On September 19 2003 the Brazilian Securities Commission (the Comissão de Valores Mobiliários or CVM) rejected a request made by representatives of the accounting profession and other trade associations for relief from existing regulations that require the rotation of independent auditors of listed companies. The CVM has also suggested that existing accounting standards may require the rotation of lead audit partners, as well as the rotation of the audit firm.
The first mandatory rotation of independent auditors is scheduled for May 2004 and the CVM has been under pressure to revisit these regulations in advance of the upcoming deadline. The rotation of auditors is one of several rules that have created significant new compliance burdens for listed companies in 2003 and will impose additional burdens beginning in 2004.
Under current CVM regulations, listed companies will be required to rotate their independent auditors every five years beginning in May 2004 and may only rehire an accounting firm after a three year cooling-off period. Auditors are also forbidden to provide their audit client with certain consulting services that are deemed to impair the auditors' independence. CVM regulations hold management personally liable for compliance with its auditor independence requirements.
Meanwhile, more recent regulations issued in January 2003 require listed companies to disclose the following information in their annual report:
- the scope of any non-audit services provided by the independent auditor to the listed company;
- the total amount of fees paid in connection with non-audit services and a comparison of non-audit fees with audit fees, if the amount of fees paid in connection with non-audit services exceeds 5% of the amount of fees paid in connection with audit services;
- the policy adopted by the listed company to safeguard the independence of its auditor and avoid conflicts of interest; and
- a summary of the reasons given by the auditor to support its claim that its independence has not been impaired by its rendering non-audit services.
A court injunction has reportedly suspended the application of the January 2003 regulations at the request of an association representing the accounting profession. If the injunction is lifted, listed companies will be under heightened scrutiny in 2004 from the CVM, which has already expressed dissatisfaction with the level of disclosure in annual reports published in 2003 regarding non-audit services provided by the independent auditors during 2002.