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That “Comfort Letter” Request May Really Be A Third-Party Verification

Writing-letterI continue to get requests from members on how to handle the "comfort letter" issue, as well as feedback on guidance the AICPA has developed and suggestions for how we can better advocate for our members and their clients. By way of background for those of you who may have missed my previous blog post, CPAs are often asked to verify a variety of client information for regulators, banks, insurance providers, state taxing authorities and more.

What they're asking for, basically, is a guarantee that certain information about a client is correct, such as confirmation of a client’s self-employment status; verification of income from self-employment; verification of a self-employed borrower’s business ownership percentage; and profitability or sustainability of a self-employed client’s business. While it's certainly understandable why they would want verification of this information, depending on what the request is can place CPAs in a risky situation. At the AICPA, we’ve received several inquiries from members regarding what is often referred to as "providing comfort" or “comfort letters.” However, the requests are actually “third-party verifications."

I was surprised at how many comments and off-line queries I received since my post appeared in March. It's clear that CPAs are being asked to provide third-party verification letters on a regular basis as the economy starts to dig itself out of a hole and more people are buying homes, starting new businesses and asking lenders for money. So, the $60,000 question becomes: how to handle a third-party verification request? To help answer that question, take a look at the top three FAQs we've posted based on our members' questions. (In addition to the FAQs, the AICPA is developing third-party verification-related FAQs specific to tax, which will be incorporated into this resource in September.)
  1. Can I provide a third-party verification letter? Should I?
    The simple answer is generally yes, as long as you're verifying factual information and not breaking client confidentiality. One BIG exception is that CPAs cannot provide assurance on matters related to solvency; doing so would be an ethical violation. That being said, the AICPA cautions you about the potential risks and liabilities involved with providing verification letters. Check your practice liability insurance to make sure you are familiar with the details surrounding your policy’s limitations. But, there are certainly ways to serve your client, from audit, review, or compilation of financial statements to examination, review, or compilation of pro forma financial information—to name just a few (my March blog post provides more details).
  2. My client's bank wants me to “fill out a form” verifying her income. Can I?
    You can, but again, there may be risks and liability involved. Brokers and lenders are generally satisfied with income tax returns and an acknowledgment that you prepared them. If you do provide verification, make sure to obtain your client's consent first and make sure the verification is written carefully and in a factual manner.
  3. I know I can't provide solvency info, but I've been asked to. What do I do?
    The professional standards do not allow a practitioner to provide any form of assurance or financial presentation on matters relating to solvency. However, you are not precluded from providing verification letters on behalf of its clients so long as the request is not on a matter related to solvency. There are ways to act as the client's trusted adviser, while still managing the risk of being sued and following professional standards. When the request is on a matter of solvency, point the client to Interpretation No. 2, “Responding to Requests for Reports on Matters Relating to Solvency,” of AT section 101, Attest Engagements (AICPA, Professional Standards, AT sec. 9101 par. .23–.33); it describes why a CPA is prohibited from providing any assurance on matters related to solvency. TIS section 9110.19, “Lender Comfort Letters” (AICPA, Technical Practice Aids), also provides non-authoritative guidance.

Are your third-party verification requests more complex? No worries. The decision on whether to provide third-party verification letters can be complicated, especially when a bank or your client is pressuring you to provide one. You don't want to lose a client, but don't want to put your practice at risk either. If you ever find yourself completely stumped, don't worry. The AICPA is here to support you. If you’re asked to provide a third-party verification and need help, call the AICPA’s Technical Hotline. Inquiries can be made by phone, 877.242.7212, or you can fill out a Technical Inquiry Form. We address all requests that are brought to our attention.

In addition, 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 we will continue such outreach.  Information from you on which organizations are requesting this information will be incredibly helpful to us. Please send this information to Salome Tinker who is managing this piece of our advocacy efforts.

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 webpage dedicated to third-party verification letters in the Financial Reporting Center. You’ll find guidance from various AICPA resources, including AON, the AICPA’s Professional Liability Insurance Program provider.  And, please, continue to reach out to us and tell us how we can help you.

As always, feel free to contact me directly, if you have concerns in the future.

Received any tricky third-party verification letter requests recently?

Susan S. Coffey, CPA, CGMA, Senior Vice President – Public Practice and Global Alliances, American Institute of CPAs.

Writing letter image via Shutterstock

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