Rankings Report: Brazil

Brazil buoyed by FDI

A boom in demand is leading to a gold rush for Brazil’s accountants but there are fears that poor quality auditing could hurt the sector’s reputation and hinder inward investment. Che Golden reports

Brazil is one of the strongest economies in Latin America and its accountancy sector is seeing a huge growth in demand for auditing and consulting services, while foreign direct investment (FDI) is pouring in. But some industry observers feel that a lack of quality control could hurt the reputation of the accounting sector and stymie FDI as less professional firms turn out poor quality work, riddled with errors.

Karin Monchak, partner at MGI Assurance Auditores Independentes S.S., Curitiba, feels the Brazilian independent audit market is solid and consolidated. She pointed out that it is an experienced business segment, with credibility and capable of meeting the most complex demands with excellence. However, pressure for increasingly specialised services, with shorter deadlines and costs are building. The impact of technology on the work of auditors is also causing a deep, broad and diverse transformation process, in her opinion.

Karin Monchak
MGI Assurance Auditores Independentes S.S., Curitiba

“It is a crucial moment for the profession, everyone is readapting to the post-pandemic with significant changes in ‘for whom’, ‘with whom’, ‘how’ and ‘where’ we provide our services and, consequently, we become more global,” says Monchak. “I see it as a complex, but essential and positive change. If we evaluate from the point of view of recruiting and retaining talent, today with a hybrid model of remote and face-to-face work, use of technologies, among others, we can become more attractive to younger generations of professionals.”

Some industry observers, however, are concerned about the lack of quality control within the profession. “Over the past few years, we have had development on professional regulation and monitoring of best practices, continuing education, and digitalisation of accounting information,” says Jacqueline Campos, partner at PrimeGlobal member firm PGBR. “But there is still a lack of regulation and monitoring of the professional practices, as most of the companies are not obligated to have an audit review of the information and so the accounting professionals of such companies do not practice best practices in delivering a service that is informational/strategic driven, but only driven for fiscal purposes.”

Jacqueline Campos
PrimeGlobal member firm PGBR

According to Campos, this has led to a lot of errors and misstatements on accounting information and advisory for companies. While she agrees there is a huge demand for auditing services, she claims this demand has been picked up by unprofessional or low-standard firms, which causes fee pressure. Staff recruitment and retention has also been difficult, as the Brazilian accountancy industry has seen a decrease in the number of students, caused by the economic crisis after the pandemic and a lack of interest in the profession.

The pressures to comply with Environmental and Social Governance (ESG) regulations may force the industry to put in better quality control. “I believe that ESG reporting is going to be a big change, not only because of the impact it will have on client companies, but also on independent auditors,” says Monchak. “Its role in ensuring the quality of ESG information from audited companies to investors, stakeholders and regulators takes on new and very important significance as part of the fight against climate change and is one of the ways companies will be held accountable for their commitments. It is important that independent audit firms, accounting professionals and their accounting organisations actively and resolutely engage in this crucial new challenge facing our profession.”

As well as ESG reporting, the attractiveness of Brazil as an investment destination is also increasing demand – foreign investors will be reluctant to invest if they cannot trust the quality of the information they are getting from auditors. “The maturity that the Brazilian start-up ecosystem has reached in recent years, with an increasing appetite from investors for the opportunities presented in Latin America and Brazil, has increased the demand for auditing and consulting services to provide investors with important information about their targets,” says Monchak. “Sectors such as health, insurance, agriculture, cybersecurity, fintechs, and e-commerce are experiencing a boom.”

At the end of 2021, Brazil published the following standards, which, together with the standards of ethical conduct of the auditor, are the normative framework on quality for audit companies:

NBC PA 01 – Gives new wording to NBC PA 01, which provides for quality management for firms (legal entities and individuals) of independent auditors, in line with the international standard ISQM 1. It is necessary that management systems be planned and implemented in accordance with this standard by December 31, 2022, and the quality management system assessment must be carried out within one year from December 31, 2022.

NBC PA 02 – Deals with the review of the quality of work, in line with the international standard ISQM 2. This standard is applicable to: (a) audits and reviews of financial statements for periods beginning on or after January 1, 2023; and (b) other assurance engagements and related services for periods beginning on or after January 1, 2023.

NBC TA 220 (R3) – Gives new wording to NBC TA 220 (R2), which provides for quality control of the audit of financial statements, in line with the international standard ISA 220. This standard applies to audits of financial statements for periods started on or after January 1, 2023

Campos has seen an increase in demand from mid-sized companies that are looking for more professionalised services such as BPO, ERP implementation, mapping of internal controls, and audit reviews. “After the election in October, we are expecting to see growth in the agricultural industrial and commercial markets, as well as the return of the consuming power of the population,” says Campos. “It will result in more investment, more transactions, and increased development of new companies, markets, the commencement of start-ups and the need to develop the areas of finance, accounting, and audit projects on the growing companies.”

Investors are also waiting to see what fiscal policies the new Brazilian president will implement – until the election is decided, it will be hard to quantify the level of risk. Recent polls have shown former President Luiz Inacio Lula da Silva leading in the presidential race, followed by current President Jair Bolsonaro. Once the election is decided, there may be some relief in the markets, but in some other Latin American countries, investors could not see a clear post-election guideline, which led them to trade assets at a discount after the vote.

Brazilian companies themselves also seem to be holding back on IPO, motivated by the same risks as foreign companies, according to Camillo Pachikoski, main partner at Nexia International - PP&C. “Those that boosted their funds with IPO funding in 2021, are now looking to accelerate the growth and consolidate markets,” he says. “There were more than 46 IPO operations in 2021, which raised cash of more than BRL 65 billion. Most of the IPO were linked to expansion plans, which are now available to shareholders for the purchase of new assets.”

Pachikoski says there is still a strong appetite for IPO amongst Brazilian firms and the amount of mergers and acquisitions are set to grow. Like foreign investors, Brazilian firms are waiting to see what the results of the presidential election will be. “By the end of the 3rd quarter of 2022, there was a general halt in initial public offerings (IPOs), but the market estimates that after the October face-to-face elections, the capital market will become more heated and about 40 IPO are expected,” he says. “These resources are usually returned to the market via acquisitions to ensure expansion plans and shake up the specialised due diligence audit market.”

Brazil's economy posted higher-than-expected growth of 1.2% in the second quarter of 2022, giving President Bolsonaro a boost ahead of elections. The result beat analyst expectations for 0.9% growth and was the fourth straight quarter of expansion for the Brazilian economy as it rebounds from the effects of the pandemic. Growth was fuelled by rises in manufacturing (up 2.2 %) and the service sector (1.3%), the state statistics agency IBGE says.

The country also recorded USD 39.71 billion in foreign direct investment (FDI) between January and May this year, the largest inflow of resources since 2011, according to the external accounts report released by the Central Bank of Brazil. FDI in the country grew compared to the same period in 2021, when it was USD 26.13 billion. In May, the net inflow of resources was USD 4.5 billion, an increase from the same month in 2021, when it was USD 2.2 billion.

In the last 12 months ending May, FDI totalled USD 60 billion, equivalent to 3.45 percent of Brazil's gross domestic product (GDP). In 2021, FDI was USD 46.44 billion, and the central bank expects it to reach USD 55 billion by the end of this year.

However, Brazil also posted a current account deficit of USD3.5 billion in May, the worst result for the month in eight years, amid trade balance weakening. A strong commodities producer, Brazil has seen its exports grow, but imports have increased at a faster pace, driven by higher prices for products such as fuel and fertilisers. In May, the trade balance surplus was USD3.4 billion, down 53.3% over the same month last year. The factor payments deficit also rose by USD1.4 billion in the month, while the services deficit rose by USD 743 million, the central bank said. Overall, this was the worst current account figure for May since 2014, when the deficit was USD 6.7 billion.