Circular Letter CVM/SNC GNA 01/2013

CIRCULAR LETTER/CVM/SNC/GNA No. 01/2013
Rio de Janeiro, February 8, 2013.
Subject: Clarifications related to the performance of auditors within the securities market

Dear Independent Auditor,

During the last fiscal year, we noted instances of non-compliance with regulations governing registration and activity within the securities market, for which we request the special attention of the independent auditor registered with this Commission.

Furthermore, we also consider it beneficial to reaffirm information on certain matters related to the activity of independent auditing within the securities market, for which deviations related to the adoption of independent auditing professional standards were also verified.

1. Periodic Information (Art. 16 – CVM Instruction No. 308/99)

Independent auditors must submit to the CVM, by the end of April of each year, certain information related to their performance in the securities market, as per Annex VI to CVM Instruction No. 308/99. This information is an important basis for the CVM to evaluate the auditors' capacity to adequately serve their clients and also allows for a global understanding of this activity in the market.

The CVM recommends that such information be submitted via the internet, on the CVM website. The submission must be made through the "DOCUMENT SUBMISSION" option, selecting the "CVMWEB" option next. At this stage, there are two options for submitting the information: i) Document submission via form and ii) Document upload. Finally, the "Annual Report of Independent Auditor" option must be selected. The "document upload" option should be used only by those auditors who have more than 10 (ten) clients that are publicly held companies (or entities under the supervision of this CVM), as in this case, it is necessary to create a file (XML standard) to submit the required information.

Late submission of this information subjects auditors to a coercive fine of R$ 100.00 per day of delay, with these values reduced by half when the auditor does not have clients within the securities market.

2. Registration Update (CVM Instruction No. 510/11)

Regardless of the submission of periodic information required by CVM Instruction No. 308/99, it is also necessary for independent auditors to keep their registration updated, observing a deadline of up to 07 (seven) days from the event that caused the alteration. To do so, independent auditors must access their registration data on the CVM website and proceed with the appropriate update. In addition to the required update, annually (between May 1 and 31), it is the responsibility of the Independent Auditor to confirm that their registration data remains valid, by issuing the Electronic Conformity Declaration, established by CVM Instruction No. 510/11. The Electronic Conformity Declaration must be issued by accessing the "REGISTRATION UPDATE" option, followed by "ELECTRONIC CONFORMITY DECLARATION", on the CVM website. It is important to note that even in cases where there are no alterations to be made, the Electronic Conformity Declaration must be issued.

Non-compliance with the provisions of Art. 1 subjects the participant to a daily coercive fine of R$ 200.00, when the participant is a legal entity; and R$ 100.00, when the participant is a natural person.

3. External Quality Review Program (Art. 33 – CVM Instruction No. 308/99)

We remind you that independent auditors must undergo an external review conducted by another auditor registered with the CVM, with the aim of also evaluating compliance with technical and professional standards, in accordance with a specific standard issued by the Federal Accounting Council (CFC). Currently, CFC Resolution No. 1.323/11 regulates the matter, and it must be observed by independent auditors.

The reviewing auditor must submit to the CVM and to the audited auditor, by October 31 of the respective year, a report containing an exposition on the examination performed and on points of recommendation for improvement or correction of deficiencies found.

Non-compliance with the Program established by the CFC, as well as the determinations contained in CVM Instruction No. 308/99, entails the application of a fine, in addition to other applicable administrative measures, including the initiation of an administrative sanction proceeding.

4. Continuing Professional Education Program (Art. 34 – CVM Instruction No. 308/99)

With the objective of maintaining a high standard of technical qualification and constant updating regarding professional standards, accounting and auditing procedures, and standards related to the exercise of their activity in the securities market, independent auditors registered with the CVM must maintain, for themselves and for their entire technical staff, a continuing education program in accordance with the guidelines approved by the CFC, contained in CFC Resolution No. 1.377/11. Non-compliance with the Program established by the CFC, as well as the determinations contained in CVM Instruction No. 308/99, entails the application of a fine, in addition to other applicable administrative measures, including the initiation of an administrative sanction proceeding.

5. Preparation of Audit Reports

With the objective of guiding Independent Auditors registered with the CVM regarding the preparation of the independent auditor's report on the financial statements of publicly held companies, in light of the independent auditing professional standards emanating from the Federal Accounting Council, and the standards that regulate the independent auditing activity within the Securities Market, we list below examples of errors in the drafting of the independent auditor's report that have appeared recurrently:

Lack of mention of the comprehensive income statement:
Cases have been identified where independent auditors did not mention in the introductory paragraph of their report the comprehensive income statement, despite such statement being part of the respective set of financial statements.

NBC TA 700, approved by CFC Resolution No. 1.231/09, in its paragraph 23, clarifies the introductory paragraph of the auditor's report:

“The introductory paragraph of the independent auditor's report must (see items A17 to A19):
(a) identify the entity whose financial statements were audited; (b) state that the financial statements were audited; (c) identify the title of each statement that makes up the financial statements; (d) refer to the summary of significant accounting policies and other explanatory notes; and (e) specify the date or period of each statement that makes up the financial statements.” (emphasis added)

Thus, whenever the comprehensive income statement is part of the financial statements in question, as per item “c” above, said statement must be identified in the introductory paragraph of the independent auditor's report.

Lack of mention, or incorrect mention, of the Statement of Added Value (DVA):
Cases have been identified where independent auditors did not mention in their report the examination of the statement of added value, as established by CFC Resolution No. 1.320/11, which approves CTA 02, with alterations approved by CFC Resolution No. 1.378/11.

CTA 02 explains that “the DVA must be treated in a paragraph of other matters, after the opinion paragraph, observing the model presented in Annex II. To maintain uniformity of audit reports, the treatment of the DVA must follow this provision for all entities.”

While CTA 02 determines exactly the treatment of the DVA in the audit report, demonstrating a model in its Annex II, NBC TA 700, issued and approved previously to this CTA, by CFC Resolution No. 1.231/09, and still in force, determines that in the case where the DVA is presented, the introductory and opinion paragraphs must be adapted in the audit report.

Annex II of CTA 02 presents “Model of independent auditor's report on the (i) individual financial statements prepared in accordance with accounting practices adopted in Brazil and (ii) consolidated financial statements prepared in accordance with IFRSs and also in accordance with accounting practices adopted in Brazil, presented together (side by side) and which do not present a difference between the result and net equity.”

No model of independent auditor's report on financial statements prepared in accordance with accounting practices adopted in Brazil that are not presented together with financial statements prepared in accordance with IFRSs is presented in CTA 02, or in another CTA.

CTA 02 explains that the basis for determining the separate treatment of the DVA in relation to other financial statements in the audit report is because it is mandatory by Brazilian corporate legislation, only for publicly held companies, not being mandatory according to IFRSs, and therefore, it should be considered as supplementary information.

Based on the above, it is possible to conclude that, for audit reports on financial statements prepared in accordance with accounting practices adopted in Brazil that are not presented together with financial statements prepared in accordance with IFRSs, the audit report should:
(i) be based on NBC TA 700, adapting its introductory and opinion paragraphs, so that the DVA is considered; or (ii) be based on CTA 02, treating the DVA in a paragraph of other matters, since, although there is no specific model for the case in question, CTA 02 mentions that, to maintain uniformity of audit reports, the treatment of the DVA must follow this provision for all entities.

Considering that it is not clear in such standards what the treatment of the DVA should be in audit reports issued on financial statements prepared in accordance with accounting practices adopted in Brazil that are not presented together with financial statements prepared in accordance with IFRSs and considering, furthermore, that CTA 02 was issued after NBC TA 700, the CVM understands that the DVA must be treated in a paragraph of other matters for all entities, as determined in CTA 02, after the opinion paragraph, to maintain uniformity among audit reports, making the necessary adaptation for the user's understanding.

Lack of the expression “qualified” in the title of the opinion paragraph with qualification:
Cases have been identified where independent auditors issued a qualified opinion, however, did not include the expression “qualified” in the title of the respective opinion paragraph, as established in NBC TA 705, approved by CFC Resolution No. 1.232/09.

“When the auditor modifies the opinion on the financial statements, he must, in addition to the specific elements required by NBC TA 700, include a paragraph in his independent auditor's report that provides a description of the matter that gave rise to the modification. The auditor must place this paragraph immediately before the opinion paragraph in his independent auditor's report, using the title “Basis for qualified opinion,” “Basis for adverse opinion” or “Basis for disclaimer of opinion”, as appropriate (see item A17).”

Lack of indication that the opinion is not qualified with respect to matters treated in emphasis paragraphs:
Cases have been identified where independent auditors issued reports with emphasis paragraphs, however, failed to indicate that their opinions were not modified with respect to the emphasized matters, as established by NBC TA 706, approved by CFC Resolution No. 1.233/09.

“When the auditor includes an emphasis paragraph in the report, he must:
(a) include it immediately after the opinion paragraph in the auditor's report; (b) use the title “Emphasis” or another appropriate title; (c) include in the paragraph a clear reference to the emphasized matter and to the explanatory note that describes the matter completely in the financial statements; and (d) indicate that the auditor's opinion is not modified with respect to the emphasized matter (see items A3 and A4).” (emphasis added)

We also emphasize that independent auditors must have mechanisms for timely monitoring of changes in independent auditing professional standards emanating from the Federal Accounting Council - CFC and, when applicable, from the Institute of Independent Auditors of Brazil - Ibracon, and from the standards that regulate the independent auditing activity within the Securities Market.

Finally, we inform that doubts related to registration and performance within the securities market can be resolved through the phones (21) 3554-8397 or 3554-8615, or by email: gna@cvm.gov.br.

Sincerely,

Signed Original by
Madson de Gusmão Vasconcelos
Audit Standards Manager

Signed Original by
Paulo Roberto Gonçalves Ferreira
Superintendent of Accounting and Audit Standards – Acting