the company exports mechanical technologies import natural gas from other South American countries, especially Bolivia, and invests in oil exploration in Africa and Asia.
In September 2010, the company conducted the largest share sale of US$ 72.8 billion on the BM&F Bovespa stock exchange, making it the fourth-largest company in the world by market capitalization. However, Petrobras has very low liquidity because of the accumulated debts (Bamato, 2015). Its debt stood at US$170 billion, and it was forecasted that the debt might escalate further. The company faced risky exposure to bond markets and lacked public trust as it had not published its audited accounts. Investigations revealed that the firm was in the midst of grand corruption scandal that involved prominent Brazilian politicians and businesspeople.
The Main Facts of the Case
The company, because it was state-backed, had for a long time enjoyed a monopoly in the Brazilian oil industry and financial security in the eyes of shareholders and watchdogs. The Petrobras executives plotted with construction companies Odebrecht SA, Andrade Gutierrez, and others to enormously overbill the oil firm. They were also involved in money laundering activities. The money gained was used as bribes and political payoffs for company executives, politicians, and political parties. Current estimates put the bribes received at a whopping US$ 2 billion. The whole scandal cost Petrobras a loss amounting to US$ 16 billion (Eliza, 2015). The company had duped its investors by misrepresenting its operations and monetary situations while soliciting billions of dollars from them.
The PricewaterhouseCoopers Auditores Independents, the PwC’s Brazilian member, is alleged to have played a role in confirming Petrobra’s financial reports and ignoring warnings. The Bill and Melinda Gates Foundation, one of Petrobras investors, was astonished that the fraud had gone on for years under PwC’s watch. PWC had constantly endorsed the integrity of Petrobras’ internal controls and financial reports. Watts (2015) describes the scandal as “a case of institutional corruption, criminal conspiracy, and massive fraud on the investing public” (p. 2). The company and PwC failed to provide financial reports that truly reflected its financial position, subjecting its stakeholders to great financial risk. Thus, the company executives committed two types of fraud, i.e., misappropriation of company assets and misrepresentation of financial statements.
According to Bamato (2015), the scam involved senior politicians, including the Brazilian president Dilma Rousseff, who once served as the head of the Petrobras board of directors. Others implicated in the scandal included former Downstream Director, Paulo Roberto Costa, Bernardo Freiburghaus of Oderbracht, and other executives from Petrobras and partner firms (Bamato, 2015). The immediate financial implications of exposure to the scandal were a drop in its bond and share value, inability to refinance projects for the next fiscal year, unemployment, and economic slowdown in the country. The investigations did not only pose reputation risk to Petrobras, but they also caused defamation and contractual risk for companies doing business with the firm.
The Petrobras Case and the Fraud Opportunity Triangle
The fraud triangle describes the factors that drive someone to commit a corporate crime (Cressey, 2011). It consists of three aspects, namely, the perceived non-shareable need, apparent opportunity, and rationalization (Cressey, 2011). The pressure to meet a certain need that is beyond one’s ability may motivate an individual to ponder committing an illegal act, such as stealing or counterfeiting a financial statement as a way to solve a personal or professional problem. Opportunity indicates a method by which one can commit an economic crime and solve his problem secretly with a low risk of getting caught. Additionally, the fraudster has to justify the crime to himself or herself in a way that makes it an acceptable act.
The motivation was the driving force behind the Petrobras scandal. The top executives of Petrobras had special financial incentives to dishonestly receive kickbacks for giving inflated construction contracts and bribes to politicians so that they vote in line with the ruling party. Greed and political loyalty could have been other factors. The elected officials appointed some of the company’s top executives. The opportunity to commit fraud existed as the company enjoyed state support and renowned state officials were among the beneficiaries of the filthy loot. The culprits were the top executives who had powers to override the internal controls in place to commit fraud. The rationalization most likely used by the offenders was that much of the proceeds were used by politicians and the ruling political party to campaign in anticipation that the government, once elected, would pay off the money without the investor being involved.
Reasons for Committing Fraud
According to Eliza (2015), corruption in oil companies had in the past resulted in blatant inaction due to highly institutionalized venality and lack of regulatory infrastructure against corporate crime. The executives were appointed by the elected politicians in the ruling party and had government protection against any possible follow up. It is reported that a former Petrobras manager had alerted the current CEO, Maria das Gracas Foster, and other executives about the irregularities, but the company, through its spokesperson, denied that Ms. Foster, a close ally of the President, was aware of them (Segal, 2015). Therefore, the scandal involved collusion between politicians and the top management of Petrobras to falsify the firm’s accounts and release incorrect financial reports.
Measures to Curb Corruption of This Nature
Lack of rules to control graft have both political and economic consequences since corruption leads to stunted economic progress as large chunks of money are directed towards illicit outflows rather than legal business operations. Retarded economic growth is as a result of companies registering losses, reduced government revenue, low foreign investment in the country, and minimal investments in welfare programs. There is a need, therefore, to set in place measures to control scams like the Petrobras scandal.
The first measure is to come up with a mechanism for ensuring that competent board members, managers, investors, and engineers are fairly appointed to protect the company’s activities from political influences. The organization should also establish a robust regulatory structure and regulatory institutions that are capable and efficient in handling such cases. The other foundation that should be put in place is a stricter supplier management process aimed at ensuring transparency in the procurement of goods and services. Only companies with verified compliance and integrity instruments are allowed to take part in the tendering process.
Organizations should limit unilateral decision-making and encourage collective decisions at all levels. In addition, firms should establish an external, independent specialized reporting channel to embolden people to report any signs of anomalies in financial dealings. Organizations should establish internal commissions comprising of investors, audit, legal, and compliance divisions to investigate possible cases of fraud and corruption. The involvement of the audit area in company executive board meetings is necessary to provide audit plans from the start of the project endorsement process.
Judicial Measures Taken
The inquiry into the Petrobras saga has led to the impeachment of over a hundred individuals linked to the company. The treasurer of Worker’s Party, the ruling party, was sentenced to 15 years in prison, having been convicted of receiving payoffs from Petrobras contractors and allotting them to the member of the ruling party (Kennedy, 2012). The former Odebrecht AS presidents, Jose Aldemario and Agenor Medeiros, were sentenced to 16 years in prison each for similar crimes. Others arrested in connection with the case were Marcelo Odebrecht, the current head of the Odebrecht group, and Otavio Azevedo of Andrade Gutierrez. The Petrobras scandal was a large and complex scheme involving national and multinational companies and up to date, investigations are ongoing to bring more suspects to book and recover assets that were lost in bribes, kickbacks, and money laundering. For those who have been convicted, the verdict is a deserved one considering the repercussions of their actions on the Brazilian economy.
References
Bamato, K. (2015). Why the Petrobras Scandal Is Shaking Brazil. Web.
Cressey, D. (2011). Other People’s Money. New York: Association of Certified Fraud Examiners, Inc.
Eliza, D. (2015). Combatting Corruption for the Sake of the Economy, the Afflictions of Oil Rich Latin America. Web.
Segal, D. (2015). Petrobras Oil Scandal Leaves Brazilians Lamenting a Lost Dream. New York: International Business Sec.
Kennedy, K. (2012). An Analysis of Fraud: Causes, Prevention, and Notable Case. Web.
Watts, J. (2015). Brazil Elite profit from $3bn Petrobras Scandal as Laid-off Workers Pay the Price. World Affairs, 1(1), 1-4.