Professional ethics issues: comfort letter requests.

• Author: Landes, Charles E.

Many CPAs receive requests from lenders and mortage brokers to attest to a client's solvency. CPAs need to be careful to avoid the risks that may be associated with such requests.

Recently, AICPA members have contacted the Institute to clarify their professional ethical obligations when asked for "comfort letters" by lenders and mortgage brokers. Depending on how practitioners respond to such requests, they may be at risk of failing to comply with AICPA professional standards. In these situations, some CPAs may violate professional standards unknowingly; others may cave in to brokers' threats to undermine the CPA-client relationship. CPAs can deal ethically and effectively with these situations if they are aware of and stick to their professional obligations.

Many CPAs think of a comfort letter as a letter from a CPA to a company involved in a bond offering, an Initial Public Offering, or a stock placement, that allows the company to assure the underwriter concerning the offering document and the company's financial reports. These letters are discussed in the AICPA's Statement on Auditing Standards (SAS) No. 72, Letters to Underwriters and Certain Other Requesting Parties.

The comfort letters at issue in recent inquiries are similar in intent. These letters are usually associated with stated income loans, which are mortgages that don't require borrowers to document their income. Such loans usually are sought by borrowers with income sources difficult to verify or whose income fluctuates from year to year. Self-employed people, individuals with investment income, or with sales jobs of varying commissions often apply for stated income loans. Lenders, lacking documentation to support borrowers' income claims, take on the risk that borrowers' claims are inadequate. Because of the higher risk, lenders charge higher interest rates. To gain more comfort in extending loans, some lenders look to borrowers' CPAs for assurance about the stated income amount.

Some practitioners have noticed an uptick in requests from brokers for such letters. Lower interest rates probably have helped create this uptick. Jonathan Smith, an Arvada, Colorado CPA, reports, "The frequency of requests over the last two years has accelerated to the point that I am receiving more than one such request a month."

Responding to requests

In an effort to minimize their risk, brokers typically ask CPAs to vouch for their clients with a letter supporting clients' claims relating to...