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Increasingly, CPAs are receiving requests from clients, lenders, loan brokers, health insurance providers, adoption agencies, regulators, and various other agencies to confirm client information. The requested information may relate to a pending loan, employee medical insurance, child adoption applications, or use-tax certification. Mortgages originated by private mortgage companies, which were resold to Fannie Mae and Freddie Mac and past due, 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. In most cases, CPAs are asked to provide a confirmation letter containing specific language, a verification statement, a comfort letter, or a certification form. |
Due to this increase, CPAs find that this process is becoming more and more confusing and that information regarding comfort letters/third party verification is increasingly important to assure that practitioners are providing optimal service. The AICPA is here to help and has gathered the information below in order to assist members.
From the AICPA Recently Issued Technical Questions and Answers Series
TIS Section 9110.19, "Lender Comfort Letters" (Issue Date: July 2012)
Inquiry—No-documentation or low-documentation loans remain popular options within the lending community, especially in lending to the self-employed. The information a prospective borrower is asked to furnish in connection with such loans is limited; however, lenders or brokers still attempt to assess a borrower’s creditworthiness and verify the accuracy of information provided to them by the borrower.
Examples of requested information include
- confirmation of a client’s self-employed status.
- verification of income from self-employment.
- profitability of a client’s business.
- the impact on a client’s business if money is withdrawn to fund the down payment on a real estate purchase.
How may an accountant respond to a request from a client, lender, or loan broker to confirm client information in connection with a pending loan application?
Download full question and answer.
From the AICPA Professional Liability Insurance Program More and more CPAs are receiving requests from clients, lenders, and loan brokers to confirm client information in connection with a pending client loan application. In some cases, CPAs are furnished with specific language to be included in a confirmation letter. Generally, these requests originate with individual tax return preparation clients. Examples of requested information include the following:
- Confirmation of a client’s self-employed status
- Verification of income from self-employment
- Profitability of a client’s business
- The impact on a client’s business if money is withdrawn to fund the down payment on a real estate purchase
When presented with such requests, it is imperative to assess the situation and ask yourself two important questions. Why are lenders and loan brokers seeking this information? And how should you respond?
Download the article "Third Party Verification Letters"
From The Tax Adviser
A CPA receives a request from a client to provide a letter to the client’s mortgage broker, lender, adoption agency, or other third party. The request seems simple enough and harmless. All the client asks is that the CPA verify that this is her client, that she has been preparing the client’s income tax returns, and that the client is employed by a particular employer or is self-employed. Is there any harm in the CPA signing the client’s suggested letter or writing one of her own?
CPAs should remember that they prepare tax returns based on information provided by the taxpayer. It is very likely that they did not audit or otherwise verify the information used in the preparation of the returns. In fact, Circular 230 affirms that the CPA, in preparing a tax form, “may rely in good faith without verification upon information furnished by the client” but “may not ignore the implications of [other] information . . . actually known” by the CPA, and he or she must make reasonable inquiries if the information provided “appears to be incorrect, inconsistent . . . or incomplete” (Circular 230 §10.34(d)).
Professional standards prescribe what CPAs can and cannot do in these circumstances, and there are professional risks to signing these “comfort” letters. The third parties requesting these letters are not the CPA’s clients. Tax preparers therefore should not convey any information to anyone without their clients’ written permission. This is a requirement under professional ethics standards, the Gramm-Leach-Bliley Act, the Internal Revenue Code, and other federal and state privacy statutes and regulations.
View the full article
From the AICPA Firm Practice Management - PCPS Area
The PCPS Firm Practice Center provides a venue for CPA firms to harness business opportunities and overcome challenges in their firms. PCPS—the AICPA Private Companies Practice Section—provides a rich array of valuable information and resources for firms of all sizes in the area of practice management.
Of significant interest to practitioners, a sample correspondence is available that may be helpful when responding to a request received from a client, lender, or loan brokers attempting to confirm client information in connection with a pending client loan application.
From the AICPA Technical Hotline
The AICPA's Accounting and Auditing Technical Hotline provides members with free, high-quality technical assistance by phone concerning issues related to: accounting principles and financial reporting; auditing, attestation, compilation and review standards. The hotline is available from 9 a.m. to 8 p.m. Eastern via telephone at 877-242-7212. Additionally, questions may be submitted electronically by filling out the hotline form.