Topic 4: Independent Accountants’ Involvement
4100 Qualifications of Accountants
(Last updated: 6/30/2009)
4110 PCAOB Registration
4110.1 PCAOB Rule 2100 requires each firm (domestic or foreign) to register with the PCAOB that:
- prepares or issues any audit report with respect to any issuer; or
- plays a substantial role in the preparation or furnishing of an audit report with respect to any issuer.
4110.2 A public accounting firm not registered with the
PCAOB may be able to perform some audit services for an issuer if the firm does
not play a substantial role in the preparation or furnishing of the audit report
as defined by PCAOB Rule 1001(p)(ii).
4110.3 In accordance with PCAOB Rule 2107(b)(1), a firm
that was once registered and then later withdrew may reissue or give consent to
the use of a prior report that it issued while registered. However, the firm
cannot update or dual-date a previously issued report after the firm is no
longer registered, as that involves additional audit work.
4110.4 Issuer financial statements audited by a
nonregistered firm are considered to be “not audited,” and any 10-K, proxy
statement, or registration statement containing or incorporating by reference
such financial statements is deemed substantially deficient. In addition, the
10-K is deemed not timely filed. The 10-K or filing should be amended
immediately to remove the nonregistered auditor’s report and label the columns
of the financial statements as “not audited.” The issuer would then need to file
another amendment to file financial statements audited by a registered firm.
4110.5 The following chart outlines the application of
certain PCAOB requirements in various filings with the SEC.
(Last updated: 12/31/2022)
No.
| Entities for which an audit report on the financial statements is included in the document filed with SEC1: | Auditor’s report on financial statements in current filing must be issued by a public accounting firm registered with the PCAOB? | Auditor’s report on financial statements must refer to PCAOB standards? |
---|---|---|---|
1 | Issuer2 and its predecessor | Yes | Yes |
2 | Entity that has filed an initial registration statement | Yes | Yes |
3a | Operating company (predecessor) whose financial statements are filed by a special purpose acquisition company (“SPAC”) | Yes | Yes |
3b | Operating company (predecessor) whose pre-acquisition financial statements are filed by an issuer that at the time the reverse merger is consummated is a public “shell company” (See Section 12250.1) | Yes | Yes |
3c | Operating company (predecessor) whose pre-acquisition financial statements are filed by an issuer that at the time the reverse merger is consummated is not a public “shell company” (See Section 12250.2) | No, but see Section 12250.2 | No, but see Section 12250.2 |
3d | Operating company (predecessor) whose post-acquisition audited financial statements are filed by the issuer after consummation of a reverse merger | Yes | Yes |
4 | Non-issuer subsidiary, division, branch, component or investment for which an audit report is filed under S-X 2-05 | See footnote3 | Yes4 |
5 | Non-issuer entity whose financial statements are filed to satisfy S-X 3-05 or 3-14 | No | No |
6 | Non-issuer entity whose financial statements are included in proxy statement or Form S-4/F-4 as target (except for the target of a SPAC in Form S-4/F-4, then follow 3a above) | No | No |
7 | Non-issuer entity whose financial statements are filed to satisfy S-X 3-09 | See footnote3 | See footnote5 |
8 | Subsidiary issuer or guarantor of guaranteed debt or debt-like securities whose separate financial statements are filed because it does not qualify for relief under S-X 3-10 (see Section 2500) | Yes6 | Yes |
9 | Employee benefit plan filing Form 11-K | Yes6 | Yes |
4110.6 For purposes of Item 5 of the table above, a
non-issuer entity could also be a bidder in a Schedule TO or an acquirer in a
proxy statement.
4110.7 [Reserved] (Last updated: 12/31/2022)
4110.8 The audited balance sheet of a non-issuer general
partner that is included in a transactional filing or registration statement of
a limited partnership issuer is not required to be audited by a PCAOB registered
firm. The audit report also is not required to refer to PCAOB standards.
4115 Involuntary PCAOB Deregistration
4115.1 If the PCAOB revokes the registration of an audit firm, audit reports issued by that firm may no longer be included in a registrant’s filings made on or after the date the firm’s registration is revoked, even if the report was previously issued before the date of revocation. Financial statements previously audited by a firm whose registration has been revoked would generally need to be reaudited by a PCAOB registered firm prior to inclusion in future filings or if included in a registration statement that has not yet been declared effective. (Last updated: 6/30/2011)
4115.2 In providing the information that Item 304 of
Regulation S-K requires regarding a change in accountants for a firm whose
registration is revoked by the PCAOB, a company should indicate that the PCAOB
has revoked the registration of its prior auditor. If a company previously
explained the PCAOB registration revocation in its Item 4.01 Form 8-K, it need
not repeat this disclosure in its Form 10-K.
4120 Duly Registered and in Good Standing Under the Laws of the Accountant’s Place of Residence or Principal Office [S-X 2-01]
(Last updated: 9/30/2011)
4120.1 The SEC will not recognize any person as a
certified public accountant unless duly registered (licensed to practice)
and in good standing under the laws of the place of the accountant’s
residence or principal office. [S-X 2-01(a)] However, S-X 2-01(a) does not
affect the applicability of any other registration, licensing or
qualification requirements that may apply in any State or competent
jurisdiction.
4120.2 The staff may question the location from which the
audit report was rendered if there does not appear to be a logical
relationship between that location and the location of the registrant’s
corporate offices, its principal operations, its principal assets, or where
the audit work was principally conducted. The staff will consider all
relevant factors in questioning the location from which the audit report was
rendered.
4120.3 An auditor whose report is included in a domestic
registrant’s filings should be an expert in U.S. GAAP and the standards of
the PCAOB (U.S. GAAS for non-issuers).
4130 Independence [S-X 2-01(b) and (c), SOX 201]
4130.1 Questions regarding independence should be directed
to OCA. Auditor reports on financial statements that refer to PCAOB
standards must comply with the independence rules of both the SEC and the
PCAOB. The SEC’s independence rules are promulgated in S-X 2-01. The PCAOB
has also issued certain independence and ethics rules, which are part of its
adopted standards. See https://pcaobus.org/. Compliance with
these rules is required to issue a PCAOB opinion.
4130.2 S-X 2-01 is designed to ensure that auditors are
qualified and independent both in fact and in appearance. Accordingly, the
rule sets forth restrictions, including but not limited to, on financial,
employment, and business relationships between an accountant and an audit
client and restrictions on an accountant providing certain non-audit
services to an audit client. These restrictions are prescribed in paragraphs
(c)(1) to (c)(8) of S-X 2-01. The general standard of independence is set
forth in S-X 2-01(b). The rule does not purport to, and the SEC could not,
consider all the circumstances that raise independence concerns, and these
are subject to the general standard in paragraph 2-01(b). In considering
this standard, the SEC looks in the first instance to whether a relationship
or the provision of a service: (a) creates a mutual or conflicting interest
between the accountant and the audit client; (b) places the accountant in
the position of auditing his or her own work; (c) results in the accountant
acting as management or an employee of the audit client; or (d) places the
accountant in a position of being an advocate for the audit client.See also
Office of the Chief Accountant: Application of the Commission's Rules
on Auditor Independence Frequently Asked Questions.
(Last updated: 10/30/2020)
4130.3 SEC Independence rules also apply to Regulation A,
except for Tier 1 offerings where the AICPA independence standards may be
applied and Regulation D filings, and when separately audited financial
statements of an equity investee is included in a filing under Rule 3-09 of
Regulation S-X. [Form 1-A Part F/S and Section O. Other Independence in
OCA: Application of the Commission’s Rules on Auditor Independence
Frequently Asked Questions.] (Last updated: 10/30/2020)
4140 Principal Auditor [S-X 2-05, PCAOB AS 1205]
4140.1 When an independent auditor uses the work and
reports of other independent auditors to audit the financial statements of
one or more subsidiaries, divisions, branches, components, or investments
included in the financial statements presented, such independent auditor
must decide whether it may serve as the principal auditor. Generally, the
principal auditor is expected to have audited or assumed responsibility for
reporting on at least 50% of the assets and revenues of the consolidated
entity. If it is impracticable for a principal auditor to assume that extent
of responsibility for one or more of the periods presented, the staff will
evaluate whether to accept the audit reports as sufficient for reliance in
filings with the SEC depending on the facts and circumstances.
4140.2 A principal auditor must decide whether to make
reference in its report to the audit performed by another auditor. If the
principal auditor decides to assume responsibility for the work of the other
auditor insofar as that work relates to the principal auditor’s expression
of an opinion on the financial statements taken as a whole, no reference
should be made to the other auditor’s work or report.
4140.3 If a principal auditor decides not to assume
responsibility for the work of the other auditor insofar as that work
relates to the principal auditor’s expression of an opinion on the financial
statements taken as a whole, the principal auditor’s report should make
reference to the audit of the other auditor and should indicate clearly the
division of responsibility between the principal auditor and the other
auditor in expressing his opinion on the financial statements. Regardless of
the principal auditor’s decision, the other auditor remains responsible for
the performance of its own work and for its own report.
4140.4 If a principal auditor makes reference to the work of the other auditor in the principal auditor's report on either the financial statements or ICFR, the separate report of the other auditor shall be filed. [S-X 2-05] (Last updated: 9/30/2012)
4140.5 If a principal auditor makes reference to the work of the other auditor in the principal auditor’s report, the other auditor must comply with all requirements with which the principal auditor must comply, with the exception of PCAOB registration when the other auditor does not meet the “substantial role” threshold defined in PCAOB Rule 1001(p)(ii) in the audit of the issuer. The other auditor must register with the PCAOB if it meets the “substantial role” threshold defined in PCAOB Rule 1001(p)(ii) in the audit of the issuer, regardless of whether the principal auditor refers to the work of the other auditor. (Last updated: 9/30/2012)
4200 Accountants’ Reports [S-X 2-02]
(Last updated: 6/30/2009)
4210 General — Audit Reports
4210.1 The accountant’s report must be dated,
electronically signed [S-T 302(a)], indicate the city and state where
issued, and identify the financial statements covered.
4210.2 The report should refer to any supplemental
schedules presented pursuant to SX Article 12 (or a separate report on
those schedules may be included with the schedules).
4210.3 The report must contain clear statements as to the
scope of the audit. It must include representations that the audit is
conducted in accordance with the standards of the Public Company Accounting
Oversight Board (United States) for issuers or applicable professional
standards (that is, U.S. GAAS as issued by the AICPA) for non-issuers (with
certain exceptions noted in Section 4210.4).
(Last updated: 10/30/2020)
4210.4 Audit reports on non-issuer financial statements may, but are not required to, refer to PCAOB standards, except in certain cases. An audit of non-issuer financial statements must be conducted in accordance with PCAOB standards if the issuer’s principal auditor makes reference to the work performed by the non-issuer auditor. (Last updated: 9/30/2012)
4210.5 The report must contain a clear statement as to the auditor’s opinion that the financial statements are presented in conformity with GAAP, and any exceptions taken. All financial statements must be prepared in accordance with
U.S. GAAP for domestic issuers. Foreign private issuers may present their financial statements in accordance with IFRS as issued by the IASB without a reconciliation to U.S. GAAP, or in accordance with non-IFRS home country GAAP reconciled to U.S. GAAP as permitted by Form 20-F.
4220 Qualified Audit Reports
The audit report that an independent auditor issues under PCAOB standards (or
U.S. GAAS for non-issuers) may indicate that the financial statements do not
satisfy the requirements of the SEC's rules or the audit procedures applied
omitted certain procedures deemed necessary by the auditor. There may be
rare instances when the staff will not object to an audit report
on the financial statements that contains a qualification. However, a waiver
from CF-OCA would need to be requested and obtained before filing. Examples
of audit reports on the financial statements that represent a substantial
deficiency in the filing are set forth in 4220.1
through 4220.4. In substantial deficiency situations, the related
filing, e.g. Form 10-K, is deemed not timely filed and would impact
compliance with certain rule and form eligibility requirements – such as,
Regulation S, Rule 144, Form S-3 and Form S-8. (Last updated:
10/30/2020)
4220.1 Disclaimer of Opinion S-X Article 2 requires the
clear expression of an opinion on the financial statements. A report that
states that the auditor is disclaiming an opinion on the financial
statements for any reason does not satisfy the requirements of S-X Article
2.
4220.2 Adverse Opinion
An audit report that states that the financial statements taken as a whole are
not presented fairly in conformity with GAAP does not satisfy the
requirements of S-X Article 2.
4220.3 Scope Qualifications [SAB Topic 1E.2]
-
A qualification with respect to the scope of the audit of the financial statements results in a finding by the staff that the audit of the financial statements required by SEC rules has not been performed.
-
Sometimes an auditor is not present for observation of inventory. In that case, the auditor must be able to satisfy himself or herself through alternative procedures. No language in the report should imply a qualification as to scope or conclusions. [FRC 607.01]
4220.4 Qualifications as to Accounting Principles or
Disclosures [SAB Topic 1E.2]
Audit reports that express a qualified or “except for” opinion due to a departure
from GAAP do not meet the requirements of S-X Article 2. Financial
statements not in conformity with GAAP are presumed to be inaccurate or
misleading, notwithstanding explanatory disclosures in footnotes or in the
accountant’s report. [FRC 607.01]
4220.5 In the case of an auditor’s issuance of an adverse
opinion on a company’s ICFR, the auditor should determine the effect an
adverse opinion on ICFR has on the auditor’s opinion on the financial
statements. An auditor should disclose whether or not an adverse opinion on
ICFR affected its audit opinion on the financial statements. [AS 2201,
paragraph 92]
4230 Other Report Modifications
4230.1 Going Concern Modifications [AS 2415]
-
Going concern modifications are required by PCAOB standards and U.S. GAAS in certain circumstances.
-
Filings that include reports having going concern modifications must also include appropriate and prominent disclosure of the financial difficulties giving rise to that uncertainty. Discussion of a viable plan that has the capability of removing the threat to the continuation of the business must be included. The plan may include a “best efforts” offering so long as the amount of minimum proceeds necessary to remove the threat is disclosed. The plan should enable the issuer to remain viable for at least the 12 months following the date of the financial statements being reported on. If management has no viable plan, the use of going concern financial statements may be inappropriate and liquidation-basis financial statements may be necessary or the classification and amounts of assets and liabilities may need to be adjusted. [FRC 607.02] AU 341 does not apply to an audit of financial statements based on the assumption of liquidation.
-
Going concern opinions that do not use the words “substantial doubt” when referencing a going concern matter do not comply with PCAOB standards/U.S. GAAS.
-
Going concern opinions that use conditional language in expressing a conclusion concerning the existence of substantial doubt about the entity’s ability to continue as a going concern are not appropriate.
-
A disclaimer of opinion, “except for” opinion, or an adverse opinion resulting from going concern matters is permitted by AS 2415, but none of these types of opinion comply with the requirements of S-X Article 2.
4230.2 Changes in Accounting Principles [ASC 250, AS 2820,
S-X 10-01]
- A change in accounting principle that has a material effect on the financial statements should be recognized in the auditor’s report. [AS 2820, paragraph 8]
- The correction of a material misstatement in previously issued financial statements should be recognized in the auditor’s report on the audited financial statements through the addition of an explanatory paragraph. [AS 2820, paragraph 9]
-
Preferability LettersThe presumption that an entity should not, in the absence of the issuance of a new accounting standard, change an accounting principle may be overcome only if the company justifies the use of an alternative acceptable accounting principle on the basis that it is preferable. [ASC 250-10-45-12] The registrant is required to file a letter from its independent accountant concurring with its conclusion as to the new method’s preferability. [S-X 10-01; SAB Topic 6G.2.b]
-
Preferability letters must be included in Form 10-Q or Form 10-K as Exhibit 18 and need only be filed once in the first applicable 1934 Act filing following the change. Preferability letters are not required in 1933 Act filings. A preferability letter generally is required in Form 10-K only when a change in accounting occurs in the fourth quarter. Even though the independent accountant referred to the change in its audit report as required by PCAOB standards and concluded as to the preferability of the change, S-K 601 requires that a preferability letter be included as an exhibit to the Form 10-K (unless it was previously filed).
-
The staff has objected to the change from one acceptable method to another acceptable method if the registrant and its independent accountants cannot demonstrate that the new method is preferable. Conforming to industry practice may not justify a change if industry practice is not the preferable method.
-
Preferability letters are not required after a business combination where changes in the acquired entity's accounting are made to conform to those of the acquiring entity.
-
A preferability letter is not required for a change in estimate effected by a change in accounting principle.
-
A preferability letter is not required for changes that are mandatory or will be mandatory.
-
4230.3 Clarification in Audit Report Regarding No Audit of
Internal Control Over Financial Reporting [SOX 404(b), S-K 308(b), AS 3105]
In a financial statement audit of an issuer or non-issuer that has determined it
is not yet required to obtain, nor did it request the auditor to perform, an
audit of internal control over financial reporting under SOX 404(b) and S-K
308(b), a firm may, but is not required to, expand its audit report to
clarify this fact. A firm may include a statement that the purpose and
extent of the auditor’s consideration of internal control over financial
reporting was to determine that the nature, timing, and extent of tests to
be performed are appropriate in the circumstances, but was not sufficient to
express an opinion on the effectiveness of internal control over financial
reporting. If a firm chooses to expand its report to clarify this point, the
scope paragraph in the audit report should follow the suggested language in
AS 3105.59 to .60.
4300 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING [SOX 404, AS 2201 and S-K 308, SEC Interpretive Guidance, ICFR FAQs, PCAOB Staff Guidance]
(Last updated: 6/30/2009)
4310 Management’s Annual Report on Internal Control Over Financial Reporting [S-K 308]
4310.1 S-K 308(a) requires management to provide its
report on ICFR containing its assessment of the effectiveness of ICFR as of
the end of the most recent fiscal year in its annual report on Form 10-K,
20-F, or 40-F (including transition reports filed on such forms upon a
change in fiscal year-end). If the registrant is a non-EGC accelerated filer
or a large accelerated filer, S-K 308(b) requires management to provide the
registered public accounting firm’s attestation report on the registrant’s
ICFR. Filings without the required report or reports are deficient and
considered not timely, except for the limited situation described in Section 4310.6 below. Non-accelerated filers
(both domestic and foreign) and EGCs (both domestic and foreign) are not
required to include an auditor attestation report under S-K 308(b).
NOTE:
Management’s report on ICFR and the accompanying
attestation report are not required in registration
statements (whether under the 1933 Act or 1934 Act)
or Forms 11-K. (Last updated: 6/30/2013)
|
4310.2 A non-EGC that enters accelerated filer status at the end of a fiscal year (based upon its public float as of the end of its second fiscal quarter) is required to include an auditor attestation report in the Form 10-K for that year. Similarly, a company that exits accelerated filer status at the end of its fiscal year (based upon its public float as of the end of its second fiscal quarter) would not be required to include an auditor attestation report in the Form 10-K for that year. (Last updated: 6/30/2013)
4310.3 The staff’s Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, Frequently Asked Questions (“ICFR FAQs”) is available at
http://www.sec.gov/info/accountants/controlfaq.htm.
4310.4 [Reserved]
4310.5 [Reserved]
4310.6 Pursuant to S-K 308, a newly public company need not provide management’s report on ICFR until it either had been required to file or had filed a Form 10-K with the Commission for the prior fiscal year. A company that historically reported under the Exchange Act as a voluntary filer or because of registered debt, and therefore filed annual reports up to and through the date of its IPO, in which it was required to comply with the disclosures required by Item 308(a) of Regulation S-K, is therefore required to provide management’s report on ICFR in its first annual report following the IPO.
Only “accelerated filers” that are not EGCs and “large accelerated filers” are
required to provide an auditor’s attestation report on ICFR under Item
308(b) of Regulation S-K. The definitions of “accelerated filer” and “large
accelerated filer” require that the issuer has been subject to reporting
under Section 13(a) or 15(d) and has filed at least one annual report. Newly
public companies and companies that historically reported under the Exchange
Act as voluntary filers or because of registered debt do not satisfy the
definitions of “accelerated filer” or “large accelerated filer” for purposes
of their first annual report following their IPO, and therefore are not
required to include an auditor’s attestation report on ICFR under S-K 308(b)
in that first annual report.
A registrant should include a statement in its first annual report in
substantially the following form:
"This annual report does not include a report of management’s assessment
regarding internal control over financial reporting or an attestation
report of the company’s registered public accounting firm due to a
transition period established by rules of the Securities and Exchange
Commission for newly public companies." [Instruction 1 to S-K
308] (Last updated: 6/30/2013)
4310.7 The framework on which management bases its
evaluation of ICFR must be a suitable, recognized control framework. Many
companies follow the COSO framework, but other frameworks are also
acceptable. In assessing effectiveness, management evaluates whether its
ICFR system addresses the elements of internal control that its chosen
framework describes as necessary for an internal control system to be
effective. There are no specifically required methods or procedures for
evaluating ICFR, so it will vary from company to company. Management will
have to use its best judgment. The evaluation must be based on procedures
sufficient to evaluate both the design and operating effectiveness of ICFR.
In June 2007, the SEC issued interpretative guidance regarding management’s
report on ICFR. [Release No. 33-8810] An evaluation following this
interpretative guidance is one way to satisfy the evaluation requirements of
ICFR.
Under any method of evaluating ICFR, management must attain a level of
"reasonable assurance" when making conclusions about the
effectiveness of ICFR. While “reasonable assurance” is a high level of
assurance, it does not mean absolute assurance. The term “reasonable
assurance” relates to similar language in the Foreign Corrupt Practices Act.
1934 Act Section 13(b)(7) defines “reasonable assurance” as the degree of
assurance that would satisfy prudent officials in the conduct of their own
affairs. There is a range of judgments that an issuer might make as to what
is reasonable in implementing SOX 404 and the SEC’s rules.
4310.8 S-K 308 does not specify the exact content of management’s annual report on ICFR. Management should tailor the wording of the report to fit its company’s particular circumstances. However, management’s annual report on ICFR must state or disclose the following:
- Management’s responsibility for establishing and maintaining adequate ICFR for the company.
- The framework used by management as criteria for evaluating the effectiveness of ICFR.
- Management’s assessment of the effectiveness of the company’s ICFR at year end, including a statement as to whether or not ICFR is effective.
- Any material weaknesses in the company’s ICFR identified by management (See Section 4320.8 for definition of material weakness).
- The fact that the company’s independent public accountant, who audited the financial statements included in the annual report, has issued an attestation report on the company’s ICFR (if applicable).
4310.9 Management must reach one of two conclusions for its assessment of ICFR – ICFR is either effective or not effective. Management cannot conclude that its ICFR is effective if there are one or more material weaknesses. Additionally, management cannot qualify its conclusion by stating that its ICFR is effective with certain qualifications or exceptions. However, management may state that its controls are ineffective for specific reasons. Because of the substantial overlap between ICFR and DCP, if management concludes that ICFR is ineffective, it must also consider the impact of the material weakness on its conclusions related to DCP. (Last updated: 9/30/2010)
4310.10 In certain circumstances, management may encounter
difficulty in assessing certain aspects of ICFR. Management must still
conclude whether ICFR is effective or not since management is not permitted
to issue a report with a scope limitation (except under the limited
circumstances described in Section 4310.11).
Therefore, management must determine whether an inability to assess certain
aspects of ICFR is significant enough to conclude that ICFR is not
effective.
4310.11 If management does not have the ability to assess
certain aspects of ICFR, management must conclude whether ICFR is effective
or not, taking into consideration any scope limitation. Scope limitations
are not permitted in management’s report, except for the following
limited exceptions (see 4310.3 for link to FAQs referenced):
-
A variable interest entity in existence prior to December 15, 2003 that is consolidated AND the registrant does not have the right or authority to assess the internal controls of the consolidated variable-interest entity and also lacks the ability, in practice, to make that assessment. A similar exception is available for an entity accounted for via proportionate consolidation in accordance with ASC 810-10-45-14 if management does not have the ability to assess ICFR. [ICFR FAQ 1]
-
Equity method investments. [ICFR FAQ 2]
-
A current year acquisition (includes initial consolidation resulting from becoming the primary beneficiary of a variable interest entity) when it is not possible to conduct an assessment of the acquired business’s ICFR in the period between the consummation date and the date of management’s assessment. The exclusion may not extend beyond one year from the date of the acquisition nor may it be omitted from more than one annual management report on ICFR. [ICFR FAQ 3] (Last updated: 9/30/2010)
-
A reverse acquisition between an issuer and a private operating company when it is not possible to conduct an assessment of the private operating company or accounting acquirer’s ICFR in the period between the consummation date of a reverse acquisition and the date of management’s assessment of ICFR. See the Division of Corporation Finance’s C&DIs for Regulation S-K, Question 215.02.
For foreign private issuers who file their financial statements in their home country GAAP, management's evaluation of ICFR should consider, in addition to controls related to preparation of the primary financial statements, controls related to the preparation of the U.S. GAAP reconciliation because the reconciliation is a required element of the financial statements. [ICFR FAQ 12]
(Last updated: 9/30/2010)
4310.12 Management should consider disclosing the following with respect to a material weakness:
- Describe the nature of the material weakness;
- Describe its impact on the financial reporting and ICFR, if any; and
- Describe management’s current plans or action already undertaken, if any, for remediating the material weakness.
4310.13 Management must communicate all significant
deficiencies and material weaknesses it detects to the audit committee and
external auditor. The SOX 302 certifications include an affirmative
statement to this effect. Management must also provide written
representations to the auditor regarding its internal controls.
4310.14 S-K 308 does not specify where management’s
internal control report must appear in the annual report on Form 10-K, but
it should be located in close proximity to the corresponding attestation
report issued by the company’s auditor. [Release No. 33-8238] Management’s
report is not required to have a title. Management’s report does not need to
be dated or signed, but may include the date and/or the names or signatures
of management.
4310.15 Our rules do not address whether the assessment of
ICFR covers supplementary financial information, Regulation S-X schedules,
or ASC
932 oil and gas disclosures. Internal controls over
supplementary information do not need to be included in an assessment of
ICFR, although adequate internal controls over the preparation of
supplementary information are required. [ICFR FAQ 11]
4310.16 There is no requirement for a company to
reevaluate the effectiveness of its internal controls and/or reissue a
revised management’s report on ICFR when a company restates its financial
statements to correct errors in the financial statements. However, a company
may need to consider whether or not its original disclosures in management’s
report continue to be appropriate in light of these errors, and should
modify or supplement its original disclosure to include any other material
information that is necessary for such disclosures not to be misleading in
light of the restatement. The company should also disclose any material
changes to ICFR, as required by S-K 308(c).
4310.17 If a company’s management concludes that its
original assessment of ICFR was incorrect, it should consider whether or not
to revise its original report on ICFR. A company should also reevaluate the
appropriateness of its prior disclosures regarding the effectiveness of the
company’s DCP and make any necessary revisions. For example, a company
disclosed that its Chief Financial Officer and Chief Executive Officer
concluded its DCP were effective in its original Form 10-K. Subsequently,
the company filed a Form 10-K/A to restate its financial statements for
errors. In the Form 10-K/A, the company revised its disclosures to state
that the Chief Financial Officer and Chief Executive Officer concluded its
DCP were not effective, and the reasons why they were not effective.
4320 Auditor’s Report on ICFR [AS 2201, S-X 2-02(f)]
4320.1 AS 2201 requires an auditor to perform an
audit of a company’s ICFR that is integrated with an audit of the financial
statements. A report on the audit of ICFR, which may be combined with or
separate from the report on the financial statements, must include the
following:
-
A title that includes the word independent;
-
A statement that management is responsible for maintaining effective internal control over financial reporting and for assessing the effectiveness of internal control over financial reporting;
-
An identification of management’s report on internal control;
-
A statement that the auditor’s responsibility is to express an opinion on the company’s internal control over financial reporting based on his or her audit;
-
A definition of internal control over financial reporting as stated in AS 2201, paragraph A5;
-
A statement that the audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States);
-
A statement that the standards of the Public Company Accounting Oversight Board require that the auditor plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects;
-
A statement that an audit includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal controls based on the assessed risk and performing such other procedures as the auditor considered necessary in the circumstances;
-
A statement that the auditor believes the audit provides a reasonable basis for his or her opinion;
-
A paragraph stating that, because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements and that projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate;
-
The auditor’s opinion on whether the company maintained, in all material respects, effective internal control over financial reporting as of the specified date, based on the control criteria;
-
The manual or printed signature of the auditor’s firm;
-
The city and state (or city and country, in the case of non-U.S. auditors) from which the auditor’s report has been issued; and
-
The date of the audit report.
4320.2 In addition, S-X 2-02(f) requires the audit report on ICFR to identify the period covered by the report.
4320.3 If the audit report on ICFR is separate from the audit report on the financial statements, both reports must be dated the same. See paragraphs 87-88 of AS 5 for sample Illustrative Reports on Internal Control Over Financial Reporting.
4320.4 AS 2201 requires the auditor to modify its report
on ICFR if any one of the following five conditions exists:
-
Elements of management’s annual report on internal control are incomplete or improperly presented;
-
There is a restriction on the scope of the engagement;
-
The auditor decides to refer to the report of other auditors as the basis, in part, for the auditor’s own report;
-
There is other information contained in management’s annual report on internal control over financial reporting; or
-
Management’s annual certification pursuant to SOX 302 is misstated. [AS 2201, paragraphs C1-C15]
The report modification may be in one of the following forms, depending on the condition:
- an explanatory paragraph;
- an adverse opinion; or
- a disclaimer of opinion.
4320.5 The auditor’s report on ICFR should clearly state
whether or not it is the auditor’s opinion that a company maintained, in all
material respects, effective ICFR at year end. It is not appropriate for the
report to state that ICFR is effective with certain qualifications or
exceptions. For example, language indicating that the company maintained
effective ICFR, except for a certain weakness in a control, is not
acceptable. Language indicating that the company maintained ICFR that are
“sufficiently effective” or “adequate” is also not appropriate.
4320.6 The auditor must express an adverse opinion on the
company’s ICFR when one or more material weaknesses in ICFR exist, unless
there is a restriction on the scope of the engagement. See Section 4320.12. An adverse opinion on ICFR must
include:
-
The definition of a material weakness; and
-
A statement that a material weakness has been identified and an identification of the material weakness described in management’s assessment.
4320.7 The auditor should determine the effect an adverse
opinion on ICFR has on the auditor’s opinion on the financial statements.
Also, the auditor should disclose whether or not the adverse opinion on ICFR
affected its audit opinion on the financial statements. [AS 2201, paragraph
92]
4320.8 A material weakness is a deficiency, or combination
of deficiencies, in ICFR such that there is a reasonable possibility that a
material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. [S-X
1-02(a)(4); AS 2201, paragraph A7]
4320.9 A deficiency or combination of deficiencies is an
indicator of a material weakness if the auditor determines that the
deficiency or combination of deficiencies might prevent prudent officials in
the conduct of their own affairs from concluding that they have reasonable
assurance that transactions are recorded as necessary to permit the
preparation of the financial statements in conformity with GAAP. [AS 2201,
paragraph 70]
4320.10 AS 2201 lists four indicators of a material
weakness in ICFR, which are:
-
Identification of fraud, whether or not material, on the part of senior management;
-
Restatement of previously issued financial statements to reflect the correction of a material misstatement;
-
Identification by the auditor of a material misstatement of financial statements in the current period in circumstances that indicate that the misstatement would not have been detected by the company’s internal control over financial reporting; and
-
Ineffective oversight of the company’s external financial reporting and internal control over financial reporting by the company’s audit committee. [AS 2201, paragraph 69]
4320.11 If the material weakness was not included in
management’s assessment, the auditor’s report on ICFR should be modified to
state that a material weakness has been identified but not included in
management’s assessment. Also, the auditor’s report should include a
description of the material weakness, which should provide the users of the
audit report with specific information about the nature of the material
weakness and its actual and potential effect on the presentation of the
company’s financial statements issued during the existence of the weakness.
If the material weakness was included in management’s assessment but the
auditor concludes that management’s disclosure of the material weakness is
not fairly presented in all material respects, the auditor’s report should
describe this conclusion as well as the information necessary to fairly
describe the material weakness. [AS 2201, paragraph 91]
4320.12 Any report modification due to a scope limitation
would result in a disclaimer of opinion on the audit of ICFR. Reports that
result in a disclaimer of opinion are expected to be rare. [S-X 2-02(f)]
Reports on audits of ICFR that disclaim an opinion due to a scope limitation
should be discussed with CF-OCA in advance of filing. (Last updated:
9/30/2011)
4320.13 When disclaiming an opinion due to a scope
limitation, the auditor must state that the scope of the audit was not
sufficient to warrant the expression of an opinion. Also, the auditor’s
report on ICFR should provide the substantive reasons for the disclaimer in
a separate paragraph. [AS 2201, paragraph C4]
4320.14 When the auditor plans to disclaim an opinion on
the audit of ICFR due to a scope limitation and the limited procedures
performed by the auditor cause the auditor to conclude that a material
weakness existed, the auditor’s report on ICFR should include the definition
of a material weakness and a description of any material weakness
identified, as described in 4320.6. [AS 2201, paragraph C5]
4320.15 If management discloses additional information in
the report (e.g., its plans to implement new controls, corrective actions
taken after the date of assessment, or a statement that management believes
the cost of correcting a material weakness would exceed the benefits to be
derived from implementing new controls), the auditor is required to modify
its report regarding any additional information and disclaim an opinion on
this information. [AS 2201, paragraphs C1 and C12-14]
4320.16 The auditor should inquire about and examine
relevant documents for events which occurred subsequent to the date as of
which ICFR is being audited but before the date of the auditor’s report.
Such subsequent events could include changes in internal controls or other
factors. If the auditor obtains knowledge about subsequent events that
materially and adversely affect the effectiveness of the company’s ICFR as
of the date specified in the assessment, the auditor should issue an adverse
opinion on ICFR. If the auditor is unable to determine the effect of the
subsequent event on the effectiveness of ICFR, the auditor should disclaim
an opinion. [AS 2201, paragraphs 93-96]
4320.17 The auditor may obtain knowledge about subsequent
events with respect to conditions that did not exist at the date specified
in the assessment but arose subsequent to that date and before issuance of
the auditor’s report. If a subsequent event of this type has a material
effect on the company’s ICFR, the auditor should include an explanatory
paragraph in its report on ICFR describing the event and its effects or
directing the reader to the event and its effects as disclosed in
management’s report on ICFR. [AS 2201, paragraph 97]
4320.18 An audit report on ICFR may be based, in part, on
the work of another auditor when another auditor has audited the financial
statements and ICFR of a subsidiary, division, branch or component of
a company. The principal auditor should determine whether or not it will
make reference in its report on ICFR to the audit of ICFR performed by
another auditor. The auditor’s decision to make reference or not is based on
factors analogous to those in AU 1205 when a principal auditor decides to
make reference to the report of another auditor when reporting on a
company’s financial statements. As a result, the decision to make reference
to another auditor’s report on ICFR may differ from the decision to make
reference to another auditor in the principal auditor’s report on the
financial statements. When the auditor decides to make reference to the
report of the other auditor in its report on ICFR, the principal auditor’s
report on ICFR should refer to the report of the other auditor when
describing the scope of the audit and expressing an opinion on ICFR. [AS
2201, paragraphs C8-C11]
4320.19 If the auditor makes reference to another
auditor’s report on ICFR, the separate report of the other auditor on ICFR
must also be included in the filing. [S-X 2-05]
4320.20 AS 6115 establishes requirements and provides
guidance that apply when an auditor is engaged to report on whether a
previously reported material weakness in internal control over financial
reporting continues to exist as of a date specified by management.
4320.21 The auditor’s objective in an engagement to report
on whether a previously reported material weakness continues to exist is to
obtain reasonable assurance about whether the previously reported material
weakness exists as of a date specified by management and to express an
opinion thereon. The auditor’s opinion relates to the existence of a
specifically identified material weakness as of a specified date and does
not relate to the effectiveness of the company’s ICFR overall.
4400 Review and Compilation Reports
(Last updated: 6/30/2009)
4410 Review Reports on Interim or Pro Forma Data [AS 4105, AT Section 401]
4410.1 Prior to filing, interim financial statements
included in quarterly or transition reports on Form 10-Q must be reviewed by
an independent registered public accountant using PCAOB standards and
procedures for conducting such reviews, as may be modified or supplemented
by the SEC. If the company states in any filing, including registration and
proxy statements, that interim financial statements have been reviewed by an
independent public accountant, a report of the accountant on the review must
be filed with the interim financial statements. [S-X 10-01(d)] Otherwise,
the report is not required to be included in the filing.
4410.2 If a Form 10-Q that contains a review report on pro
forma data or interim financial statements is incorporated by reference into
a registration statement, the auditor must acknowledge use of its review
report in a letter filed as Exhibit 15 to the registration statement. [S-K
601]
4410.3 If the review was not performed by a registered public accounting firm, the Form 10-Q is considered substantially deficient and not timely filed. In addition, the Form 10-Q must include the following disclosures:
- Identify the report as deficient;
- Label the columns of the financial statements as “not reviewed”; and
- Describe how the registrant will remedy the deficiency.
When the review is completed by a registered accounting firm, the registrant must file an amendment to remove the references to the deficiency and the financial statements as “not reviewed.”
4420 Selected Quarterly Financial Data [AS 4105]
4420.1 Selected quarterly financial data is required for
all registrants except foreign private issuers, mutual life insurance
companies, and smaller reporting companies, and in initial registration
statements. If it is required to be presented, it must be reviewed by the
independent registered accountant. [S-K 302]
4420.2 No reference in the audit report to the quarterly
data accompanying the annual financial statements is necessary if the
auditor’s review conformed with applicable standards and the auditor is not
aware that the interim information is materially affected by a departure
from GAAP. Otherwise, the auditor must discuss the departures that
exist.
4430 Compilation Reports
Compilation reports are not appropriate in any filings, including Regulation A filings, because the association of the accountant provides no basis for reliance. In addition, the presence of a compilation report may indicate a violation of SEC independence standards under S-X 2-01(c)(4)(i)(B).
4500 Change in Accountants [S-K 304, ITEM 4.01 FORM 8-K]
(Last updated: 6/30/2009)
4510 Change in Accountants
4510.1 If a change in accountant for a registrant or a significant subsidiary on whose report the principal accountant relied occurred within 24 months prior to or in any period subsequent to the date of the most recent financial statements, the registrant should provide the required information in:
- An Item 4.01 Form 8-K within 4 business days of the change;
- Proxy statements, even though previously disclosed in Form 8-K, if required by Item 9 of Schedule 14A; and
- Forms 10-K and 20-F, and registration statements, unless the change was previously disclosed.
NOTE: The disclosures about disagreements required by S-K 304(b) must
always be provided, where required, even if previously disclosed. [Instruction 1
to S-K 304; Instruction 2 to Item 16F of Form 20-F for registrants with fiscal
years ending on or after December 15, 2009] |
4510.2 Disclosure of the following items should be provided:
- Whether the accountant resigned, declined to stand for reelection or was discharged (one of these must be specifically stated in the filing);
- The date of resignation or discharge;
- Whether the decision was recommended or approved by the Board of Directors or a committee thereof;
- Whether the accountant had issued a report in the last two fiscal years containing a disclaimer or adverse opinion, or that was qualified or modified. A modified opinion includes an opinion that expresses substantial doubt about a company’s ability to continue as a going concern;
- Whether in connection with audits of the two most recent years through the date of resignation or discharge there were any disagreements with the former accountant on any matter which, if not resolved to the satisfaction of the accountant, would have caused the accountant to make reference in its report to the matter. Among other items specified in S-K 304(a)(1)(iv), the filing should describe the subject matter of any such disagreement. Disagreements required to be reported include both those resolved to the satisfaction of the accountant and those not resolved to the satisfaction of the accountant.
- If there were any reportable events described under S-K 304(a)(1)(v) during the two most recent years and any interim period preceding the former accountant’s resignation or discharge, provide the disclosures required by S-K 304(a)(1)(iv). If the event led to a disagreement, then it should be reported as described under Section 4510.2(e) and need not be repeated.
4510.3 If the registrant amends the Item 4.01 Form 8-K
disclosures for any reason, it must also file an updated letter from the
auditor addressing the revised disclosures as Exhibit 16.
4520 Unusual Issues Involving Changes in Accountants
4520.1 [Reserved]
4520.2 Predecessor Auditor Refuses to Furnish Exhibit 16
Letter
If the predecessor auditor refuses to furnish an Exhibit 16 letter stating
whether it agrees with the registrant’s statements, the registrant should
indicate that fact in the Item 4.01 Form 8-K or by amendment to the original
Form 8-K. See the Division of Corporation Finance’s C&DIs for Exchange
Act Form 8-K, Question 214.01.
4520.3 Reverse Acquisition
- Unless the same accountant reported on the most recent financial statements of both the registrant and the accounting acquirer, a reverse acquisition always results in a change in accountants. An Item 4.01 Form 8-K should be filed within four business days of the change in accountants, which often occurs on the date the reverse merger is consummated. The accountant that will no longer be associated with the registrant’s financial statements is the predecessor accountant. If a decision has not been made as to which accountant will continue as the successor auditor as of the date of filing the Item 2.01 Form 8-K, an Item 4.01 Form 8-K must be filed within four business days of the date the decision is made.
- The disclosures required by S-K 304 with respect to any changes in the accounting acquirer’s auditor which occurred within 24 months prior to, or in any period subsequent to, the date of the acquirer’s financial statements must be provided in the filing. See Section 12230.
4520.4 Form 11-K Plans
Staff practice is not to object if a change in accountants for an employee stock
purchase plan or similar plan filing a Form 11-K does not result in the
filing of an Item 4.01 Form 8-K.
4530 Additional Guidance
(Last updated: 12/31/2010)
4530.1 Guidance regarding changes in accountants can be found in the Division of Corporation Finance’s Compliance and Disclosure Interpretations. Questions are grouped into the following categories and sections:
- Regulation S-K, Sections 111 and 211 — Item 304 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
-
Subsequent interim period
-
No reportable events
-
Remediation of internal control deficiencies
-
Material weakness or significant deficiency in ICFR
-
Going concern
-
Explanatory paragraph in report on ICFR
-
Revocation of accountant’s PCAOB registration
-
Time period preceding resignation, declination or dismissal
-
- Exchange Act Form 8-K, Section 114 and 214 -Item 4.01 Changes in Registrant’s Certifying Accountant
- Revocation of accountant’s PCAOB registration
- New principal accountant related to former principal accountant
- Business combination between principal accountant and another accounting firm
- Former accountant declines to provide agreement letter
- Requirement to use Form 8-K
4600 Non-Reliance on Previously Issued Financial Statements or Related Audit Report or Completed Interim Review [Item 4.02 Form 8-K]
(Last updated: 6/30/2009)
4610 Non-Reliance on Previously Issued Financial Statements [Item 4.02(a) Form 8-K]
4610.1 An Item 4.02(a) Form 8-K should be filed when
a registrant’s board of directors, committee of the board, or board
authorized officer(s) concludes any previously issued financial statements
should no longer be relied upon due to an accounting error.
4610.2 [Reserved]
4610.3 The staff believes that filing an Item 4.02(a) Form
8-K without also filing an Item 4.02(b) Form 8-K would be acceptable unless
the auditor’s conclusion that the financial statements can no longer be
relied on relates to a different error or matter from that which triggered
the registrant’s filing under Item 4.02(a) Form 8-K. See the Division of
Corporation Finance’s C&DIs for Exchange Act Form 8-K, Question
115.01.
4610.4 The Form 8-K should disclose:
- The date that the registrant concluded the financial statements should no longer be relied upon and identify the financial statements and years or periods covered that should no longer be relied upon;
- A description of the facts underlying the conclusion to the extent known to the registrant at the time of filing; and
- Whether the audit committee, or the board of directors in the absence of an audit committee, or authorized officer(s), discussed the disclosed matters with the registrant’s independent accountant.
4620 Non-Reliance on Previously Issued Audit Report or Completed Interim Review [Item 4.02(b) Form 8-K]
4620.1 An Item 4.02(b) Form 8-K should be filed if the
registrant’s current or former independent accountant advises or notifies it
must disclose or take action to prevent future reliance on a previously
issued audit report or completed interim review related to previously issued
financial statements.
4620.2 The filing of an Item 4.02(b) Form 8-K may, but
does not necessarily, result in non-reliance on previously issued financial
statements, and require the filing of an Item 4.02(a) Form 8-K. It would
depend upon the underlying reasons that the accountant advised a registrant
that its audit report or completed interim review should no longer be relied
on.
4620.3 [Reserved]
4620.4 The Form 8-K should disclose:
- The date on which the accountant advised or notified the registrant;
- The specific financial statements that should no longer be relied upon;
- A brief description of the information provided by the accountant; and
- A statement of whether the audit committee, or the board of directors in the absence of an audit committee, or authorized officer or officers, discussed the matters disclosed in the filing under Item 4.02(b) of Form 8-K with the accountant.
4620.5 The Form 8-K should include any written notice
received from the accountant as Exhibit 7.
4620.6 A registrant should provide the accountant with a
copy of the disclosures the registrant is making in response to the Item
4.02(b) Form 8-K no later than the day that the disclosures are filed with
the SEC.
4620.7 A registrant should request the accountant furnish
the registrant as promptly as possible a letter addressed to the SEC stating
whether the independent accountant agrees with the statements made by the
registrant in response to the Item 4.02(b) Form 8-K and, if not, stating
with what it does not agree. If the letter is not available on the date the
8-K is filed, a company should amend its previously filed Form 8-K to file
the independent accountant’s letter as Exhibit 7 no later than two business
days after the registrant’s receipt of the letter.
4630 Other — Prior Disclosures Regarding Disclosure Controls and Procedures
A registrant should consider whether the disclosures provided under S-K 307 in
prior filings need to be modified, supplemented or corrected in order to
explain whether management’s previously discussed conclusions regarding the
effectiveness of DCP continue to be appropriate in light of the restated
financial statements or non-reliance on a previously issued audit report or
completed interim review. [Release No. 33-8810]
4700 “To Be Issued” Accountant's Reports
(Last updated: 6/30/2009)
4710 Contingent Upon Future Event or Transaction
(Last updated: 10/30/2020)
If audited financial statements are required in a filing, the audit report should
be signed and unrestricted. Generally, the staff will not make a review
determination on or commence a review of a filing that does not meet that
requirement. In some circumstances, however, a transaction that will occur at or
immediately before the effectiveness of a registration statement is
retrospectively reflected in the annual financial statements. If the transaction
prevents the auditor from expressing an opinion on the financial statements at
the time of filing, the staff has accepted the filing of a “draft report” in the
form that it will be expressed at effectiveness. Such transactions may include,
but are not limited to:
- stock splits; and
- reorganizations in which the entities comprising an IPO registrant will not be legally transferred to the registrant until immediately before effectiveness.
Another transaction where the staff has accepted the filing of a “draft report”
in the form that it will be expressed at effectiveness is if there is a
component that qualifies as a discontinued operation before an initial
registration statement is filed but after the date of the latest balance sheet
included in the initial filing. A “to-be-issued” report in this circumstance may
be included when:
- The disposal of the discontinued operation has occurred;
- The audit of the financial statements, including the retrospective revision, is complete; and
- The registrant has consulted with CF to confirm that the use of the “to-be-issued” audit report is appropriate.
In these cases, the draft report should be accompanied by a signed preface of the
auditor stating that it expects to be in a position to issue the report in the
form presented at effectiveness. No registration statement can be declared
effective until the preface is removed and the accountant’s report
finalized.
4720 Contingent Upon Future Underwriting Agreement
(Last updated: 6/30/2010)
An auditor may conclude that it is appropriate to include an explanatory
paragraph about the registrant’s ability to continue as a going concern in
the auditor’s report. The auditor may believe that upon the receipt of the
proceeds from the offering that the explanatory paragraph could be removed.
As the receipt of the proceeds occurs upon closing — not at effectiveness —
the auditor’s report should include the explanatory paragraph that the
auditor believed was appropriate at the time of effectiveness. It would not
be appropriate for the report to indicate that the explanatory paragraph
would be removed at closing as that event takes place after
effectiveness.
4800 Other Matters
(Last updated: 6/30/2009)
4810 Consents to the Use of Audit Reports
4810.1 Registrants must file a copy of the auditor’s
consent to the use of its audit report or an acknowledgement letter
regarding the use of its review report in any filing under the 1933 Act as
an exhibit. The primary purpose of obtaining a consent or acknowledgement
letter is to assure that the auditor is aware of the use of its report and
the context in which it is used.
4810.2 The consent or acknowledgement letter must indicate
the date and a conformed EDGAR signature. A manually signed consent or
acknowledgement letter must be kept on file by the registrant.
4810.3 A new consent or acknowledgement letter is required:
- Whenever any change, other than typographical, is made to the financial statements;
- For an amendment if there have been intervening events since the prior filing that are material to the company; and
- Prior to the effectiveness of a registration statement if an extended period of time passes since the last filing. An extended time is generally any period which is more than 30 days. (Last updated: 12/31/2010)
4810.4 1934 Act Reports
-
Filing of a consent to the use of an audit report (or acknowledgment letter) is not required in 1934 Act reports, other than an annual report on Form 40-F, unless the 1934 Act report is automatically incorporated by reference into a previously filed 1933 Act filing, such as a Form S-3 or Form S-8. In addition, a consent is required in a registration statement on Form 20-F [Item 10.G of 20-F] and in registration statements and annual reports on Form 40-F. (Last updated: 12/31/2010)
-
Periodic reports on Forms 10-K and 20-F, and 1934 Act registration statements on Form 10 or Form 20-F must include a signed audit report. The signature must be a conformed EDGAR signature. [S-T 302] The original manually signed report must be kept on file by the registrant.
-
Definitive proxy statements that include financial statements must have a manually signed audit report.
-
A reissuance of the auditor’s report is required when a previously filed 1934 Act filing is amended to include restated financial statements or retrospectively adjusted financial statements.
-
A registrant need not file an updated consent on the annual financial statements when the registrant forward incorporates a Form 10-Q into a pre-effective Form S-3. However, the auditor’s Section 11 liability extends through the effective date of the registration statement regardless of the inclusion of the updated consent. (Last updated: 9/30/2009)
4810.5 Waivers [Regulation C, Rule 437]
-
In rare circumstances, such as situations involving hostile takeover attempts, a consent may be waived if the registrant submits a request to CF-OCA for a waiver and provides an affidavit complying with Rule 437 of Regulation C.
-
Hostile takeovers
-
A registrant offering its own securities in a hostile exchange offer for a target’s stock may seek and not be able to obtain the target’s cooperation in providing either its audited financial statements or the target auditor’s consent to the use of its report in the required registration statement. The acquirer/registrant should use its best efforts to obtain the target’s permission and cooperation for the filing or incorporation by reference of the target’s financial statements and the target auditor’s consent to the inclusion of its report on the financial statements. At a minimum, a registrant is expected to write to the target requesting these items and to allow a reasonable amount of time for a response prior to effectiveness of the filing.
-
If a registrant uses its best efforts but is unsuccessful in obtaining the target’s permission and cooperation for the filing or incorporation by reference of its financial statements and its auditor’s consent to the inclusion of its report on the financial statements, the registrant may request a waiver of the consent. The affidavit included in the request should document the specific actions taken by the registrant to obtain the cooperation of the other party for the filing as well as the efforts to obtain the auditor’s consent. Correspondence evidencing the registrant’s request for these items should accompany the affidavit.
-
Depending on the facts and circumstances, the staff may agree to waive the requirement to include or incorporate by reference the target auditor’s audit report in the event the target is unwilling to cooperate. In that situation, disclosure should be made that, although an audit report was issued on the target’s financial statements and is included in the target’s filings, the auditor has not permitted use of its report in the registrant’s registration statement. The auditor should not be named. Any legal or practical implication for shareholders of the registrant and the target resulting from the inability to obtain the cooperation of the target or consent of the target’s auditor should be explained. No disclosure in the registration statement should expressly or implicitly disclaim the registrant’s liability for the target’s financial statements. In the event that circumstances change, the registration statement should be amended to include the audited financial statements and the auditor’s consent required by the form.
-
4810.6 The consent of the independent accountant is not
required for a report on financial statements which is not a part of a 1933
Act registration statement under Rule 412(c) of Regulation C, like
superseded financial statements.
4820 Accountant’s Inability to Reissue Reports [AI 23, Interpretation 15; Regulation C, Rule 437]
4820.1 When an accounting firm ceases operations, it may
be unable to reissue a prior report or give consent to the use of a prior
report. A company should submit a consent waiver request under Regulation C,
Rule 437 with CF-OCA if the auditor does not reissue or give consent to the
use of its prior report. The guidance in Section
4810.5 regarding consent waiver requests should be followed. If
the firm still exists, although it is not practicing public accounting, and
has the ability to reissue or give consent to the use its prior report, a
waiver may not be granted.
NOTE: The footnote to Interpretation 15 of AI 23 states a
firm is considered to have ceased operations when it
no longer issues audit opinions either in its own
name or in the name of a successor firm. A firm may
cease operations with respect to public entities and
still issue audit opinions with respect to
non-public entities. |
4820.2 If the waiver request is granted, certain
disclosures should be made in any filings or reports that include the ceased
firm’s audit report. The predecessor auditor’s latest signed and dated
report on the financial statements should be reprinted with a legend
indicating that the report is a copy of the previously issued report and
that the ceased firm has not reissued the report. [AI 23.65]
4830 Successor Auditor Reports [AI 23]
4830.1 If the prior period financial statements audited by
the predecessor auditor are unchanged, the successor auditor should indicate
in the introductory paragraph of his or her report that the financial
statements of the prior period were audited by another auditor, the date of
the predecessor auditor’s report, the type of report issued by the
predecessor auditor, and if the report was other than a standard report, the
substantive reasons for it. The successor auditor ordinarily should indicate
in its report that the other auditor has ceased operations. The successor
auditor should not name the predecessor auditor in the report. [AI
23.61]
4830.2 If the financial statements audited by the ceased
firm are restated, the successor auditor will need to either reaudit the
financial statements, or in certain cases, audit only the restatement
adjustments. The successor’s auditor’s report should state that the
predecessor auditor reported on the prior financial statements before
restatement. [AI 23.66]
4830.3 A full reaudit generally is necessary when the restatement adjustments include, but are not limited to:
- Corrections of an error;
- Reflection of a change in reporting entity;
- Retrospective application of change in accounting principle:
- with significant impact on previously reported amounts, or
- that affect previously reported net income or net assets;
- Reporting discontinued operations; and
- Changes affecting previously reported net income or net assets. [AI 23.70]
4830.4 If the successor auditor is engaged to audit only
the restatement adjustments to the prior period financial statements that
were audited by a predecessor auditor, the successor auditor must be able to
form an opinion that the adjustments are appropriate and have been properly
applied. In determining whether he or she can form such an opinion, the
successor auditor should consider the extent of the adjustments, the reason
for the adjustments, and the cooperation of the predecessor auditor. [PCAOB
Staff Questions and Answers, “Adjustments to Prior-Period Financial
Statements Audited by a Predecessor Auditor”, Question 4]
4830.5 If the successor auditor is able to satisfy him or
herself as to the appropriateness of the restatement adjustments, he or she
may report on the restatement adjustments pursuant to the guidance in AS
3105.58. [AI 23.71]
4830.6 A successor auditor may audit the restatement
adjustments in prior period financial statements audited by a predecessor
auditor that has not ceased operations, so long as the auditor is
independent and registered with the PCAOB.
4830.7 An auditor that is subsequently determined to be no
longer independent of its client may reissue previously issued reports and
consents to the use of those previously issued reports, as long as it was
independent at the time of original issuance of the report. An auditor may
perform the normal subsequent events procedures required by AS 4101 prior to
reissuing a report. Situations in which other audit work would be necessary
to reissue the report should be discussed with OCA prior to filing.
4840 Accountant’s Refusal to Reissue Reports
4840.1 The staff is not in a position to evaluate the
reasons for an accountant’s refusal to reissue its report and will not
intervene in disputes between registrants and their auditors. Moreover, the
staff will not waive the requirements for the audit report, the accountant’s
consent to the use of its audit report, or the naming of the accountant as
an expert in filings. If a registrant is unable to reuse the previously
issued audit report in a current filing, the registrant must engage another
accountant to reaudit those financial statements.
4850 Illegal Acts
Section 10A of the 1934 Act requires that auditors report in a timely manner
certain uncorrected illegal acts to a registrant's board of directors. It
further requires the registrant, or the auditor if the registrant fails to
do so, to provide information regarding the illegal act to OCA. For
additional information, see Notices required under Section 10A-1 of
Exchange Act. (Last updated: 10/30/2020)
4860 Signatures
Wherever a signature is required, typed signatures or duplicated or facsimile
versions of the manually signed document may be used. In any of these cases,
each signatory must manually sign the document authenticating, acknowledging
or otherwise adopting the signature that appears in the filing before or at
the time that the filing is made, and the manually signed document must be
retained by the filer for five years. A copy of this document must be
furnished to the SEC upon request. [S-T 302] In certain instances, an
auditor may reissue its audit report. If the reissued report is included in
a filing, it must be manually signed as described above. (Last updated:
12/31/2010)
4870 Selected Financial Data
4870.1 An auditor may be engaged to report on
selected financial data using the guidance of AS 3315. Unless the auditor
reports on selected financial data using the guidelines in AS 3315, the
information should not be labeled or described as audited. However, it would
be acceptable to state that the information is derived from audited
financial statements.
4870.2 If an auditor was engaged to report on the selected
financial data, the form of report specified by AS 3315 should be included
in the filing and the auditor’s consent to the report should make reference
to its applicability to the selected financial data.
Footnotes
1
This table describes the staff’s
application of PCAOB registration requirements for
an auditor whose report is included in a filing with
the SEC. There are instances, not included in the
table, when a principal auditor will use the work of
another auditor and take responsibility for the
other auditor’s work. In these instances, the other
auditor’s report is not included in the filing with
the SEC. The determination of whether the other
auditor must be registered with the PCAOB is made by
reference to the Sarbanes-Oxley Act and the PCAOB’s
rules. In all such instances the principal auditor
is responsible for performing the audit in
accordance with PCAOB standards.
2
The term ‘issuer’ means an issuer
(as defined in Section 3 of the 1934 Act), the
securities of which are registered under Section 12
of that Act, or that is required to file reports
under Section 15(d) of that Act, or that files or
has filed a registration statement that has not yet
become effective under the 1933 Act, and that it has
not withdrawn. See Section 2(a)(7) of the Sarbanes
Oxley Act and PCAOB Rule 1001.
3
The auditor of the financial
statements of the non-issuer entity must be
registered if, in performing the audit, the auditor
played a “substantial role” in the audit of the
issuer, as that term is defined in PCAOB Rule
1001(p)(ii). If the “substantial role” test is not
met, the firm is not required to be registered. The
inclusion or exclusion of such a report under S-X
2-05 does not affect this determination.
4
S-X 2-02 requires that the auditor’s
report state the applicable professional standards
under which the audit was conducted. Under S-X 1-02
an audit of the financial statements of an issuer
means an examination by an independent accountant in
accordance with the standards of the PCAOB. In the
situation identified in the chart above, the view of
the SEC staff is that the applicable professional
standards in S-X 2-02, as applied to the other
auditor’s report, relates to an issuer and,
therefore, the other auditor’s report must refer to
the standards of the PCAOB.
5
If a principal auditor is making
reference to another auditor’s report on the
financial statements of the non-issuer entity, the
other auditor’s report must refer to the standards
of the PCAOB. See footnote 4 above. If a principal
auditor does not make reference to another auditor’s
report on the financial statements of the non-issuer
entity, the other auditor’s report need not refer to
the standards of the PCAOB.
6
The entity is itself an issuer and
so must comply with the rules applicable to
issuers.