December 11, 2017
Mortgage brokers, lenders, health insurance providers, adoption agencies, regulators and several other third parties will often contact CPAs requesting written correspondence to verify client information. Sometimes these requests may seem simple: A loan officer may wish to confirm a client’s income, or an adoption agency may wish to verify the client’s employment status. This process has become increasingly common since the economic recession, as mortgages originated by private companies and resold to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., often require quality review. However, in 2012, Freddie Mac eliminated the practice of obtaining a comfort letter from an accountant as a method of deterring the impact of a withdrawal on a self-employed borrower’s business.
These verification letters are often part of an application process that can be of special significance to the client’s life – from purchasing a home to ensuring the health of their family. However, while a CPA may wish to help the client, responding to a third-party verification request may violate professional standards.
What professional standards allow
CPAs may be asked to respond to third-party verification request (also known as “comfort letters”) by supplying forms, letters or statements designed to corroborate a client’s financial disclosures. However, it is important to realize CPAs prepare tax returns and other financial documents based on information supplied by the client, without auditing or verifying the particulars.
The American Institute of CPAs’ Statements on Standards for Tax Services and the U.S. Treasury Department’s Circular No. 230 both allow CPAs to rely on a good faith agreement with their clients and their own reasonable judgment that the information clients provide is true when preparing tax forms and other documents. However, without independent verification of the information, a CPA cannot confirm the accuracy of client-provided information to a third party without violating professional standards and putting themselves at risk for a malpractice claims or licensing implications.
How CPAs may respond to comfort letters
According to professional guidelines established by the AICPA, CPAs can confirm factual information to third parties as long as they are not violating a client’s confidentiality and have the client’s written, contemporaneous consent. Examples of factual disclosures include providing a copy of a prepared tax return or verifying that the CPA assisted the client in preparing the form. However, CPAs cannot answer questions related to a client’s solvency.
If a third party is requesting confirmation of the client’s ability to meet financial obligations, including income level, creditworthiness or profitability of the client’s business, the CPA could not ethically provide this information. CPAs understand the need of lenders and regulators to verify financial information, as well as the client’s need to meet the requirements of their loan or application processes. However, due diligence standards would require the CPA to perform services resulting in a higher level of assurance as to the state of the client’s financial position.
Clients in need of these additional services in order to comply with third-party verification requests may utilize SGA’s Audit and Assurance Services in order to provide financial performance credibility for lenders, adoption agencies, regulators or other parties.
With summer right around the corner, it is time to remind you that June 17th is the due date for the second quarter estimated tax payments. If you are required to make estimated tax payments, use the payment vouchers that you received following the completion of filing your 2018 returns.
If you have not finalized your 2018 taxes and you believe that you may...
With taxes due in the upcoming days, you should be on high alert for fraudulent calls claiming to be from the Internal Revenue Service. These scammers insist that you owe money to the government. Then, they threaten you with loss of your driver’s license, arrest, or even deportation. Once they’ve caught you off guard, they’ll insist that you send the money using a prepaid...
With 2019 officially here, it is time to remind you that January 15th is the due date for the fourth quarter estimated tax payments. If you are required to make estimated tax payments, use the payment vouchers that you received after filing your 2017 returns.
Remember, if you do not pay enough tax by the due date of each payment period, you may be charged a penalty when you file your...