ASB issues standard for auditors involved with exempt offering documents

By Ken Tysiac

A new auditing standard issued Wednesday by the AICPA Auditing Standards Board (ASB) establishes when an auditor is involved with an exempt offering document—and describes the procedures an auditor is required to follow when involved with such a document.

Statement on Auditing Standards (SAS) No. 133, Auditor Involvement With Exempt Offering Documents, does not amend or supersede any previous guidance and will take effect for exempt offering documents that are initially distributed, circulated, or submitted on or after June 15, 2018.

The size of the exempt securities market and new complexities and risks in the market led the ASB to conclude that standards-level guidance for when an auditor is considered involved in an offering, as well as the audit responsibilities once involved, is in the public interest and will promote consistency in practice. Opportunities for issuance of exempt securities have increased in recent years as a result of regulations that have been passed to create opportunities for small businesses to raise funds.

In particular, SEC rules issued in 2015 to permit companies to offer and sell securities through crowdfunding established a new method for the offering of exempt securities. Depending on the amount offered and sold during a 12-month period, these companies may be required to have their financial statements reviewed by an independent public accountant or audited by an independent auditor. If an auditor’s report on the financials is included in the crowdfunding offering and the auditor performs one of the activities specified in the SAS, the auditor would be considered involved.

Also in 2015, the SEC amended Regulation A to create a new exemption from registration under the Securities Act, creating another opportunity for smaller companies to raise money. SAS No. 133 may apply to Regulation A offerings as well.

Broadening the scope

Before SAS No. 133 was issued, the AICPA provided best practices for auditors related to exempt offerings in the industry-specific AICPA Audit and Accounting Guides State and Local Governments and Health Care Entities.

The best practices described in the guides were specific to issuances of municipal securities. The new standard broadens the scope of the guidance to include auditors’ involvement with securities offerings that are exempt from registration under the Securities Act of 1933, as amended, and to franchise offerings.

Exempt offerings differ from registered offerings, as typically there are no laws or regulations requiring auditors to undertake procedures related to an exempt offering document or prohibiting the issuer from including the auditor’s report without obtaining the auditor’s permission. In some cases, the engagement contract between the auditor and the entity will require the auditor’s permission to be obtained.

Instead, an indirect system of regulation exists for exempt offerings. The SEC imposes certain regulatory requirements on the underwriters of exempt offerings, related to the entity’s disclosure at the time of issuance as well as after issuance.

For example, municipal securities offerings are subject to primary market disclosures at the time of sale, which are made by issuing an official statement. In addition, the underwriter must obtain a covenant from the issuer that after issuance, the issuer will provide disclosures to the market throughout the life of the securities.

Known as “continuing disclosures” or “secondary market disclosures” throughout the life of the securities, these disclosures include financial information—including audited financial statements—and material events notices. Official statements and continuing disclosure statements are filed electronically with the Electronic Municipal Market Access (EMMA) system maintained by the Municipal Securities Rulemaking Board. The investing public can obtain information free of charge through EMMA.

Franchise offerings, meanwhile, are regulated at the federal level by the Federal Trade Commission (FTC). States also may impose additional requirements. A franchise disclosure document (FDD) serves as the exempt offering document for franchise offerings. The FDD is updated at least annually to be used to sell franchises, and an FTC rule requires annual audited financial statements (with a phase-in period) within 120 days of the fiscal year close. Some states require an auditor’s consent to use the auditor’s report in the FDD.

As previously noted, SAS No. 133 is designed to protect the public interest and promote consistency in practice. The standard provides performance requirements for auditors involved with documents for exempt offerings such as municipal securities; securities issued by not-for-profit religious, education, or charitable organizations; crowdfunding; small issues of securities such as Regulation A offerings; and franchise offerings.

When are auditors ‘involved’?

An auditor’s involvement with an exempt offering document is established under SAS No. 133 if both of the following occur:

  • The auditor’s report on financial statements or the auditor’s review report on interim financial information is included or incorporated by reference in an exempt offering document; and
  • The auditor performs one or more specified activities with respect to the exempt offering document. These activities include:
    • Assisting the entity in preparing information included in the exempt offering document.
    • Reading a draft of the exempt offering document at the entity’s request.
    • Issuing a comfort or similar letter in accordance with AU-C Section 920, Letters for Underwriters and Certain Other Requesting Parties, or an agreed-upon procedures report in accordance with AT-C Section 215, Agreed-Upon Procedures Engagements, in lieu of a comfort letter or similar letter on information included in the exempt offering document.
    • Participating in due-diligence discussions with underwriters, placement agents, broker-dealers, or other financial intermediaries in connection with the exempt offering.
    • Issuing a practitioner’s attestation report on information relating to the exempt offering.
    • Providing written agreement for the use of the auditor’s report in the exempt offering document.
    • Updating an auditor’s report for inclusion in the exempt offering document.

When an auditor is involved with an exempt offering, SAS No. 133 requires the practitioner to perform procedures described in Paragraphs 6–16 of AU-C Section 720, Other Information in Documents Containing Audited Financial Statements, on the exempt offering document.

In addition, SAS No. 133 requires the auditor to perform procedures designed to identify events occurring between the date of the auditor’s report and the date of distribution, circulation, or submission of the exempt offering document that may have caused the auditor to revise the auditor’s report had the events been known to the auditor as of the date of the auditor’s report.

The standard also discusses requirements and considerations when the auditor identifies subsequent events or subsequently discovered facts.

Ken Tysiac ( is a JofA editorial director.

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