|Increasingly, CPAs are receiving requests from clients, lenders, loan
brokers, health insurance providers, adoption agencies, regulators, and
various other agencies to confirm client information. In turn, the AICPA
has received several inquiries from CPAs on what they often refer to as
||However, 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. 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.
AICPA Webinar Series
The AICPA recently hosted a webinar, "You Want Me to Verify What? Understanding & Responding to Third Party Verification Requests
", regarding third-party verification requests. The webinar is available for re-play.
From the AICPA Insights
Sue Coffey, CPA, CGMA, Senior Vice President – Public Practice and Global Alliances, has authored a blog post to help CPAs determine the best course of action for responding to requests for third-party verification.
From the AICPA Recently Issued Technical Questions and Answers Series
TIS Section 9110.19, "Lender Comfort Letters" (Issue Date: July 2012)
See That “Comfort Letter” Request May Really be a Third-Party Verification for more.
From the AICPA Professional Liability Insurance Program
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.
An additional AICPA resource in response to frequently asked questions regarding third party verification letters has been developed. These answers are non-authoritative responses to those questions most commonly asked. Additional commonly asked questions specific to tax are in development and will be incorporated in this resource in the coming months.
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: From the AICPA Tax Section
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?
- 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
Download the article "Third Party Verification Letters"
From the AICPA Firm Practice Management - PCPS Area
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)). In addition, disclosing your client’s tax information to 3rd parties or government agencies other than the IRS or use of their information for purposes other than the preparation of their return may require client consent under section 7216 of the internal revenue code. Learn more in our Section 7216 Consent Form Practice Guide, which includes sample consent forms.
In April 2012, the Farm Service Agency (FSA) started sending letters requesting “certification” of income as an alternative to providing an actual return as part of their loan renewal or qualification process. The AICPA immediately engaged in a discussion with FSA to clarification the definition of “certification” for this purpose, since the due diligence requirements under Circular 230 and the AICPA Statements on Standards for Tax Services do not rise to this level. In response, the Tax Practice Responsibilities Committee developed the FSA Certification Letter Guidance web page to provide comprehensive information and resources regarding these letters.
Professional standards prescribe what CPAs can and cannot do in these circumstances, and there are professional risks to signing these “comfort” letters or any other request for “certification” of tax return information. 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. A June, 2008, article from The Tax Adviser titled “Concerns About CPA Letters to Third Parties” (available via the Journal of Accountancy) is still relevant and includes a great discussion on these issues.
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.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.