The Public Company Accounting Oversight Board is proposing to update what it says are outdated provisions in the auditing standard related to auditor comfort letters.
The Public Company Accounting Oversight Board is proposing to update what it says are outdated provisions in the auditing standard related to auditor comfort letters.
The proposed amendments to the existing standard—AS 6101, Letters for Underwriters and Certain Other Requesting Parties—would modernize its provisions, notably by removing the 135-day rule that can prevent auditors from providing negative assurance as to subsequent changes in selected financial statement items in comfort letters.
Negative assurance is a statement by an auditor that no adverse issues have been found regarding the accuracy of a client’s financial statements.
AS 6101 has not been substantially amended since its adoption as an interim standard in 2003, according to the PCAOB.
PCAOB Chairman Demetrios Logothetis said during a board meeting on Tuesday that the targeted changes to AS 6101 would make sure the “outdated timing convention does not stand in the way of auditors providing negative assurance when they believe it is appropriate.”
“The change is narrow, but it matters,” he added. “It would help ensure that the standard continues to work as intended in today’s capital markets.”
Comfort letters are an important source of information for underwriters to consider when companies raise capital. According to accounting firm Mayer Brown, a comfort letter is “a letter delivered by an issuer’s independent accountants to the underwriters or initial purchasers in connection with an offering that provides certain assurances with respect to financial information included in a registration statement, prospectus, or offering memorandum used for the securities offering.”
Some public companies could plan to raise capital 135 days or more after the end of the most recently audited or reviewed period and before filing their next required financial reports. During that period, an underwriter—usually an investment bank—involved in the fundraising could seek negative assurance as to subsequent changes in specified financial statement items as part of their due diligence. Even if the auditor decides that providing such assurance would be appropriate under the circumstances, the existing 135-day convention prohibits the auditor from doing so, the PCAOB says. In this situation, if the requested negative assurance relates to a date 135 days or more after the end of that period, the auditor might report in a comfort letter only the procedures performed and findings obtained. This convention can prevent an auditor from providing the broader comfort that an underwriter may seek, even when the company is current in its required filings, the board added.
As a result, under existing AS 6101, there are periods of time in which the auditor is unable to provide negative assurance. For example, for a calendar-year filer, the auditor is unable to provide negative assurance between a date that is 135 days or more after the third quarter reporting date (Sept. 30) and the date the annual report is filed, which is generally due no earlier than March 1 and up to March 31, depending on filer status, according to the PCAOB.