An audit by the General Comptroller of the Union (CGU) identified “relevant” weaknesses in Correios’ internal controls and recommended adjustments to the state-owned company’s 2023 balance sheet that could increase the loss by around R$1 billion. The CGU also recommended that the company improve internal controls relating to the monitoring of legal actions, and establish a mechanism to improve dialogue between the legal and accounting areas regarding the handling of legal disputes.
The company is experiencing the worst crisis in its history. In the year up to September, the negative result is around R$6 billion and one of the expenses that has grown the most in recent years is court orders, the payment of debts related to legal actions. The adjustment to the balance sheet was already on the company’s radar, since the technical area of the Federal Audit Court (TCU) had already made a similar recommendation, but members of the state-owned company say that the company’s biggest problem is cash. When contacted, the company did not respond.
The CGU’s analysis mainly focused on the reduction from R$ 1.032 billion to R$ 18 in a provision (reserve) to face labor lawsuits that questioned the payment of salary benefits to employees. The change was made in February 2024, reflected in the 2023 balance sheet, a period in which the state-owned company had a loss of R$597 million. The company’s argument is that the liabilities expected from the labor actions could be offset by a possible gain for the state-owned company in another related process.
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The two legal discussions deal with the Additional for Distribution and/or External Collection Activity (AADC) and the Additional Dangerousness for Motorcycle Activities (AP). The first was created by Correios in 2008 and was paid to eligible company employees until November 2014, when the Ministry of Labor created hazard pay for motorcyclists. In the company’s understanding, the two benefits had the same nature.
Later, however, in August 2022, the Superior Labor Court (TST) recognized the legality of the cumulative payment of AADC and AP. Despite this, the state-owned company took a long time to correctly recognize the actions as a “probable loss”, with the value updated to include interest and fines. Only in December 2023 did a provision of R$1.032 billion appear in relation to the processes.
In January 2024, in turn, Correios obtained a favorable preliminary decision in another action, which requested the nullity of the Labor ordinance that created the hazard pay, with retroactive effects. Therefore, in the company’s view, it would be possible to apply compensation between the debts from the labor actions and the credits obtained with the nullity of the second benefit — although none of the processes have been closed.
According to the CGU report, the company’s internal survey also showed a favorable balance for Correios of R$16.5 million. Thus, the provision was reduced from R$1.032 billion to R$18, representing R$1 per share, because the obsolete Post Office system did not accept the change to zero.
For the CGU, however, for accounting purposes, the use of compensation in the context of ongoing labor actions “lacks more concrete evidence”. According to the agency, although compensation is a possible legal instrument, accounting standards do not allow evidence in the company’s balance sheets to be carried out at the “net value” due to the loss of transparency.
“It was found that the practice of compensation between different legal actions, adopted by ECT (Correios) to justify the reduction of the provision in the amount of R$ 1.032 billion to R$ 18.00, is not in compliance with current accounting principles and standards. This procedure resulted in an accounting record that does not faithfully reflect the entity’s present obligation, failing to comply with the recognition, measurement and accounting disclosure criteria.”
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In view of this, the CGU recommended that Correios make adjustments to the accounting records and re-present the balance sheet in relation to legal actions relating to benefits, considering current accounting standards.
Estimates
The audit also found weaknesses in the measurement of estimates of debts related to labor actions and credits related to the payment of AP. The inconsistency, according to the CGU, indicates that there is a risk of distortion of the calculation in favor of Correios.
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“Based on the above, it was found that there are differences between the employees considered on the basis of calculating the compensation/deduction and those who were covered in the settlement of the actions, which could cause the risk of distortion in the calculation of the balance in favor of Correios, in the amount of R$ 16.5 million, which served as one of the main pieces of evidence to settle the AADC cumulative actions.”
At this point, the CGU recommended reviewing the calculation memory of the values to be used in eventual compensation in actions related to the cumulative nature of the AADC. According to the agency, estimates must be made individually, per employee.
Another finding of the audit was the weakness in internal controls relating to the monitoring of legal actions, especially involving the system used by the state-owned company, but also internal regulations, with problems from a practical and conceptual point of view.
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In relation to the system, cases of duplication of processes were identified, as well as inconsistencies in the data entered, which, according to the CGU, highlights the lack of automatic validations at the time of registration.
“Such weaknesses compromise the reliability of the database used for management and accounting purposes, in addition to making it difficult for responsible managers to effectively monitor actions,” says the report.
Problems were also identified in the process of filling out the estimated loss or success values of legal actions. According to the agency, the field has been filled with the value of the case, not with estimates of the financial value actually intended in the demand.
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“The mistaken use of the value of the case as if it were the estimated value compromises the reliability of the information used for accounting provision and risk assessment purposes, in addition to highlighting a deficiency in the adherence of internal procedures to established standards.”
The body also highlighted a lack of control routines for periodic review of the risk classification of legal actions and technical limitations of the system used.
“In terms of consequences, the weaknesses identified compromise the effectiveness of institutional control over judicial liabilities, make timely monitoring of actions difficult and expose the entity to the risk of inadequate accounting of provisions. Furthermore, the inconsistency of the data recorded in the IUS system reduces the reliability of the information used in preparing the financial statements, which may compromise the transparency and reliability of the information provided to control bodies and society.”
In this context, the CGU recommended that Correios improve internal controls relating to the monitoring of legal actions, establish indicators to measure the effectiveness of the process and mechanisms to improve dialogue between the legal and accounting areas on the topic, such as the creation of a committee, and implement measures to improve the computerized management of judicial and administrative litigation.
