The Brazilian corporation law defines a supervisory board called Fiscal Council (“Conselho Fiscal”). The Brazilian SEC (CVM) defines on another hand, the characteristics of the Audit Committee that is required in Brazil in listed companies. This article presents the characteristics of each board and compare them.
Fiscal Council (Conselho Fiscal)
The Fiscal Council (Conselho Fiscal) is an independent supervisory board that is defined in Brazilian Corporation Law – Corporations Law No. 6404/76, of December 15th, 1976.
According to Brazilian Corporation Law, Brazilian companies must constitute a Fiscal Council (“Conselho fiscal’), which may be either permanent or appointed for a specific fiscal year, by request of shareholders representing at least 5% of non-voting shares or 10% of voting shares of the company.
The Fiscal Council is composed of a minimum of 3 members and a maximum of 5 and the same number of substitutes. The titular members are elected by a shareholder vote and, therefore, the controlling shareholder typically elects a majority of its members (2 out of 3, for example). Each titular member will choose a substitute of his confidence. Minority shareholders of preferred non voting shares are entitled to elect one member of the Fiscal Council. Non-controlling holders of voting shares representing at least 10% of all voting shares may also elect one member of the Fiscal Council.
Members are nominated by shareholders for a fiscal year but remain legally independent. Each member can exercice independently its duties from others .
The members of the Fiscal Council of a company may not be employees, directors, officers or affiliated with directors or officers of the company. The members of the Fiscal Council have fiduciary duties and are accountable to the company for any failure to fulfill their statutory and corporate responsibilities.
Responsibilities of the Brazilian Fiscal Council (Conselho Fiscal)
The Fiscal Council of a Brazilian corporation is responsible to supervise and monitor the acts of the officers and ensure that they comply with their legal and statutory duties.
The duties of the Fiscal Council are established in article 163 of the Corporation Law, according to which the Fiscal Council has the following legal responsibilities:
(a) to supervise the acts of the officers and ensure that they comply with their legal and statutory duties;
(b) to give an opinion on the annual report of the management, including the supplementary information deemed necessary or useful for deliberation at a general meeting;
(c) to give an opinion on any proposals of the administrative bodies to be submitted to a general meeting, regarding an alteration in the capital, the issue of debentures or subscription bonuses, investment plans or capital budgets, dividend distribution, transformation, merger, consolidation or division;
(d) to report any error, fraud or criminal acts it may discover to the administrative bodies, and, if these fail to take the necessary steps to protect the corporation’s interests, to a general meeting suggesting an appropriate course of action;
(e) to call the annual general meeting should the administrative bodies delay doing so for more than one month, and an extraordinary general meeting whenever serious or urgent matters occur, including in the agenda of the meeting such matters as it may deem necessary;
(f) to examine, at least every three months, the trial balance sheet and other financial statements periodically prepared by the corporation;
(g) to examine the accounts and financial statements for the fiscal year and to provide an opinion on them;
(h) to exercise such responsibilities during a liquidation, taking into account the special provisions which regulate liquidations.
The rules of operation of the Fiscal Council may be more fully described in its internal charter (`Regimento interno’) or in the by-laws of the company. The charter is defined by the members and defines the quantity of meetings. The members of the fiscal council should meet at least quarterly.
As an oversight body, the Fiscal Council has only an advisory role and does not participate in managing a Brazilian company. The decisions of the Fiscal Board are documented in minutes of meetings as recommendations. Minutes are sent to Management for knowledge and action.
The Fiscal Council, or any of its members, may send inquiries to management or to the independent auditors. Therefore, each member of the fiscal council is independent from others and as complete autonomy. This is due to the fact that frequently only one member (Conselheiro Fiscal) is nominated by minority shareholders.
The fiscal council members are fully independent from management and the board of directors. The Brazilian Corporation Law establishes that each member of the Fiscal Council bears the same fiduciary responsibilities of the corporation’s board of directors and officers, are accountable for any damage resulting from any failure to comply with their duties and from culpable or fraudulent acts or any violations of the law or the bylaws, and shall exercise their duties in the sole interest of the corporation (article 165 of the Corporation Law). Therefore, the Fiscal Council is a truly independent and responsible body.
When a closely held corporation does not have independent auditors, the company’s fiscal council (Conselho Fiscal) may require to appoint auditors at the corporation’s expense if it is believed that this is necessary for the proper fulfillment of its responsibilities.
However, the Fiscal Council is not directly responsible for the oversight of the work of independent auditors. This a function that should be performed by the Audit Committee, as explained hereafter.
The Brazilian Audit Committee (Comitê de Auditoria Estatutário) is defined in the instruction nº509 of Brazilian SEC (CVM). Listed companies in Brazil must have an Audit Committee.
The Brazilian Audit Committee is a body that is subordinated to the Board of Directors and that must defined in the bylaws of the company.
According to Brazilian Corporation law, committees are accessory bodies to the Board of Directors. Its existence does not imply the delegation of responsibilities that are incumbent upon the Board of Directors as a whole.
Therefore, according to Brazilian corporation law the Audit Committee (“Comitê de auditoria estatutário“) is an accessory body of the board of directors that execute a function of management (“administração“) and not a strict function of inspection and control (“fiscalização“) like the Fiscal Council (“Conselho Fiscal“).
The Audit Committee is composed of a minimum of 3 members that are chosen by the board of Directors. At least one member should be a Certified Public Accountant (CPA) and at least one member should be member of the board of director. Director of the company cannot be members of the Audit Committee.
Changes of the members must be communicated to CVM within 10 days.
Responsibilities of the Brazilian audit committee
The responsibilities of the audit committee are the following:
- Express an opinion on the hiring and dismissal of the independent auditor.
- Supervise independent auditors
- Supervise internal control activities
- Supervise internal audit function
- Supervise the preparation of financial statements
- Supervise the risk management function
- Prepare an annual report about its activities, results, conclusions and recommendations
The board of directors of a corporation is expressly charged by statute with selecting and dismissing the independent auditors.
Fiscal Council versus Audit Committee
The table presented hereafter summarizes the main differences between the two bodies.
(“Comitê de Auditoria Estatutário“)
|Nomination||By Shareholders (holders representing 5% of non-voting or 10% of voting shares)||By the Board of Directors|
|Independence||Fully independent from management.||Subordinated to the Board of Directors|
|Function||Inspection and control.
Supervise, monitor and inspect the acts of the officers to ensure that they comply with law and bylaws.
Supervise specific departments and activities (external and internal audit, internal controls, risk management and financial reporting).
|Meetings||At least quarterly||At least twice a month|
|Members||At least 3 members. At least 1 member designated by minority shareholders.||At least 3 members. At least 1 member designated by minority shareholders.|
Many of the oversight functions of an audit committee are in fact exercised by the Fiscal Council of a Brazilian company. However, the decisions of the Fiscal Council are not binding on the corporation.
The Audit Committee does not replace the fiscal council, it complements it and is a mandatory body in listed companies.
In Brazil, the “Fiscal Council”(Conselho Fiscal“) is a body mainly designed to defend the interests of minority shareholders. Therefore, this body should always be required by minority shareholders representing 5% of non-voting shares or 10% of voting shares in any corporation.
If critics are right to emphasize that in the past, some fiscal council members have failed in Brazil in their supervisory function, this was not due to inherent deficiencies in the body, but rather to the lack of criterion and rigor of the shareholders (mainly non-controllers) in the choice of its members.
The Fiscal Council is a body where the members must demonstrate strong qualifications and technical skills necessary for the adequate exercise of the function.
Autor: César Ramos