CVM/SNC Circular Letter No. 12/2009

CIRCULAR LETTER/CVM/SNC NO. 12/2009
Rio de Janeiro, September 2, 2009.
Subject: Accounting Statements closed on December 31, 2009.

• Role of Independent Auditors.

Dear Auditors,

This Circular Letter aims to alert registered Independent Auditors at this CVM regarding the preparation of the audit report to be issued on the accounting statements related to the closing of the social fiscal year of 2009 of open companies, in light of the professional auditing standards of independent auditing of the Federal Council of Accountancy and Ibracon, and the regulations governing the activity of independent auditing within the Securities Market.

2. This alert is supported by the fact that, regarding the audit reports issued on the accounting statements of the social fiscal year ended on 12/31/2008, cases were identified where there was an inappropriate issuance of the type of report and omissions in the comments in additional paragraphs, given the circumstances presented in the accounting statements of the audited open companies, contradicting the aforementioned regulatory framework, as per the examples listed below:

• Reservation Paragraphs without quantification of the resulting effects:
  Cases were identified where independent auditors included reservation paragraphs in their respective reports, however, without expressly mentioning the quantification of the effects on the accounts or subgroups of the Asset, Liability, Equity, and Result accounts, as determined by item IV of article 25 of CVM Instruction No. 308/99.
  It should be clarified that the professional standard NBC T 11 – IT – 5 – Report of Independent Auditors on Accounting Statements, approved by CFC Resolution No. 830/98, in its item no. 16, determines that the quantification of effects must be carried out and described in the report by independent auditors “if practicable”; however, such cases are exceptions, prevailing the determination that the reservation paragraph must clearly and objectively include the reasons that justified it and the quantification of the resulting effects.

• Omissions of relevant information in explanatory notes and absence of reservation in the independent auditor’s report:
  Cases were identified where the audited open company omitted relevant information in explanatory notes, thereby compromising the quality of the informational content of the presented accounting statements and hindering the analysis and interpretation of said statements by users. Under these circumstances, the professional standard NBC T 11 – IT – 5 – Report of Independent Auditors on Accounting Statements, approved by CFC Resolution No. 830/98, in its item No. 38, determines that independent auditors must mention such fact in an intermediate paragraph (reservation) in their report.

• Reservation included in the Report due to limitation in the extent of examination of a relevant item not duly clarified:
  Cases were identified where independent auditors included a reservation paragraph in their report due to not having examined and applied auditing procedures on a certain item of the accounting statements of the audited company, however, limiting themselves to informing that “it was not possible for us to examine...”, thus omitting the reasons that made the examination of said item impossible. Under these circumstances, auditors must clearly indicate the reasons that led to the impossibility of examining that specific item, in accordance with item IV of article 25 of CVM Instruction No. 308/99.

• Use of Emphasis Paragraph instead of Reservation Paragraph:
  Cases were identified where independent auditors opted to give treatment of an emphasis paragraph in their report for certain situations that, in truth, should have been grounds for a reservation paragraph.
  It is worth mentioning that NBC T 11 – Standards for Independent Auditing of Accounting Statements, approved by CFC Resolution No. 820/97, defines that the emphasis paragraph, after the opinion paragraph, must be used in cases that constitute “uncertainty regarding a relevant fact, whose outcome could significantly affect the entity’s net worth and financial position, as well as the result of its operations”.

Therefore, the keyword is “uncertainty” for the inclusion of an emphasis paragraph; otherwise, when the auditor disagrees with the management of the audited company regarding a certain accounting practice adopted or if there is a limitation in the extent of the examination of a relevant item in the accounting statements, it is incumbent upon the auditor to include a reservation paragraph in their report.

• Issuance of Report with Reservation for cases where Report with Disclaimer of Opinion would apply:
  Cases were identified where independent auditors issued an opinion on the accounting statements of the audited companies, notwithstanding the existence of significant limitations in the extent of the auditing work, which resulted in the inclusion of reservations in the report. There were cases where such limitations are relevant as a whole or even the existence of a specific scope limitation, however, the unexamined item is of such relevance that it would not allow the auditor to issue an opinion on the accounting statements subject to the audit. For the aforementioned circumstances, the adoption of a “with reservation” report type is incorrect; one should adopt the “with disclaimer of opinion” report type, in light of the independent auditing professional standard NBC T 11 – IT – 5 – Report of Independent Auditors on Accounting Statements, approved by CFC Resolution No. 830/98, in its item No. 21, as follows:
  “The report with disclaimer of opinion due to limitation in the extent is issued when there is a significant limitation in the extent of the examination that prevents the auditor from forming an opinion on the accounting statements, due to not having obtained sufficient evidence to support it, or due to the existence of multiple and complex uncertainties affecting a significant number of items in the accounting statements.” It is worth noting that NBC T 11 – IT – 5 – Report of Independent Auditors on Accounting Statements, approved by CFC Resolution No. 830/98, also determines that in the “report with disclaimer of opinion”, the paragraphs dealing with significant scope limitations that prevented the issuance of an opinion on the accounting statements must clearly indicate the omitted auditing procedures and the description of the circumstances of such limitations.

• Issuance of Report with Reservation despite the existence of multiple reservations that would lead to the issuance of Adverse Report:
  Cases were identified where independent auditors included several reservations in the report on certain accounting statements that, taken together, given the relevance of the deviations pointed out, it could be said that the audited accounting statements did not represent the net worth and financial position of that company for 12/31/2008.
  Thus, we emphasize that for cases of this nature, independent auditors observe what is stated in items 18 and 19 of NBC T 11 – IT – 5 – Report of Independent Auditors on Accounting Statements, approved by CFC Resolution No. 830/98, as follows:
  “18. When the auditor verifies the existence of effects that, individually or jointly, are of such relevance that compromise the set of accounting statements, they must issue an adverse report. In their judgment, they must consider both the distortions caused and the inadequate or substantially incomplete presentation of the accounting statements.

19. When issuing an adverse report, the auditor must describe, in one or more intermediate paragraphs, immediately preceding the opinion paragraph, the reasons and the nature of the divergences supporting their adverse opinion, as well as their main effects on the net worth and financial position, and the result of the fiscal year or period.”

20. Additionally, besides the situations explicitly mentioned above, independent auditors must observe whether the audited companies, in the process of preparing the accounting statements, complied with the determinations of the current accounting standards for this social fiscal year of 2009, emanating from the Accounting Pronouncements Committee - CPC and ratified by this Securities and Exchange Commission, given the new normative accounting environment aimed at convergence with international accounting standards issued by the International Accounting Standards Board - IASB. It is worth noting that these international standards, on which the CPC pronouncements are based, are principle-based and do not exhaust all possibilities of accounting treatment for the items contemplated therein. Therefore, it becomes essential knowledge and understanding of the conceptual accounting structure for the adequate interpretation and application of these pronouncements, and the independent auditor should not confine themselves to the literal text.

21. In this regard, in the examination of factual situations during the course of auditing work, in light of the Basic Conceptual Pronouncement of the CPC - Conceptual Structure for Preparation and Presentation of Accounting Statements, endorsed by CVM Deliberation No. 539/08, it is worth highlighting that independent auditors must evaluate the transactions and events of the audited companies based on their economic substance and not restrict themselves to merely formal aspects.

22. Finally, we emphasize that any non-compliance by independent auditors in the exercise of their activity within the Securities Market is subject to the opening of an Administrative Sanctioning Process, which may result in the application of penalties provided for in Article 11 of Law No. 6,385/76.

ANTONIO CARLOS DE SANTANA
Superintendent of Accounting Standards and Auditing