How comfortable should you be when you’re asked by a client for a “comfort letter”?
A comfort letter, or third-party verification letter, is often requested by a client to furnish to a third party to facilitate a loan or other transaction. Their use, and the liability that attaches to them, seems to go in cycles.
“Just when you think they will go away, they come back, and liability attaches because the CPA is like a guarantor and provides some additional level of certainty regarding the client’s ability to pay back the loan,” said John Rasponte, director of risk management for North American Professional Liability Insurance Agency. “It’s not a new issue, but it seems to go away and then come back. We see it more often during a poor economy. If a loan runs into problems, the bank will go back to the file and see a letter from a CPA regarding financial solvency.”
Providing written assurance to third parties is a violation of the AICPA Statements on Standards for Attestation Engagements unless the CPA performs services and provides reports in accordance with these standards, noted Joe Wolfe, assistant vice president or risk control at CNA, the carrier for the AICPA’s Professional Liability Insurance Program. “CPAs should avoid confirming client information to third parties,” he said.
“Lenders often have the practice of looking for independent verification of income from someone other than the borrower, to assure that there is sufficient cash flow to service the loan,” he said. “Usually the lender asks for it, and they are using the client to pressure the CPA.”
A self-employed borrower might use business assets to obtain a mortgage, Wolfe observed. By procuring a comfort letter from the borrower’s CPA, a lender may attempt to shift the responsibility for confirming the accuracy of the information and the risk of non-repayment.
Although it is preferable, from a risk control perspective, to avoid confirming any client information to a third party, refusing to provide any information may alienate clients. As an alternative, Wolfe recommends that the CPA send a letter to the third party confirming only that the firm prepared the client’s income tax returns to meet the client’s tax-filing obligations.
“Third parties are responsible for performing their own due diligence rather than relying on a representation or verification of information by a CPA,” Wolfe said. “Additionally, while clients desire the flexibility to obtain credit in the marketplace, the responsibility for underwriting a loan and determining the creditworthiness of the borrower lies with the lender, not the client’s CPA.”
But there may be some good in comfort letters, according to Edward S. Karl, vice president for taxation at the AICPA. Writing in the July issue of The Tax Adviser, an AICPA publication, Karl suggests it is a good thing that the financial world looks to CPAs for help in various forms, cementing the CPA’s status as the most trusted professional provider of tax services.
However, he posits some questions that CPAs should be able to answer “yes” to before providing this kind of help to their clients:
• Do you have liability insurance?
• Are you in contact with your liability carrier, and do you use the carrier as a resource? Have you read its material on comfort letters? Have you also read the AICPA material?
• Do you use engagement letters?
• Are you familiar with the SSTSs [Statements on Standards for Tax Services], Circular 230, and the appropriate levels of due diligence to apply in tax engagements?
• Are you aware of the prohibitions on providing assurance with regard to matters involving solvency?
If the answer to any of these questions is “no,” the comfort letter might provide comfort to just about anyone except the CPA who faces a professional liability claim as a result.
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