PCAOB proposes to eliminate 135-day outside date for negative assurance in comfort letters

The proposal is responsive to the SEC’s semiannual reporting proposal and its separate filer status proposal, each of which would lengthen the periods during which auditors cannot give negative assurance under the existing standard. Notably, the PCAOB takes the view that it need not wait for the SEC to act on its recent proposals, because the 135-day convention is already out of step with current quarterly filing deadlines, although it seeks comment on whether to adopt the amendments if the SEC does not move forward with its semiannual reporting proposal. 

If adopted and approved by the SEC, the amendments would remove a long-standing constraint on offering timing, as we discussed in our comment letter to the semiannual reporting proposal, while leaving auditors with discretion over whether to provide negative assurance. 

We view the proposal as a welcome change, whether or not the SEC ultimately adopts optional semiannual reporting. The proposal does not specifically address how the new filing deadline-based approach would apply to issuers that have no required interim filing, and we expect foreign private issuers that access the U.S. markets frequently to continue to obtain voluntary interim reviews on a cadence they determine is appropriate to support customary comfort.

Key takeaways

• Outside date is tied to an issuer’s reporting obligations. Auditors could give negative assurance on subsequent changes at any point up to the company’s next annual or interim filing deadline, rather than only within 135 days of period end. The PCAOB argues that this approach also has the benefit of accommodating future changes to an issuer’s reporting obligations. 
• Negative assurance is not automatic beyond day 135. A new note would make clear that auditors are not required to give negative assurance and would list factors that may inform that decision, including the length of time since the end of the most recent audited or reviewed period, management’s ability to respond to inquiries, changes in senior management and the effectiveness of internal control over financial reporting. Negative assurance would remain unavailable once a required filing has been missed. 

Background: The 135-day convention

Under the existing PCAOB Auditing Standard 6101, an auditor may give negative assurance on subsequent changes only as of a date less than 135 days after the end of the most recent audited or reviewed period.  After that, the comfort letter would be limited to procedures performed and findings obtained – what are commonly referred to as “management inquiries” – and investment banks are usually unwilling to proceed with an offering if the comfort letter does not include a customary negative assurance paragraph.  Even under today’s quarterly cadence, the period between the third quarter end and the 10-K deadline can be as long as 182 days, leaving up to a 47-day window in the first quarter where an issuer is effectively precluded from conducting an offering. The gap would grow to as long as 212 days for the proposed small non-accelerated filer category and up to 274 days for semiannual filers. 

Under the existing standard, a foreign private issuer, whose Form 6-K interim financials are not required to be reviewed, generally cannot obtain negative assurance from approximately May 15 until the next annual report is filed (for a calendar-year filer), unless it voluntarily prepares and obtains a review of interim financial statements and negative assurance is requested within 135 days after the end of the period covered by that review. 

The proposed amendments

Filing deadline-based approach

As amended, AS 6101 would permit negative assurance as of a date after the end of the most recent audited or reviewed period and before the date by which financial statements for the next annual or interim period are required to be filed. Revised AS 6101 would prohibit negative assurance only where the requested date is on or after a filing deadline that was missed. For a timely filer, the amendments would eliminate the gaps created by the 135-day threshold, although whether negative assurance is actually given would remain at the auditor’s discretion, and the standard would accommodate semiannual reporting, extended deadlines or any future changes in SEC filing requirements. 

Auditor discretion and factors that may inform their decision

To address commenter concerns that a longer window increases the risk of changes unknown to the auditor, and that the 135-day convention served as a useful guardrail, the PCAOB would add a note to AS 6101 confirming that auditors may, but are not required to, provide negative assurance within the permitted period. 

The note lists non-exhaustive factors that may inform the decision, including the length of time since the last audited or reviewed period, management’s ability to respond to inquiries as of a date that does not coincide with a month-end close, changes in senior management or key personnel, the effectiveness of internal control over financial reporting, the company’s ability to continue as a going concern, restatement activity and the appointment of new auditors during the change period. 

The proposal does not prescribe additional procedures or change what constitutes negative assurance, and the note reflects existing practice in which auditors give negative assurance on some line items and exclude others depending on what information is available and management’s comfort level with commenting on those line items in the representation letter required by the auditors as part of the comfort letter process. 

Practical implications

Potential timing flexibility for capital markets access… The amendments would remove an artificial constraint on the timing of offerings, as they would allow customary comfort with negative assurance, including for example in the weeks before the 10-K is filed. The proposal responds to concerns, raised by many commenters including Davis Polk, that the existing 135-day limit could impair capital markets access for semiannual filers, as underwriters may not proceed with an offering without customary negative assurance.

…but providing negative assurance would still be up to the auditors. Because negative assurance would remain discretionary, we expect auditors to be cautious about giving it for dates far removed from the last interim review or annual audit, or in cases that involve any of the factors outlined in the proposal. That said, the proposed amendments allow auditors the flexibility to make that determination based on the attendant facts and circumstances, rather than being limited by a prescriptive fixed-day count. Where auditors decline to provide negative assurance, underwriters who determine to proceed with the offering would likely require additional due diligence and/or a CFO certificate covering the relevant financial information to bridge any gap in comfort. 

Key dates

The PCAOB is seeking comments on the proposal by January 4, 2027. Any final amendments require SEC approval, and the PCAOB is also seeking input on whether to make the amendments effective immediately upon SEC approval or after a delay, such as 30 days.