Circular Letter CVM/SNC 02/96: Audit Opinions and Limited Review Reports

CIRCULAR LETTER CVM/SNC No. 02/96.
Rio de Janeiro, January 18, 1996.
Subject: Audit Opinions / Limited Review Reports.
Omission of Qualifications or Inadequate Wording.

Dear Sirs,

In monitoring the performance of independent auditors during the 1995 fiscal year, we observed certain irregularities in the wording of audit opinions and reports on the limited review of quarterly financial information (ITR) that conflict with the interests of the securities market and with current professional standards.

A sample based on the accounting statements submitted to this Agency by approximately 300 (three hundred) public companies, among those with shares listed on the stock exchange, indicates that 60 (sixty) companies presented accounting statements with deviations from Fundamental Accounting Principles, Law No. 6.404/76, and current Standards, which resulted in inquiries to the respective independent auditors, as shown in the table below:

Audit Opinion/Report Deviations	Frequency (Q)	%
Unqualified opinions on deviations not qualified	47	64
Qualification instead of disclaimer of opinion	1	1
Improper emphasis paragraph instead of qualification	12	16
Emphasis/qualification without quantification of respective effects	14	19
Total	74	100

Q = cumulative frequency of deviations.

Among the accounting statements with unqualified opinions on deviations, indicated in the table above, 32 (thirty-two), i.e., 43% (forty-three percent) of the total, were subject to a determination by this Securities and Exchange Commission (CVM) to redo or republish. Such deviations, in their vast majority, are:

a. non-observance of the conservatism (prudence) principle in the treatment of active or passive contingencies; b. late recording of monetary correction under Law No. 8.200/91;
c. indiscriminate retention of results (improper establishment of reserves, mainly Reserves for Profits to be Realized), affecting the calculation base for the mandatory minimum dividend, and
d. improper accounting of prior period adjustments in Retained Earnings.

Another aspect that drew our attention (16% of deviations) was the improper treatment as an emphasis paragraph for deviations that violate Fundamental Accounting Principles, such as: recording of contingent assets, break in uniformity, and change in accounting criterion, when the correct treatment would be a qualification.

It is also relevant to note that 19% (nineteen percent) of the qualified deviations or those subject to emphasis failed to be quantified, and the effects of their impact on the companies' equity and on the results of the audited period were not disclosed.

The above information is being forwarded to you to remind you that Law No. 6.385/76 confers upon the independent auditor a responsibility of public order, and their performance within the securities market is of fundamental importance for the credibility of information, and they may be held civilly liable for their acts.

In this sense, we wish to emphasize that it is imperative that audit opinions and reports on limited review always be issued in conformity with the audit standards and procedures endorsed by CVM Instruction No. 216, of June 29, 1994, observing Fundamental Accounting Principles and in accordance with the interests of the securities market.

Sincerely,

Antonio Carlos de Santana
SUPERINTENDENT OF ACCOUNTING AND AUDIT STANDARDS

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