An inspiring speech

The speech delivered by the president of CVM (the Brazilian Securities and Exchange Commission), Leonardo Pereira, in the 6th International Financial and Capital Markets Conference organized by BMF Bovespa in the city of Campos do Jordão, State of São Paulo, was particularly relevant and interesting for being focused on the core of CVM’s activities.

For approximately 40 minutes, our capital market’s regulator provided the some 600 attendees with a broad view of its priorities and initiatives. Attentive participants left the event with a clear perception of the direction the regulation agency will be taking for the next years, as well as of some points CVM has been preparing in the technical sphere.

No doubt one of the most important topics addressed was CVM’s Strategic Plan, a process that has been conducted for several months and in which 650 investors and 50 market’s agents (including Amec) have been participating to help build the entity’s long-term agenda. Although we have not had access to the final product, it has been clearer and clearer that this important initiative follows the agency’s tradition, that is, to listen, analyze and only after that, regulate.

This tradition is not only beneficial for our capital market. It should be used as an example for all regulatory agencies in Brazil. The partnership CVM managed to establish with its regulated public is an example of how it is possible to prevent negative surprises. The transparency benefits both sides once regulated agents can get ready for new measures by studying them and the regulator can listen to the potential consequences of its acts before applying them. Indeed, it should be a model for all regulatory activities in Brazil.

Have you ever considered how our lives could improve if this practice was adopted by other regulators? Let’s think about the energy industry, which made investors and operators lose sleep in recent months, or yet the taxation topic. It would be great if the government and agents could formally talk before that new regulatory actions were taken… Can you imagine how many lawsuits would no longer be filed in our jammed courts? How many billions of reais could be saved in mistakes avoided in advance?

Amec has been gearing efforts towards contributing with every single public hearing organized by CVM regarding its mission of advocating for the rights of minority shareholders in Brazilian companies. This year alone, we contributed with changes to CVM Instruction 480 and CVM Instruction 391. Additionally, we submitted other suggestions that, although not part of formal public hearings, have been used by CVM in its analyses to enhance the regulatory environment.

CVM’s president mentioned that public hearings are a critical tool for the regulatory process. “We have been listening to the market,” he said. Let’s hope it goes on like that.

Another important point of his speech is related to accounting standards. Here follows part of it addressing this topic:

“As I stated when I joined CVM, the process to implement the IFRS was very well conducted in Brazil, but I believe some points needed special attention during this consolidation phase. The IFRS focuses on the substance and gives rise to interpretations. Therefore, only with a continuous qualification of the agents  and a more comprehensive debate when a regulation is discussed in a public hearing that we will be able to maintain and enhance the quality of our accounting statements, instead of focusing only on the quantity and form.”

Amec can only celebrate this statement. During 2013, we have been highlighting a number of problems resulting from the implementation of the IFRS in Brazil. We are aware that investors failed when they did not participate in the public hearings promoted by the International Accounting Standards Board (IASB) and the Brazilian Accounting Pronouncements Committee (CPC). “Nostra culpa.”

However, problems have arisen. The first analysis we made was related to the consolidation rules. By means of the President Letter 07/2013, we warned CVM that the end of the proportional consolidation would mean that Brazilian accounting statements would be less transparent. Investors can no longer analyze the economic and financial situation of companies with several affiliated companies. In addition to that, the use of the “control” concept enables some transactions to be expressly designed with the objective of reaching a specific accounting treatment – usually the non consolidation of heavily-indebted businesses. Now, there is at least one transaction underway that is being clearly impacted by the “strategic accounting practice.” It is an inappropriate procedure for a market that wants to be mature. Another problem identified and discussed by Amec is related to the adoption of a hedge accounting practice by some companies. Some members have the impression that, in some situations, the essence has been ignored in favor of the form – the opposite of what IFRS was expected to. If companies adopt – and CVM allows them to – accounting practices that meet the pronouncements’ form but lead investors to make mistakes, then the IFRS will face considerable risk.

And what about the impairment exercises that will increasingly impact accounting statements? If the processes to judge these studies, including the selection of premises, are too discretionary and not transparent, financial statements’ users will face the risk of not knowing the nature of the figures they are presented with.

As CVM’s president stated, “the IFRS focuses on the substance and give rises to interpretations.” No doubt the qualification of agents to understand this philosophy is very important. But maybe it is not sufficient. The posture of doing “what one can do” in view of some “strategic” objectives of the administration and not “what must be done” must be avoided. Investors and regulatory bodies must be attentive. In the words of the “sheriff” himself:

“…it is important to focus on structures that assure that decision-making processes have the social interest in mind and are based on policies that ensure the disclosure of clear, precise and consistent information.”

“Just to conclude this topic: announcing and using information correctly is of utmost importance! Accordingly, CVM, regulatory bodies and self-regulatory entities cannot be tolerant when it comes to the process of overseeing, supervising, and approving, if it’s the case. We are talking about credibility and there is no room for doubt!”

Once again, music to our ears. The regulatory agency showed to be aware of how this topic is important for the credibility of our capital market. Therefore, it is up to investors to share their concerns with CVM so that we can have more and more reliable financial statements.