Accountants' Association Plans to Limit Assurances On Official Statements
WASHINGTON -- A senior panel of the American Institute of Certified Public Accountants is proceeding with a controversial plan to limit the ability of bond underwriters to get assurances from accountants that their official statements are complete, according to a spokesman for the group.
The institute's senior technical committee met in New York to debate a rule proposed May 10 by its securities auditing practices task force that would restrict the availability of so-called comfort letters from accountants. While no vote was taken, the spokesman said the panel plans to go ahead with the rule.
But the spokesman stressed that the committee has called for a rewrite of the draft ruling that would make it more palatable to securities lawyers who warn that restricting the availability of comfort letters will expose municipal dealers unfairly to liability. He would not elaborate.
At issue are the written assurances that underwriters going to market routinely seek from their accountants stating that official statements contain no material omissions or misstatements. The institute says the number of requests for comfort letters from underwriters worried about lawsuits have gotten out of hand and if dealers want that level of review, they will have to pay more for it.
As a result, it proposed in May that comfort letters providing the so-called negative assurances that no flaws exist in documents should be restricted to deals registered with the Securities and Exchange Commission. Municipal bond deals are not registered with the SEC.
Deals not registered with the SEC, including municipal bond offerings, could still get comfort letters, but they would state only that the financial documents in the deal were prepared using the same accounting principles used in prior years. They would not include the "negative assurance" sought by underwriters.
The proposal drew strong opposition from the National Association of Bond Lawyers, which argued in a July 25 letter that, while municipal bonds do not have to be registered with the SEC, bond underwriters still have to ensure that disclosure is accurate. They pointed to the SEC's 1989 interpretation that municipal bond underwriters must have a reasonable basis for believing in the accuracy of key representations concerning the securities they underwrite.
"The committee members don't think that those people who oppose the ruling really understand what the changes would entail," the spokesman said. "There's going to be some rewriting." He said those who could not get comfort letters under the proposed rule would still be able to get those same services "in different ways.
"They could hire auditors firms to perform other services that would give them the same negative assurances," the spokesman said, noting that the committee hopes to finalize a rule in November.
The NABL proposed in its comment letter that accountants should continue to provide comfort letters with negative assurances in municipal deals where underwriters have a responsibility to do due diligence, which is, in effect, saying in every deal.
"It's distressing that the issue comes down to whether accountants are being paid enough," said Stanley Keller, immediate past chairman of NABL's securities law and disclosure committee. "I can understand their concerns about exposure to liability, but lots of participants in transactions have the same concern. The question is making sure the marketplace understands what the level of responsibility is and that people make sure that what they are doing they are doing in a professional manner."
The senior technical committee of accountant's group is the body that sets auditing standards in the United States.