FREQUENTLY ASKED QUESTIONS
RELATING TO COMFORT LETTERS AND
COMFORT LETTER PRACTICE
IntroductiontoComfortLetters
Whydounderwritersreceivecomfortletters?
Theunderwritersinaregisteredsecuritiesofferingwill
require,asaconditiontotheirparticipation,thereceipt
of one or more comfort letters from the issuers
accountants. As discussed below, comfort letters may
also be needed in transactions that are not registered
with the SEC. Comfort letters constitute an important
part of the underwriters due diligence defense against
potentialliabilityunderthefederalsecuritieslawsifthe
registration statement relating to the offering later is
allegedtocontainuntruestatementsortoomitmaterial
facts.
Who is entitled to receive a comfort letter, and to be
namedasarecipient?
To be named as an addressee of a comfort letter, a
recipient must be entitled to a due diligence defense
under the Securities Act of 1933 (the Securities Act).
Accordingly, the parties to a securities transaction that
are entitled to receive a comfort letter include the
underwriters and the companys board of directors.
The issuer itself, however, is not entitled to a comfort
letter,asitdoesnothavethebenefitofaduediligence
defense.
Howdoesacomfortletterhelpanunderwriterestablish
itsduediligencedefense?
Under Section 11(a)(5) of the Securities Act, absent a
statutory defense, an underwriter may be liable for a
material misstatement, or an omission to state material
facts necessary to make the statements therein not
misleading, in the issuers financial statements that
arepart of the registration statement. Under
Sections11(b)(3)(B) and (C) of the Securities Act, an
underwriter has to satisfy two different standards of
diligence to establish its defense against Section 11
liability. The lesser standard of Section 11(b)(3)(C) of
theSecuritiesActappliestotheauditedannualfinancial
statements, which are expertized by the auditors. In
contrast, Section 11(b)(3)(B) of the Securities Act
requires a higher standard of diligence for an
underwriter to establish its defense with respect to the
unaudited interim financial statements and other
financialinformation,whicharenotexpertized.
Withrespecttoitsdefenseagainstliabilityrelatingto
the expertized audited financial statements, an
underwriter has the comparatively lighter burden of
having no reasonable grounds to believe and did not
believe, at the time such part of the registration
statement became effective, that the statements therein
wereuntrueorthattherewasanomissiontostateafact
required to be stated therein or necessary to make the
statementsthereinnotmisleading.Anunderwritercan program may act as selling agents rather than

rely, in part, on the comfort letter in establishing its underwriters and, consequently, often require the

defense,particularlytheauditorsopinionstatedtherein representationletterdiscussedbelow,oralegalopinion

thatthefinancialstatementsauditedbytheauditorand fromtheagentscounsel,asaconditiontodeliveryofa

includedintheregistrationstatementcomplyastoform comfortlettertotheagents.

in all material respects with the applicable accounting

Doinvestorsinanofferingreceiveacomfortletter?
requirementsoftheSecuritiesActandtheSECsrelated

rulesandregulations. No. Investors purchasing securities for their own

account do not typically have liability under the

However, with respect to an underwriters burden to
Securities Act, and have no need for a due diligence
establish a diligence defense relating to the unaudited
defense.Accordingly,investorsinaprivateplacement
(not expertized) interim financial statements and other
or Rule 144A offering, or purchasers in a registered
financial information, the underwriter must have had,
offering,arenotentitledtoreceiveacomfortletter.
after reasonable investigation, reasonable grounds to

believe and did believe, at the time that part of the

registration statement became effective, that the

FormandContentofComfortLetters
statements therein were true and that there was no

omission to state a material fact required to be stated What is SAS 72 and how does it impact comfort
thereinornecessarytomakethestatementsthereinnot letters?
misleading. The comfort letter is helpful to an
Statement on Auditing Standards No. 72 (SAS 72)
underwriter in establishing its defense under
provides guidance to accountants in the preparation of
Section11(b)(3)(B) of the Securities Act. However, an
comfortletters,includingtheirscopeandform.(SAS72
underwriter must still conduct a reasonable
is also referred to as AU Section 634, where it was
investigationoftheunauditedfinancialinformation.
subsequentlycodified.)SAS72setsforththecontentsof
See the discussion below under To what extent can sample letters, which have become the basic industry
underwriters rely on a comfort letter as part of their due text for these letters. For counsel reviewing a comfort
diligenceprocess? letter, any draft received should be reviewed against

SeegenerallySAS72Paragraph.12. SAS 72s examples in order to help ensure that all

relevantorrequireditemsarecoveredbytheletter.
Are selling agents (named, but not called
SAS72(aswellasSAS76,whichisdiscussedbelow)
underwriters)entitledtoreceiveacomfortletterina
may be found at the following link:
registeredoffering?
http://www.aicpa.org/Research/Standards/AuditAttest/
Yes, if they are underwriters for purposes of the
DownloadableDocuments/AU00634.pdf.
Securities Act, such as the agents in a registered

mediumterm note program. In practice, auditors

assume that all agents in a mediumterm note

Morrison&FoersterLLP 2
WhatisaSAS76comfortletter?
SAS 76 specifies the more limited type of comfort that
maybeprovidedinanonregisteredoffering,inwhich
there is no statutory due diligence defense. These
typesof offerings include Rule 144A offerings and
RegulationSofferings.
Asofwhatdatearecomfortlettersdated?
InmostU.S.securitiesofferingsinvolvingdeliveryofa
comfort letter, at least two separate letters will be
delivered.Theseincludethemaincomfortletter,which
isdeliveredatthetimethattheunderwritingagreement
is signed, and dated as of the pricing date of the
offering.Inaddition,theauditorswillprovideabring
down comfort letter, which is delivered and dated as
of the closing date. The bringdown letter may repeat
thestatementsintheinitialcomfortletter,togetherwith
any updates, or may consist of a very short letter that
reaffirmsthestatementsintheinitialletter.
In contrast, for comfort letters delivered in Europe,
suchasforEurobondofferings,seeWhenisthecomfort
letter given in European capital markets transactions?
below.
In the case of a closing held for an overallotment of
securities(agreenshoeclosing),anadditionalbring
down comfort letter will also be delivered on the
subsequentsettlementdate.
Whenisadealerinanonregisteredofferingentitledto
aSAS72letterinsteadofaSAS76comfortletter?
In unregistered offerings, where there is no due
diligence defense, the issuers auditors may deliver
comfort letters to brokerdealers or other financial
intermediariesthatareparticipatingintheoffering,and
to the issuers board of directors. For example, the
Morrison&FoersterLLP
initial purchaser in a Rule 144A offering or the lead
dealer for a Section 3(a)(2) bank note offering, will
request and receive comfort letters. A sample comfort
letter delivered to a nonunderwriter can be found at
Example P of SAS 72. However, as a condition to
receivingsuchaletter,thesepartiesmustfirstdelivera
representationlettertotheauditorsstatingthattheyare
conducting a review process or due diligence
investigation substantially consistent with the inquiry
that they would make in an SECregistered offering of
securities.Paragraphs.06and.07ofSAS72setoutthe
requiredcontentoftheseletters.
Whatarethekeysectionsofacomfortletter?
A comfort letter will typically include the following
principalsubstantivesections:
A statement as to the accountants
independencefromtheissuer.
The compliance of the issuers audited
financial statements with applicable SEC
requirements.
Statements regarding the accountants review
ofinterimunauditedfinancialstatements.
Negative assurance statements relating to the
unaudited comparative stub period financial
statements included in the registration
statement.
Recital of any changes in selected key line
items during the period after the date of the
latest financial statements in the registration
statement.
Comments on the results of additional
procedures performed on the miscellaneous
financial information in the registration
statement(tickingandtying).
3
What are the dates after the end of a fiscal calendar is determined, such as at an organizational

quarter/fiscal year end beyond which a comfort letter meeting.

cannotbedelivered(the135dayrule)?

Inacomfortletter,theauditorscanonlyprovidelimited
ScopeofComfortProvided
comfort as to the period between the last quarterly or

monthlyfinancialstatementsandanagreedcutoffdate.
Whatkindofcomfortisprovidedforauditedfinancial
The auditors procedures for this period are typically
statements?
limited to asking officials of the issuer who have
Thecomfortletterwillaffirmthattheauditedfinancial
responsibility for financial and accounting matters
statements comply as to form in all material respects
whether any changes have occurred in certain key
with the applicable accounting requirements of the
financialstatementlineitems,suchasoutstandingdebt
Securities Act, and the related rules and regulations of
and outstanding equity. If 135 days or more have
theSECthereunder.
passed between the date of the most recent financial

statements that have been audited or reviewed, on the
one hand, and the cutoff date of the comfort letter, on
the other hand, the auditors cannot give negative
assurance on the change period. This limitation stems
from SAS 72, which states that if the underwriter
requestsnegativeassuranceastosubsequentchangesin
specifiedfinancialstatementitemsasofadate135days
ormoresubsequenttotheendofthemostrecentperiod
forwhichtheaccountantshaveperformedanauditora
review, the accountants may not provide negative
assurance but are limited to reporting procedures
performedandfindingsobtained.
In addition, for a registered offering, Rule 312(a) of
Regulation SX requires that the latest balance sheet
included in a registration statement be dated no more
than134daysfornonacceleratedfilers(or129daysfor
accelerated and large accelerated filers) before the
effectivedateoftheregistrationstatement.
What kind of comfort is provided for unaudited
quarterlyfinancialstatements?
For unaudited quarterly financial statements, the
highest level of comfort that may be provided is a
review conducted in accordance with the Public
Company Accounting Oversight Board (the PCAOB)
interim review standards for a public company
(Statementon AuditingStandardsNo.100(SAS100)
or, for private companies, Statement on Auditing
StandardsNo.116(SAS116)).Areviewconductedin
accordance with these standards permits the
accountants to provide the underwriters negative
assurance as to whether (i) any material modifications
shouldbemadetothequarterlyfinancialstatementsfor
them to be in conformity with generally accepted
accounting principles (GAAP) and (ii) such financial
statements comply as to form with the accounting
requirementsoftheSecuritiesAct.

These timing limitations will also limit the

underwriters appetite for effecting an offering during

periods in the issuers financial reporting cycle, and

need to be considered at the time that the offerings

Morrison&FoersterLLP 4
What kind of comfort is provided for unaudited statement,orifadditionalduediligenceproceduresare

monthlyfinancialstatements? appropriate.

The procedures the accountants can perform on any

What kind of comfort can be provided for financial
availablemonthlyfinancialstatements(whichcoverthe
informationbetweenthelastcompletedmonthandthe
periodsincetheendofthelastfiscalquarterforwhich
dateofthecomfortletter?
quarterly financial statements are available) are even
The comfort on any financial information available for
morelimitedthanthoseperformedinconnectionwitha
theremainingstubperiodthatis,fromthedateofthe
SAS100review.Theaccountantswillreadthemonthly
latest available quarterly or monthly financial
financialstatementsandmakeinquiriesofmanagement
statements through to the cutoff date is very
as to those financial statements. Based on these
limited. At best, the accountants will cover those line
procedures, the accountants will generally compare
items addressed in their comfort provided on the
(i)certain balance sheet items set forth in the most
monthly financial statements, and based on
recent monthly balance sheet to the corresponding
managements representations, will describe any
itemssetforthinthemostrecentbalancesheetincluded
materialchangestotheselineitems.Iftherearenosuch
or incorporated by reference in the registration
changes, the accountants, based on managements
statement and (ii) certain income statement items set
representations and their reading of the issuers board
forth in the most recent monthly income statement to
minutes, will provide negative assurance that no
the corresponding items set forth in the income
changeshaveoccurred,otherthanthosedisclosedinthe
statement covering the comparable period of the prior
registration statement. As with the monthly financial
year and, in each case, comment on changes in these
statementlineitemcomparisons,materialchangesmay
items. The line items typically covered include capital
require additional investigation as a due diligence
stock, longterm debt, consolidated net current assets,
matter.
stockholders equity, net sales, total or pershare

amountsofincomebeforeextraordinaryitems,andtotal
Whatisanegativeassurancestatement?
or pershare amounts of net income. The precise line
Negative assurance consists of a statement by
itemstobecoveredareoftensubjecttonegotiation.The
accountants that, as a result of performing specified
accountantswillgivenegativeassurancethat,asofthe
procedures,nothingcametotheirattentionthatcaused
end of the most recent full month, there were no
them to believe that specified matters do not meet a
changesinthebalancesheetlineitemssincetheendof
specified standard (for example, that nothing came to
thelastfiscalquarter,andthattherewerenodecreases
their attention that caused them to believe that any
in the income statement items that have not been
materialmodificationsshouldbemadetotheunaudited
disclosed in the registration statement. To the extent
financial statements or unaudited condensed financial
that there are material changes, the underwriters and
statements forthem to be in conformity with generally
their counsel will need to consider whether additional
acceptedaccountingprinciples).
disclosures should be made in the registration
SAS72,Paragraph.12,note10.

Morrison&FoersterLLP 5
Whatisthepropertimingforthecutoffdatesetforth
inthecomfortletter?
SAS72statesthatthecutoffdate,whichisthedatethat
the underwriting agreement states as the date through
which certain procedures will be performed by the
accountants, may be five days prior to the date of the
comfort letter. In practice, the cutoff date is often the
second or third business day prior to the date of the
comfort letter, as the underwriters prefer to have a
shorterdarkperiod.
SAS72,Paragraph.23.
What documents incorporated by reference in the
registrationstatementshouldbecoveredbythecomfort
letter?
Typically,anyreportfiledundertheExchangeActthat
containscompanyfinancialinformationcanbecovered
by the comfort letter. This will typically include the
issuers annual report on Form 10K (or Form 20F),
quarterly reports on Form 10Q, and any reports on
Form 8K or Form 6K that are filed, rather than
furnished,andincludeauditedorunauditedfinancial
information.AForm6K mustspecificallystatethatit
is incorporated by reference into a particular
registration statement to be covered by the comfort
letter, or the registration statement must list that
Form6K as being incorporated into the registration
statement.
When can a Form 8K that includes earnings release
informationbecoveredinacomfortletter?
Prospectusesthatarefiledaftertheendofafiscalyear
orquarter,butbeforetheauditedorunauditedfinancial
statements are issued, often include or incorporate by
reference capsule financial information for the
Morrison&FoersterLLP
relevant completed quarter. This information consists
of summary financial information for the period. The
underwriters will typically request that the comfort
lettercoverthisinformation.
Priortotheadoptionofthe2005whitepaperissued
by the American Institute of Certified Public
Accountants(theAICPA),itwascommonforcomfort
letters to cover Form 8K filings (or Form 6K filings)
that included the issuers most recent unaudited
financial information set forth in an earnings release.
However, under the white paper, the AICPA
discouraged auditors from providing comfort on
capsule information for a completed fiscal year before
the auditors had completed their review procedures
with respect to the relevant Form 10K (or Form 20F)
filing.Thelimitationsoncomfortdescribedinthewhite
paper only explicitly apply to fourthquarter and full
year capsule financial information. However, in
practice, many auditors have declined to provide
comfort as to capsule financial information for all
quarterly periods, due to the principles articulated in
thewhitepaper.
In these cases, it is possible, depending upon the
circumstances,forthe(a)offeringtobepostponeduntil
new financial statements are available or (b) relevant
financialinformationtobecoveredbyadditionalofficer
certifications.
Thewhitepapermaybefoundatthefollowinglink:
http://www.thecaq.org/sites/default/files/comfort_letter
_procedures2.pdf
What information should be subject to the auditors
ticksandties?
The auditors can typically cover information that is
taken from, or based on, the issuers financial
6
statements or internal financial records. SAS 72 limits
the information that the auditors can give tickmark
comfortastoinformationthat:
Isexpressedindollarsorpercentagesbasedon
dollar amounts and has been obtained from
theissuersaccountingrecordsthataresubject
toitscontrolsoverfinancialreporting.
Has been derived by analysis or computation
directly from the issuers accounting records
that are subject to controls over financial
reporting.
Isquantitativeandhasbeenobtainedfroman
accounting record if the information is subject
tothesamecontrolsoverfinancialreportingas
dollaramounts.
SAS72alsolistsexamplesofthetypesofquantitative
information that can only be comforted if it is derived
from accounting records subject to controls. These
include number of employees, square footage of
facilities and backlog information. SAS 72 notes that
usually this type of information is not subject to
controls.
In practice, only numbers in the narrative sections of
the registration statement (managements discussion
andanalysis,forexample,andsummaryfinancialdata)
are tickmarked. The numbers in the audited financial
statements, and the quarterly financial statements
coveredbyanAU100review,andtherelatedfootnotes,
arenottickmarked.
In addition, SAS 72 prohibits auditors from giving
comfort on information that is subject to legal
interpretation. This includes, for example, the number
ofsharesthatarebeneficiallyownedbytheissuer.
Morrison&FoersterLLP
Needless to say, the identification of the information
to be ticked and tied will typically require careful
analysis, and discussions between underwriters
counsel and the auditors. Accordingly, particularly in
thecontextofnewdisclosures(andinanIPO,virtually
all information is new), underwriters counsel is
encouraged to begin this process as early as possible,
and in all cases, before a red herring is circulated to
investors.
Whatotherdisclosuresthatarenotpartoftheissuers
financial statements may be comforted by the
accountants?
The accountants may be requested to comfort financial
information included in the registration statement
under SEC Regulation SK. The accountants may
comment as to whether this information is in
conformity with Regulation SK requirements if the
information is (i) derived from accounting records
subjecttotheissuerscontroloverfinancialreporting,or
hasbeenderiveddirectlyfromsuchaccountingrecords
by analysis or computation, and (ii) capable of
evaluation against reasonable criteria that have been
establishedbytheSEC.
Consequently, the accountants may provide comfort
oninformationresponsivetoItem301ofRegulationSK
(Selected Financial Data), Item 302 (Supplementary
Financial Information), Item 402 (Executive
Compensation), and Item 503(d) (Ratio of Earnings to
Fixed Charges) and the related Exhibit 12 to the
registrationstatement.
The auditors may not give positive assurance on
conformity of these sections with the disclosure
requirements of Regulation SK of the type
contemplated by a law firms compliance as to form
7
legal opinion. Instead, they are limited to giving Institutions Examination Council, rather than GAAP.

negative assurance, since this information is not given Thus, they are nonGAAP numbers with respect to

intheformoffinancialstatementsandgenerallyhasnot which the accountants will only perform agreedupon

beenaudited. proceduressetforthinthecomfortletter.

SAS72,Paragraph.57. Incontrast,theratioofearningstofixedcharges,and

therelatedexhibitfiledwiththeregistrationstatement,
What types of information are not covered by comfort
arecomforted.
letters?

Severaltypesofinformationwilltypicallynotbesubject How does an underwriter conduct due diligence on

toacomfortletter: financial information that is not comforted by the

auditors?
Information that is deemed furnished, but

not filed, with the SEC. This may include, Underwriters may request an officers certificate of the

for example, (a) certain information that is chief financial officer of the issuer attesting to the

included as an exhibit to a Form 8K that accuracy of financial information not covered by the

contains earnings information or (b) certain comfortletter.Theofficerscertificatemayincludetick

information furnished (but not filed) by a marked pages identifying that financial information.

foreignprivateissueronaForm6K. Althoughnotashelpfulasacomfortletterprovidedby

theissuersauditors,thiscertificatewouldbepartofthe
The dark periodseveral days between the
underwriters due diligence investigation of the issuer
cutoff date and the date of the letter, as
anditsfinancialdisclosure.
discussedabove.

NonGAAP financial information, if

applicable. ComfortLettersandDifferentTypesofTransactions

Some financial ratios of banks and bank holding

companies are not comforted; alternatively, they may When should pro forma financial information relating

receive a low level of comfort, such as confirming that to mergers and similar transactions be covered by a

the ratio conforms to the number in the banks comfortletter?

accounting records and/or that the calculation of the Pro forma financial statements are hypothetical

ratio, as performed by the bank, was correct. If a historical financial statements that are designed to

financial ratio or other financial data in the disclosure demonstrate the impact of a particular transaction.

document is derived from a banks Call Report, the They show how an issuers financial statements for a

auditors will expressly state that they are not specifichistoricalperiod,orasofaspecificdate,would

commentingonthebanksapplicationoftheregulatory have appeared if the transaction had occurred at an

requirementsrelatedtotheCallReport.Thatisbecause earliertime.

abanksCallReportcontainsfinancialdatapreparedin UnderSAS72,auditorsmayaskmanagementforthe
accordancewiththeguidelinesoftheFederalFinancial basisofitsdeterminationoftheproformaadjustments

Morrison&FoersterLLP 8
to the historical financial statements, and may confirm Because the proxy/prospectus will include or

that the pro forma financial information complies with incorporate by reference historical financial statements

applicableaccountingrequirements(suchasRule1102 ofboththeacquirorandthetarget,andalsoincludepro

ofRegulationSX),andcheckthearithmeticaccuracyof formacombinedfinancialdata,thedealermanagerwill

thoseadjustments,providedthat: want to receive separate comfort letters from the

the auditors have an appropriate level of auditors of both the acquiror and the target company.

knowledge of the accounting and financial The dealermanager will have to provide the

reporting practices of the entity (ordinarily representationletterdescribedinSAS72paragraphs.06

obtained if the auditors have audited the and .07. The auditors of the acquiror will typically

issuers financial statements for one or more cover the pro forma combined financial data in their

periods);and comfort letter. Example D of SAS 72 sets forth typical

comfort letter language with respect to pro forma

the auditors have performed an audit of the
financialstatements.
annual financial statements or an interim

review of the interim financial statements of Ifthebusinesstobeacquiredisanonpubliccompany

theentitytowhichtheproformaadjustments whose financial statements are not subject to the

havebeenapplied. PCAOBs audit standards, the comfort letter for the

acquired company may be governed by AU 920 rather

See SAS 72, Paragraph .42 and Example D. For
than SAS 72. AU 920 may be found at:
additional information, please see our firms
http://www.aicpa.org/Research/Standards/AuditAttest/
publication, Practice Pointers on: Financial Statement
DownloadableDocuments/AUC00920.pdf.
Requirements for Significant Acquisitions and Pro

Forma Financial Information, which may be found at

Howoftenshouldcomfortlettersbedeliveredunderan
the following link:
MTNorsimilarprogram?
https://media2.mofo.com/documents/1506practicepointe
Most programs provide for comfort letters to be
rsonfinancialstatement.pdf
delivered at the time of the establishment of the

Who provides the comfort letter when securities are program, and following the issuance of audited

issuedinamerger? financial statements. Many programs also provide for

the delivery of comfort letters when the issuers

In a merger where shareholders of the target company
unaudited quarterly financial information is released.
arereceivingsharesoftheacquiror,theproxystatement
Whether or not required by the applicable program
is also a prospectus of the acquiror because it includes
agreement or similar agreement, the underwriters will
an offer of the acquirors shares. The dealermanager
also typically require the delivery of an updated
forthemergerwillrequestacomfortletterbecauseitis
comfort letter in connection with a syndicated or other
inapositionsimilartothatofanunderwriterastothe
significanttakedownofsecuritiesundertheprogram.
offeringoftheacquirorsshares.

Morrison&FoersterLLP 9
Are comfort letters provided to the dealermanager in issuer/guarantorortoofferanopinionastowhetheror

anexchangeoffer? not any change in the issuers/guarantors financial

Yes. An exchange offer is an offering of securities and conditionismaterial.

must either be registered under the Securities Act or However,practicesinrelationtoaccountantscomfort

qualify for an exemption from the requirements. The letters differ between the United States and the

offering documentation will often include disclosure European Markets. In this regard, it should be noted

that is similar to that of a securities offering. Dealer that there is no uniform liability regime in Europe. In

managers will generally conduct a due diligence particular, there is no statutory liability in the U.K.

process and obtain comfort letters (and legal opinions regimeregardingfinancialstatementsequivalenttothat

and other deliverables)in amanner that is comparable intheSecuritiesActintheUnitedStates.

to that of the underwriters in a securities offering for

When is the comfort letter given in European capital
cash.
marketstransactions?

Are comfort letters also given in European capital Underwriterstypicallyreceiveacomfortletterfromthe

marketstransactions? auditors at the date on which the offering circular/

In the European capital markets, it is typical for the prospectusispublished(i.e.,thesigningdate,inthecase

underwriters to require a comfort letter from the ofastandaloneissue,ortheestablishment/updateofthe

issuers/guarantors accountants. This letter has program,inthecaseofanEMTNprogram).

traditionallyconfirmed,inessence,twomainitems: Where a comfort letter is required as a condition

(i) that the financial information contained in the precedenttoclosing,itis,therefore,oftennomorethan

offering document is accurate and fairly a confirmation that the statements made in the earlier

presented;and comfortletterremaintrue.

(ii) thattherehasbeennomaterialadversechange
What are engagement letters and how are they used
to the financial condition of the
incomfortletterpractice?
issuer/guarantor between the date of its last
In U.S. practice, there is no engagement letter between
audited accounts and the date on which the
the auditing firm and the underwriters, because the
comfortletterisprovided.
auditorsarehiredandpaidbytheissuer.However,in
The major accounting firms in the United Kingdom
Europe and other jurisdictions, the auditing firm will
and elsewhere in Europe expect to provide comfort
oftenhaveaseparateagreementwiththeunderwriters.
letters that follow the form published by the
This agreement may be referred to as an engagement
InternationalCapitalMarketsAssociation.Thecomfort
letter or an arrangement letter. In this agreement,
provided in this form is limited to information about
the auditing firm will seek to include provisions that
changes in specific financial measures; the accountants
may limit its liability, for example, up to a specified
are not required either to state expressly that there has
amount,ortolimitliabilitytotheofficeofthefirmthat
beennoadversechangeinthefinancialconditionofan

Morrison&FoersterLLP 10
is issuing the comfort letter. Other provisions in the
documentmayinclude,forexample:
restrictionsontheuseofthecomfortletter,and
the(lackof)abilityofthirdpartiestorelyonit;
and
the procedures that the auditors will perform
todelivertheletter.
LimitationsofComfortLetters
To what extent can underwriters rely on a comfort
letteraspartoftheirduediligenceprocess?
Comfortlettersareregardedasanimportantpartofthe
underwritersduediligenceprocess.However,without
appropriate due diligence procedures by the relevant
underwriters, the comfort letter itself may not be
particularlyusefultoestablishaduediligencedefense.
In the case In re WorldCom, Inc. Securities Litigation, 346
F. Supp. 2d 628 (S.D.N.Y. 2004), the District Court for
the Southern District of New York held that the
underwriterdefendantsrelianceoncomfortlettersand
unaudited financial statements, absent reasonable
investigation of the statements accuracy, would not
establish a due diligence defense. The court held that
the underwriters mere reliance on audited financial
statements, where the underwriter faces facts
suggesting a red flag concerning the accuracy of those
statements, would not establish a reliance defense and
that the red flag triggered a duty to investigate.
Accordingly, the receipt of comfort letters should be
accompaniedbyappropriateduediligence,andfollow
upwithrespecttoanyissuesthatraiseconcerns.
Or, put another way, comfort letters are a significant
partofanunderwritersduediligenceprocess,andcare
Morrison&FoersterLLP
should be applied to their review and negotiation.
However, comfort letters are certainly not a substitute
for robust due diligence of the issuers financial
statementsandotherfinancialinformation.
SASNo.133andExemptOfferings
What is SAS No. 133, and how will it impact exempt
offerings?
InJuly2017,theAICPAAuditingStandardsBoard(the
ASB) issued new Statement on Auditing Standards
(SAS)No.133,whichisanewstandardforauditorsto
followwhentheyareinvolvedinreviewinganexempt
offering document, including by issuing a comfort
letter, and describes certain procedures that they must
follow.SASNo.133willapplytoofferingsbeginningin
June 2018. SAS No. 133 will apply when the relevant
securities, or the relevant transaction, is exempt from
registrationundertheSecuritiesAct.Thesetransactions
include,butarenotlimitedto,Rule144A,unregistered
banknote,crowdfundingandRegulationAofferings.
ThesizeoftheexemptsecuritiesmarketledtheASBto
conclude that additional guidance was appropriate for
determiningwhenanauditorisconsideredinvolvedin
an offering, as well as to set forth the audit
responsibilities.
When is an auditor deemed to be involved in an
offering?
Under SAS No. 133, an auditor is deemed to be
involvedwithanexemptofferingdocumentif:
the auditors report on financial statements or
its review report on interim financial
information is included or incorporated by
11
 reference in an exempt offering document, These may be found at the following link:

suchasanofferingcircular;and http://www.aicpa.org/Research/Standards/AuditAttest/

The auditor performs one or more specified DownloadableDocuments/AUC00720.pdf

activities as to the exempt offering document, What are the auditors duties as to events occurring

including: betweenthedateofitsreportandthedateoftheexempt

o issuing a comfort or similar letter, or offeringdocument?

anagreeduponproceduresreport,as SASNo.133requirestheauditortoperformprocedures

to the financial information included designed to identify events (subsequent events)

or incorporated by reference in the occurring between the date of the auditors report and

offeringdocument; thedateofdistribution,circulation,orsubmissionofthe

o assisting the issuer in preparing exempt offering document that may have caused the

information included in the offering auditor to revise the auditors report had the events

document; beenknowntotheauditorasofthedateoftheauditors

report. If the auditor identifies subsequent events that

o readingadraftoftheexemptoffering
mayrequireadjustmentof,ordisclosurein,theaudited
documentattheissuersrequest;
financial statements or reviewed interim financial
o participating in due diligence
information, the auditor should not agree to the
discussions with placement agents or
inclusion of the auditors report in the exempt offering
other financial intermediaries in
document until the auditors consideration of the
connectionwiththeoffering;
subsequentevents,includingtheeffectontheauditors
o issuing a practitioners attestation
report, has been satisfactorily evaluated. If
report on information relating to the
management of the issuer does not revise the financial
offering;
statements in circumstances in which the auditor
o providingawrittenagreementforthe believestheyneedtoberevised,theauditorshouldnot
use of the auditors report in the agree to the inclusion of the auditors report in the
offeringdocument;or exemptofferingdocument.

o updating an auditors report for

inclusionintheofferingdocument.

What must an auditor do if it is involved in such an
_____________________
exemptoffering? ByLloydS.Harmetz,Partner,
If an auditor is involved with an exempt offering, SAS BradleyBerman,OfCounsel,
No. 133 requires the auditor to perform procedures Morrison&FoersterLLP
described in Paragraphs 616 of AUC Section 720,
Other Information in Documents Containing Audited
Morrison&FoersterLLP,2017
FinancialStatements,ontheexemptofferingdocument.

Morrison&FoersterLLP 12