insight magazine

Don’t Crack Under the Pressure of Comfort Letter Requests

Here is how CPAs can avoid the risks of providing assurances in CPA-to-lender comfort letters. By Suzanne M. Holl, CPA | Digital Exclusive - 2019


Have you ever come under fire from banks or other lenders trying to pressure you into providing assurances regarding a client’s financial strength? You are not alone. Many CPAs have shared their frustrations and concerns with me regarding veiled threats from aggressive brokers and lenders alleging that their clients will not qualify for a loan without receiving a letter from the CPA supporting the client’s loan qualifications. Some brokers have even suggested that the client should seek a “more cooperative” CPA.

Tempting as it may be to simply comply with such requests, providing the requested assurances could put your CPA license at significant risk. First, you face the risk of defying the AICPA’s professional standards, which prohibit CPAs from providing any level of assurance that an entity is, or will continue to be, solvent. Another risk is that a lender could allege that you were negligent or misrepresented a client’s self-employment status, financial condition, or creditworthiness should he or she later default on the loan.

So, how do you avoid such risks?

Use Professional Judgment

The creditworthiness dilemma is a balancing act — you need to carefully evaluate the risks associated with complying with these requests. For example, since professional standards do not require CPAs to provide any letters to third parties, they need to balance the risks of saying “no” (e.g., losing the client or being sued by the client should the loan fall through) against the risks of saying “yes” (e.g., not meeting the profession’s standard of care, or becoming a “deep pocket” target for the lending institution if the client later defaults).

The following examples of requests provide some ideas on how to traverse the delicate balance of mitigating risks while managing client and third-party expectations.

Request No. 1: Verification of Tax Information and Employment

Financial institutions often send forms directly to a prospective borrower’s CPA requesting verification of tax information, employment or self-employment, and/or assurances that the client’s business or owner will not be affected by the contemplated loan. Typically, the form is short and pre-filled and calls for the CPA’s response and signature verifying the information provided. I strongly encourage you to be cautious when considering this type of request.

Only after the client has provided you with appropriate written consent would I suggest that you draft a letter in response to the form (instead of signing it) that clearly identifies:

• The scope and limits of the services rendered to the client.

• The responsibility of the financial institution to exercise its own due diligence and to perform procedures and tests the lender deems appropriate in determining whether to extend credit.

• The limited responses (which should be facts, as opposed to judgments) to the questions posed on the form that are relevant to the client, stating that these answers are based solely upon the information shared by the client and were not audited or otherwise verified. In order to avoid potential privity issues, this letter should also clearly state that your response is not intended to establish a client relationship with the financial institution.

Request No. 2: Telephone Verification

Another type of request that adds even more exposure to you comes from the so-called “Underwriting Quality Control” divisions of large financial institutions asking you to provide verbal confirmations regarding their clients’ self-employment and/or other assurances regarding their clients’ financial information. I recommend letting the caller know that professional standards regarding client confidentiality prohibit CPAs from discussing their clients with the caller over the phone. You should request that the financial institution put any questions it may have in writing and, if you receive written client consent to respond, you will address the inquiries in writing as deemed appropriate given the scope and limitations of the services provided. You should consider sending a letter or an email acknowledging the request and reiterating that no assurance was given during the conversation — this is excellent defensive documentation if later allegations are made.

Request No. 3: Confirm Information on a Previously Issued Lender Letter

You should be wary if you are ever contacted after the fact by a third party requesting that you confirm client information previously provided to the lender. These individuals may work for a mortgage insurance company or other organization as investigators trying to build a fraud case against a borrower who has defaulted on a loan. You have no professional obligation to respond to these requests, and you would breach client confidentiality if you responded without written client consent. I strongly recommend that you do not sign or make any statements in writing, over the phone, or in person to requests of this nature. Such calls typically suggest that the loan was selected at random, but the loans are typically nonperforming loans.

Tips for Responding to Third-Party Requests

Remember the following before you tailor a response letter:

• Be sure to obtain the client’s written consent before disclosing tax return information.

• The letter should be simple and clear.

• Document only facts and the services that you have performed. Refrain from speculating on future events (e.g., forecast future income or contingencies) and avoid making conclusions not supported by the services performed for the client (i.e., a CPA should not make assurances regarding the accuracy or completeness of the information provided unless the scope of the services enables the CPA to provide such assurances).

• Do not provide any form of assurance regarding matters of solvency.

• Avoid using words that expand, rather than narrow, your responsibilities.

Educating Your Clients

It’s also important to inform clients about these issues so that they understand what information you, as their CPA, can and cannot provide. I suggest taking the following steps:

• Have a conversation with the client regarding the scope and limits of the services you performed.

• Clarify for the client what you can and cannot provide under the scope and limits of the services rendered.

• Explain that professional standards prohibit you from providing assurance regarding their financial position when the requisite scope of services hasn’t been performed.

• State that professional standards for CPAs prohibit you from offering any form of assurance regarding matters of solvency.

Following these guidelines early in a relationship is ideal, because the client or financial institution often gives CPAs little or no time to address such issues after they make their requests.

Suzanne M. Holl, CPA, is senior vice president of loss prevention services with CAMICO.

Leave a comment