WASHINGTON -- A proposal by an American Institute of Certified Public Accountants task force to limit the ability of underwriters to get assurances from their accountants that their official statements are complete is drawing objections from dealers' lawyers.
The National Association of Bond Lawyers is drafting a comment letter to the institute's securities auditing practices task force warning that the May 10 proposal to restrict the availability of so-called comfort letters will expose municipal dealers unfairly to liability.
Underwriters going to market routinely seek written assurances from their accountants that official statements contain no material omissions or misstatements. The review is part of underwriters' efforts to show they have used "due diligence" to ensure that bond documents are accurate.
But the institute says requests for comfort letters from underwriters worried about lawsuits have gotten out of hand. It proposed in May that comfort letters that provide the so-called negative assurance that no flaws exists in documents should be restricted to deals registered with the Securities and Exchange Commission.
Deals that are not registered with the SEC, including municipal bond offerings, could still get comfort letters, but they would only state that the financial documents in the deal were prepared using the same accounting principles that were used in prior years. They would not include the "negative assurance" sought by underwriters.
If dealers want that level of a review, they will have to pay more for it, says Mary Finan, head of the auditing practices task force and associate national director of SEC practices for Ernst & Young in New York.
The comfort letters issue is part of a broad review Ms. Finan's panel is conducting of auditing standards on the institute's books since 1984, called Statement on Auditing Standards No. 49.
According to Ms. Finan, the accounting profession is concerned that requests for comfort letters are proliferating and that restrictions are needed. Standards No. 49 was designed to comfort underwritters covered by the Securities Act of 1933 -- the federal law requiring registration of securities, she said. The concern is that "little by little, people have been nibbling away" at that, she said.
But bond lawyers this week are expected to argue that while municipal bonds do not have to registered with the SEC, bond underwriters still have investigate responsibilities to ensure that disclosure are accurate. The group is expected to point out that general antifraud provisions of the federal securities laws apply to municipal securities, just as they apply to other securities.
Moreover, the SEC stated in a 1989 interpretation that municipal bond underwriters must have a reasonable basis for believing in the accuracy of key representations concerning the securities they underwrite, and that means a reasonable investigation, bond lawyers will say.
According to Stanley Keller, chairman of the securities law and disclosure committee of NABL, as Congress, the SEC and the market push for improvements in disclosure, it is important for accountants to continue to provide the kind of comfort and assurances the market has come to expect.
Ms. Finan said comments on standard No. 49 will be reviewed by the institute's auditing standards board in early August. She said the board may be able to approve a final document as early as October.
"There is no intention here for the accounting professional not to work with bond underwriters," Ms. Finan said. "Auditors are still very willing to perform procedures for them and tell them the results of those procedures. That's still permissible" under the proposal, she said. "But it would not be equivalent comfort."
