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AICPA Offers Comfort Letter Procedures for Capsule Financial Information

The AICPA's Center for Public Company Audit Firms' SEC regulations committee has issued a framework of procedures for accountants to consider when providing comfort letters relating to the financial information included in registration statements prior to the issuance of year-end financial statements. Underwriters often ask accountants to provide a comfort letter in connection with securities offerings that are made after an issuer's fiscal year-end but before the date that the year-end financial statements are issued. The framework describes the level of comfort that accountants should consider providing. The PCAOB has not approved, disapproved or otherwise acted upon the framework, according to the committee.

The framework explains that registration statements that are prepared after a fiscal year-end but before the financial statements are issued may include capsule financial information for the fourth quarter and/or the full year. Financial statements are considered issued as of the date they are distributed for general use in a format that complies with generally accepted accounting principles. In the case of annual financial statements, they contain an audit report advising that the auditors have complied with generally accepted auditing standards in completing their audit. Financial statements would not be considered issued as of the date of an earnings release or a posting on a registrant's Web site.

Underwriters generally request a comfort letter with respect to certain information in the registration statement as part of their due diligence procedures. The framework notes that neither the 1933 Act nor the Statement on Auditing Standards No. 72 obligate an accountant to issue a comfort letter. The underwriter may perform all of the due diligence procedures that he or she deems necessary to demonstrate that a reasonable investigation was performed, according to the framework.

While accountants want to facilitate the capital formation process, they may be reluctant to perform procedures on capsule financial information when the financial statements underlying the data are not complete and have not been issued. The accountant may even be in the process of conducting the audit at the time the comfort letter is issued, which puts the accountant in the position of being asked to comment on amounts that are subject to change.

The framework warns accountants to proceed with caution when reporting the results of procedures on balances and amounts that are subject to ongoing, soon to be undertaken or completed audit procedures that may still be subject to change. Accountants should avoid undue and disproportionate risk. However, the framework describes a number of procedures that accountants are generally willing to perform on capsule financial information prior to the date that the year-end financial statements are issued after considering the issuer's circumstances, including the internal control environment, past history of audit adjustments, open contingencies and the nature of the business.

The framework recommends that accountants wait until audit fieldwork is substantially complete and the year-end financial statements are in substantially final form before considering the provision of a SAS 100 negative assurance on the fourth quarter financial statements or capsule information. If the accountant is prepared to give this level of comfort, the framework advises that the fourth quarter financial statements must be prepared at an S-X article 10 level of detail, with all required financial statements and disclosures, and must be attached to the comfort letter if they are not included in the registration statement.

An accountant may provide negative assurance that he or she has read the issuer's financial information for the last three months of a calendar-year company and is unaware of certain specified changes in financial statement amounts. However, the framework urges extreme caution in providing this level of comfort prior to the completion of the audit. The accountant should consider providing negative assurance as to specified changes in financial statement amounts based on reading subsequent financial statements through the end of a fiscal year only after the audit fieldwork is substantially complete, but could provide negative assurance for a shorter period within the fourth quarter where the audit fieldwork is not substantially complete. The framework suggested that the accountant may wish to note that the audit of the full year financial statements is not completed and that the fourth quarter information is still subject to change.

The framework also urged extreme caution when providing comfort after asking company officials about any changes in specified financial statement amounts. SAS 72 permits an accountant to give negative assurance after such an inquiry up to a date that is less than 135 days from the end of the most recent period for which the accountant has performed an audit or review.

Accountants should not comment on the completion or the status of the audit prior to the issuance of the underlying financial statements. Even though the audit fieldwork may be substantially complete, or the date of the audit report has passed, the framework notes that the company and the auditor are responsible for evaluating subsequent post-balance sheet events for their impact on the financial statements up to the issuance date. Management cannot assert that the financial statements are complete until the date they are issued, according to the framework. If the audited financial statements were complete, they would have to be included in the registration statement.