135-DAY RULE
The 135-day rule limits when an auditor can provide a SAS 72 comfort letter that gives negative assurance. Under the 135-day rule, an auditor cannot give negative assurance 135 days or more after the last balance sheet date for which the auditor has performed an audit or review.
Some Background
In practical terms, the 135-day rule creates windows during which a large securities offering typically would be completed. Generally, the securities offering would need to be completed within 4 months of the last balance sheet date for which the auditor has performed an audit or review.
Why does the 135-day rule often determine when a large securities offering would be completed?
Suppose a company wants to IPO on the London Stock Exchange. If the IPO is sufficiently large, then the offering will likely need to be marketed in the United States, the largest capital market in the world, to find enough investor demand. The investment banks leading the marketing of the transaction often will agree to extend the offering into the United States, which has a reputation for being litigious, only if the US offering is limited to "qualified institutional buyers" and the investment banks receive a US-style comfort package that includes negative assurance from professional advisers.
The way the 135-day rule is written means that negative assurance is available up to and including the 134th day since the last balance sheet date for which the auditor has performed an audit or review. The table below sets out the last date on which negative assurance is available based on an audit or review of financial statements with the balance sheet date indicated.
Some Practical Tips
Does the SAS 72 comfort letter need to be dated on or before the 134th day since the last reviewed or audited balance sheet date?
Not quite. The date that matters for the 135-day rule is not the date of the SAS 72 comfort letter itself but rather the "cut-off date" indicated in the body of the comfort letter (i.e. the date through which the auditor performed relevant procedures, which is typically up to 5 calendar days before the date of the comfort letter). By way of example, based on a review of 30 June 2023 financial statements, a SAS 72 comfort letter providing typical negative assurance could be delivered as late as 16 November 2023 (i.e. 5 calendar days after the last cut-off date of 11 November).
Is there any way to extend the period during which negative assurance is available without updating the financial statements in the prospectus?
Yes, the auditor could perform a private review of financial statements with a later balance sheet date (e.g. one month beyond the financial statements included in the prospectus). However, preparing and reviewing financial statements to the appropriate standard can take a significant amount of time and thus this may not be a quick fix for a timetable delay. In addition, in that case more recent financial statements would exist that have not been disclosed to investors. Accordingly, the company and investment banks would want to think carefully about the disclosures in the prospectus (e.g. the current trading disclosure) to ensure that investors have all material information needed to make an informed investment decision.
Useful Links
See AU-C Section 920: Letters for Underwriters and Certain Other Requesting Parties (in particular paragraph 59).
