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Financial Reporting Manual

Dec. 11, 2017

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TOPIC 4 - Independent Accountants' Involvement

4100QUALIFICATIONS OF ACCOUNTANTS

(Last updated: 6/30/2009)

4110PCAOB Registration

4110.1PCAOB Rule 2100 requires each firm (domestic or foreign) to register with the PCAOB that:

  1. prepares or issues any audit report with respect to any issuer; or
  2. plays a substantial role in the preparation or furnishing of an audit report with respect to any issuer.

4110.2A public accounting firm not registered with the PCAOB may be able to perform some audit services for an issuer if the firm does not play a substantial role in the preparation or furnishing of the audit report as defined by PCAOB Rule 1001(p)(ii).

4110.3In accordance with PCAOB Rule 2107(b)(1), a firm that was once registered and then later withdrew may reissue or give consent to the use of a prior report that it issued while registered. However, the firm cannot update or dual-date a previously issued report after the firm is no longer registered, as that involves additional audit work.

4110.4Issuer financial statements audited by a nonregistered firm are considered to be “not audited,” and any 10-K, proxy statement, or registration statement containing or incorporating by reference such financial statements is deemed substantially deficient. In addition, the 10-K is deemed not timely filed. The 10-K or filing should be amended immediately to remove the nonregistered auditor’s report and label the columns of the financial statements as “not audited.” The issuer would then need to file another amendment to file financial statements audited by a registered firm.

4110.5The following chart outlines the application of certain PCAOB requirements in various filings with the SEC.

(Last updated: 9/30/2012)

No. # Entities for which an audit report on the financial statements is included in the document filed with SEC (1): Auditor’s report on financial statements in current filing must be issued by a public accounting firm registered with the PCAOB? Auditor’s report on financial statements must refer to PCAOB standards?
1 Issuer (2) and its predecessor Yes Yes
2 Entity that has filed an initial registration statement Yes Yes
3a Operating company (predecessor) whose financial statements are filed by a special purpose acquisition company Yes Yes
3b Operating company (predecessor) whose pre-acquisition financial statements are filed by an issuer that at the time the reverse merger is consummated is a public “shell company” (See Section 12250.1) Yes Yes
3c Operating company (predecessor) whose pre-acquisition financial statements are filed by an issuer that at the time the reverse merger is consummated is not a public “shell company” (See Section 12250.2) No, but see
Section 12250.2
No, but see
Section 12250.2
3d Operating company (predecessor) whose post-acquisition audited financial statements are filed by the issuer after consummation of a reverse merger Yes Yes
4 Non-issuer subsidiary, division, branch, component or investment for which an audit report is filed under S-X 2-05 See footnote (3) Yes (4)
5 Non-issuer entity whose financial statements are filed to satisfy S-X 3-05 or 3-14 No No
6 Non-issuer entity whose financial statements are included in proxy statement or Form S-4/F-4 as target No No
7 Non-issuer entity whose financial statements are filed to satisfy S-X 3-09 or 3-16 See footnote (3) See footnote (5)
8 Subsidiary–guarantor whose separate financial statements are filed to satisfy S-X 3-10 (a) or 3-10(g) Yes (6) Yes
9 Employee benefit plan filing Form 11-K Yes (6) Yes

4110.6For purposes of Item 5 of the table above, a non-issuer entity could also be a bidder in a Schedule TO or an acquirer in a proxy statement.

4110.7As noted in the table above, subsidiary guarantors are considered issuers whose financial statements filed under S-X 3-10 must be audited by a PCAOB-registered firm using PCAOB standards.  However, relief from these requirements may be available for recently-acquired subsidiary guarantors in certain circumstances.  Registrants should consult with CF-OCA prior to filing any S-X 3-10(g) financial statements that are not audited by a PCAOB- registered firm.  (Last updated: 3/31/2011)

4110.8The audited balance sheet of a non-issuer general partner that is included in a transactional filing or registration statement of a limited partnership issuer is not required to be audited by a PCAOB registered firm. The audit report also is not required to refer to PCAOB standards.

4115Involuntary PCAOB Deregistration

(Last updated: 9/30/2009)

4115.1If the PCAOB revokes the registration of an audit firm, audit reports issued by that firm may no longer be included in a registrant’s filings made on or after the date the firm’s registration is revoked, even if the report was previously issued before the date of revocation. Financial statements previously audited by a firm whose registration has been revoked would generally need to be reaudited by a PCAOB registered firm prior to inclusion in future filings or if included in a registration statement that has not yet been declared effective.

(Last updated: 6/30/2011)

4115.2In providing the information that Item 304 of Regulation S-K requires regarding a change in accountants for a firm whose registration is revoked by the PCAOB, a company should indicate that the PCAOB has revoked the registration of its prior auditor. If a company previously explained the PCAOB registration revocation in its Item 4.01 Form 8-K, it need not repeat this disclosure in its Form 10-K.

4120Duly Registered and in Good Standing Under the Laws of the Accountant’s Place of Residence or Principal Office [S-X 2-01]

(Last updated: 9/30/2011)

4120.1The SEC will not recognize any person as a certified public accountant unless duly registered (licensed to practice) and in good standing under the laws of the place of the accountant’s residence or principal office. [S-X 2-01(a)] However, S-X 2-01(a) does not affect the applicability of any other registration, licensing or qualification requirements that may apply in any State or competent jurisdiction.

4120.2The 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.

4120.3An 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).

4130Independence [S-X 2-01(b) and (c), SOX 201]

4130.1Questions regarding independence should be directed to OCA. Auditor reports on financial statements that refer to PCAOB standards must comply with the independence rules of both the SEC and the PCAOB. The SEC’s independence rules are promulgated in S-X 2-01. The PCAOB has also issued certain independence and ethics rules, which are part of its adopted standards. See http://www.pcaobus.org/. Compliance with these rules is required to issue a PCAOB opinion.

4130.2S-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.

4130.3SEC Independence rules also apply to Regulation A and Regulation D filings. [FRC 602.02(a)]

4140Principal Auditor [S-X 2-05, PCAOB AU Secs. 543 and 9543]

4140.1When an independent auditor uses the work and reports of other independent auditors to audit the financial statements of one or more subsidiaries, divisions, branches, components, or investments included in the financial statements presented, such independent auditor must decide whether it may serve as the principal auditor. Generally, the principal auditor is expected to have audited or assumed responsibility for reporting on at least 50% of the assets and revenues of the consolidated entity. If it is impracticable for a principal auditor to assume that extent of responsibility for one or more of the periods presented, the staff will evaluate whether to accept the audit reports as sufficient for reliance in filings with the SEC depending on the facts and circumstances.

4140.2A 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.

4140.3If 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.

4140.4If 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)

4140.5If 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)

4200ACCOUNTANTS’ REPORTS [S-X 2-02]

(Last updated: 6/30/2009)

4210General – Audit Reports

4210.1The accountant’s report must be dated, electronically signed [S-T 302(a)], indicate the city and state where issued, and identify the financial statements covered.

4210.2The report should refer to any supplemental schedules presented pursuant to S-X Article 12 (or a separate report on those schedules may be included with the schedules).

4210.3The 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 U.S. GAAS for non-issuers (with certain exceptions noted in Section 4210.4).

4210.4Audit 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)

4210.5The 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.

4210.6Auditors’ 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]

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

4220Qualified Audit Reports

The audit report that an independent auditor issues under PCAOB standards (or U.S. GAAS for non-issuers) may indicate that the financial statements do not satisfy the requirements of the SEC's rules or the audit procedures applied omitted certain procedures deemed necessary by the auditor. There may be rare instances when the staff will not object to an audit report on the financial statements that contains a qualification. However, a waiver from CF-OCA would need to be requested and obtained before filing. Examples of audit reports on the financial statements that represent a substantial deficiency in the filing are set forth in 4220.1 through 4220.4.

4220.1Disclaimer 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.

4220.2Adverse 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.

4220.3Scope 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]

4220.4Qualifications 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]

4220.5In 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 5, paragraph 92]

4230Other Report Modifications

4230.1Going Concern Modifications [AU 341]

  1. Going concern modifications are required by PCAOB standards/U.S. GAAS in certain circumstances.
  2. Filings that include reports having going concern modifications must also include appropriate and prominent disclosure of the financial difficulties giving rise to that uncertainty. Discussion of a viable plan that has the capability of removing the threat to the continuation of the business must be included. The plan may include a "best efforts" offering so long as the amount of minimum proceeds necessary to remove the threat is disclosed. The plan should enable the issuer to remain viable for at least the 12 months following the date of the financial statements being reported on. If management has no viable plan, the use of going concern financial statements may be inappropriate and liquidation-basis financial statements may be necessary or the classification and amounts of assets and liabilities may need to be adjusted. [FRC 607.02] AU 341 does not apply to an audit of financial statements based on the assumption of liquidation.
  3. Going concern opinions that do not use the words "substantial doubt" when referencing a going concern matter do not comply with PCAOB standards/U.S. GAAS.
  4. Going concern opinions that use conditional language in expressing a conclusion concerning the existence of substantial doubt about the entity's ability to continue as a going concern are not appropriate.
  5. A disclaimer of opinion, "except for" opinion, or an adverse opinion resulting from going concern matters is permitted by AU 341 (SAS 59), but none of these types of opinion comply with the requirements of S-X Article 2.

4230.2Changes in Accounting Principles [SFAS 154 /ASC 250, AS 6, 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 6, 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 6, 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. [SFAS 154, paragraph 13 / 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/U.S. GAAS 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), AU 508, AS 5] 

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 AU 9550.07 to .11.

4300REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING [SOX 404, AS 5 and S-K 308, SEC Interpretive Guidance, ICFR FAQs, PCAOB Staff Guidance]

(Last updated: 6/30/2009)

4310Management's Annual Report on Internal Control Over Financial Reporting [S-K 308]

4310.1S-K 308(a) requires management to provide its report on ICFR containing its assessment of the effectiveness of ICFR as of the end of the most recent fiscal year in its annual report on Form 10-K, 20-F, or 40-F (including transition reports filed on such forms upon a change in fiscal year-end). If the registrant is a non-EGC accelerated filer or a large accelerated filer, S-K 308(b) requires management to provide the registered public accounting firm's attestation report on the registrant's ICFR. Filings without the required report or reports are deficient and considered not timely, except for the limited situation described in Section 4310.6 below. Non-accelerated filers (both domestic and foreign) and EGCs (both domestic and foreign) are not required to include an auditor attestation report under S-K 308(b).

NOTE: Management's report on ICFR and the accompanying attestation report are not required in registration statements (whether under the 1933 Act or 1934 Act) or Forms 11-K. (Last updated: 6/30/2013)

4310.2A 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)

4310.3The 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]

4310.6Pursuant 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)

4310.7The 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.

4310.8S-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).

4310.9Management 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)

4310.10In 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.

4310.11If 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:

  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 EITF 00-1 [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)

4310.12Management 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.

4310.13Management 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.

4310.14S-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.

4310.15Our rules do not address whether the assessment of ICFR covers supplementary financial information, Regulation S-X schedules, or SFAS 69 [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]

4310.16There 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).

4310.17If 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.

4320Auditor's Report on ICFR  [AS 5, S-X 2-02(f)]

4320.1AS 5 requires an auditor to perform an audit of a company's ICFR that is integrated with an audit of the financial statements. A report on the audit of ICFR, which may be combined with or separate from the report on the financial statements, must include the following:

  1. A title that includes the word independent;
  2. A statement that management is responsible for maintaining effective internal control over financial reporting and for assessing the effectiveness of internal control over financial reporting;
  3. An identification of management’s report on internal control;
  4. A statement that the auditor’s responsibility is to express an opinion on the company’s internal control over financial reporting based on his or her audit;
  5. A definition of internal control over financial reporting as stated in AS 5, paragraph A5;
  6. A statement that the audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States);
  7. A statement that the standards of the Public Company Accounting Oversight Board require that the auditor plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects;
  8. A statement that an audit includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal controls based on the assessed risk and performing such other procedures as the auditor considered necessary in the circumstances;
  9. A statement that the auditor believes the audit provides a reasonable basis for his or her opinion;
  10. A paragraph stating that, because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements and that projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate;
  11. The auditor’s opinion on whether the company maintained, in all material respects, effective internal control over financial reporting as of the specified date, based on the control criteria;
  12. The manual or printed signature of the auditor’s firm;
  13. The city and state (or city and country, in the case of non-U.S. auditors) from which the auditor’s report has been issued; and
  14. The date of the audit report.

4320.2In addition, S-X 2-02(f) requires the audit report on ICFR to identify the period covered by the report.

4320.3If 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.

4320.4AS 5 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 5, 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.

4320.5The 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.

4320.6The 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.

4320.7The 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 5, paragraph 92]

4320.8A 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 5, paragraph A7]

4320.9A 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 5, paragraph 70]

4320.10AS 5 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 5, paragraph 69]

4320.11If 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 5, paragraph 91]

4320.12Any 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)

4320.13When 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 5, paragraph C4]

4320.14When 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 5, paragraph C5]

4320.15If 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 this information. [AS 5, paragraphs C1 and C12-14]

4320.16The 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 5, paragraphs 93-96]

4320.17The 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 5, paragraph 97]

4320.18An 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 543 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 5, paragraphs C8-C11]

4320.19If 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]

4320.20AS 4 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.

4320.21The 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.

4400REVIEW AND COMPILATION REPORTS

(Last updated: 6/30/2009)

4410Review Reports on Interim or Pro Forma Data [SAS 100]

4410.1Prior to filing, interim financial statements included in quarterly or transition reports on Form 10-Q must be reviewed by an independent registered public accountant using PCAOB standards and procedures for conducting such reviews, as may be modified or supplemented by the SEC. If the company states in any filing that interim financial statements have been reviewed by an independent public accountant, a report of the accountant on the review must be filed with the interim financial statements. [S-X 10-01(d)] Otherwise, the report is not required to be included in Form 10-Q.

4410.2If 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]

4410.3If 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.”

4420Selected Quarterly Financial Data [AU 722/SAS 100]

4420.1Selected quarterly financial data is required for all registrants except foreign private issuers, mutual life insurance companies, and smaller reporting companies, and in initial registration statements. If it is required to be presented, it must be reviewed by the independent registered accountant. [S-K 302]

4420.2No 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.

4430Compilation Reports

Compilation reports are not appropriate in any filings, including Regulation A filings, because the association of the accountant provides no basis for reliance. In addition, the presence of a compilation report may indicate a violation of SEC independence standards under S-X 2-01(c)(4)(i)(B).

4500CHANGE IN ACCOUNTANTS [S-K 304, ITEM 4.01 FORM 8-K]

(Last updated: 6/30/2009)

4510Change in Accountants

4510.1If a change in accountant for a registrant or a significant subsidiary on whose report the principal accountant relied occurred within 24 months prior to or in any period subsequent to the date of the most recent financial statements, the registrant should provide the required information in:

  1. An Item 4.01 Form 8-K within 4 business days of the change;
  2. Proxy statements, even though previously disclosed in Form 8-K, if required by Item 9 of Schedule 14A; and
  3. Forms 10-K and 20-F, and registration statements, unless the change was previously disclosed.

NOTE: The disclosures about disagreements required by S-K 304(b) must always be provided, where required, even if previously disclosed. [Instruction 1 to S-K 304; Instruction 2 to Item 16F of Form 20-F for registrants with fiscal years ending on or after December 15, 2009]

4510.2Disclosure 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.

4510.3If 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.

4520Unusual Issues Involving Changes in Accountants

4520.1[Reserved]

4520.2Predecessor 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.

4520.3Reverse 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.

4520.4Form 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.

4530Additional Guidance

(Last updated: 12/31/2010)

4530.1Guidance regarding changes in accountants can be found in the Division of Corporation Finance’s Compliance and Disclosure Interpretations. Questions are grouped into the following categories and sections:

  1. Regulation S-K, Sections 111 and 211 - Item 304 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    • Subsequent interim period
    • No reportable events
    • Remediation of internal control deficiencies
    • Material weakness or significant deficiency in ICFR
    • Going concern
    • Explanatory paragraph in report on ICFR
    • Revocation of accountant’s PCAOB registration
    • Time period preceding resignation, declination or dismissal
  2. Exchange Act Form 8-K, Section 114 and 214 - Item 4.01 Changes in Registrant’s Certifying Accountant
    • Revocation of accountant’s PCAOB registration
    • New principal accountant related to former principal accountant
    • Business combination between principal accountant and another accounting firm
    • Former accountant declines to provide agreement letter
    • Requirement to use Form 8-K

4600NON RELIANCE ON PREVIOUSLY ISSUED IFINANCIAL STATEMENTS OR RELATED AUDIT REPORT OR COMPLETED INTERIM REVIEW [ITEM 4.02 FORM 8-K]

(Last updated: 6/30/2009)

4610Non-Reliance on Previously Issued Financial Statements [Item 4.02(a) Form 8-K]

4610.1An Item 4.02(a) Form 8-K should be filed when a registrant’s board of directors, committee of the board, or board authorized officer(s) concludes any previously issued financial statements should no longer be relied upon due to an accounting error.

4610.2[Reserved]

4610.3The 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.

4610.4The 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.

4620Non-Reliance on Previously Issued Audit Report or Completed Interim Review [Item 4.02(b) Form 8-K]

4620.1An Item 4.02(b) Form 8-K should be filed if the registrant’s current or former independent accountant advises or notifies it must disclose or take action to prevent future reliance on a previously issued audit report or completed interim review related to previously issued financial statements.

4620.2The 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]

4620.4The 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.

4620.5The Form 8-K should include any written notice received from the accountant as Exhibit 7.

4620.6A 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.

4620.7A 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.

4630Other – Prior Disclosures Regarding Disclosure Controls and Procedures

A registrant should consider whether the disclosures provided under S-K 307 in prior filings need to be modified, supplemented or corrected in order to explain whether management’s previously discussed conclusions regarding the effectiveness of DCP continue to be appropriate in light of the restated financial statements or non-reliance on a previously issued audit report or completed interim review. [Release No. 33-8810]

4700“TO BE ISSUED” ACCOUNTANT’S REPORTS

(Last updated: 6/30/2009)

4710Contingent Upon Future Event or Transaction

(Last updated: 6/30/2011)

If audited financial statements are required in a filing, the audit report should be signed and unrestricted. Generally, the staff will not make a review determination on or commence a review of a filing that does not meet that requirement. In some circumstances, however, a transaction that will occur at or immediately before the effectiveness of a registration statement is retrospectively reflected in the annual financial statements. If the transaction prevents the auditor from expressing an opinion on the financial statements at the time of filing, the staff has accepted the filing of a “draft report” in the form that it will be expressed at effectiveness. Such transactions may include, but are not limited to:

  • stock splits, and
  • reorganizations in which the entities comprising an IPO registrant will not be legally transferred to the registrant until immediately before effectiveness.

In these cases, the draft report should be accompanied by a signed preface of the auditor stating that it expects to be in a position to issue the report in the form presented at effectiveness. No registration statement can be declared effective until the preface is removed and the accountant’s report finalized.

4720Contingent upon Future Underwriting Agreement

(Last updated: 6/30/2010)

An auditor may conclude that it is appropriate to include an explanatory paragraph about the registrant’s ability to continue as a going concern in the auditor’s report. The auditor may believe that upon the receipt of the proceeds from the offering that the explanatory paragraph could be removed. As the receipt of the proceeds occurs upon closing - not at effectiveness – the auditor’s report should include the explanatory paragraph that the auditor believed was appropriate at the time of effectiveness.  It would not be appropriate for the report to indicate that the explanatory paragraph would be removed at closing as that event takes place after effectiveness.

4800OTHER MATTERS

(Last updated: 6/30/2009)

4810Consents to the Use of Audit Reports

4810.1Registrants must file a copy of the auditor’s consent to the use of its audit report or an acknowledgement letter regarding the use of its review report in any filing under the 1933 Act as an exhibit. The primary purpose of obtaining a consent or acknowledgement letter is to assure that the auditor is aware of the use of its report and the context in which it is used.

4810.2The 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.

4810.3A 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)

4810.41934 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)

4810.5Waivers [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.

4810.6The 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.

4820Accountant's Inability to Reissue Reports [AU 9508, Interpretation 15; Regulation C, Rule 437]

4820.1When an accounting firm ceases operations, it may be unable to reissue a prior report or give consent to the use of a prior report. A company should submit a consent waiver request under Regulation C, Rule 437 with CF-OCA if the auditor does not reissue or give consent to the use of its prior report. The guidance in Section 4810.5 regarding consent waiver requests should be followed. If the firm still exists, although it is not practicing public accounting, and has the ability to reissue or give consent to the use its prior report, a waiver may not be granted.

NOTE: The footnote to Interpretation 15 of AU 9508 states a firm is considered to have ceased operations when it no longer issues audit opinions either in its own name or in the name of a successor firm. A firm may cease operations with respect to public entities and still issue audit opinions with respect to non-public entities.

4820.2If 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. [AU 9508.65]

4830Successor Auditor Reports [AU 508, AU 9508]

4830.1If the prior period financial statements audited by the predecessor auditor are unchanged, the successor auditor should indicate in the introductory paragraph of his or her report that the financial statements of the prior period were audited by another auditor, the date of the predecessor auditor's report, the type of report issued by the predecessor auditor, and if the report was other than a standard report, the substantive reasons for it. The successor auditor ordinarily should indicate in its report that the other auditor has ceased operations. The successor auditor should not name the predecessor auditor in the report. [AU 9508.61]

4830.2If 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. [AU 9508.66]

4830.3A 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. [AU 9508.70]

4830.4If 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]

4830.5If 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 AU 508.74. [AU 9508.71]

4830.6A 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.

4830.7An 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 AU 711 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.

4840Accountant's Refusal to Reissue Reports

4840.1The staff is not in a position to evaluate the reasons for an accountant's refusal to reissue its report and will not intervene in disputes between registrants and their auditors. Moreover, the staff will not waive the requirements for the audit report, the accountant's consent to the use of its audit report, or the naming of the accountant as an expert in filings. If a registrant is unable to reuse the previously issued audit report in a current filing, the registrant must engage another accountant to reaudit those financial statements.

4850Illegal Acts

Section 10A of the 1934 Act requires that auditors report in a timely manner certain uncorrected illegal acts to a registrant's board of directors. It further requires the registrant, or the auditor if the registrant fails to do so, to provide information regarding the illegal act to OCA.

4860Signatures

Wherever a signature is required, typed signatures or duplicated or facsimile versions of the manually signed document may be used. In any of these cases, each signatory must manually sign the document authenticating, acknowledging or otherwise adopting the signature that appears in the filing before or at the time that the filing is made, and the manually signed document must be retained by the filer for five years. A copy of this document must be furnished to the SEC upon request. [S-T 302] In certain instances, an auditor may reissue its audit report. If the reissued report is included in a filing, it must be manually signed as described above. (Last updated: 12/31/2010)

4870Selected Financial Data

4870.1An auditor may be engaged to report on selected financial data using the guidance of AU 552. Unless the auditor reports on selected financial data using the guidelines in AU 552, the information should not be labeled or described as audited. However, it would be acceptable to state that the information is derived from audited financial statements.

4870.2If 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.


[1] This table describes the staff’s application of PCAOB registration requirements for an auditor whose report is included in a filing with the SEC. There are instances, not included in the table, when a principal auditor will use the work of another auditor and take responsibility for the other auditor’s work. In these instances, the other auditor’s report is not included in the filing with the SEC. The determination of whether the other auditor must be registered with the PCAOB is made by reference to the Sarbanes-Oxley Act and the PCAOB’s rules. In all such instances the principal auditor is responsible for performing the audit in accordance with PCAOB standards.

[2] The term ‘issuer’ means an issuer (as defined in Section 3 of the 1934 Act), the securities of which are registered under Section 12 of that Act, or that is required to file reports under Section 15(d) of that Act, or that files or has filed a registration statement that has not yet become effective under the 1933 Act, and that it has not withdrawn. See Section 2(a)(7) of the Sarbanes Oxley Act and PCAOB Rule 1001.

[3] The auditor of the financial statements of the non-issuer entity must be registered if, in performing the audit, the auditor played a “substantial role” in the audit of the issuer, as that term is defined in PCAOB Rule 1001(p)(ii). If the “substantial role” test is not met, the firm is not required to be registered. The inclusion or exclusion of such a report under S-X 2-05 does not affect this determination.

[4] S-X 2-02 requires that the auditor’s report state whether the audit was conducted in accordance with GAAS. In Release No. 34-49708, the SEC stated that “references in Commission rules…to GAAS or to specific standards under GAAS, as they relate to issuers, should be understood to mean the standards of the PCAOB plus any applicable rules of the Commission” (emphasis added). In the situation identified in the chart above, the view of the SEC staff is that the reference to GAAS in S-X 2-02, as applied to the other auditor’s report, does “relate to an issuer” for purposes of Release No. 34-49708 and that, therefore, the other auditor’s report must refer to the standards of the PCAOB.

[5] If a principal auditor is making reference to another auditor’s report on the financial statements of the non-issuer entity, the other auditor’s report must refer to the standards of the PCAOB. See footnote 4 above. If a principal auditor does not make reference to another auditor’s report on the financial statements of the non-issuer entity, the other auditor’s report need not refer to the standards of the PCAOB.

[6] The entity is itself an issuer and so must comply with the rules applicable to issuers.

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