On Nov. 3, the Public Company Accounting Oversight Board (PCAOB) proposed amendments to Auditing Standards 6101, Letters for Underwriters and Certain Other Requesting Parties (AS 6101). The proposed amendments are intended to update the provisions of AS 6101 that address an auditor’s ability to provide negative assurance on subsequent changes in specified financial statement items in a comfort letter.

A comfort letter is a letter delivered by an issuer’s auditors in an offering of securities registered with the Securities and Exchange Commission (SEC) and in certain types of unregistered securities offerings. These letters, which provide assurances about the financial information contained in an offering document, are an important part of the underwriters’ due diligence procedures because they provide evidence to support a due diligence defense to potential liability for the financial disclosure in the offering document. The content of comfort letters are governed by accounting standards like AS 6101.

Auditors’ comfort letters typically include statements as to changes in specified financial statement items during a period subsequent to the date and period of the latest financial statements included in the registration statement. For example, underwriters may request that an auditor provide a statement that nothing has come to the auditors’ attention that caused them to believe that, as of a date prior but close in time to the date of pricing, there had been an increase in long-term debt or decrease in net current assets relative to the most recent audited or reviewed financial statements.

Currently, AS 6101 permits an auditor to provide negative assurance regarding subsequent changes in specified financial statement items only as of a date that is less than 135 days after the end of the most recent period for which the auditor performed an audit or a review. As a result, there are periods of time in which auditors are unable to provide negative assurance as to subsequent changes and, therefore, issuers may be unable to access capital markets during these gap periods if underwriters are unwilling to engage in offerings without an auditor providing negative assurance. Based on the SEC’s current quarterly reporting regime, the 135-day limitation leaves few such gaps during the year, the longest of which is between the third quarter reporting date (generally Sept. 30) and the date when the annual report is filed (generally due no earlier than March 1 and up to March 31, depending on filer status). However, if the SEC adopts its proposal on optional semiannual reporting, the gaps in which auditors are unable to provide negative assurance would widen significantly for companies that elect to report interim results on a semiannual cadence. The amendment proposal points out that the number of days between the semiannual reporting date (generally, June 30) and the date when the annual report is filed could reach up to 274 days.

In order to alleviate these gaps and promote capital formation, the proposed amendments would replace the fixed 135-day limitation with references to the filing deadline for the next annual or interim period for which financial statements are required to be filed. If adopted, the result would be no more gaps between the date through which auditors can provide negative assurance and an issuer’s next filing deadline.

The PCAOB is seeking comments on the proposed amendments to AS 6101 until Jan. 4, 2027, and will determine whether to adopt final amendments after the close of such comment period.