An autumn ‘chestnut’ – how to avoid problems with accountants’ comfort letters in Q1 2019 capital markets deals

From 12 November, H1 2018 interim financial statements of issuers with calendar year ends went ‘stale’ for purposes of receiving negative assurance in a SAS 72 letter. If your offering has been delayed due to ongoing market turbulence, or for other reasons you are targeting a first quarter 2019 launch, an auditor’s review of financial statements for a period ending prior to 135 days of your contemplated completion date (eg the nine months to 30 September) can extend the negative assurance period.

You should, however, be aware of a potential issue presented by the AICPA’s 2005 white paper ‘Comfort Letter Procedures Relating to Capsule Financial Information Presented in a Registration Statement Prior to the Issuance of Year-End Financial Statements’ (the White Paper).

The White Paper sharply restricts the period covered by negative assurance in a SAS 72 letter delivered after year end if the audit fieldwork for that year is not substantially complete. Annex A of our alert provides fuller details of the specific restrictions; in summary, underwriters are likely to find themselves faced with a lengthy gap between the end of the period for which an issuer’s accountants can provide negative assurance (typically 30 November, and sometimes earlier) and the completion of an offering.

In considering early first quarter transactions for calendar year-end issuers, underwriters should move quickly to establish:

• the extent to which the accountants in question are likely to apply the White Paper’s restrictions;
• when the issuer and its auditors expect audit fieldwork to be ‘substantially complete’ and the issuer’s financial statements to be in ‘substantially final form’ and whether these can be accelerated; and
• the quality and type of financial and operational information available during the affected period to allow underwriters to undertake additional financial due diligence in lieu of negative assurance.

For further details, please see the alert here.