Recent cases of fraud in Brazil, such as scandals involving large companies and financial institutions, have accelerated debates about the limitation of auditing and the role of corporate governance. These events highlighted significant flaws in internal control systems and in the effectiveness of external audits, and several factors contribute to these discussions about the importance of assuring internal controls. These events underscore the need for more robust and independent audits to ensure the integrity of internal processes. Additionally, the effectiveness of external audits has been questioned when substantial fraud goes unnoticed. The limitation of auditing, including potential conflicts of interest and lack of rigor, became a focal point, suggesting the need for reforms to ensure more independent and comprehensive audits.
Pressure from regulatory authorities has intensified demands to improve corporate transparency and accountability. As a result, debates turn to how audits and governance can be reinforced to meet new regulatory expectations and prevent future fraud. That's because significant fraud has a devastating impact on both the economy and the financial market's reputation. These incidents compromise investor and public confidence, pressuring companies and regulators to adopt stricter measures to prevent recurrences.
Brazil has observed international governance and auditing practices, where countries with stricter regulations have demonstrated greater effectiveness in preventing fraud. The adoption of global standards can help align Brazil with international best practices. Therefore, discussions on the topic are leading the country to a strong possibility that the issuance of internal control assurance reports will become a legal requirement. This initiative aims to increase corporate transparency and governance, especially among large corporations and financial institutions.
The proposed legislation is in line with international trends, where companies, especially in the European Union, are required to report their sustainability policies and performance under guidelines such as the CSRD - Corporate Sustainability Reporting Directive.
We can cite as similar initiatives, for example, for financial institutions, Resolution No. 4,968 of the Central Bank, which requires the implementation and maintenance of robust internal control systems.
Resolution No. 4,968 of the Central Bank of Brazil, published on November 25, 2021, establishes guidelines for the implementation and maintenance of internal control systems in financial institutions and other institutions authorized to operate by the Central Bank. This resolution aims to strengthen corporate governance and risk management within these entities.
The potential new law would ensure that all large companies, not just financial institutions, adhere to strict internal control and risk management standards, promoting a more transparent and responsible business environment in Brazil.
The implementation of internal control assurance reports offers several significant benefits for companies and the market in general, such as the improvement in Corporate Governance, because the assurance of internal controls strengthens it, promoting greater transparency and accountability. This can increase the confidence of investors and other stakeholders in the management of the company.
Another benefit is the reduction of risks, since assurance reports help identify and mitigate operational, financial, and compliance risks, reducing the likelihood of fraud and significant errors, and even meeting regulatory compliance, as maintaining a robust structure of internal controls is often a regulatory requirement. Assurance reports can demonstrate compliance with laws and regulations, avoiding sanctions and penalties.
With regard to operational efficiency, the review and continuous improvement of internal controls can lead to more efficient operational processes, reducing costs and increasing the effectiveness of operations. Assurance reports provide an independent view of the effectiveness of internal controls, which can increase investor confidence and improve access to capital, in addition to improving the quality of information, since the quality of reported financial and non-financial information improves, facilitating informed decision-making by management and investors.
And clearly, companies that demonstrate a commitment to transparency and good governance are often viewed more favorably by the public and the market, improving their reputation and corporate image.
The mandatory reporting of internal controls can, therefore, bring substantial benefits both to individual companies and to the market as a whole, promoting a more transparent and secure business environment. In view of this, some discussions are under way to seek to reinforce the companies' duties and expand the limits of auditing.
One of them is Bill No. 2581, of 2023, authored by Senator Sergio Moro, which seeks to protect, encourage, and reward informants who report crimes or illegal acts in the securities market or in publicly traded companies. In addition, the bill proposes the amendment of Law No. 6,385, of December 7, 1976, to include audits of internal controls and new classifications of crimes against the capital market.
The implementation of strict internal control practices, backed by independent assurance, establishes a solid foundation for financial integrity and market trust, promoting a safer and more transparent business environment. Thus, organizations not only fulfill their legal obligations, but also reinforce their reputation and attract investment, creating a virtuous cycle of growth and stability.
Get in touch with TATICCA Allinial Global Brazil , which provides integrated auditing, accounting, tax, corporate finance, financial advisory services, Risk Advisory , technology, business consulting and training. For more information, visit www.taticca.com.br or email taticca@taticca.com.br. Our company has professionals with extensive experience in the market and has certified methodologies for carrying out activities.
