ALTERNATIVE PERFORMANCE MEASURES
10B-5 DISCLOSURE LETTER
A SAS 72 comfort letter is an accounting comfort letter delivered by an auditor to
investment banks seeking to establish a due diligence defence under Rule 10b-5. A SAS
72 comfort letter typically includes (i) a circle-up that "ticks and ties" the historical financial
figures in the prospectus back to the company's underlying accounting records, and (ii) negative assurance with respect to subsequent changes in key line items after the last set of financial statements included in the prospectus.
Negative assurance is a form of comfort delivered by professional advisers to investment banks seeking to establish a due diligence defence to potential liability under Rule 10b-5.
Negative assurance is "negative" in the sense that it does not provide positive confirmation
thatsoething is the case—rather, it confirms the professional adviser is not aware of
anything that caused it to believe that something is (or is not) the case.
Alternative performance measures (a.k.a., non-GAAP financial measures) are financial
measures that are not defined by or presented in accordance with IFRS or other generally
accepted accounting principles. Examples of alternative performance measures include
EBITDA, net debt and operating free cash flow. Alternative performance measures are
frequently important to investors but may also raise disclosure and comfort issues.
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.
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A CFO circle-up is a form of comfort delivered by a CFO (or other senior manager responsible for financial and accounting matters) to investment banks seeking to establish a due diligence defence to potential liability under Rule 10b-5. A CFO circle-up "fills the gap" by circling financial figures that the auditor was unable to circle in the circle-up attached to the SAS 72 comfort letter. A circle indicates that certain procedures have been performed with respect to a figure, which should reduce the risk that the figure has been misstated.
SAS 72 COMFORT LETTER
DUE DILIGENCE DEFENCE