The Comfort Letter – Why is my bank asking a Certification Letter from my Miami CPA?
Professional Standards promulgated by the American Institute of Certified Public Accountants AICPA dictate “how’ and “what” a Certified Public Accountant can and cannot do. This includes a disturbing and growing trend referred to as “Comfort Letters”. A comfort letter is sometimes requested by a bank, mortgage company, insurance company or vendor when considering a loan, mortgage or in general any business relationship where risk exist. The bank request that a CPA “Certify” a fact about your business. The request range from from “ I CPA certify that ABC Inc is financially sound and will not go out of business” to events to which a Miami CPA does not have knowledge of by looking at your bank statements such as “ I CPA certify that ABC Inc is not involved in any litigation”.
Please read these two brief pages found at the AICPA site discussing Comfort Letters”:
The American Institute of Certified Public Accountants (AICPA) is the governing body regulating Miami CPA’s and tasked with promulgating standards and drafting standard formats for such letters and Accountants Reports. An example of a standard “Accountants Report” is the “Compilation Letter” accompanying your quarterly financial statements we provide. It reads in part:
“I have compiled the accompanying Balance Sheet of ABC Inc. as of March 31st ,2014 and the related statements of income and capital for the three months period then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.” And ends with: “I have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them”.
The standardized and recommended format by the AICPA, if the CPA chooses to issue the Comfort Letter, reads as follows:
“This letter is intended for the use of Wells Fargo. ABC Inc is a domestic corporation chartered in _____ on ____ date. I am the tax preparer for the corporate income taxes, both federal and state. I have neither audited nor reviewed these books. The corporation is organized as a Subchapter S Corp. I have been asked to give an opinion whether or not the withdrawal of $_____ in the form of a shareholder distribution would adversely affect the continued operations of this business. Attached is a restated Financial Statement reflecting the effect of such a withdrawal. I am not permitted to offer an opinion on such a matter, however, the attached statements should speak for themselves. After the withdrawal, ABC Inc would have assets in the amount of _____, liabilities in the amount of ___, and net worth of _______. The current ratio, short term assets to short term liabilities are positive, and is _____. Sales are booked on a cash basis and there are no reported amounts due and owing for inventories. The fixed expenses for each month average out to _______, and gross profits in the past have averaged _______, which is in excess of the expenses. In conclusion, while I am prevented from offering an opinion on future operations, the withdrawal of this amount of cash does not seem to severely affect the operating potential of this entity from the standpoint of business ratios, and historical information”.
Rules governing our profession explicitly prohibit the Miami CPA to render an opinion on these matters (see phrase above that I underlined and in bold). Banks are well aware of these rules and standards and if a CPA prepares a letter that sways from these standards, it will likely hurt your case for loan approval. The banks want to insure that your CPA is ethical and independent. A letter written in any other way, would give the bank cause for suspicion. The letter above in no way “Certifies” anything nor gives the bank in guarantee. So why as for the letter you ask, that’s a good question.
Why is my bank asking a Certification letter from my Miami CPA?
Before the real estate bubble and bank melt downs, the government had to bail out many lending institutions including the two largest Fanny Mae and Freddie Mac. Both of these are quasi government agencies that financially back the vast majority of all loans made by banks or mortgage companies. In other words, when Bank of America lends you money for a mortgage, Fanny Mae and Freddie Mac guarantee that if you default on the loan, Fanny Mae or Freddie Mac will reimburse Bank of America for their losses. After the financial melt down six years ago the federal government changed the law and mortgages originating from banks or mortgage companies which were resold to Fannie Mae and Freddie Mac, are subject to required quality reviews. Quality review standards may require the mortgage originator to contact CPAs whose comfort letters/third party verification are contained within the loan file to confirm the statements made in such letters.
Accordingly, CPA’s are now inundated by request for “Comfort Letters” are a result of the Obama Administrations new legislation. The AICPA AU-C section 920, Letters for Underwriters and Certain Other Requesting Parties (AICPA, Professional Standards), defines a comfort letter as a letter issued by an auditor in accordance with AU-C section 920 to requesting parties in connection with an entity’s financial statements included in a securities offering. The requests that CPAs are actually receiving from third parties pertain to verification letters. The requested information may relate to a pending loan, employee medical insurance, child adoption applications, or use-tax certification.
CPA’s are reluctant and many refuse to issue the Comfort Letter because of the liability. The contents of the letter have to be audited according to AICPA AU-C section 920. Most small companies do not have their financial records audited, and as such, ask the CPA to issue and auditor is a violation of the rules that govern his or her profession. Beyond that, the CPA who actually “certifies” any document as factual, now becomes legally obligated by law to pay the loan in the unfortunate case if the original borrower defaults. The AICPA and Congress are working at changing the current legislation with both sides recognizing these letters are essentially useless as currently written and which explicitly prohibits the CPA to render an opinion on these matters.