Targeted Amendments to AS 6101 – Reducing a Barrier to Negative Assurance

Remarks as prepared for delivery

Thank you, Mr. Chairman.

Today, the Board is presented with a staff recommendation to propose targeted amendments to AS 6101 (Letters for Underwriters and Certain Other Requesting Parties). A review of AS 6101 to determine whether it remains fit for purpose is appropriate, because it was adopted as an interim standard in 2003 and has not been substantially amended since then. I support the proposal at this preliminary stage and will pay close attention to public comments before making a decision on a final rule.

The proposal would amend AS 6101.46 and AS 6101.47, which pertain to so-called “comfort letters.” When issuers seek to raise capital, such as by issuing general unsecured debt through public securities offerings, they typically engage a financial institution to serve as the underwriter for these securities. As part of its due diligence, an underwriter may ask the issuer’s auditor to provide a comfort letter addressing certain financial and accounting information in the issuer’s registration statement.

Currently, AS 6101.46 and AS 6101.47 provide directions to auditors relating to comfort letters.  One direction concerns an auditor providing “negative assurance” as to subsequent changes to financial statement items in the registration statement. The direction does not permit an auditor to provide negative assurance as of a date that is 135 days or more after the end of the most recent period for which financial statements were audited or reviewed. If the 135-day limitation precludes an auditor from providing negative assurance, AS 6101.47 allows the auditor to provide a comfort letter that is “limited to reporting procedures performed and findings obtained. . . .” 

The proposal’s preamble says that the current 135-day limitation generally poses no problems for most of the year for auditors to provide negative assurance. But under the existing standards, there will be times during the year when the auditor cannot provide negative assurance. And, these time periods may increase in the future if the Securities and Exchange Commission (SEC) promulgates a final rule affording certain issuers the option of filing on a semi-annual basis instead of on a quarterly basis.¹

So, what is the problem this proposal is trying to solve?  The economic analysis points out that some issuers may want to raise capital at a time when our rules would not allow an auditor to provide negative assurance to an underwriter. Without that negative assurance, underwriters may be unwilling to support the issuer’s public securities offerings on standard terms.² For this reason, the proposed amendments are designed to “to reduce the potential for the standard to unnecessarily constrain timely access to capital markets in light of current and potential future financial statement filing deadlines.” Emphasis added.

I believe the proposal is a reasonable answer to this problem and thus support seeking public comment on the proposed amendments. Removing potential impediments in our standards to capital formation can protect investors and help ensure that our capital markets remain the most attractive and liquid in the world. But I am not heedless of the commenters who, for example, stated in the context of the SEC’s proposed semi-annual reporting rule that “[r]emoving or extending the 135-day limitation, particularly without intervening review procedures, would increase risk to issuers and investors given the longer period over which events may occur . . . .”³ I intend to carefully review the comment letters we receive to see if the proposal achieves its objectives.

I want to thank staff in the Office of the Chief Auditor, the Office of Economic and Risk Analysis, and the Office of the General Counsel for their hard work on this proposed standard. I also want to express special appreciation to Dominika Taraskiewicz, who has done an excellent job as Acting Chief Auditor.

Back to you, Mr. Chairman.