Circular Letter CVM/SNC/SEP 02/06: Disclosure of Information on Other Services Provided by Independent Auditors – CVM Instruction 381/03

CIRCULAR LETTER CVM/SNC/SEP Nº 002/2006.
Rio de Janeiro, December 28, 2006.
Subject: Disclosure of Information on the Provision of Other Services by Independent Auditors – CVM Instruction 381/03.

Dear Director of Investor Relations,

This circular letter aims to alert public companies and their respective independent auditors to the obligation to disclose, in the Management Report, information related to the provision of other services beyond external audit, as determined by CVM Instruction No. 381/03.

The aforementioned regulation is based on the principles of transparency and disclosure of relevant information of public companies directed to participants in the MVM, especially the investing public.

In this sense, this Commission recognizes the relevance of information pertinent to the relationship between the audited entity and its independent auditors, mainly in the case of the provision of other services beyond those related to the external audit of the financial statements.

Furthermore, the suspension, by judicial decision, of the effectiveness of item II and the sole paragraph of Article 23 of CVM Instruction No. 308/99, regarding the prohibition of the simultaneous provision of audit and consulting services for the same audited entity, reinforces the need to disclose the information required by CVM Instruction No. 381/03, aiming to provide elements for the interested public to assess the aspects of objectivity and independence of independent auditors.

Thus, CVM Instruction No. 381/03 determines that the following be disclosed in the Management Report: information regarding the characteristics of the contract for the provision of other services beyond audit (contract date, term, and nature of the service); the total value of fees contracted for other services and their percentage relative to audit fees; policy or procedures adopted by the company to avoid conflict of interest, loss of independence, or objectivity of its auditors; and a summary of the exposure made by the auditors to the management of the audited entity that, in their understanding, the other services provided did not affect the independence and objectivity in the performance of external audit services.

It should be noted that CVM Instruction No. 381/03 exempts public companies from disclosing the value of fees and their percentage relative to audit services (Art. 2, II) only when the fees contracted for other services are less than 5% of the fees contracted for external audit services. However, the provision of other services below the aforementioned percentage does not exempt the company from presenting the other information required in Article 2, items I and III. Thus, it is necessary to disclose the information as to whether independent auditors provided other services to the audited entity.

FOLLOW-UP OF DISCLOSED INFORMATION

2002 Fiscal Year
With the publication of Instruction No. 381, on 01/14/2003, considering the wording given by Article 6 of the aforementioned norm, the technical area of CVM began monitoring the disclosure of information based on the standardized financial statements of 2002 (DFP 2002).

It was verified that part of the public companies presented their accounting statements, without however proceeding to the correct disclosure of information regarding their relationships with the contracted independent auditors.

As a result of such fact, the technical area of this Autarchy issued Circular Letter CVM/SEP/SNC/Nº 02/2003, of 03/20/2003, emphasizing the necessity and obligation of the disclosure and detailing of information relating to the other services provided by independent auditors to the audited public companies, as well as alerting regarding the penalties provided for in the current legislation.

Regarding the fiscal year ended on 12/31/2002, the technical area of CVM analyzed the management reports of 110 public companies, with the following results:

Nº	%
Companies with complete disclosure	64	58
Companies with incomplete/incorrect disclosure or no disclosure	46	42
TOTAL	110	100

The companies that proceeded with incomplete or incorrect disclosure or with no information were notified by SEP (Superintendence of Corporate Relations), which consequently determined that the information be disclosed through the IPE system (System for Sending Periodic and Occasional Information), in the "market communication" field.

It should also be noted that in that fiscal year, SESCON – SP (Sindicato das Empresas de Serviços Contábeis do Estado de São Paulo) obtained a judicial injunction suspending the effects of CVM Instruction No. 381/03. However, still in 2003, a decision by the 6th Chamber of the Regional Federal Court – 3rd Region canceled the effects of the aforementioned injunction, thus reestablishing the obligation to present the information required by the Instruction.

2003 Fiscal Year
In the 2nd year of obligation of the determinations contained in CVM Instruction No. 381/03, the technical area of CVM intensified the task of monitoring and verifying the information disclosed by public companies.

Regarding the fiscal year ended on 12/31/2003, the management reports of 313 public companies were analyzed, with the following results:

Nº	%
Companies with complete disclosure	209	67
Companies with incomplete/incorrect disclosure or no disclosure	104	33
TOTAL	313	100

In the same way as in the previous year, the companies that proceeded with incomplete or incorrect disclosure or with no information were notified by SEP (Superintendence of Corporate Relations), determining that the information redone or complemented be disclosed through the IPE system (System for Sending Periodic and Occasional Information), in the "market communication" field.

2004 Fiscal Year
For the period ended on 12/31/2004, the technical area of CVM analyzed the information disclosed by 400 public companies, regarding the relationship with their respective independent auditors, obtaining the following configuration regarding compliance with the requirements of CVM Instruction No. 381/03:

Nº	%
Companies with complete disclosure	289	72
Companies with incomplete/incorrect disclosure or no disclosure	111	28
TOTAL	400	100

Again, repeating the procedure adopted in previous years, the companies that proceeded with incomplete or incorrect disclosure or with no information were notified by SEP (Superintendence of Corporate Relations) for the appropriate notifications and disclosure of the required information.

2005 Fiscal Year
Regarding the fiscal year ended on 12/31/2005, the information disclosed by 426 public companies, regarding their relationship with their independent auditors, was analyzed by the technical area of this autarchy, verifying the result below regarding compliance with the requirements of CVM Instruction No. 381/03:

Nº	%
Companies with complete disclosure	363	85.21
Companies with incomplete/incorrect disclosure or no disclosure	63	14.79
TOTAL	426	100

Among the companies that did not meet the informational requirements, those not habitual were oriented by letter to disclose this information in the IPE system, option "Market Communication" and to no longer omit them in future Management Reports. 18 recurrent public companies were identified that failed to comply with CVM Instruction No. 381/03 for the 2nd or 3rd consecutive year, failing to reveal in their DFPs their relationship with their independent auditors, which had already been oriented in this sense in previous years, and which were summoned to present explanations regarding the reasons for non-disclosure.

FOLLOW-UP PROCEDURES OF DISCLOSED INFORMATION FOR DFP 2006

Although we can perceive a significant improvement in the quality of the disclosure of the information required by CVM Instruction No. 381/03, there are still companies that are not adequately meeting the provisions contained in that Instruction. The main deviations observed can be grouped as follows:

1. absence of information regarding the contract date and duration of contracted services (violation of item I of Article 2);
2. reports the value of contracted fees in reais (R$), without specifying its percentage relative to the fees related to external audit services (violation of item II of Article 2);
3. reports the percentage of fees for other services relative to the fees related to external audit services, without specifying the value of contracted fees in reais R$ (violation of item II of Article 2);
4. reports that the value of fees for other services was higher than 5% of the value of fees for external audit services, but does not report how much they effectively represented (e.g., 10%, 20%, or 50%) (violation of item II of Article 2).

Thus, we inform you that after four fiscal years of validity of CVM Instruction No. 381/03, and considering that there are still companies that continue to violate this regulation, CVM will intensify the monitoring of the disclosure of this information and increase the punitive rigor for the deviations verified from the closing of the social exercise of 2006. We also advise companies that have not reported the information regarding the already closed fiscal years, including in the case of non-provision of other services by their independent auditors, to do so through the IPE system, in the "market communication" field.

Therefore, it is worth alerting that, regarding the end of the current social exercise (DFP 2006), public companies that do not fully comply with the requirements of CVM Instruction No. 381/03, in addition to being summoned to correct the identified flaws and omissions, re-presenting the DFP form and republishing their financial statements in the newspaper in which they were originally published, will be subject to the sanctions provided for in Article 11 of Law No. 6.385/76, as it is a serious nature offense, according to the provisions of Article 5 of the mentioned Instruction.

Sincerely,

ELIZABETH LOPEZ RIOS MACHADO
Superintendent of Corporate Relations

RONALDO CANDIDO DA SILVA
Superintendent of Accounting Standards and Audit – in exercise

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