Brazil: The Brazilian Regulator Softens The Rule Of Rotation Of Audit Firms

The rule of rotation of audit firms is mandatory for all Brazilian companies that are subject to the supervision and control of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM).

By means of CVM Instruction No. 509 issued on November 16, 2011 (CVM Instr. 509/2011), this rule was softened for companies that have a Statutory Audit Committee (Comitê de Auditoria Estatutário - CAE),1 which aims to control the internal and external auditors.

According to CVM Instr. 509/2011 companies that install and maintain the CAE pursuant to the conditions required by said instruction may hire an independent auditor to provide audit services for up to ten consecutive years. Previously the maximum term permitted by CVM was limited to five years.

Installation of the CAE is optional and therefore companies are free to retain the present system of rotation of an independent auditor every five years, if they so wish.

The ten-year term may be adopted provided that the audited company has a CAE in continuous operation and the independent auditor is a legal entity (an audit firm). For the use of this prerogative, the CAE should be installed in the year preceding the hiring of the independent auditor. Once this prerogative is adopted, the audit firm shall carry out the rotation of the technical officer, director, manager and any other member of the audit team with a managerial function in a period not exceeding five years, with a minimum interval of three years for his return.

CVM also allowed that this prerogative of rotation every ten years be used by any company that on December 31, 2011 has an audit committee installed and running, which meets the requirements of CVM Instr. 509/2011 and/or amends its bylaws to contemplate the existence of the CAE within 120 days from January 1, 2012.

In summary, the CAE has the following duties: (i) decide on the hiring and dismissal of the independent auditors for the preparation of independent external audit or any other service; (ii) monitor and evaluate the activities of the independent auditors; (iii) monitor the quality and integrity of internal control mechanisms and the company's financial statements; (iv) evaluate and monitor the risk exposures of the company.

CVM Instr. 509/2011 also establishes rules for disclosure of the internal regulation of the CAE, its annual report and the specific requirements to be complied by its members.

The CAE must: (i) be provided in the bylaws of the company; (ii) be structured as an advisory body linked directly to the Board of Directors (Conselho de Administração); (iii) meet whenever necessary but at least every two months, so that the accounting information be always examined prior to its disclosure; (iv) have its own internal regulation approved by the Board of Directors, providing for its functions in detail, as well as its operating procedures; (v) have the means to receive complaints, including confidential information, internal and external to the company in matters related to the scope of the company´s activities; and (vi) have operational autonomy and a budget, annual or by project, within limits approved by the Board of Directors to conduct or determine consultations, evaluations and investigations within the scope of the CAE´s activities, including the hiring and use of independent external experts.

The meetings of the CAE shall be recorded in minutes. The coordinator of the CAE, accompanied by other members of the CAE, when necessary or appropriate, shall meet with the Board of Directors at least quarterly and attend the Ordinary General Shareholders´ Meeting of the company.

The CAE will consist of at least three members appointed by the Board of Directors, who shall serve for a maximum of ten years. Most members will be independent members and at least one must be a member of the company´s Board of Directors who does not participate in the Executive Committee (Diretoria Executiva). It is expressly forbidden the participation in the CAE of any directors of the company, its subsidiaries, parent companies, affiliates or companies under joint control, directly or indirectly.

In order to fulfill the requirement of independence, a member of the CAE cannot be or have been in the last five years a director or employee of the company, its parent, subsidiary, affiliate or company under joint control, directly or indirectly, or of the technical team involved in audit work of the institution, nor can he/she be a spouse, relative, straight or collateral line up to the third degree and affinity to the second degree of any of those persons.

The members of the CAE must comply with all the requirements provided for in article 147 of Law No. 6404, of December 15, 1975, as amended by Law No. 10303, of October 31, 2011 (the Brazilian Corporation Law)2.

After the end of his/her term of office, any member of the CAE can only be appointed for a new term in the same company after the elapse of at least three years counted as of the end of such term.

At least one member of the CAE must have recognized experience in corporate accounting matters, having: (i) knowledge of generally accepted accounting principles and of financial statements; (ii) ability to evaluate the application of these principles in relation to key accounting estimates; (iii) experience in preparing, auditing, analyzing or evaluating financial statements that have scope and level of complexity comparable to those of the company; (iv) educational qualifications with the skills required for corporate accounting activities of the CAE; and (v) knowledge of internal controls and corporate accounting procedures. The compliance with these requirements need to be proven through documentation maintained at the company´s headquarters at the disposal of CVM for five years counted from the last day of the term of office of the member of the CAE.

The CAE members must keep impartial and skeptical attitude in carrying out their activities and especially in relation to the estimates contained in the financial statements and in the management of the company.

The replacement of any member of CAE will have to be reported to CVM within ten days of his/her replacement.

The company shall maintain at its headquarters and at the disposal of CVM for a period of five years a comprehensive annual report prepared by the CAE, containing a description of: (a) its activities, findings and conclusions reached and recommendations made; and (b) any situations in which there is significant divergence between the company's management, independent auditors and the CAE in relation to the financial statements of the company.

The independent auditors shall meet the demands of the CAE in all matters within its competence.

Although the issue of compulsory rotation of independent auditors in other countries is still in an early stage, CVM believes that this initiative already implemented in Brazil is serving as an inspiration to the international regulators, as the Public Company Accounting Oversight Board (PCAOB) in the United States and the European auditor oversight bodies, that started to discuss the adoption of such rotation in their respective jurisdictions.

Footnotes

1 CVM Instruction 509/2011 adds new articles to CVM Instruction No. 308, of May 14, 1999, and amends articles and exhibit of CVM Instruction No. 480, of December 7, 2009, which imposed the rule of rotation of audit firms in Brazil.

2 This provision establishes that: Article 147. Where the law requires certain qualifications for appointment to an administrative position in the corporation, the general meeting may only elect a person who has produced the evidence of the appropriate qualifications, copies of which shall be filed at the head office of the corporation. Paragraph 1. The following are disqualified for election to an administrative office in the corporation: persons disqualified by special law, or sentenced for a bankruptcy offense, fraud, bribery or corruption, misappropriation of public funds or embezzlement, crimes against the national economy or decency or public property, or to any criminal sanction which precludes, even temporarily, access to public office. Paragraph 2. A person who has been declared by the Brazilian Securities and Exchange Commission to be incapacitated is also ineligible for election to an administrative office in a publicly held corporation. Paragraph 3. Officers shall have unblemished reputations and are ineligible for election, unless an applicable waiver is granted by the general meeting, in the following cases: I – holding of a position in a competing company, specially in management board or advisory or finance committees; and II – conflicting interests with the company. Paragraph 4. The evidence of compliance with the provisions set out in § 3 shall have be effective with a statement signed by the elected officer pursuant to the terms defined by the Brazilian Securities and Exchange Commission, as mentioned in Sections 145 and 159, under the penalties of law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Walter Stuber
Adriana Maria Gödel Stuber
 
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