Brazilian Fiscal Council (Conselho Fiscal) and Audit Committee

Introduction

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.

Consititution

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.

Members

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.

Independence

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.

Assistance

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.

Audit Committee

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.

Constitution

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“).

Members

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.

Criteria Fiscal Council

(“Conselho Fiscal“)

Audit Committee

(“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.

Management

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.

Conclusion

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

Accounting and Auditing in Brazil

This article presents the accounting and auditing environment in Brazil.

Legal and Regulatory Environment

Corporation Law

The Corporations Law No. 6404/76 of 1976 was amended in 2007 by Law No. 11638/07 to align financial reporting requirements in Brazil with International Accounting Standards (IAS / IFRS).

Brazilian Accounting and Auditing Standards

An accounting entity called Comitê de Pronunciamentos Contábeis (CPC), equivalent to a Brazilian IASBis responsible to publish accounting standards that are in compliance with IFRS to comply with the legal requirement of convergence that is defined in Law No. 11638/07.

List of Brazilian CPCs

The Brazilian Accounting and Auditing Standards are published by Federal Accounting Council (CFC).

List of Brazilian Accounting Standards (NBC TG)

NBC TG standards are equivalent to Brazilian CPCs.

List of Brazilian Auditing Standards (NBC TA)

List of Brazilian Internal Auditing Standards (NBC TI)

The audit requirements defined in Brazilian Auditing Standards are similar to International Auditing Standards.

Brazilian Certified Public Accountants

There are two classes of accountants in Brazil: Certified Public Accountants (Contadores) and Accounting technicians (Técnicos de contabilidade). In Brazil, a Certified Public Accountant (CPA) holds a bachelor’s degree in accounting sciences and passed the proficiency examination organized by the Federal Council of Accounting. The Brazilian CPA is permitted by law to perform all types of professional accounting work. Accounting technicians (técnicos de contabilidade) are Non-graduates professionals whose field of activity is restricted by law.

Accountants are registered in the Federal Accounting Council (CFC) and holds a CRC registry number (Conselho Regional de Contabilidade).

Brazilian Independent Auditors

Independent Auditors in Brazil are Certified Public Accountants that passed the professional technical audit qualification examinations (Exames de Qualificação Técnica de auditoria) organized by the Federal Council of Accounting (Conselho Federal de Contabilidade) in order to be registered in the National Registry of Independent Auditors (CNAI, Cadastro Nacional de Auditores Independentes) of the of the Federal Accounting Council (CFC).

There are 4 professional technical audit qualification examinations for registration in the National Registry of Independent Auditors (CNAI) : QTG, CVM, BCB and SUSEP .

QTG: Professional qualification required to audit financial statements and to be registered in the National Registry of Independent Auditors (CNAI, Cadastro Nacional de Auditores Independentes).

CVM: Additional Audit qualification required to audit listed companies regulated by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários).

BCB: Additional Audit qualification required to audit financial institutions regulated by the Brazilian Central Bank (Banco Central do Brasil).

SUSEP: Additional  Audit qualification to audit insurance companies regulated by the Superintendence of Private Insurance (SUSEP, Superintendência de Seguros Privados).

Brazilian Internal Auditors

In Brazil, the internal audit activity is a protected by law and is a legal prerogative of CPAs. Internal auditors must be Certified Public Accountants and must be registered in the Federal Accounting Council (CFC). Internal auditors cannot be used as statutory auditors.

Audit requirements in Brazil

Corporations that are not large (see criteria in the table below) or listed are not required to be audited by independent auditors. Even if a company is not required by regulation or bylaws to be audited, banks frequently require audited financial statements from borrowers. SA corporations are required to publish their annual financial statements.

Financial institutions and other entities regulated by the Central Bank, as well as insurance companies regulated by SUSEP, are required to prepare annual and biannual audited financial statements.

Listed companies and entities regulated by the CVM must prepare quarterly audited financial statements.

Type of Entity Criteria Auditor
Listed companies Regulated by CVM Auditor with QTG and CVM qualifications
Large companies Entities with total assets of over BRL 240 million or annual revenue over BRL 300 million Auditor with QTG and CVM qualifications
Financial institutions and other entities regulated by
the Central Bank
Regulated by Central Bank Auditor with QTG and BCB qualifications
Investment funds Regulated by Central Bank Auditor with QTG and BCB qualifications
Insurance companies regulated by the SUSEP Regulated by SUSEP Auditor with QTG and SUSEP qualifications
Private pension funds Regulated by SUSEP Auditor with QTG and SUSEP qualifications

 

This article is not intended to provide detailed information to allow you to assess and understand audit requirements and accounting practices in Brazil. Its objetive is to inform you about Brazilian specificity and the need to use qualified accountants, auditors and internal auditors in your subsidiaries in Brazil. Therefore,  we strongly advise you to seek assistance exclusively from CPAs duly registered in Brazil.