Comfort Letters – What to Do?
How should you respond?
By Wilhelm Dingler, Esquire
Requests for comfort letters from loan underwriters and other parties have generated significant buzz in the accounting community. The topic has garnered considerable attention on NSA Tax Talk and local AICPA’s tax list serves, as well as a host of others.
Indeed, as far back as 2011, the NSA website posted a blog by one of its members regarding the issue. In light of this recent buzz, we have developed risk management recommendations accountants should consider when presented with a comfort letter situation.
First and foremost, the response to a comfort letter must educate the recipient. You should inform the recipient that you are not sufficiently versed in the recipient’s underwriting procedures to provide any assurances that the response will be sufficient for their purposes. You also need to be flexible in crafting the response, so the recipient cannot rely completely on the communication. If you have performed a review of unaudited interim financial statements and state this fact in the comfort letter, you should attach the review report to the comfort letter. When educating the recipient, you should not provide any assurances or comments related to the client’s solvency. For clarity’s sake, if any inquiry suggests that you provide a solvency attestation, make it clear in any response that you are not making any attestation as to solvency or financial viability.
Further, to the extent tax information is relied upon in preparing the comfort letter, a Form 7216 Authorization must be executed by the client. Remember, you are required to obtain the required authorization, even if your client specifically asked you to provide the comfort letter. Failure to obtain the necessary approvals is a violation of Federal law and can subject you to penalties. As noted in the statute, the violator “shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not more than $1,000, or imprisoned not more than one year, or both together with the costs of prosecution” (26 USC §7216).
The focus of many analysts, including the author of this article, is preserving the integrity of accounting functions, avoiding spillover into areas not part of the accountant’s engagement, and protecting the accountant from liability. The best way to avoid becoming a guarantor of your client’s loan when responding to a comfort letter request is to use common sense and disclaim any attestation function in the response. As we have previously cautioned, wherever possible use limiting language such as:
- This information comes from resources in our possession solely from information provided to us by the client.
- We make no warranty or representation (express or implied) as to the accuracy or veracity of this information.
- You are not entitled to rely upon the information provided by us as either accurate or truthful and may not make release of this information to you a component of your reliance for purposes of extending credit to the client.
- By providing this information to you, we do not establish any independent relationship with you upon which you may later make claim that you extended credit (or other financing decisions/options) to the client in reliance upon our having provided you with this information.
- We make no attestation (express or implied) as to any subsequent events unknown to us, which may have a bearing on the information/document(s) supplied to you.
- You recognize that there is no attestation by us of the information supplied, as that term is understood by professional accountants.
Corollaries of these same basic tenets are now found in publications, hotlines, and related risk management repositories available to practitioners. In addition, state and local CPA societies have resources to help with responses to requests for client financial information. We strive to provide sound risk management advice and suggestions and hope this information is both helpful and thought-provoking, so you can adequately insulate yourself from potential liability.
This article is provided for informational purposes only. None of it constitutes legal advice, nor is it intended to create any attorney-client relationship between you and the author. You should not act or rely on this information without seeking the advice of your own attorney.