6.10 Comfort Letters

The comfort letter lists procedures performed by the auditor on the basis of (1) PCAOB standards and (2) specific requests by underwriters. These procedures typically include:

• Assertion of the auditor’s independence.
• Affirmation of the annual periods audited under PCAOB standards and compliance of the financial statements with the accounting requirements of the 1933 Act.
• Affirmation of the interim periods reviewed under PCAOB standards.
• A description of procedures performed with respect to periods after the latest balance sheet included in the prospectus; the purpose of such procedures is to determine whether there have been any significant financial changes, such as a decline in sales or income since the last balance sheet date, that are not adequately disclosed in the document.
• “Circle-up” or “tickmark” comfort, in which the auditor compares financial data in the prospectus with accounting records or financial statements or proves the arithmetical accuracy of such data.

Under PCAOB standards, the auditor may only provide comfort with respect to information that (1) is expressed in dollars (or percentages derived from such dollar amounts) and that has been obtained from accounting records that are subject to the entity’s controls over financial reporting or (2) has been derived directly from such accounting records by analysis or computation. The auditor may also comment on quantitative information that has been obtained from an accounting record if the information is subject to the same controls over financial reporting as the dollar amounts. It is important for the company to be involved in the procedures requested by the underwriters early in the process, since management may need to provide support for amounts in the registration statement.

Two comfort letters are generally issued — one on the effective date of the registration statement and one on the closing date, the latter of which is often referred to as the “bring-down” letter. However, a draft of the comfort letter may be requested as of each filing date so that the underwriters may decide whether the procedures described in the letter are consistent with what they requested.

If more than one auditor is involved in the IPO, either as a predecessor auditor to the registrant or as the auditor of other financial statements included in the IPO document, the other auditors may also be requested to provide a comfort letter related to financial information with which they are associated.

 

Connecting the Dots

Providing supporting documentation for amounts included in MD&A, pro forma financial information, and elsewhere in the registration statement is critical to expediting the procedures auditors perform upon the request of underwriters. Including both management and the auditor in discussions with the underwriter regarding comfort letter timelines and the expected nature of the auditor’s “comfort” procedures may prevent surprises.