OSC Staff Notice: CICA Assurance Standards Board Exposure Draft-Auditor Assistance to Underwriters and Others
OSC Staff Notice: CICA Assurance Standards Board Exposure Draft-Auditor Assistance to Underwriters and Others
OSC STAFF NOTICE
CICA ASSURANCE STANDARDS BOARD EXPOSURE
DRAFT - AUDITOR ASSISTANCE TO UNDERWRITERS AND OTHERS
Attached is a notice issued by the Assurance Standards Board (the "Board") of The Canadian Institute of Chartered Accountants (the "CICA") relating to an exposure draft issued for comment entitled "Auditor Assistance to Underwriters and Others". The proposed standards set out in the exposure draft are intended to replace and expand upon guidance currently provided in paragraphs 7100.55 to .62 of the Handbook of the CICA. The exposure draft is located on the CICA's website at the following address: cica.ca/cica/cicawebsite.nsf/public.
The exposure draft provides expanded guidance to auditors who are requested to provide assistance to an underwriter in connection with an offering of securities pursuant to an offering document. In particular, the exposure draft provides guidance to auditors on the preparation of "long form" comfort letters and on participation at due diligence meetings. The Board believes that the exposure draft proposals represent a codification of best practices already in effect in Canada and, to the best of the Board's knowledge, best practices in the United States.
The exposure draft contains "Highlights" that explain briefly the Board's reasons for issuing the exposure draft and summarize the main features of the exposure draft. The exposure draft also includes in appendices extensive examples of "long form" comfort letters (and related documents) and examples of questions commonly asked of auditors in due diligence meetings together with comments on how the auditor might respond to those questions.
In OSC staff's view, the assistance provided by an auditor to an underwriter contributes to the effectiveness of the due diligence performed by an underwriter as a basis for signing the required certificate relating to the provision of full, true and plain disclosure in a prospectus, a key document on which investors make investment decisions. The current proposals are therefore directly relevant to the OSC's mandate to protect investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in their integrity.
OSC staff believe it is important that all affected parties participate in a full and informed discussion of the role of auditors in assisting an underwriter in connection with an offering of securities pursuant to an offering document. Accordingly, staff encourage interested parties to provide the Board with written comments on the exposure draft. Comments should be submitted to the CICA no later than December 6, 1999, marked for the attention of Diana R. Hillier, CA, Director, Assurance Standards at the address set out in the exposure draft.
To assist in its evaluation of the standards proposed, OSC staff would appreciate receiving a copy of comments provided to the CICA by market participants. Staff are particularly interested in learning whether market participants agree with the Board's belief that the exposure draft codifies best practices already in effect in Canada and the United States. Please provide a copy of any comments which are sent to the CICA to the Office of the Chief Accountant, Ontario Securities Commission, 20 Queen Street West, Suite 800, Box55, Toronto, Ontario M5H 3S8 (or by email at [email protected]).
Reference:
Marcel Tillie, CA
Practice Fellow, Office of the Chief Accountant
(416) 593-8078
Marrianne Bridge, CA
Advisory Services, Corporate Finance
(416) 595-8907
NOTICE OF EXPOSURE DRAFT
CICA ASSURANCE STANDARDS BOARD
PROPOSED ASSURANCE STANDARDS
Auditor assistance to underwriters and others
September 1999
Comments must be received by December 6, 1999
The Assurance Standards Board of The Canadian Institute of Chartered Accountants has issued an exposure draft, Auditor Assistance to Underwriters and Others. The exposuredraft proposes new standards to be included in the CICA HANDBOOK - ASSURANCE.
The Board invites individuals, businesses and organizations to send written comments on the proposed standards. Comments are requested from those who agree with theexposure draft as well as from those who do not.
Comments are most helpful if they are related to a specific paragraph or group of paragraphs, clearly explain the problem, and include a suggestion for alternative wordingsupported by specific reasoning. All comments received will be available on a public file one month after new Handbook material is issued unless confidentiality is requested.
To be considered, comments must be received by December 6, 1999, addressed to:
Diana R. Hillier, CA
The Canadian Institute of Chartered Accountants
277 Wellington Street West
Toronto, Ontario
M5V 3H2
[email protected]
Who should read the exposure draft
The exposure draft should be relevant to financial executives, accountants, auditors, securities dealers, securities lawyers, and others involved with the public offering of securities.
How to get the exposure draft
The exposure draft Auditor Assistance to Underwriters and Others can be obtained from the CICA web site: www.cica.ca.
For those without Internet access, the exposure draft can be obtained by writing to:
Information Services Officer
Standards Group
The Canadian Institute of Chartered Accountants
277 Wellington Street West
Toronto, Ontario
M5V 3H2
The Information Services Officer may also be contacted by e-mail at [email protected],or by fax at (416) 204-3412.
OVERVIEW
The Assurance Standards Board has undertaken a project to revise and expand the present Section 7100 of the CICA HANDBOOK - ASSURANCE, THE AUDITOR'SINVOLVEMENT WITH PROSPECTUSES AND OTHER OFFERING DOCUMENTS. The exposure draft constitutes the first stage in this project, and would replace existing paragraphs 7100.55-.62 dealing with letters to underwriters and add Recommendations on an auditor's participation in "due diligence" meetings with underwriters. In large part, the new material represents a codification of best practices already in effect in Canada and, to the best of the Board's knowledge, best practices in the United States.
The proposed Recommendations provide guidance to an auditor engaged by or on behalf of an issuer of securities who furnishes assistance to an underwriter in the form of a comfort letter or by participating in a due diligence meeting. Such assistance might relate to a prospectus, a take-over bid or other information circular, or an offering memorandum for an exempt offering of securities. For purposes of the exposure draft, the term" underwriter" is taken to include an agent who offers securities to the public on behalf of the issuer or vendor.
The proposed Recommendations are based on four underlying principles:
- Only the underwriter can determine what is necessary for a reasonable investigation.
- A statement made by a professional accountant or auditor, written or oral, will betaken to add credibility to the subject matter of the statement.
- An auditor should not make a statement adding credibility to a matter unless:
(a) he or she has adequate training and experience; and
(b) he or she has done some work to support the statement.
- An auditor should not provide assurance, positive or negative, unless there are suitable criteria that can be applied in reaching the conclusion expressed.
Comfort letters
Securities laws impose civil liabilities on an underwriter, the directors of the securities issuer, and other parties who sign an offering document in the event that the document contains a misrepresentation. One of the principal defences available to the underwriter and to the directors is that the party concerned conducted a reasonable investigation to provide reasonable grounds for believing that there had been no misrepresentation in the offering document (a "due diligence defence"). Since it is not usually practical for underwriters to carry out such an investigation themselves, they frequently ask the auditor of the issuer to provide them with comfort, in a comfort letter or a due diligence meeting, or both, on areas outside of the audited financial statements.
The exposure draft provides that an auditor should furnish a comfort letter to an underwriter or other requesting party only if either:
(a) the requesting party has a due diligence defence under securities law; or
(b) the requesting party provides a letter to the auditor stating that the requesting party is knowledgeable with respect to a statutory due diligence investigation, and will be performing an investigation substantially consistent with that which the party would carry out if it had a statutory due diligence defence.
Securities offerings are often carried out under severe time pressures, and the exposure draft points to the need to reach early understanding and agreement with both management and the underwriter as to the procedures the auditor will carry out. Usually the auditor will provide a draft of the comfort letter to both. In preparation for a due diligence meeting, the auditor would agree the terms of the engagement with management, including management's consent to the auditor's participation, management's undertaking to be represented in the meeting, and a waiver of normal confidentiality requirements.
The exposure draft outlines the type of information usually contained in an auditor's comfort letter. This would include reference to the auditor's report(s) included or incorporated by reference in the offering document, an assertion of the auditor's independence, assurance as to compliance of the financial statements as to form with regulatory requirements, negative assurance based on a review of unaudited interim financial statements, and other procedures performed at the underwriter's request and the results of performing those procedures. The letter concludes with a paragraph restricting its use to the addressees.
There are three important constraints on the comments the auditor makes in the comfort letter:
(a) The auditor should comment only on matters to which his or her professional competence is relevant.
(b) The auditor must have obtained knowledge of the client's internal controls, policies and procedures for the period for which the procedures are performed.
(c) The auditor cannot take any responsibility for the adequacy or appropriateness of the procedures for the underwriter's purposes.
Underwriters sometimes ask auditors to give some form of assurance on an offering document taken as a whole, either in a comfort letter or in a due diligence meeting. There are no assurance standards by which an auditor can properly make such a statement, and the exposure draft clearly prohibits an auditor's giving any form of blanket assurance on an offering document.
An appendix to the exposure draft includes illustrative examples of comfort letters and other letters related to the auditor's assistance to underwriters and others.
Due diligence meetings
As noted above, the part of the exposure draft dealing with the auditor's participation in due diligence meetings represents an addition to the CICA HANDBOOK - ASSURANCE, but largely represents a codification of current best practices.
The exposure draft suggests that the auditor would normally request the underwriter to provide in advance of the meeting a list of the questions addressed to the auditor; the auditor may wish to discuss the intended responses with management. The auditor would confine comments in the meeting to matters properly relating to the audit engagement and to work undertaken in connection with the offering document. It is essential that comments be restricted to what the auditor would be prepared to put in writing, and such a communication could be made only if it met the standards set out in the Assurance Recommendations in the CICA HANDBOOK - ASSURANCE. The appendix to the exposure draft contains a number of examples of questions commonly asked in due diligence meetings, together with comments on the auditor's response.