A Closer Look at Comfort and Verification Letters

• Author: J. Russell Hardin,Thomas G. Noland
• Published date: 01 January 2018
• Date: 01 January 2018
• DOI: http://doi.org/10.1002/jcaf.22305

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© 2018 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22305

A Closer Look at Comfort and

Verification Letters

Thomas G. Noland and J. Russell Hardin

INTRODUCTION

Corporations

and other organiza-

tions may issue, or

have issued to them,

documents that are

referred to as “com-

fort letters.” Certified

public accountants

(CPAs) of both

public and private

companies are often

asked to write these

comfort letters or

verification letters.

Underwriters of pub-

lic companies will

frequently need to

obtain comfort letters

to aid in an equity

or debt offering to

include an initial

public offering (IPO).

AU-C section 920

of the AICPA Auditing Stan-

dards, Letters for Underwriters

and Certain Other Requesting

Parties (https://www.aicpa.org/

research/standards/auditattest/

downloadabledocuments/au-c-

00920.pdf), defines a comfort

letter as a letter issued by an

auditor in accordance with this

section to requesting parties

in connection with an entity’s

financial statements included

in a securities offering. CPAs

can also be asked for verifica-

tion letters concerning a client’s

income from self-employment,

profitability of a self-employed

client’s business, or ownership

percentage in a busi-

ness. The client may

need this information

provided to a finan-

cial institution or

mortgage broker to

assist them in obtain-

ing a loan.

Comfort letters

are also prepared

by other types of

entities. Banks will

occasionally pre-

pare an informal

letter indicating its

willingness to sup-

port a customer with

a short-term loan.

Parent corporations

may issue comfort

letters to reassure

a subsidiary firm’s

lender or supplier

that it will support

the subsidiary in case

of financial difficulties. Specific

terminology used in the let-

ter determines whether such

assurance constitutes a binding

contract by the parent company

or only a moral obligation. A

comfort letter indicates that

the loan request is authorized,

is in order, and that the parent

Corporations and other organizations may issue, or

have issued to them, documents that are referred

to as “comfort letters.” Underwriters of public

companies will frequently need to obtain comfort

letters to aid in an equity or debt issue. Comfort

letters are also prepared by other types of entities.

Banks will occasionally prepare an informal letter

indicating its willingness to support a customer

with a short-term loan. Parent corporations may

issue comfort letters to reassure a subsidiary firm’s

lender or supplier that it will support the subsidiary

in case of financial difficulties. Specific terminology

used in the letter determines whether such assur-

ance constitutes a binding contract by the parent

company or only a moral obligation. When comfort

letters are being used by a corporation to support

a business transaction, chief financial officers,

corporate controllers and treasurers should consult

with attorneys and CPAs to make sure unintended

obligations do not arise. © 2018 Wiley Periodicals, Inc.

Refereed (Double-Blind

Peer Reviewed)