Financial Information – Does the SEC comment on the financial statements? (39)

What are auditors’ consents and why are they
necessary?
The SEC requires that auditors consent in writing to the inclusion of their audit reports in the prospectus. Under the Securities Act, auditors have liability as experts. Further, a positive audit report is viewed by the market as critical to an IPO. Therefore, in order to ensure that the auditors have reviewed the prospectus that includes their audit report and to protect the auditors from companies falsely including audit reports in the auditors’ names, the SEC requires the company to include an executed auditor’s consent as an exhibit to its filed registration statement.
Does the SEC comment on the financial statements?
The SEC will review and comment on the financial statements and the MD&A. The SEC’s areas of particular concern are:
revenue recognition;
business combinations;
segment reporting;
financial instruments;
impairments of all kinds;
deferred tax valuation allowances; and
compliance with debt covenants, fair value and loan losses.
Companies and their auditors should review their accounting policies and potential areas of concern before filing the registration statement. The SEC encourages discussions with its accounting Staff of accounting concerns early in the preparation process, thus avoiding potential problems once the registration statement is filed and publicly available.

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