Recently, the PCAOB proposed amendments to AS 6101, ‘Letters for Underwriters and Certain Other Requesting Parties,’ to address the limitations on an auditor’s ability to provide negative assurance in comfort letters. The proposal would modernize requirements that have remained largely unchanged since 2003. Comments are due by January 4th.
Here are five things to know:
1. Accommodating Semiannual Reporting: Although the proposal was prompted in part by the SEC’s proposed shift toward optional semiannual reporting, the PCAOB decided to address existing limitations of the comfort letter process without waiting for the SEC to finalize its proposal. The amendments would accommodate both quarterly and semiannual reporting schedules.
2. Eliminating the 135-Day Limitation: Under existing rules, auditors generally cannot provide negative assurance regarding subsequent changes for certain financial statement items more than 135 days after the most recent audit or review, even when an issuer is current with its reporting obligations. The proposal would replace this fixed limitation with a deadline tied to when the issuer’s next annual or interim financial statements must be filed.
3. Removing Obstacles to Capital Formation: The existing 135-day limitation creates periods during which issuers may have difficulty accessing capital markets because underwriters can’t obtain customary negative assurance. The proposal would eliminate these gaps, allowing auditors to provide negative assurance through the issuer’s next applicable financial statement filing deadline, subject to their professional judgment.
4. Additional Risk Factors for Auditors to Consider: The proposal would add a note identifying factors – which are intended to serve as reminders rather than restrictions – that auditors may consider when deciding whether to provide negative assurance, including:
– Changes in senior management,
– Management’s ability to respond to inquiries,
– ICFR effectiveness,
– Going-concern concerns,
– Financial statement restatements, and
– Changes in independent accountants.
5. Auditor Discretion Remains Unchanged: Importantly, auditors would retain their existing discretion to decline to provide negative assurance, even when the applicable timing requirements are satisfied. The presence of one or more of the newly identified risk factors would not automatically prevent an auditor from providing negative assurance.
Authored by
Broc Romanek