Comfort letters to underwriters are normally signed by the

1

The term "issued" in this paper is used in the context as it was interpreted by the SEC staff in EITF Topic No. D-86. Financial statements are considered issued "as of the date they are distributed for general use and reliance in a form and format that complies with generally accepted accounting principles (GAAP) and, in the case of annual financial statements, that contain an audit report that indicates that the auditors have complied with generally accepted auditing standards (GAAS) in completing their audit. Issuance of financial statements then would generally be the earlier of when the annual or quarterly financial statements are widely distributed to all shareholders and other financial statement users or filed with the Commission." Financial statements would not be considered issued as of the date of either an earnings release or posting of financial statements to the registrant's web site.

2

Throughout this paper references to "included" are intended to mean "included or incorporated by reference".

3

See Section 11(c) of the Act.

4

AU 634.12 states: "What constitutes a reasonable investigation of unaudited financial information sufficient to satisfy an underwriter's purposes has never been authoritatively established. Consequently, only the underwriter can determine what is sufficient for his or her purposes."

5

It is important to note that neither the Act nor SAS 72 obligates the accountant to issue a comfort letter and there is nothing which would preclude the underwriter from performing (for himself) all of the "due diligence" procedures he believes are necessary in order to demonstrate that a reasonable investigation was performed.

6

Rule 3-12(c) of Regulation S-X states that: "Where a filing is made near the end of a fiscal year and audited financial statements for that fiscal year are not included in the filing, the filing shall be updated with such audited financial statements if they become available prior to the anticipated effective date, or proposed mailing date in the case of a proxy statement." [emphasis added]

7

Even if audit fieldwork is substantially complete or the date of the audit report has passed, both the issuer and the auditor are responsible for evaluating post-balance sheet (pre-issuance) subsequent events for their impact on the financial statements and disclosures up to the issuance date.

8

An audit (the expression of an opinion, or positive assurance, as to whether a particular set of financial statements presents fairly, in all material respects, the financial position, and results of operations and cash flows in conformity with generally accepted accounting principles) is a higher level of professional service as compared to reporting in a comfort letter either negative assurance or findings as a result of applying agreed upon procedures specified by the underwriter.

9

AU 634.39 provides that negative assurance as to conformity with GAAP is limited to capsule information that complies with the minimum disclosure requirements of Accounting Principles Board (APB) Opinion No. 28. Otherwise, negative assurance is limited to consistency with the audited financial statements.

10

The independent accountant must exercise professional judgment in determining what constitutes "substantially complete". Some accountants may view "substantially complete" as fieldwork being complete (having reached the audit report date). Other accountants may view "substantially complete" as audit procedures having sufficiently advanced to a point that the accountant is satisfied that there are no significant matters that would likely cause a change in the numbers on which comfort is being considered.

11

The independent accountant must exercise professional judgment in determining what constitutes "substantially final form". Some accountants may view "substantially final form" as being the same as "issued". Other accountants may view "substantially final form" as having been through the full measure of a company's internal quality control procedures (including any planned involvement/review by senior management, company counsel, the disclosure committee, the audit committee and the board of directors) but not requiring that the financial statements be issued. Still others may view "substantially final form" as being primary financial statements with key footnote disclosures (but not necessarily through the full measure of internal quality control procedures and senior management/audit committee/board/counsel/disclosure committee review).

13

The independent accountant should apply judgment and may determine that prior to agreeing to provide this level of comfort that the company must publicly disseminate 4th quarter information (e.g., an 8-K with primary financial statements but no footnotes) as evidence supporting management's assertion that the information has been prepared on a basis consistent with the audited financial statements and has been subjected to the appropriate internal quality control processes. Additionally, the accountant may decide to comment in the comfort letter that the accountant has not completed the audit of the full year financial statements and that the 4th quarter information is still subject to change.

15

If the cut-off date extends beyond year-end, the accountant may wish to wait until audit fieldwork is substantially complete and apply the guidance in footnote 13 above. Alternatively, the accountant may decide to restrict his comments to reporting the results of the inquiries (rather than expressing negative assurance) similar to paragraph 4c of Example O of SAS 72.

Who signs a comfort letter?

What is a letter for underwriters?

What is the purpose of a comfort letter?

What should be included in a comfort letter?