Topic 4: Independent Accountants’ Involvement

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).

4130.2 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 OCA: Application of the Commission’s Rules on Auditor Independence Frequently Asked Questions available here. (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)

4140.2 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)

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.

4210.6 Auditors’ reports must refer to each period for which audited financial statements are required, except that audit reports opining on only the most recently completed fiscal year are permitted in an annual report to shareholders. Including an audit report on only the current period precludes the incorporation by reference of those financial statements into the Form 10-K or other filings unless the audit reports for previous years are separately included or incorporated by reference from another document. [Proxy Rules 14a-3(b)(1), Note 1]

4210.7 See Section 4320 for further requirements regarding ICFR audit reports, including PCAOB standard requirements.

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]

1. 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.
2. 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]

4230.2 Changes in Accounting Principles [ASC 250, AS 2820, S-X 10-01]

1. 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]
2. 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]
3. Preferability Letters
   The 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 enterprise 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]

   1. 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).
   2. 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.
   3. 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.
   4. A preferability letter is not required for a change in estimate effected by a change in accounting principle.
   5. 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.

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:

1. Management’s responsibility for establishing and maintaining adequate ICFR for the company.
2. The framework used by management as criteria for evaluating the effectiveness of ICFR.
3. 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.
4. Any material weaknesses in the company’s ICFR identified by management (See Section 4320.8 for definition of material weakness).
5. 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):

1. 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]
2. Equity method investments. [ICFR FAQ 2]
3. 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)
4. 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:

1. Describe the nature of the material weakness;
2. Describe its impact on the financial reporting and ICFR, if any; and
3. 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.

4320.2 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:

1. Elements of management’s annual report on internal control are incomplete or improperly presented;
2. There is a restriction on the scope of the engagement;
3. The auditor decides to refer to the report of other auditors as the basis, in part, for the auditor’s own report;
4. There is other information contained in management’s annual report on internal control over financial reporting; or
5. 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:

1. The definition of a material weakness; and
2. 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:

1. Identification of fraud, whether or not material, on the part of senior management;
2. Restatement of previously issued financial statements to reflect the correction of a material misstatement;
3. 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
4. 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.

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:

1. Identify the report as deficient;
2. Label the columns of the financial statements as “not reviewed”; and
3. 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.”

4420.2 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.

4510.2 Disclosure of the following items should be provided:

1. Whether the accountant resigned, declined to stand for reelection or was discharged (one of these must be specifically stated in the filing);
2. The date of resignation or discharge;
3. Whether the decision was recommended or approved by the Board of Directors or a committee thereof;
4. 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;
5. 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.
6. 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.

4520.2 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

1. 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.
2. 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.

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:

1. 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;
2. A description of the facts underlying the conclusion to the extent known to the registrant at the time of filing; and
3. 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.

4620.2 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:

1. The date on which the accountant advised or notified the registrant;
2. The specific financial statements that should no longer be relied upon;
3. A brief description of the information provided by the accountant; and
4. 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.

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.

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:

1. Whenever any change, other than typographical, is made to the financial statements;
2. For an amendment if there have been intervening events since the prior filing that are material to the company; and
3. 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

1. 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)
2. 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.
3. Definitive proxy statements that include financial statements must have a manually signed audit report.
4. 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.
5. 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]

1. 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.
2. Hostile takeovers

   1. 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.
   2. 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.
   3. 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.

4820.2 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]

4830.2 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:

1. Corrections of an error;
2. Reflection of a change in reporting entity;
3. Retrospective application of change in accounting principle:

   1. with significant impact on previously reported amounts, or
   2. that affect previously reported net income or net assets;
4. Reporting discontinued operations; and
5. 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.

4870.2 If an auditor was engaged to report on the selected financial data, the form of report specified by AU 552 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.