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Trust But Verify – Another Perspective on Comfort Letters

Back in March, AICPA Senior Vice President Susan Coffey wrote about the dangers of providing client comfort letters. Since then, we’ve been hearing from more and more members that they are seeing a rise in requests from third parties for some sort of assurance on client accounting and tax information, or financial condition. I think Edward Karl said it best in CPAs and Comfort Letters: The New Chocolate (from the July edition/DC Currents column of The Tax Adviser) when he described them as requests for “verification, confirmation, certification, corroboration, authentication or substantiation of their clients’ financial information.” You name it, we’ve been asked to validate it. On the bright side, an increase in these requests confirms the faith, confidence and trust that business owners, decision makers and the public have in CPAs.

The notion of “trust but verify” is something CPAs are familiar with. After all, we are professional skeptics who perform audits for a living. Tax practitioners can trust the information provided to them by their clients. In fact, both the AICPA’s Statements on Standards for Tax Services and Circular 230 due diligence standards allow us to rely on the information provided by clients and third parties, although we must inquire if we find inconsistencies or information that conflict with other known information. However, it would seem the business community is starting to adopt a slightly different notion of this phrase, closer to the definition provided by St. Bernard Parish President Craig Taffaro, when talking about his frustrations with BP after the infamous oil spill in the Gulf of Mexico, when he said “we trust what you say is true, as soon as we verify that we know it's true."

As the economy starts to recover, more small businesses will be formed and existing businesses that struggled through and outlasted the recession will start to grow. Homeowners who find that they are no longer underwater will start to refinance their mortgages to take advantage of low rates before they inevitably begin to rise again. These are all good problems to have as a country with a recovering economy. However, for CPAs, it means we need to be ready to respond to a request for a comfort letter that may really be a third-party verification request. For that I have good news: the AICPA has new resources to help you with exactly that!

 We have recently added an expanded frequently asked questions document to our webpage (aicpa.org/verifications) dedicated to third-party verification letters. These non-authoritative responses now include tax information to help practitioners navigate the complex Internal Revenue Code section 7216 disclosure rules. One of the FAQs even includes some sample text that members can use when responding to a third-party verification request for a tax-only client. Additional resources on aicpa.org/verifications, include the video featured above of Sue Coffey in a discussion on matters of solvency and the types of responses CPAs can provide to third-party verification requests.   

Want to learn more? The AICPA is hosting a webcast, “You Want Me to Verify What? Understanding & Responding to Third Party Verification Requests,” at 1 p.m. ET on Jan. 16, to explore the issues and challenges in more detail.  Other new resources are in development, so check back often. Please continue to share your experiences and challenges with us at [email protected]. Your feedback allows us to identify and develop new resources to provide guidance and support for our members.

Jina Etienne, CPA, Director of Taxation, American Institute of CPAs. Jina started her career in 1989 in the tax department of Touche Ross and, in 1993, started her own practice to focus on the needs of small businesses and their owners. She recently joined the AICPA after 17 years in private practice.

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