Rankings report: Brazil
Brazil’s buoyant outlook fuels accounting industry
Brazil’s economy continues to outperform economic forecasts. An aggressive ESG strategy, sweeping tax reforms as well as a maturing business environment is creating a gold rush for the local accountancy market. Che Golden reports.
While other economies have been struggling with the effects of the pandemic, which has left many with an economic hangover, Brazil is beating all market forecasts. With a new left-wing government in power that is keen to work with foreign investors, a maturing business environment and an aggressive push for corporate transparency to aid ESG reporting, the local accounting industry is gearing up for some boom years.
The last time IAB reported on Brazil, there were concerns that the quality of auditing was not up to a high standard. But the aggressive drive by the government to persuade private companies to implement an ESG strategy is having a big impact on audit quality. The Brazilian Security Exchange Commission, CVM (Comissão de Valores Mobiliários), published a new regulation in December 2022, to be implemented in 2023, to regulate private equity funds. According to Jacqueline Rodrigues Campos, managing partner of PGBR Auditores e Consultores, a PrimeGlobal member firm, while this is not directly related to the improvement on the quality of audit work, the demand for ESG disclosure has an impact on the audit engagements and audit committees.
“It has addressed the need for a clear and common definition of the ESG culture and actions needed for a fund or a company to be considered as green, sustainable and social,” she said. “The articles that address this in the new regulation text seem to have the objective of dismissing greenwashing and establishing rules for implementation and disclosure of the ESG agenda.”
Jacqueline Rodrigues Campos, managing partner at PGBR Auditores e Consultores, a PrimeGlobal member firm
As well as pushing an ESG agenda, Brazil is currently undergoing significant tax reform. The recently approved tax reform in the Chamber of Deputies is a proposed constitutional amendment that will replace five current taxes with two new taxes. The objective is to simplify the tax system, reduce distortions and enhance transparency. Tax reform is a hot topic in Brazil as experts think Brazil's tax collection system to be one of the most complex in the world, with too many rules, numerous exceptions and high compliance costs.
At present, in Brazil a product or service is taxed multiple times throughout the production-distribution chain. This means the current tax collection system in Brazil does not allow for a precise calculation of how much tax is levied on each product or service. Often, the value that appears on receipts is an estimate. It also penalises Brazilian exports because exporting companies cannot offset part or all of the taxes paid throughout the production chain. As a result, products made in Brazil are often more expensive and less competitive in the international market.
All this reform is keeping Brazilian accountants very busy. “The Brazilian independent audit market is solid and consolidated,” said Karin Monchak, partner at MGI Assurance Auditores Independentes S.S. “It is an experienced business segment, with credibility and capable of meeting the most complex demands with excellence. However, client demand for increasingly specialised services, with shorter deadlines and costs is increasing, while the impact of technology on the work of auditors is a deep, broad and diverse transformation process.”
Karin Monchak, partner at MGI Assurance Auditores Independentes S.S.
Customer demand for accounting in Brazil has increased significantly over the past five years as companies seek transparency and sustainable growth, according to Campos. “The fee pressure, that was an enormous challenge, is getting better as the companies are being educated on the importance of this industry to achieve that sustainable growth,” she said. While every country in the world has struggled with the economic impact of the pandemic, Brazil has seen its startup ecosystem reach maturity in recent years, according to Monchak. Brazil has in recent years benefited from its openness to new technology, recent infrastructure projects, the expansion of its capital markets and a more sophisticated business environment.
“The accounting sector in Brazil seems to be quite consolidated and stable, as many entrepreneurs are now realising the significance of accounting for the efficient management of their companies,” said César Ramos, partner and founder of International Relations, Kreston Partnership. “They are demanding accounting firms that provide excellent services and deliver their balance sheets swiftly. Some accounting firms are merging to improve their efficiency and increase their expertise to meet these demands. The expectation is to expand new markets through partnerships, mergers, and acquisitions with other offices in other states, as well as increase internal training and the well-being of their team for retention and motivation to provide excellent service.”
IPO and merger and acquisition (M&A) activity has also remained positive - Campos claims Brazil leads the operations of IPOs and M&As in Latin America in 2023. “Even considering a decrease on the number of operations when compared to 2022 (34% drop), the scenario is positive considering the geopolitical circumstances and the recent election,” she said. “The election seems to have had a low impact on the number of transactions and the market behaviour is a consequence of the new opportunities considering the establishment of the interest rate drop and inflation control.”
César Ramos, partner and founder of International Relations, Kreston Partnership
While the results of the recent election have not led to a dramatic drop in IPOs and M&As, there has not been an uptick in transactions either. Last year, industry observers felt that many investors, both local and international, were holding off on major decisions until the election was over and they were more confident as to what kind of business environment the new government was going to foster. But there has not been a bounce effect and that is purely down to the economy, according to Camillo Eduardo Pachikoski, founding partner of Pachikoski of PP&C, a Nexia member firm. “Since the recent election, there has not been a noticeable increase in both IPO or M&A activity in Brazil,” he said. “This reduction in capital market transactions in my opinion is not reflective of investor confidence but an unfavourable economic environment.”
Brazil is getting its financial house in order and economic forecasts are very optimistic. Brazil entered 2023 with expectations for its economic growth to slow, but Q1 GDP growth of 1.9% quarter-on-quarter exceeded expectation. Unemployment has fallen to an eight-year low, while inflation is now below 4%. At 3.9%, Brazil’s rate of inflation is lower than in most of its peer nations or even that of richer countries such as the US, Canada or Australia, and it is two-thirds the headline inflation rate of the euro zone.
Originally, economic forecasters thought that growth would weaken over the second half of the year but it now looks like the economy will expand by over three per cent in 2023.
Camillo Eduardo Pachikoski, founding partner at Pachikoski of PP&C, a Nexia member firm
Such a positive outlook is leading to a bigger demand for accountancy services and the industry is gearing up for some bumper years. “Within the Brazilian accounting industry, there has been some consolidation and merger activity,” said Pachikoski. “Mainly among mid-sized firms seeking to expand their service offerings and geographic reach. These mergers aim to enhance the firms' capabilities and competitiveness in the evolving market.”
The expectations are for the accounting and auditing industry to grow over 12% as the consolidation of the ESG agenda occurs and demands the market to increase transparency even more. “The business sector is expected to increase in Brazil in alignment with the GNP growth and the stability of the economic scenario which demands companies invest in data, analysis and well-prepared disclosures for which the accounting and audit firms play a central role,” said Campos.
Like many accountancy firms around the world, Brazil has a skills shortage and companies are having to get creative to meet demand. “The pandemic has brought a new perspective on our profession,” said Marcelo Lico, managing partner of Crowe Macro Auditoria e Consultoria Ltda. “For employee retention, companies at our level are very similar in terms of training, growth prospects, compensation plan and benefits. Therefore, no one stands out. As a result, we try to retain professionals through mentoring plans, motivational lectures with psychologists and intensive actions through our Diversity and Inclusion Committee.”
Carlos Toretelli, managing partner of Crowe Consult
Over the next 12 months, ESG is going to remain an important driver for Brazilian companies as they seek corporate transparency and a big revenue stream for accountancy firms. “I believe that the big change is related to ESG reports that have an impact on companies, but also on independent auditors,” said 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.”
Pachikoski has seen demand increase in areas related to advisory and consulting services, such as cybersecurity, data analytics, and of course, ESG advisory. “These additional services cater to the evolving needs of clients, who seek guidance beyond traditional financial statement audits,” he said.
“Looking ahead, I anticipate continued regulatory changes in the next 12 months, especially regarding ESG reporting standards and tax regulations,” Pachikoski continued. “Additionally, advancements in technology and data analytics will further shape the way audits are conducted. The accounting profession will need to adapt swiftly to these changes, ensuring it continues to meet the evolving needs of clients and stakeholders while upholding the highest standards of integrity and professionalism.”
Looking at the kind of turbulence currently buffeting other South American economies, it will be interesting to see if Brazil can keep outperforming economic forecasts for the rest of the year. With foreign investors feeling so positive about the new government settling into power, the next year could see Brazil transforming itself with reform and a steady flow of cash for it’s president’s ambitious social and economic policies.
Main Image: Christ The Redeemer, Rio de Janeiro, Brazil. Credit: Ksenia Ragozina /Shutterstock