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Key Facts about a New SAS on Exempt Offerings

SAS 133A municipal government issues a bond offering after the audit report date. Or a franchisor is getting ready to prepare its annual update to its franchise disclosure document. What are the auditor’s responsibilities in each case? Practitioners with governmental clients are probably familiar with long-standing guidelines to address involvement with municipal securities offerings, however a recently issued auditing standard expands those best practices into required guidance for all exempt offerings.  

What’s the Background?

The Auditing Standard Board’s Statement on Auditing Standards (SAS) No. 133, Auditor Involvement With Exempt Offering Documents, applies to exempt securities or franchise agreements when the auditor is involved. The Securities and Exchange Commission (SEC) oversees a significant regulatory framework for publicly traded offerings, setting rules on what types of information and documents must be filed and when, and on auditor involvement. Some offerings, such as municipal securities, franchise offerings, crowdfunding, and short-term commercial paper with a maturity of nine months or less, are exempt from SEC registration rules. Exhibit A in the new SAS includes a list of exempt offerings.

The ASB’s objective in developing this SAS was to establish when an auditor is involved with an exempt offering document and the related responsibilities. Although the AICPA State and Local Governments, Not-for-Profit Entities and Health Care Entities audit and accounting guides have long set forth best practices, an audit guide doesn’t have the same level of authority as an auditing standard. Since the SAS is based on many of the practices cited in the audit guides, auditors involved with municipal securities offerings may not experience significant changes; however, auditors involved with other types of exempt offerings (e.g. franchise agreements) will likely experience a change in practice because of the expanded scope of the SAS.

What Constitutes “Involvement”?

The SAS outlines when the auditor is involved in an offering as well as the required procedures. The auditor is considered involved if both of the criteria below are met.

  1. The auditor’s report on financial statements is included in an exempt offering document.
  2. The auditor performs any of the activities defined in paragraph 8(b) of the SAS. One example is reading a draft of the document at the entity’s request.

The Auditor is Considered Involved. Now What?

The auditor is required to read other information related to the offering and to perform certain subsequent event procedures.

What if the Auditor Doesn’t Know about an Exempt Offering?

In most exempt offerings, the entity making the offering may use the auditor’s report without discussing it with or obtaining permission from the auditor. Therefore, the SAS outlines triggering activities so that auditors would not unknowingly find themselves subject to this standard. The auditor has to take an action related to the offering to be involved (see paragraph 8(b) of the SAS). If a client issues an exempt security using the auditor’s report without making the auditor aware, the auditor would not have met any of the triggering activities, and therefore would not be considered involved.

As part of their risk management process, some firms may include a requirement in the terms of their engagement for clients to alert them when they are going to market. This engagement clause would not in and of itself constitute involvement. However, if a client alerts the auditor about including their report in the offering and, for example, asks the auditor to give the offering document a read, issue a comfort letter or take part in any of the other stated triggering activities, the SAS’s requirements apply.

Clarifying Expectations

The new SAS clarifies what it means to be involved and the auditor’s responsibilities involved when a client issues an exempt offering. The SAS is effective for exempt offering documents where the auditor is involved, that are initially distributed, circulated or submitted on or after June 15, 2018. Early application is permitted. You may be interested in attending a webcast on this topic on August 10 at 2 p.m. ET.

Laura Hyland, CPA, Senior Manager, Governmental Auditing and Accounting, Association of International Certified Professional Accountants.

Auditing courtesy of Shutterstock


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