Brazil: Audit Committees In The Brazilian Financial System

Pursuant to the regulations attached to Resolution 3081, of May 29, 2003, as amended by Resolution 3170, of January 30, 2004, both issued by the Brazilian Monetary Council, any financial institution or entity duly authorized to operate by the Central Bank of Brazil (Bacen), that at the end of the last two financial years (i) has an equity equal to or higher than R$ 1 billion; or (ii) is responsible for the management of third party’s funds equal to or exceeding R$ 1 billion; or (iii) has raised a total amount of deposits plus third party management funds equal to or exceeding R$ 5 billion, must create an Audit Committee (Comitê de Auditoria), which will report directly to its Board of Directors (Conselho de Administração) or, in the absence thereof, to its Board of Officers (Diretoria). The Audit Committee for the first two periods corresponding to the financial years ending 2002 and 2003 will have to be fully operative by July 1^st, 2004, and for the subsequent periods by March 31 of the subsequent financial years, and it will consist of at least three members, whose terms of office may not exceed five years in the case of publicly-held institutions with stock exchange listed shares and no fixed term of office for the closely-held institutions.

The number and the criteria for nomination, replacement and remuneration of members; the term of office and duties and authority of the Audit Committee must be expressly provided for in the company’s by-laws or articles of association. At least one of the committee members must have proven knowledge and expertise in accounting and auditing. A member can only be nominated for the Audit Committee of the same institution after a minimum three-year period counted as from termination of his/her previous term of office.

The following are conditions to being a member of the Audit Committee: (i) the individual is not, or was in the preceding twelve months, an officer of the relevant institution or any of its connected companies (the only exception is the closely-held institution, in which case this restriction does not apply), or an employee of the institution or any of its connected companies; or the head technician, officer, manager, supervisor or any other member, with managerial duties, of the team involved with the company’s auditing; or a member of the Tax Council (Conselho Fiscal) of the institution or any of its connected companies (ii) the individual is not a direct or collateral relative or even by affinity, up to second degree relative of the individuals mentioned in item I other than a member of the Tax Council; (iii) the individual does not receive any compensation from the company or its connected companies other than that regarding their duties as member of the Audit Committee. In the case of a closely-held institution, the option between the remuneration of an officer or of a member of the Audit Committee is admitted.

In addition to the above, additional conditions apply. In the case of institutions with stock exchange-listed shares controlled by the federal, state or the Federal District governments. In this case, the individual may neither hold a permanent position (and be licensed) at any of said governments nor hold or discharge, or have held or discharged in the preceding twelve months, position or duties in any of said governments. Bacen may, however, upon properly justified request from the privately-held company, release the company from the one-year-in-office requirement. Now for privately-held companies, all members of the committee must be officers in office for at least one year, being that one of them must necessarily be the officer charged with the relationship with Bacen, irrespective of time in office.

The duties of an Audit Committee are the following:

1. to establish the rules of the Audit Committee operation in writing, subject to approval of the Board of Directors or, in the absence thereof, the Board of Officers;
2. to formally recommend the use or replacement of an audit firm;
3. to review the annual reports and auditor’s opinions prior to their publication;
4. to assess the effectiveness of independent and internal auditing for compliance with legal and regulatory provisions and applicable internal rules and codes;
5. to confirm the implementation by the company’s management of the independent and internal auditors’ recommendations;
6. to establish and publicize the procedures used to receive and handle information about lack of compliance with applicable rules and regulations and internal rules and codes, including arrangements to protect any disclosing party and confidentiality of information;
7. recommendation of amendments or improvements to the company’s policies, practices and procedures;
8. to meet with the company’s management, independent and in-house auditors on a quarterly basis to check for adherence to any recommendation, including recommendations as to audit work planning;
9. to check for adherence to recommendations, if any, by the company’s board of officers; and
10. to meet with the Tax Committee and Board of Directors, upon request thereof, to discuss policies, practices and procedures identified in the discharge of their duties.

Additionally, within its authority, an Audit Committee may hire the services of expert, however, it will not be discharged from its duties.

Financial conglomerates may have one single Audit Committee for all its units, appointed by the leading companies, to comply with the requirements provided in the law. However, such decision must be made, and recorded, by way of deliberation at shareholders’ meeting of each and every company member of the conglomerate.

A semi-annual report, for semesters ending June 30 and December 31, must be prepared by the Audit Committee indicating the Committee’s operation in the period. The following are also requirements to be met: evaluation of the effectiveness of internal control systems, and proof of any determined shortcomings; described recommendations to the board of officers and any recommendation not adhered to and justification; assessment of the effectiveness of independent and internal auditing for compliance with legal and regulatory provisions and applicable internal rules and codes; assessment of the quality of financial statements, specially adherence to the Brazilian generally accepted accounting practices and compliance with the Bacen rules and regulations with proof of any determined shortcomings. In this respect, Audit Committees must make available its report to the Bacen and the company’s Board of Directors for at least five years of its preparation. Another duty of the Audit Committee is the publication of a summary of the main aspect of its report together with the company’s financial statements.

^{1.Walter Douglas Stuber is an expert in finance law and capital market and partner of Stuber - Advogados Associados.}