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...