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.
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.
“CPAs prepare tax returns based on a good faith agreement as to accuracy.”
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 claim.
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 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.
“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 LaPorte’s Audit and Assurance Services in order to provide financial performance credibility for lenders, adoption agencies, regulators or other parties.