The Dangers of Providing Client Comfort Letters
Every few years, the issue of providing clients with comfort letters – or verification documents – rears its head among our members. Regulators or banks often look for verification that certain items within a financial statement (e.g., revenue) or a tax return (e.g., income) is "right" and they want a CPA to verify it. AICPA members have even received requests for comfort letters from adoption agencies, health insurance providers and state taxing authorities.
According to the AICPA’s Professional Liability Insurance Program, examples of third party verification information requested by lenders and loan brokers include:
- Confirmation of a client’s self-employment status;
- Verification of income from self-employment;
- Verification of a self-employed borrower’s business ownership percentage;
- Profitability or sustainability of a self-employed client’s business; and
- The impact on a self-employed client’s business if money is withdrawn to fund the down payment on a real estate purchase.
CPAs are often drawn to the profession by its service-oriented nature. Our clients may believe that comfort letters are just part of the services we provide, not realizing what we can and might not be able do. In some situations, we may simply have to say no and offer an alternate solution. It may be best to tell clients that, while you support their ambitions, you cannot provide certification in the way a comfort letter request asks – especially in matters regarding solvency.
According to AICPA Technical Practice Aids on lender comfort letters, in response to a request to confirm client information in connection with a pending loan application, an accountant may provide a client with various professional services that may be useful with a financing. Those services include an:
- audit, review, or compilation of financial statements;
- examination, review, or compilation of pro forma financial information;
- examination or compilation of prospective financial information; or
- agreed-upon procedures report, as long as the agreed-upon procedures do not provide any assurance on matters related to solvency.
To find information on these requests by banks or other parties, why you should decline and how to go about doing it, visit the AICPA’s Financial Reporting Center. You’ll find guidance from various AICPA resources, including AON.
Finally, know that the AICPA is supporting you. We address all requests that are brought to our attention. We've reached out to several financial institutions and regulatory agencies to educate them on what CPAs can and cannot provide on behalf of clients – and have had many successes. For example, we are making strides with the Farm Service Agency, which has required that beneficiaries of certain farm programs present proof that their adjusted gross income does not exceed specified limitations. Program beneficiaries may provide “certification” from a CPA or other third party as an alternative to providing actual tax returns as proof.
It makes sense to deal with these issues at the national level so I encourage you to bring these types of request to our attention. Feel free to contact me directly at email@example.com, if you have concerns in the future.
Susan S. Coffey, CPA, CGMA, Senior Vice President – Public Practice and Global Alliances, American Institute of CPAs.
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