Circular Letter CVM/SNC/SEP No. 002/2011

Circular Letter CVM/SNC/SEP No. 002/2011
Rio de Janeiro, March 4, 2011.
SUBJECT: Guidance on relevant aspects to be observed in the preparation of financial statements relating to the fiscal year beginning on or after January 1, 2010

Dear Investor Relations Directors and Independent Auditors,

The Joint Circular Letters issued by the Superintendence of Corporate Relations (SEP) and the Superintendence of Accounting Standards (SNC) have as their main objective to guide issuers of securities admitted to trading on regulated markets, as well as their respective independent auditors, on relevant aspects that must be observed when preparing and disclosing financial statements and the forms provided for in Articles 28 and 29 of CVM Instruction No. 480/09, filled with data from statements prepared in accordance with the accounting rules applicable to the issuer.

On 02/24/2011, Circular Letter CVM/SNC/SEP No. 001/2011 was published with the objective of (i) informing open companies and their respective independent auditors about the most frequent deviations identified in the financial statements disclosed in 2010, as well as (ii) highlighting some specific rules to be observed in the preparation of statements relating to the fiscal year ended on 12/31/2010.

The SEP and SNC decided to issue this circular letter, consolidating the subjects contained in Circular Letter CVM/SNC/SEP No. 001/2011, with the objective of alerting the market to the following recently identified issues:
a) recognition of revenue in real estate activities (OCPC 04) and Technical Communication No. 05/2010 of IBRACON, regarding the issuance of the auditors' report for the financial statements of real estate development entities (item XIII); and b) alerting auditors to the need to present the report on the internal controls of the audited entities and to the obligation to verify the eventual non-compliance with legal provisions, as provided for in professional standards and CVM Instruction No. 308/99 (item XIV).

General Aspects

Broadly speaking, in the supervision work of the financial statements disclosed in 2010, deficiencies were identified notably regarding the disclosure of information in explanatory notes. It is known that one of the most relevant aspects in the new Brazilian accounting scenario concerns the increase in the quantity and quality of information in explanatory notes to the financial statements. It is important to emphasize that explanatory notes are fundamental for users of financial statements to be able to identify the accounting practices selected by the company for their preparation, as well as methodological details that allow these users to understand the assumptions and judgments made by management in the recognition and measurement of the economic-financial events incurred by the company.

Below, the most frequent deviations identified in the financial statements disclosed in 2010 will be addressed, as well as some specific rules to be observed in the preparation of statements relating to the fiscal year ended on 12/31/2010 will be highlighted.

I. Pronouncement CPC 01 "Impairment of Assets"

In accordance with item 132 of Pronouncement CPC_01(R1), the entity is encouraged to disclose the assumptions used to determine the recoverable amount of assets (cash-generating units) during the period.

However, item 134 requires the entity to disclose information about the estimates used to measure the recoverable amount of a cash-generating unit when goodwill or indefinite-life intangible assets are included in the carrying amount of the unit.

In these cases, the entity must disclose the information required in items (a) to (f) of item 134 of Pronouncement CPC_01(R1), for each cash-generating unit (group of units) whose carrying amount of goodwill or indefinite-life intangible assets, allocated to the unit (group of units), is significant compared to the total carrying amount of goodwill or indefinite-life intangible assets recognized by the entity.

If a portion of goodwill arising from a business combination that occurred during the period has not been allocated to a cash-generating unit (group of units) by the end of the reporting period in accordance with item 84 of that same pronouncement, the unallocated amount of goodwill must be disclosed along with the reasons why the value remains unallocated.

II. Pronouncement CPC 05 "Disclosure of Related Parties"

Entities must disclose, in the explanatory notes, a broad set of information listed in items 13 to 27 of Pronouncement CPC 05(R1), regarding their relationship and any transactions with related parties.

It is recommended that all this information be contained in the specific explanatory note on related parties or, alternatively, that a precise reference to another note containing the required information be included in this note.

Among the information required in the aforementioned pronouncement, the entity must disclose the remuneration of key management personnel in total and for each of the following categories: (a) short-term employee benefits; (b) post-employment benefits; (c) other long-term benefits; (d) termination benefits; and (e) share-based payment.

In item 13 of the Reference Form, the issuer must disclose, among other information, in tabular form, by body, quantitative data on the annual remuneration attributed to the board of directors, the statutory executive board, and the fiscal council, segregated between their different fixed and variable components. It is important that the issuer verify the consistency of the information disclosed in the explanatory notes with this information contained in the Reference Form.

Likewise, attention should be paid to the consistency of the information contained in the explanatory note relating to related parties with the information contained in item 16 of the Reference Form.

It is worth noting the guidance contained in item 23 of Pronouncement CPC 05(R1) to the effect that disclosures that transactions with related parties were conducted on terms equivalent to those prevailing in transactions with independent parties are made only if these terms can be effectively proven.

Cases were identified where the issuer, in item 16.1 of the Reference Form, declares that its transactions with related parties follow market practices and values, when this information was not contained in the explanatory notes to its financial statements.

We draw the attention of those responsible for preparing the financial statements of open companies to include in the respective explanatory note, regarding each transaction or group of relevant transactions, the disclosure of the aforementioned information. In cases where transactions between related parties were conducted under verifiable market conditions, the issuer must present this information, in accordance with § 23 of the aforementioned Pronouncement. In the case of contracts where it is impossible to effectively prove these terms, the conditions of the transaction and the procedures for its contracting must also be disclosed, in line with the information required in item 16.3 of Annex 24 of CVM Instruction No. 480/09, including measures taken to address conflicts of interest and ensure the commutative nature of the agreed conditions.

III. Pronouncement CPC 12 "Present Value Adjustments".

As required by Pronouncement CPC 12, the issuer must disclose, in the respective explanatory notes, the assumptions used by management in the accounting measurement at present value of assets and liabilities.

In item 33 of the aforementioned pronouncement, it is highlighted that, "regarding disclosure in explanatory notes, minimum information must be provided that allows users of the financial statements to obtain an unequivocal understanding of the present value measurements carried out for assets and liabilities, comprising the following non-exhaustive list":
(a) detailed description of the item subject to present value measurement, nature of its cash flows (contractual or non-contractual) and, if applicable, its quoted market entry value; (b) assumptions used by management, interest rates broken down by embedded premiums and risk factors (risk-free, credit risk, etc.), amounts of estimated cash flows or series of estimated cash flow amounts, estimated or expected time horizon, expectations in terms of amount and timing of flows (associated probabilities); (c) models used for risk calculation and model inputs; (d) brief description of the discount allocation method and the procedure adopted to accommodate changes in management assumptions; (e) purpose of the present value measurement, whether for initial recognition or (f) new measurement and management's motivation to carry out such procedure.

We emphasize that the above list, although it is a non-exhaustive list of information to be disclosed, must be considered as a minimum set of information that, to the extent applicable, enables the understanding of the criteria used in the present value measurement of the issuer's assets and liabilities.

IV. Pronouncement CPC 25 – Provisions, Contingent Liabilities and Contingent Assets

Contingent assets arise normally from past events that give rise to the possibility of inflow of economic benefits to the entity, and their effective realization may or may not be confirmed by the eventual occurrence of one or more future uncertain events not fully under the control of the entity.

For this reason, it should be highlighted that, as provided in item 57 of the conceptual framework, the concept of asset is linked to the entity's ability to control the economic benefits arising from that asset or right.

In this sense, contingent assets are not recognized in the accounting statements, since their realization is independent of the entity's control, and may be a result that never comes to be realized.

When the inflow of economic benefits is probable, the entity must disclose a brief description of the nature of the contingent assets at the balance sheet date and, when practicable, an estimate of their financial effects measured, using the principles established for provisions.

When the realization of the gain is virtually certain, the corresponding asset is not a contingent asset and its recognition is required.

In light of all the above, the gain can only be considered as virtually certain in cases where the entity comes to control the economic benefits arising from it. In other words, the realization of the asset is virtually certain when it is independent of any action or omission by third parties.

In the case of lawsuits, even if there is a trend towards a gain, and even if management judges the winning of the case to be probable, if an appeal by the other party is still possible, the situation is not yet considered virtually certain, and therefore, the gain should not be recorded.

In this evaluation, those responsible for preparing the financial statements must consider the principles listed in items 36 to 52 of Pronouncement CPC 25, in particular, the principles of prudence and true and fair view.

It should also be noted that, in item 4 of the Reference Form, all relevant contingencies must be described, in particular, judicial, administrative, or arbitral proceedings that, individually or collectively, are relevant, in which the issuer or its controlled companies are parties.

When preparing the explanatory note relating to provisions and contingencies, the entity must ensure that the information contained in this note, in addition to complying with the provisions of items 84 to 91 of Pronouncement CPC 25, is consistent with the information disclosed in item 4 of its Reference Form.

V. Pronouncement CPC 40 and Guidance OCPC 03- Financial Instruments: Disclosure

Regarding the topic of financial instruments, it is worth remembering that the set of accounting standards emanating from the Accounting Pronouncements Committee (CPC), and approved by the CVM, converges fully with the international accounting standards IFRS issued by the International Accounting Standards Board (IASB), whose guidance is based on principles and not on rules.

In this sense, in accordance with Technical Pronouncement CPC 40, with the aim of providing useful information that allows users to adequately assess financial instruments, the open company must disclose in an explanatory note the information that best indicates (i) the significance of the financial instrument for the entity's financial position and performance, and (ii) the nature and extent of the risks resulting from financial instruments to which the entity is exposed during the period and at the end of the accounting period, and how the entity manages these risks.

Throughout 2010, in the course of the analysis of the accounting statements contained in the DFP/ITR Forms, in some cases, insufficiencies and omissions of information in explanatory notes regarding the financial instruments contracted by open companies were identified, especially regarding derivative financial instruments.

Below, we exemplify some types of insufficiencies and omissions identified, regarding derivative financial instruments:
a) incomplete disclosure regarding the criteria for valuation, measurement, methods, and significant assumptions applied in determining fair value (§79 (d) of OCPC 03 and § 27 of CPC 40); b) unsorted or even insufficient information regarding the values recorded in asset and liability accounts and which were not properly segregated, by category, risk, and market strategy (§79 (e) of OCPC 03 and § 31 of CPC 40); c) unsorted information regarding amounts and maturity dates of operations, as well as reference values, cost, fair value, and risk of the portfolio and the counterparties of the transactions (§79 (f) of OCPC 03); d) in the case of adoption of the hedge accounting methodology, insufficient information regarding the amounts transferred from equity as a result of the accounting recognition of losses and gains in the item subject to hedge (§ 79 (h) of OCPC 3 and § 23 (d) of CPC 40); e) incomplete information regarding the characteristics of embedded derivatives in composite financial instruments (§ 31 of CPC 40).

Additionally, it is important to highlight that companies must present information on the derivative financial instruments contracted duly reconciled with the positions registered in entities authorized to register such operations, especially in the case of contracting over-the-counter (non-standardized) derivatives.

It should also be noted that, in the event of application of resources in exclusive investment funds, in which operations with derivative financial instruments take place, the company must detail the objectives and strategies for the use of these vehicles, as well as proceed to the complete disclosure of the positions contracted, in light of the parameters established by the Technical Pronouncement CPC 40 itself, notably in cases where, by virtue of the fund's regulations, the company is exposed to the risk of covering eventual negative equity.

It is worth remembering the obligation to disclose the sensitivity analysis table, for each type of market risk considered relevant by management, arising from financial instruments, to which the entity is exposed at the end of each period, required by CVM Instruction No. 475/08 and by Technical Pronouncement CPC 40, §§ 40 and 41.

Finally, attention should be paid to the consistency of the information contained in the explanatory note relating to financial instruments with the information contained in item 5 of the Reference Form.

VI. Pronouncement CPC 27 - Fixed Assets

Article 73 of Pronouncement CPC 27 provides that the accounting statements must disclose, for each class of fixed assets, among other information, (i) the depreciation methods used; (ii) the useful lives or depreciation rates used; and (iii) the gross carrying amount and accumulated depreciation (plus accumulated impairment losses) at the beginning and at the end of the period.

The indication, for a set of assets of the same classification, of a very extensive useful life range, such as, for example, 2 to 30 years, does not allow the user of the information to understand the depreciation rate effectively used for those assets. In these cases, the Company must evaluate whether these assets and their respective components should, in fact, have the same classification, and, if so, inform for each set of assets, the expected average (weighted) useful life.

It should be highlighted that the residual value and useful life of an asset are reviewed at least at the end of each fiscal year and, if expectations differ from previous estimates, the change must be accounted for as a change in accounting estimate.

VII. Deemed Cost - Technical Interpretation ICPC 10

CVM Deliberation 619/09 approved ICPC 10, which allows and encourages the application of deemed cost to fixed assets and investment properties, in substitution to the previously recorded carrying amount. This option is applicable only and solely upon initial adoption, and revision of the option in subsequent periods to the initial adoption is not admitted.

It should be noted, however, that, as an optional procedure, its non-adoption does not indicate exemption from disclosure. Item II of CVM Deliberation 619/09, which approved the aforementioned Interpretation, must be observed, which determines:
"II – open companies that do not adopt, in the initial valuation of fixed assets and investment property, the deemed cost provided for in items 20 to 29 of Technical Interpretation ICPC 10 shall disclose the fact, in explanatory notes to their financial statements, indicating the reasons that justified the non-adoption, especially in the occurrence of the provision in item 21 of the aforementioned Technical Interpretation"; Therefore, we alert to the need for broad disclosure of the facts and reasons that led companies, which opted for the non-adoption of deemed cost, to conclude that the carrying amount of Fixed Assets and Investment Properties adequately represents the potential for generation of future economic benefits of these assets.

VIII. Reliability of financial statements

In fiscal years ending on or after 12/31/2010, open companies are applying, for the first time, the complete set of new accounting standards in their individual financial statements in accordance with the Technical Pronouncements, Interpretations, and Guidance issued by the CPC - Accounting Pronouncements Committee, as well as they are applying, for the first time, the complete set of IFRS in their consolidated statements in accordance with the specific CPC Pronouncements, documents from the CPC approved by this Autarchy.

In the application of the aforementioned standards, special attention must be given to the interpretation and judgment necessary to achieve the objectives set in the Basic Conceptual Pronouncement - Conceptual Framework and in Technical Pronouncement CPC 26 (R1) – Presentation of Financial Statements.

The CVM reminds that the responsibility for the preparation of the aforementioned statements lies with the company's management; therefore, in cases where the exercise of judgment is necessary, always keeping in mind the aforementioned objectives, it is necessary for management to analyze, judge, and deliberate on the most appropriate procedure, formally documenting the reasons that lead to the chosen approach.

On the other hand, independent auditors must also exercise their own judgment after analyzing the arguments presented by the company, and must also formalize the reasons why they agree or disagree, totally or partially, with the position of the company's management.

In the event of qualifications, adverse opinions, or disclaimers by the auditor due to disagreement regarding judgment, the CVM reminds that it will request the documentation that supports the positions of the company and the auditor.

The analysis of the facts and circumstances that underpinned the understandings of the company's management and its auditors may lead to the determination of republication of these statements, without prejudice to other measures applicable to the specific case.

It is worth remembering, furthermore, that, in accordance with the Technical Pronouncement CPC 26 (R1) cited:

“9. The financial statements are a structured representation of the entity’s net worth and financial position and its performance. The objective of the financial statements is to provide information about the entity’s net worth and financial position, performance, and cash flows that is useful to a large number of users in their assessments and economic decision-making. Financial statements also aim to present the results of management’s performance in managing the entity and its accountability regarding the resources entrusted to it.” Consequently, the standards are the instrument for meeting these objectives, and not the objective itself of Accounting. For this reason, it is worth remembering, finally, that, still according to the cited Pronouncement,
19. In extremely rare circumstances, in which management concludes that compliance with a requirement of a Pronouncement, Interpretation, or Orientation would lead to such a misleading presentation that it would conflict with the objective of financial statements established in the Conceptual Framework for the Preparation and Presentation of Financial Statements, the entity will not apply this requirement and will follow the provisions of item 20, unless this procedure is strictly prohibited from a legal and regulatory point of view.”

IX. Report of the Independent Auditor
On 07/13/2007, CVM issued Instruction 457, subsequently amended by Instruction 485/10, determining that the consolidated financial statements for the fiscal year ended on 12/31/2010 should be presented adopting the international accounting standard as issued by the IASB. The aforementioned Instruction further determines that, in the preparation of consolidated statements, open companies must use documents issued by the CPC and endorsed by CVM, as they are fully convergent with the cited international standards. However, as described in CVM Deliberation 651/10, which approved CPC 43(R1), a caveat must be made when referring to individual financial statements; that is, in our legal-corporate environment, two exceptions to full convergence with international standards may occur. The first is the application of the equity method in these individual statements, a practice required by our corporate legislation and divergent from international accounting standards when dealing with separate statements, according to CVM Deliberation 607/09 which approved Technical Pronouncement CPC 35/09. The other divergence, permitted by Law 11.941/09, is the maintenance of the balance of Deferred Assets existing on 12/31/2007. Therefore, open companies that have one or both of the situations presented cannot have their financial statements declared as convergent with international accounting standards. In this context, special attention must be given to the report of the independent auditor when declaring the set of accounting practices used in the preparation of the financial statements for the fiscal year ending from 2010 onwards. IBRACON issued Technical Communication 04/2010, approved by CFC Resolution 1320/11, on the Issuance of the Report of the Independent Auditor regarding Individual and Consolidated Financial Statements for fiscal years ended on or from December 31, 2010. In this document, specific audit report models are presented for cases of divergence between accounting practices adopted in Brazil and international accounting standards. CVM makes public that it ratifies the orientations contained in said document, as it understands that the content of the auditor’s report models adequately expresses the possible hypotheses of divergence between the accounting practices adopted in Brazil and international accounting standards.

X. Recognition of financial asset in public concessions (bifurcated model)
OCPC 05 deals with the initial recognition of this financial asset in its item 22:
“Classification of the financial asset in the balance sheet
22. Item 24 of ICPC 01 allows the classification of the financial asset into three categories, as defined in Technical Pronouncement CPC 38 – Financial Instruments: Recognition and Measurement. Analyzing the Brazilian regulatory environment, and the definitions of CPC 38, it is understood that the financial asset of indemnification, in principle, would be better classified as receivable”.
(we underline)
CVM alerts that the understanding highlighted above is due to the analysis of the nature of this asset and its framing within the definitions of financial asset contained in CPC 38. Thus, the initial recognition of the financial asset must be based on its economic essence and not on the effects of subsequent valuations. It is also worth noting the need for wide disclosure of the reasons that led the company to decide on a registration different from that provided in OCPC 05.

XI. Regulatory assets and liabilities
recognition of financial assets and liabilities has been debated by the IASB since 2005, culminating in the issuance in July 2009 of Exposure Draft ED/2009/8 – Rate-Regulated Activities. After the public hearing period ended, the IASB began discussions on the project in meetings in February, June, and September 2010, culminating in the finding of a lack of consensus related to the definition of whether the recording of regulatory assets and liabilities would be in accordance with the conceptual structure of IFRS. Thus, we have that the normative framework of the IASB, and consequently of the CPC, does not contain a specific standard on the topic, which leads us to observe items 10, 11, and 12 of CVM Deliberation 592/09, which approved CPC 23 - accounting policies, change in estimate, and correction of error “10. In the absence of a Pronouncement, Interpretation, or Orientation that applies specifically to a transaction, another event, or condition, management will exercise its judgment in the development and application of an accounting policy that results in information that is:
(a) relevant for economic decision-making by users; and (b) reliable, such that the financial statements:
(i) adequately represent the net worth and financial position, financial performance, and cash flows of the entity; (ii) reflect the economic essence of transactions, other events, and conditions, and not merely the legal form; (iii) are neutral, i.e., free from bias; (iv) are prudent; and (v) are complete in all material aspects.
11. When exercising the judgments described in item 10, Management must consult and consider the applicability of the following sources in descending order:
(a) the requirements and orientation of Pronouncements, Interpretations, and Orientations that deal with similar and related subjects; and (b) the definitions, recognition criteria, and measurement concepts for assets, liabilities, revenues, and expenses contained in the Conceptual Structure.
12. When exercising the judgments described in item 10, management may also consider the most recent technical positions assumed by other accounting standard-setting bodies that use a conceptual structure similar to that of the CPC to develop accounting pronouncements, or even other accounting literature and generally accepted practices of the sector, to the extent that these do not conflict with the sources stated in item 11”.

XII. Guidance on filling out Form DFP/10 – information from previous exercises for comparative purposes
Items 38 to 43 of Pronouncement CPC 26, in line with what was already provided by Law No. 6.404/76, in § 1st of its article 176, provide that, as a rule (except in cases where the entity applies an accounting policy retrospectively or makes retrospective disclosure), financial statements must contain the indication of values from the current and previous fiscal years. Along the same lines, Pronouncement CPC 37, which deals with the initial adoption of international accounting standards. For this reason, it must be observed that, notwithstanding the already existing legal provision (art. 176 mentioned) for the disclosure of two fiscal years, the Form DFP model already provided for the sending of information from the ante-penultimate fiscal year (“three columns”). This model with the provision for sending information from the last, penultimate, and ante-penultimate fiscal years (three columns), considering the relevance of the comparative information presented, continues to be adopted in the new EmpresasNet system. For this reason, the third column is part of said form. However, in the case of companies adopting international accounting standards for the first time, the columns relating to the 2008 fiscal year, of the Statement of Result of the fiscal year, Statement of Comprehensive Income, Statement of Cash Flows, Statement of Changes in Equity, and Statement of Added Value are optional to fill in. In these cases, the column of 12/31/08 of the Balance Sheet must be filled with the data from the opening balance of 01/01/09. Finally, we recommend reading Circular Letter CVM/SNC/SEP No. 002/2010, which contains “Highlights of documents issued by the CPC - Financial Statements of 2010”, observing that, as already emphasized in said document from the CPC, this work does not replace the full reading of pronouncements, interpretations, and orientations, nor should it be considered as a list of the main items of that set of documents for all circumstances and for all societies.

XIII. Revenue recognition in real estate activities (OCPC 04)
The Orientation OCPC 04, approved by CVM Deliberation 653/10, which deals with the application of Technical Interpretation ICPC 02 to Brazilian real estate development entities, introduced into the Brazilian accounting environment, the understanding regarding revenue recognition in this sector. This understanding, which had as support the analysis of contracts in the Brazilian economic environment, evidenced:
“33. (...) that in the Brazilian economic environment, usually, contracts for promise of purchase and sale or contracts for purchase and sale of a unit to be delivered in the future, it is necessary, the recognition of revenues and expenses as construction advances once the transfer of risks and benefits occurs continuously”.
From the approval of said Orientation, it becomes part of the set of accounting norms explicitly declared by CVM and the CPC, both in Instruction CVM/457, with changes introduced by Instruction CVM 485/10, and in CPC 43(R1), as being convergent with international accounting standards.
It is worth noting, however, that the fundamental subsidy for decision-making is the detailed analysis of contractual terms and their framing within the available regulatory framework, an activity that is inalienable to the company’s administration.
Also inalienable is the right of independent auditors to have a different opinion from that manifested by the CPC and ratified by CVM, understanding that, in general, the revenue recognition of this activity should be carried out upon the delivery of keys.
Add to this the fact that the IASB issued in June/2010 the ED/2010/6 – Revenue from contracts with customers which resulted, after the end of the public hearing period, in a total of 986 comment letters, evidencing the relevance and diversity of opinions on the issues presented in the ED in the various participating jurisdictions. Among these issues is that regarding revenue recognition in real estate activity, mainly concerning the concept of control of an asset and the specifics of its continuous transfer. The IFRIC scheduled for its March agenda the discussion of a topic of IFRIC 15 regarding clarification on continuous transfer of control. The expectation of Brazilian market agents is that the product of this meeting will enable more effective direction regarding the IASB’s understanding of the issue. Thus, CVM alerts that the financial statements of real estate development entities in Brazil, for the fiscal year ended on 12/31/2010, will present, if applicable, due to the adoption of the understanding exposed in Orientation OCPC 04, an emphasis paragraph in the report of the independent auditor. As provided in IBRACON Technical Communication 05/2011, the emphasis paragraph will indicate that these statements were prepared in accordance with accounting practices adopted in Brazil (individual) and in accordance with accounting practices adopted in Brazil and international financial reporting standards (IFRS) applicable to Brazilian real estate development entities (consolidated), as approved by the Committee of Accounting Pronouncements (CPC), the Securities and Exchange Commission (CVM), and the Federal Council of Accounting (CFC). It will also include information that this matter is under discussion at the IASB, and that its decision may impact future financial statements if it concludes in favor of a distinct accounting practice from that used in the preparation of the current statements.

XIV. Duties and Responsibilities of Independent Auditors
The standards issued by the Federal Council of Accounting (NBC TA 265, approved by CFC Resolution No. 1210/09, among others) establish that the auditor must bring to the knowledge of those responsible for governance and management, the internal control deficiencies that are identified during the audit that, in their professional judgment, should be reported.
Furthermore, for auditors acting specifically within the securities market, whether in open companies or investment funds, Instruction CVM No. 308, of May 14, 1999, further determines that, in the exercise of this activity, the auditor must “prepare and send to management and, when requested, to the Fiscal Council, a detailed report containing their observations regarding deficiencies or inefficacy of the internal controls of the audited entity.” (art. 25, II). Instruction CVM No. 308/99 also establishes that the independent auditor, during their audit work, must verify “the eventual non-compliance with legal and regulatory provisions applicable to the activities of the audited entity, which have, or may come to have, relevant reflections on the financial statements or on the operations of the audited entity” (art. 25, I “d”). The aforementioned instruction further determines that, upon detecting any relevant irregularity, it is up to the independent auditor to communicate the fact in writing to CVM. During our supervision, it was found that these obligations were not fully met, therefore, it is worth alerting that non-compliance with these provisions characterizes a serious offense, in accordance with article 37 of the same Instruction, with independent auditors subject to the initiation of a sanctioning administrative process. Respectfully, FERNANDO SOARES VIEIRA ANTONIO CARLOS DE SANTANA Superintendent of Corporate Relations Interim Superintendent of Accounting Standards and Auditing