Comfort Letters: How Does SAS 72 Affect Them?
Conditions once again appear favorable for public offerings of securities. In 1992, the volume of initial public offerings (IPOs) on the New York Stock Exchange (NYSE), which handles about 80% of all IPOs in the United States, was $34.2 billion. The NYSE IPO volume for the first six months of 1993 alone totaled $22.7 billion. In addition, secondary offerings amount to hundreds of billions of dollars each year. What does this mean for CPAs? An increased volume of public offerings means clients may ask CPAs to provide letters to underwriters (often referred to as comfort letters). Underwriters and other parties often require a comfort letter before proceeding with an offering. Involvement in clients' public securities offerings thus gives CPAs a unique opportunity to provide a valuable service. In February 1993 the American Institute of CPAs auditing standards board issued Statement on Auditing Standards no. 72, Letters for Underwriters and Certain Other Requesting Parties. The new SAS, which supersedes SAS no. 49, Letters for Underwriters, is effective for comfort letters issued on or after June 30, 1993. SAS no. 72 was issued to clarify who is entitled to obtain comfort letters and to address changes in related authoritative auditing literature. This article should help both CPAs and parties requesting comfort letters understand when such letters may be provided and, when the SAS no. 72 criteria for providing a comfort letter are not met, what other services CPAs can provide. WHAT ARE COMFORT LETTERS? Comfort letters are a special type of agreed-upon-procedures report. They are issued in connection with offerings that must be registered with the Securities and Exchange Commission in accordance with the Securities Act of 1933 (the act). They are part of the procedures underwriters undertake to perform and document a "reasonable investigation" of unaudited information included in offering documents. Section 11 of the act provides underwriters with a so-called due diligence defense against possible claims if they have performed such an investigation. Comfort letters typically include * A statement regarding the CPA's independence. * In connection with offerings registered with the SEC, the CPA's opinion on whether the audited financial statements and related schedules comply in terms of form with the act's applicable accounting requirements. * A description of the procedures applied by the CPA, at the underwriter's request, to unaudited information in the offering documents and the findings obtained. In SAS no. 72, the ASB expanded the matters CPAs are permitted to address in comfort letters to include financial forecasts and compliance of certain information (such as selected financial data, supplementary financial information, executive compensation and ratios of earnings to fixed charges) with SEC regulation S-K. WHO MAY OBTAIN COMFORT LETTERS? Although comfort letters issued under SAS no. 49 were intended only for underwriters with a due diligence defense, such letters often were provided to other parties. SAS no. 72 restricts the availability of comfort letters to the following parties: 1. Named underwriters with a due diligence defense under section 11 of the act. 2. Other parties who have a due diligence defense in connection with a securities offering registered with the SEC. CPAs may provide comfort letters to such requesting parties, which typically include agents, as long as the party provides the CPA with a lawyer's written opinion confirming the party has such a defense. Alternatively, if such parties provide a representation letter as described below, CPAs may provide them with comfort letters. 3. Broker-dealers or other financial intermediaries involved in the offering or placement of securities, as long as the requesting party provides the accountant with a representation letter. …