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SEC 2300 - Experts Language
Publication date: 30 Jun 2023
us PwC SEC Volume 2300
.1 General
.11 What is “experts” disclosure?
"Experts" disclosure typically refers to disclosure in the materials relating to an underwritten offering registered under the Securities Act which indicates that the audited financial statements have been included or incorporated by reference in the registration statement and prospectus in reliance on the report of the independent registered public accounting firm, given on their authority as experts in auditing and accounting. A similar statement might also be made with respect to management's assessment of the effectiveness of internal control over financial reporting, when applicable.
.12 Why do certain parties seek to include “experts” disclosure in offering materials relating to a Securities Act registration statement?
Certain parties seek to include “experts” disclosure in offering materials relating to a Securities Act registration statement because there are provisions in the US securities laws which may provide those parties with some liability protection.
Section 11 of the Securities Act imposes liability on various parties (e.g., issuers, underwriters, accountants, certain officers and directors) for materially false or misleading statements/omissions in a registration statement. Section 11 also provides that certain parties (e.g., underwriters, officers and directors) may avoid this liability with respect to any part of the registration statement purporting to be made "upon the authority of an expert" if that party "had no reasonable ground to believe and did not believe" the "expertized" portion of the registration statement contained an untrue statement, or that there was a material omission.
Because of the protection afforded by this provision, almost all prospectuses and prospectus supplements relating to underwritten offerings registered under the Securities Act contain some form of “experts” disclosure. This is true even though the SEC's rules and regulations do not require “experts” disclosure for domestic companies.
See SEC 2300.901 and SEC 2300.902 for additional guidance.
.13 Does the SEC staff expect “experts” disclosure to refer to audit report modifications?
Generally, yes. We understand the SEC staff expects “experts” disclosure to refer to audit report modifications unless the modification relates solely to a matter of consistency in the application of accounting principles. Common examples of audit report modifications which would ordinarily be disclosed in “experts” disclosure include references relating to going concern, restatements, an adverse opinion on internal control over financial reporting and the exclusion of a recently acquired business from the scope of the audit of internal control over financial reporting. See SEC 2300.904 for additional guidance.
.14 Are there specific wording considerations related to “experts” disclosure that should be considered?
The independent accountant should exercise care when reviewing management’s draft "experts" disclosure so that the language used with respect to the accountant is appropriate. We believe wording such as "the financial statements are included upon the authority of our independent registered public accounting firm as experts" should not be used because that wording might imply that the independent accountant authorized the inclusion of the financial statements (which is the company's responsibility). In addition, we do not believe it is appropriate to use the phrase “and on the authority of the independent accountant” instead of "given on the authority of the independent account" because a similar inference might be drawn. Additionally, we believe it is important to ensure that the fields in which the independent accountant is an expert (auditing and accounting) are stated clearly.
We believe the "experts" disclosure should unambiguously convey the date of the financial statements (and, if appropriate, the date of management’s assessment of the effectiveness of internal control over financial reporting) that are being included or incorporated by reference in the registration statement/prospectus in reliance on the independent accountant’s report. We do not believe the "experts" disclosure should simply refer to the "latest Annual Report" or "most recent financial statements," because that type of reference could be misconstrued to "expertize" the independent accountant with respect to financial statements or assessments of internal control over financial reporting on which they have not reported and with which they might not otherwise be associated (e.g., in the case of a shelf registration statement and a change in independent accountant).
Additionally, we do not believe it is appropriate for “experts” disclosure to make reference to financial statements that are not a part of the offering materials at the time the “experts” disclosure is prepared (e.g., no “future” or “evergreen” expertization).
.15 Do registration statements on Form S-8 generally include “experts” disclosure?
No. "Experts" disclosure is generally not included in a registration statement on Form S-8 (e.g., for stock option plans) because it is generally not an underwritten offering.
.16 Do offering materials relating to transactions that are exempt from registration under the Securities Act typically include “experts” disclosure?
Generally, no. Because the concept of an “expert” has a specific meaning in the Securities Act, we believe the independent accountant generally should not agree to be named as an expert in connection with private placements, Regulation A or D offerings, or other offerings exempt from registration under the Securities Act, nor in an offering document filed with the Office of Thrift Supervision. However, we believe the independent accountant ordinarily agrees to language substantially in the form referred to in PCAOB AI 26.12-.15 and AICPA AU-C 945-A29. We believe the caption "Experts" should not be used in a non-Securities Act offering.
.2 References in “experts” disclosure to an independent registered public accounting firm or independent auditors
.21 How should the independent accountant be referred to in “experts” disclosure?
We believe the manner in which the independent accountant is referred to in the "experts" disclosure (i.e., as an independent auditor or as an independent registered public accounting firm) depends primarily on how its report is titled.
As a general matter, we believe that when the independent accountant’s report relates to a registrant, it is referred to as an "independent registered public accounting firm," and when its report relates to a non-registrant (e.g., an acquired business that is not a registrant), it is referred to as "independent auditors."
.22 How should the independent accountant be referred to when multiple audit reports are included in a single Securities Act registration statement?
In instances where the independent accountant is named as an expert with respect to multiple audit reports in a single document, we believe all references to the independent accountant are ordinarily consistent. For example, where the independent accountant is the auditor of both the registrant and a non-registrant whose financial statements are also included or incorporated by reference in the registration statement, we believe the independent accountant is referred to consistently as "an independent registered public accounting firm" in the "experts" disclosure.
[Editor’s note: This guidance relates to references to the independent accountant in the "experts" disclosure and does not affect the manner in which its audit report is titled.]
.3 Reports on reviews of interim financial information included or incorporated by reference in a securities act registration statement
.31 Should “experts” disclosure indicate that management has included its unaudited interim financial information in reliance on an independent accountant’s review report on the interim financial statements if that review report is also included or incorporated by reference in the Securities Act registration statement?
No. Securities Act Rule 436(c) excludes a report on a review of unaudited interim financial information from the definition of a "report prepared by an expert," as that term is used in Sections 7 and 11 of the Securities Act. However, see SEC 2300.32 for guidance relating to disclosures registrants consider providing.
.32 What are some typical impacts on “experts” disclosure when an independent accountant’s interim review report is included or incorporated by reference in a Securities Act registration statement?
In order to clearly distinguish between accountants' reports on audited and unaudited financial statements, when an interim review report is included or incorporated by reference in a Securities Act filing, the prospectus will typically indicate that an interim review report is not a report within the meaning of Sections 7 and 11 of the Securities Act and that the independent accountant's liability under Section 11 does not extend to its review report.
When an interim review report is included or incorporated by reference in a Securities Act registration statement, we believe it is preferable to use the caption "Independent Registered Public Accounting Firm" (for a registrant) or "Independent Auditors" (in the limited circumstances in which this situation could arise for a non-registrant) rather than "Experts" as the title to the “experts” disclosure because Section 11 liability does not extend to the review report. As outlined in PCAOB AS 4101.09, wording such as the following would ordinarily be appropriate when the independent accountant’s interim review report is included or incorporated by reference in a Securities Act filing:
With respect to the unaudited financial information of ABC Corporation for the three-month periods ended March 31, 20X3 and 20X2, included [incorporated by reference] in this Prospectus, XYZ Auditor LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated April 28, 20X3 appearing [incorporated by reference] herein states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. XYZ Auditor LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by XYZ Auditor LLP within the meaning of Sections 7 and 11 of the Act. |
[Editor's note: When an interim review report is included or incorporated by reference in a non-Securities Act offering (e.g., Rule 144A offering), we believe the above paragraph should be included in the offering materials. However, the word "Prospectus" should be replaced with a description to fit the circumstances (e.g., "offering memorandum") and the last sentence of the disclosure should be deleted because there is no Section 11 liability for any auditor report.]
In addition, we believe the accountants’ consent should be modified to indicate that the independent accountant consents to the reference to it as experts under the heading "Independent Registered Public Accounting Firm" in such Registration Statement.
For those prospectuses incorporating by reference more than one Form 10-Q, the above language would be modified to refer to each of the separate review reports incorporated, as well as the respective periods covered by each report.
[Editor’s note: For non-public companies, AU-C 930 requires a written review report to be issued when the independent accountant is engaged to perform an interim review (e.g., when performing an interim review for a non-public company in connection with a non-Securities Act offering such as under Rule 144A). However, there is no requirement that the review report be included or incorporated by reference in the offering document.]
.33 Should a Form 10-Q that (i) includes the review report of an independent accountant and (ii) is automatically incorporated by reference into an effective Securities Act registration include disclosure relating to the fact that the independent accountant is not an expert with respect to its interim review report?
Yes. The example in SEC 2300.32 addresses review reports on unaudited interim financial statements filed before or at the time of the filing of the Securities Act registration statement. There are additional considerations if the registration statement provides for automatic incorporation of future SEC filings.
In a "continuous" or "evergreen" offering of securities (e.g., on Form S-3), all Form 10-Qs filed during the period the securities continue to be offered are automatically incorporated by reference into the registration statement. Accordingly, we believe that each subsequent Form 10-Q which contains the independent accountant’s interim review report should include a section or footnote to the financial statements explaining that the review report is not a "report" within the meaning of Sections 7 and 11 of the Securities Act, and that the independent accountant's liability under Section 11 does not extend to its interim review report. The disclosure should be similar to the example disclosure included in SEC 2300.32.
Since an interim review report is not a "report" prepared by a certified public accountant within the meaning of Sections 7 and 11 of the Securities Act, we do not believe it is necessary to modify the language in "continuous" or "evergreen" Securities Act registration statements for interim review reports included in Form 10-Qs filed after the filing of the registration statement. However, we generally would not object if management made a voluntary disclosure to update the previously filed language for this purpose. We believe the disclosure should be outside of the historical financial statements and should not be a part of the independent accountant’s interim review report (since is it not a statement by the independent accountant). The following is an example of the type of modification that a company might consider including in its Form 10-Q:
"The Independent Registered Public Accounting Firm section in Form S-3, File No. 333-XXXXXX, of ABC Corporation is modified to include the following:
With respect to the unaudited financial information of ABC Corporation for the three- and six-month periods ended June 30, 20X3 and 20X2, incorporated by reference in this Prospectus, XYZ Auditor LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their separate report dated August 8, 20X3 incorporated by reference herein, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. XYZ Auditor LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by XYZ Auditor LLP within the meaning of Sections 7 and 11 of the Act." |
.9 Frequently asked questions
.901 Does the SEC expect an accountants’ consent provided in connection with the filing of a Securities Act registration statement to include a reference to the "experts" disclosures?
Yes. Section 7 of the Securities Act requires a written consent from "any accountant, engineer, or appraiser, or any person whose profession gives authority to a statement made by him" that is named as having prepared or certified any part of the registration statement, or that is named as having prepared or certified a report for use in connection with the registration statement. Securities Act Rule 436(b) also requires a consent if the registration statement states that any information contained in the registration statement "has been reviewed or passed upon by any persons and that such information is set forth in the registration statement upon the authority of or in reliance upon such persons as experts." Accordingly, an accountants’ consent included in a registration statement is expected to include a statement indicating that the independent accountant consents to the reference to their firm in the "experts" disclosure. See SEC 2400.12.
.902 Is a consent required when the “experts” disclosure is updated in a prospectus supplement to an already effective registration statement?
Some registrants elect to update the "experts" disclosure in an already effective registration statement by including revised (e.g., more current) “experts” disclosure in a later filed prospectus supplement. We do not believe an independent accountant provides a consent for updated "experts" disclosure provided in a prospectus supplement unless the filing of the prospectus supplement creates a new effective date for the independent accountant and the independent accountant is otherwise required to provide a consent. Even when the independent accountant is not providing a consent, the independent accountant reviews management’s draft “experts” disclosure for appropriateness.
.903 Is it appropriate for “experts” disclosure to indicate that management’s assessment of the effectiveness of internal control over financial reporting was included or incorporated by reference in a Securities Act registration statement in reliance on the independent accountant’s report if the independent accountant issued a disclaimer of opinion of the effectiveness of internal control over financial reporting?
We do not believe that a disclaimer of opinion provides a sufficient basis to indicate that management’s assessment has been included or incorporated by reference in reliance on the independent accountant’s report.
.904 Is it appropriate for predecessor and successor auditors to consider being identified as experts when the successor auditor has audited and reported on modifications to financial statements previously audited by the predecessor auditor?
When a successor auditor has audited and reported on modifications to financial statements previously audited by a predecessor auditor, we believe the successor auditor may agree to be identified as experts with respect to the portion of the successor auditor’s report that relates to the audit of the modifications when the predecessor auditor agrees to be identified (and is identified) as experts with respect to its report on the "pre-modification" financial statements. Similarly, depending on the circumstances, we believe the predecessor auditor may agree to be identified as experts with respect to its report on pre-modification financial statements when the successor auditor audits the modifications and agrees to be identified (and is identified) as experts with respect to the portion of its report relating to the adjustments to the financial statements.
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