VISIT TO SAO PAULO OF PUBLIC COMPANY ACCOUNTING OVERSIGHT

1. Summary. PCAOB Member Charles D. Niemeier, sponsored by the
Public Affairs Section, was the guest speaker at the August 15
meeting of Cafe com Finanzas (Coffee with Finances), a national
group of financial organizations who meet on a bimonthly basis to
discuss finance-related matters. Mr. Niemeier spoke on the Rotation
of External Auditors in Financial Institutions, which generated
spirited debate on the merits of mandatory audit rotation. He
subsequently met representatives of various financial, futures, and
regulatory institutions, and observed firsthand the Sao Paulo Stock
Exchange's (BOVESPA) Novo Mercado (New Market), Brazil's impressive
new transparent stock exchange listing. End Summary.

Debate on Mandatory Rotation of Auditing Companies


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2. At the August 15 bimonthly meeting of the financial discussion
group Cafe com Finanzas, PCAOB Board Member Charles Niemeier
discussed the factors that led to the 2002 Sarbanes-Oxley Act, which
created an independent auditing committee, which should guarantee
greater oversight of the auditing process and greater independence
for auditors from management control. In Brazil, mandatory rotation
of auditors every five years has been required since 1999.
Niemeier's discussion generated spirited debate on whether mandatory
rotation of auditors has been beneficial to the Brazilian system.
Luiz Fernando Figueiredo, president of the Association of Market
Investors and former director of the Central Bank, previously
supported the mandatory rotation of auditing companies, but today
feels that this practice is disruptive, costly, and inefficient. He
now advocates the rotation of individual auditors instead. The
president of the National Association of Auditors was also strongly
opposed, stating that mandatory rotation is destroying the
auditor/company relationship, increasing costs to a prohibitive
level, and raising problems in retaining talented auditors in the
field. On the other side, the Brazilian Central Bank supports
mandatory rotation, as does Bengt Hallqvist, founder of the
Brazilian Institute of Corporate Governance, who believes the root
of the problem is found in the concentration of business in Brazil's
four largest auditing firms. The general consensus that emerged
during the discussion was that after experience with two rotations
in Brazil, there needs to be a study of the practice's
effectiveness.

Visit to Futures and Stock Markets


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3. A short visit to the futures trading floor allowed Niemeier an
opportunity to observe the intense trading in dollars, and the more
traditional coffee market, which still operates on the trading
floor. The Futures and Commodities Exchange (BM&F), which has
offered electronic trading for the past 10 years, will have more
electronic transactions than traditional transactions for the first
time this year. Niemeier also visited Bovespa's Novo Mercado,
introduced in 2000 with stringent transparency requirements
regarding corporate governance for companies listed. The result has
created a stronger, more credible and transparent market, with
increased activity and equity capital for the Brazilian stock
market. Since the new rules were introduced, 22 companies have
raised approximately USD 6.8 billion in 26 primary and secondary
issues, compared to a total of five IPOs seen from 1995 to 2003.
Niemeier stated that the Novo Mercado, with its transparency and
good governance requirements, is a good example for the rest of the
world and will attract investors in the long run. Joao Lauro
Amaral, International and Government Relations Director for BM&F,
confided that companies opening up to public investment are now
considered questionable if they do not appear on the Novo Mercado.
Amaral, like the rest of the financial community in Brazil, believes
the Novo Mercado has strengthened the market and created a sense of
credibility with its tough regulations and transparency.


SAO PAULO 00000970 002 OF 002


Positive Press


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4. Comment: Mr. Niemeier's presentation on the mandatory rotation
of auditors generated frank discussion among the business leaders,
bankers, and auditors present at the Cafe com Finanzas, both for and
against mandatory rotation. In addition to the open exchanges at
meetings, the positive press generated made this a successful visit
for all involved. An interview with Mr. Niemeier discussing
mandatory rotation and the Novo Mercado appeared in Brazil's most
traditional business-oriented daily newspaper, the Gazeta Mercantil,
(circulation of 73,000). He also received favorable coverage in
Valor Economico, an independent daily newspaper launched in 2000 by
Folha de Sao Paulo and O Globo whose editorials are sometimes
critical of US trade policy toward Brazil (circulation 60,000). In
all his comments, Mr. Niemeier was very positive about the Novo
Mercado and its effect on the Brazilian stock market, and predicted
it will continue to attract more investors in the future due to its
transparency, regulations, and higher standards. End Comment.



5. This cable was coordinated/cleared with Embassy Brasilia.


McMullen