Big 4 dominate in Chile, challenging mid-tiers

The Chilean market is a difficult one to navigate for local accountancy firms. Utterly dominated by the Big 4, it is hard for mid-tier companies to compete and the country is in a political flux. Chileans recently rejected a new constitution that was felt to be very socialist, with many saying they wanted to keep features of the constitution originally set out by General Pinochet, which favoured the private sector. The international business community has seen this as a positive sign that the country will eventually develop a constitution that is market-friendly, but there is no sign of when it will come into effect. In the meantime, inflation rates are rising, the Chile central bank predicts the economy will not bounce back until 2023 and the country has had to apply once again to the International Monetary Fund’s Flexible Credit line to provide it with a much-needed buffer against a weak peso. While everyone IAB talked to is predicting growth in the accountancy sector, it will be hard won.

“The accounting industry in Chile is quite solid, with long-standing, consolidated firms, registered with the Commission for the Financial Market (equivalent to the US SEC), and most of them members of some international network,” says David Molina, lead audit partner at Kreston MCA Chile. “There is a lot of demand for accountancy services. The biggest companies are regulated, and current regulations require semi-annual audited information. The rest of the companies show a high demand for services, basically due to demands from banks to provide financing. Fees have experienced downward pressure, because of the current economic recession that affects businesses in general.”

What Molina would call stable, Viviana Rojas, Partner at MGI Hernán Espejo y Asociados Ltda., would call stagnant. “In Chile, the accounting industry has presented a stagnation in recent years in terms of demand from clients,” she says. “This is mainly due to the effects of the pandemic, where companies have maintained stability and generally reduced rates and hiring. Likewise, the retention of personnel is affected, since the rates do not present a greater increase.”

While some industry observers predicted there would be a migration from the Big 4 to mid-tier firms, Rojas does not think this has happened. “In Chile the market is very concentrated, the Big 4 serve practically 90% of the market of companies listed on the stock exchange and generally the rotation is between them,” she says. “It is very difficult to obtain clients of this nature for medium-sized companies.”

However, while there are no official statistics, Molina feels that due to the current economic situation, there is a migration to mid-level companies, even if it is not significant. Chinese Audit firm, "Shine Wing", has also entered the market in Chile, which intends to compete with the Big 4.

Fee pressure has also been created by former partners from the big 4 creating their own firms and trying to win clients with lower fees, according to Sergio Bascunan, partner at Crowe Chile. “As for staff, the first quarter of 2022 has shown plenty of demand for proposals, from all sectors,” he says. “We therefore expect to hire more staff for the final quarter 2022 and beginning of 2023.”

Chile had hoped to exit the International Monetary Fund’s Flexible Credit Line this year. Instead, it has reached an agreement with the IMF for a further two-year Flexible Credit Line (FCL) arrangement, worth USD18.5 billion. The FCL will provide a buffer for Chile, which has seen high volatility in the peso this year and an announcement of a USD25 billion intervention programme by the central bank. International reserves at the central bank have fallen to USD 44.4 billion from a peak of USD 55 billion in October 2021, so the size of the FCL should offer some comfort to foreign investors who may have been concerned about the scale of FX interventions planned. The central bank only intends to draw on the FCL in an emergency, but if tapped it would augment the nation’s existing FX reserves.

Foreign Direct Investment will be crucial as Chile has been struggling this year with a widening current account deficit of over 8% of GDP – the leaves the peso heavily reliant on foreign capital inflows. One of the issues investors were concerned about in last year’s report was the quality of information that was available. The government has taken steps to boost investor confidence, in particular through the General Character Regulation (‘NCG’) No. 461 (11/12/2021, which has been issued by the Commission for the Financial Market (CMF). This standard modifies the structure and content of the Annual Report of issuers of publicly offered securities, banks and insurance companies, indicating the minimum content of the report and incorporating new information requirements on sustainability and corporate governance. The objective is for entities to report the policies, practices and goals adopted in environmental, social and governance (ASG) matters in line with international standards.

“Provisions have been introduced that simplify the registration of public offering securities (stocks and bonds), and continuous reporting exemptions have been established for some companies, all to facilitate access to financing,” says Molina.

In general, the important regulations are given by some changes in laws and/or regulations. Law No. 21453, of June 2022, Amends the Tax Code forcing Banks and Other Financial Institutions to deliver information on balances and amounts of credits in financial accounts to the Internal Revenue Service. Law No. 21,420 of January 2022 reduces or eliminates tax exemptions, while Law No. 21481 of August 2022 amends the quorums for the Reform of the Political Constitution of the Republic.

NCG No. 472 of the CMF has regulated and established the Registry of Investment Advisors to regularly make recommendations in Chile related to investment in financial instruments of any kind, by any means and addressed to the general public or to specific sectors of the it, natural and legal persons that are not banks, insurance and reinsurance companies, securities intermediaries, general fund administrators and portfolio administrators supervised by the Commission, must be previously registered in the Registry of Investment Advisors kept by the CMF.

While the economy and the global situation remains volatile, everyone IAB spoke to was confident there would be growth next year. “There has been a greater demand for the services related to certification of bankruptcies or reorganisations, and due diligence services for acquisitions of companies,” says Molina. “Our expectations are that the demand for audit and consulting services will continue to increase, mainly because the market demand for reliable financial information is increasing. The effects on the economy of the pandemic and currently the Ukraine-Russia war have raised the level of scepticism about financial information, making it increasingly essential for independent auditors to participate in and review such information.”

Rojas is seeing demand for services grow in the areas of information technology, also tax advisory services as companies get to grips with the reforms in recent years and the reform projects already presented to Congress and under discussion. “Our expectations as a firm during the next year is to retake growth in the areas of auditing and consulting,” she says. “Mainly with information technology and tax consulting services, considering the important changes due to the reforms that the Government is promoting in this area.”

“Sustainability looks to be a big service for large clients in over the next year,” says Buscunan. “BPO services for new investors and medium sized companies is also going to be in demand, as they need to reduce costs to be more competitive.”

Inflation is going to hit Chile hard – in September the central bank raised its inflation expectations to 11.4% from 10.8% in its quarterly monetary policy report, with analysts predicting more rate hikes to come to combat rising prices. "This greater inflationary persistence requires a more contractionary monetary policy – in nominal and real terms – than that anticipated in the previous report," it said.

The adjustment comes at a time in which real wages are continuing to shrink, job creation has slowed down and the remaining liquidity of the 2021 stimulus measures has been exhausted, it added. "By the start of 2024 we will see a return of figures closer to the goal," it said.

The bank also revised upward its economic growth forecasts for 2022 to 1.75-2.25% from 1.5-2.25%. For 2023, however, it predicted a contraction of 0.5-1.5%, from a previous estimate in a range of zero to a 1.0% drop. The bank said that the current account deficit should decline in coming quarters, in line with adjusted spending and a more favourable savings-investment balance compared to last year.

Politically, the country remains in flux, with Chileans recently rejecting a new progressive constitution to replace its dictatorship-era charter, a document that was three years in the making and had been billed as a democratic effort to replace the constitution imposed by General Augusto Pinochet 41 years ago. Chilean political leaders of all agree the constitution that dates from the country’s 1973-1990 dictatorship must change. The process that will be chosen to write up a new proposal still has to be determined and will likely be the subject of negotiations between the country’s political leadership.