Explanatory Note to CVM Resolution No. 38 of September 13, 1984

EXPLANATORY NOTE TO CVM RESOLUTION NO. 38, OF SEPTEMBER 13, 1984.

Ref.: CVM Resolution No. 38 of 09/13/84, which provides for the exercise of independent auditing activity within the Securities Market – encompassing the independent auditing of public companies, groups of companies that include a public company, and institutions, societies, or companies that are part of the distribution and intermediation system for securities.

I – INTRODUCTION

Making efforts to safeguard the reliability of the market constitutes a significant task for the Securities and Exchange Commission (CVM), based on the premise that the attraction and retention of investor public will guarantee a growing volume of resources to the market. Given that independent auditing is a relevant activity, essential to the credibility of the market, the Securities and Exchange Commission issued the Standards for Registration of Independent Auditors (CVM Resolution No. 04/78), regulating the auditor's performance within the limits of competence granted by law, that is, within the scope of the securities market – public companies, groups of companies that include a public company, and institutions, societies, or companies that are part of the distribution and intermediation system for securities.

Considering that independent auditing standards and procedures are of general application, the Securities and Exchange Commission aims only to complement them, whenever deemed necessary for the interests of the market, as in the case of the present Resolution, particularly with regard to incompatibilities, duties, and responsibilities of the independent auditor.

II – STANDARDS AND PROCEDURES FOR INDEPENDENT AUDITING IN THE SECURITIES MARKET

The elaboration and establishment, by the community to which independent auditors belong, of the standards that regulate their activities lead to increased acceptance of these standards and make the community feel more responsible for their compliance, reducing the need for permanent intervention by the Securities and Exchange Commission as a regulatory body.

Under these conditions, the Securities and Exchange Commission sought to incorporate into the present Resolution the standards and procedures for independent auditing issued by the regulatory bodies of the professional activity, while maintaining, however, the legal prerogative to restrict or complement them through a specific act for application within the scope of the Securities Market, whenever deemed appropriate.

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III – INCOMPATIBILITIES AND RESTRICTIONS ON THE INDEPENDENT AUDITOR IN THE SECURITIES MARKET

It is of utmost importance for the Securities Market and for professional respectability that the public trusts the impartiality of the independent auditor, since their primary function is to guarantee the fidelity of the audited financial statements.

This confidence would be compromised if there were indications that the independent auditor lacked impartiality. The auditor must be objective in performing their work, not allowing prejudice or any bias to interfere with their activity. They must always maintain an impartial attitude, in order to safeguard their independence. To this end, they must be free from any interests or personal ties that could affect their behavior or be incompatible with the integrity and objectivity required of them.

If the independent auditor has, by way of example, financial interests in a company or a family relationship with its administrators, they may express their opinion on the financial statements of that company with independence, but public opinion will hardly accept this fact without raising doubts. Therefore, the auditor must avoid situations that could lead third parties to doubt their impartiality. To be publicly recognized as independent, they must be free from any interest, obligation, or tie with respect to the audited company, its administrators and shareholders, as well as with respect to the employees responsible for the accounting and financial areas.

IV – DUTIES AND RESPONSIBILITIES OF THE INDEPENDENT AUDITOR IN THE SECURITIES MARKET

The Securities and Exchange Commission, as a regulatory body, retains specific competencies that allow it to avoid possible inconveniences of self-regulation, such as complacency regarding matters of public interest, the tendency of the regulated to protect themselves, leniency in imposing sanctions, and tolerant attitudes resulting from the desire to avoid adverse publicity for businesses.

In the present case, the Securities and Exchange Commission establishes, within the competence attributed to it by law, the duties and responsibilities of the independent auditor in the exercise of their activities within the scope of the securities market, especially with regard to the opinion expressed in their audit report. On this subject, it is noted, above all, that the independent auditor must carry out their examinations with due professional care. The necessary caution regarding the basic documentation of the examinations (working papers) requires that the information obtained be described clearly enough to support the opinion and provide evidence that the auditing standards applicable to the peculiar circumstances of each case have been met.

The consummation of fraudulent acts or practices that constitute manipulation in the Securities Market is harmful to its development and must be avoided at all costs. The presence in the market of professionals with high ethical standards constitutes a great protection for investors against the occurrence of fraud and abuses. Therefore, the independent auditor, in their function of safeguarding the fidelity and reliability of the financial statements of public companies and entities that

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are part of the distribution and intermediation system for securities, will be contributing to the efficient development of this market.

When issuing an opinion on the financial statements of a company or enterprise, the independent auditor must be aware of their duties and responsibilities before the market, since, in the exercise of their functions, they are civilly and unlimitedly liable for damages caused to third parties, in addition to being subject to punishment in the administrative sphere.

On the other hand, the Securities and Exchange Commission understands that independent auditing should not be considered as "just another burden" for companies or enterprises legally obliged to hire this specialized service. These, in turn, must also be aware of the importance of independent auditing for their own development, insofar as these services contribute to the improvement of their efficiency and the security of their assets.

For this reason, the Resolution also recommended that the company or enterprise provide the elements and conditions necessary for the effectiveness of independent auditing services, since its administrators are directly responsible for any failures or omissions detected in the preparation and dissemination of their financial statements. Finally, the Standards now issued clarify, by way of example, the content of the responsibility of independent auditors, whose opinions constitute one of the main sources of reference to influence investors' decisions in the market to sell or buy securities, providing, moreover, for the application of relevant legal and regulatory provisions in cases where eventual failures, omissions, or irregularities are observed by the Securities and Exchange Commission.

Published in the Official Gazette on 09/18/84.
Page 13,585.