CVM Explanatory Note 09/78

CVM EXPLANATORY NOTE NO. 9/78.
Ref.: CVM Instruction No. 04/78, which establishes the Norms regarding the Registration of Independent Auditors with the Securities and Exchange Commission.

1. INTRODUCTION
   Due to its relevance, an effectively independent audit constitutes an indispensable support for the good performance of the duties assigned to the Securities and Exchange Commission.
   The figure of the independent auditor is essential to market credibility, representing an instrument of inestimable value in investor protection, insofar as its function is to ensure the fidelity and reliability of the financial statements of publicly held companies.
   The accuracy and clarity of these financial statements, the disclosure in explanatory notes of information indispensable for a view of the company's equity and financial situation and results, depend on an effective audit system and, primarily, on the independent auditor's awareness of their role.
   Thus, it is evident the need for the market to have highly qualified auditors who simultaneously enjoy a high degree of independence in the exercise of their activities.
   By regulating the activities of the independent auditor, what the CVM seeks is precisely to fix the parameters that guide this performance, in the sense of effective professional independence and competence.
   It is worth noting that the issued norms aim to unify viewpoints, incorporating changes that the interested parties themselves deemed important, in addition to innovating in some points and simplifying procedures aiming at greater operationalization and agility in registrations.

2. REGISTRATION OF INDEPENDENT AUDITOR
   Law No. 6.385 of December 7, 1976, which regulates the securities market and creates the Securities and Exchange Commission, determines in Article 26 that only accounting audit firms or independent accounting auditors registered with the Securities and Exchange Commission may audit the financial statements of publicly held companies and institutions, societies, or companies that are part of the distribution and intermediation system of securities. The norms now issued establish only two categories of registration: Independent Auditor - Individual and Independent Auditor - Legal Entity, extinguishing the old figure of the Linked Independent Auditor. In the CVM's understanding, the existence of the linked auditor, contemplated by previous norms, is not justified, since these auditors are part of the technical staff of the company and, consequently, the company itself is responsible before the CVM, with partners responding jointly and unlimitedly for damages caused to third parties. On the other hand, the activity of independent audit is the prerogative of the Accountant legally qualified, registered in the Regional Council of Accounting, an activity that can be exercised individually or in a society constituted, provided that this is registered in the Regional Council of Accounting and its partners are also accountants. Consequently, it is an indispensable requirement among the conditions instituted for registration with the Securities and Exchange Commission that the Accountant be registered and the society be inscribed in the Regional Council of Accounting. It is important to note that the Securities and Exchange Commission is not instituting a new professional category, since the exercise of the activity of independent audit is the prerogative of the legally qualified or legally equivalent Accountant, there being, consequently, no incompatibility between these norms and the disciplinary regime of the Accountant professional category. This is one of the reasons why the Securities and Exchange Commission is not adopting numerical seriation for the identification of the Registered Independent Auditor. Audit documents and opinions, issued and signed by the Independent Auditor and intended to satisfy the requirements of the Securities and Exchange Commission, will indicate only the registration number in the Regional Council of Accounting.

3. GRANTING OF REGISTRATION, REFUSAL, SUSPENSION OR CANCELLATION
   The Securities and Exchange Commission disciplines the activity of independent audit only within the strict limits conferred by law. On one hand, it establishes the conditions for registration and, on the other hand, it provides for the cases in which it may or must refuse, suspend or even cancel this registration or apply another penalty, once certain provisions of the legislation are not complied with. It is worth observing that the Securities and Exchange Commission, first of all, does not intend to restrict the exercise of a professional category, nor to override the specific competence area of other bodies. In fact, the Securities and Exchange Commission considers that it legally competes to foresee the requirements for the exercise of the activity of Independent Auditor of certain companies. Inherent to its power to register is the power to temporarily suspend, cancel the registration or apply some sanction, once the requirements that it is incumbent upon the Securities and Exchange Commission to administer are not met. The exclusion, suspension or any other sanction applied by the Securities and Exchange Commission means the provisional or definitive disqualification for the exercise of the activity of Independent Auditor, related to publicly held companies and institutions of securities, not preventing, in theory, the professional exercise of the Accountant or audit activity, outside the jurisdictional area of the Securities and Exchange Commission, which will only occur in case of decision by the proper body of the professional category. Moreover, broad right of defense is assured, by the legislation that created the Securities and Exchange Commission, according to the procedure established by the disciplinary norms of the Inquiry and Administrative Process (Resolution No. 454/77).

4. CIVIL LIABILITY OF THE INDEPENDENT AUDITOR
   In accordance with Paragraph 2 of Article 26 of Law No. 6.385/76, accounting audit firms and independent accounting auditors will be civilly liable for the damages they cause to third parties due to fault or intent in the exercise of their functions.
   The Independent Auditor, exercising their functions in their own name, is civilly liable, unlimitedly, for the damages they cause to third parties as a result of the exercise of their functions. The Law extends to accounting audit firms the civil liability for damages caused in the exercise of these functions in the name of the society. Certainly, this extension must be understood without any restriction. Thus, the Norms now issued require, for registration purposes, that societies be constituted in the form of civil society (therefore, any form of commercial society, including limited liability quota society, is prohibited) and that they incorporate into their respective social contract or equivalent constitutive act, the clause of joint and unlimited liability. For existing societies, a period of 12 months is granted for adaptation to the new rule, under penalty of automatic cancellation of registration. Since it is a society typically of persons, in which there is civil liability for damages caused in the exercise of the professional activity, it is required that all partners be Accountants registered in the Regional Council of Accounting.

5. SIMPLIFICATION OF DOCUMENTATION REQUIRED FOR REGISTRATION
   These Norms eliminate the requirements for presentation of certificates, including the requirement to update certificates with expired validity periods.
   In substitution, Independent Auditors must present the legal declaration and the term of commitment according to the models that accompany the Norms, greatly reducing expenses with obtaining documents and enabling the acceleration of registration processes.
   It is important to mention that the Independent Auditor assumes responsibility for the declarations made and assumes the commitment to update this information so that the registration with the Securities and Exchange Commission is maintained.

6. MAINTENANCE OF PROFESSIONAL OFFICE WITH INSTALLATIONS COMPATIBLE FOR THE EXERCISE OF THE ACTIVITY OF INDEPENDENT AUDIT
   It is a condition for registration of Independent Auditor the maintenance of a professional office with installations compatible for the exercise of the activity of Independent Audit (conditions that guarantee the custody, security and confidentiality of information resulting from the activity). In fact, it is intended that the Independent Auditor works in conditions that facilitate their independence from the client. Independence is fundamental and the Securities and Exchange Commission considers its preservation important. Within this spirit, the Independent Auditor will present a list of clients (from the area of competence of the Securities and Exchange Commission) for whose audit they are responsible, clarifying the reasons why some of them were excluded, if applicable. The office must be duly legalized in its own name when the activity is exercised by Independent Auditor - Individual, or in the name of the society when exercised by Independent Auditor - Legal Entity.

7. EFFECTIVE AND CONTINUOUS PROFESSIONAL EXPERIENCE, ACQUIRED IN THE EXERCISE OF THE ACTIVITY OF AUDIT
   The norms now issued maintained the requirement of five years of experience in the exercise of the audit activity and, also, the condition to reduce to three years, proven the completion and attested the performance, of a specialization course in accounting audit at the postgraduate level.
   For this effect, however, the Securities and Exchange Commission conditioned that the courses to be taught have their own regulation, issued by the Federal Council of Education, which is an official body with competence to accredit institutions that wish to carry out these courses, and approve them at the postgraduate level.

8. CONTINUITY OF THE EXERCISE OF THE ACTIVITY OF INDEPENDENT AUDITORS PREVIOUSLY REGISTERED WITH THE CENTRAL BANK OF BRAZIL
   The norms now issued contemplate the automatic registration with the Securities and Exchange Commission of Independent Auditors who were registered with the Central Bank of Brazil, conditioning it to the compliance, within the established deadlines, of the following requirements:
   a) present the Legal Declaration and the Term of Commitment instituted in substitution to the certificates previously required; b) proceed to alter the social contract of the societies, adopting the civil form and including a clause expressly contemplating civil liability for damages to third parties caused due to fault or intent in the exercise of the functions of the audit activity; c) proceed to alter the social contract to keep as partners only Accountants registered in the Regional Council of Accounting. These same requirements must be met by Independent Auditors registered with the Securities and Exchange Commission prior to the issuance of the Norms now approved.

9. PUBLIC HEARING
   The CVM, consistent with the orientation it imposed upon itself, submitted the initial project to a public hearing. Individuals and entities, linked or not to the area of interest, participated and presented invaluable contributions for the improvement of the Norms in their final version. The successive reforms that gave rise to the document now approved were based on the need to better translate the reality on which the CVM must act. An innovation - that the partner, director or technical manager should integrate a single society registered with the Securities and Exchange Commission - was excluded in the final wording of the Norms, attending to the claim of the interested parties. But it is important to note that the partner, director or technical manager will be excluded from the roster of auditors of any other societies registered with the CVM, provided that any of them becomes subject to a penalty that disqualifies them from the exercise of the activity of independent audit in the area of attribution of the CVM.