Comfort letter: underwriter letters versus lender requests

The word covers three documents with different authors and different rules. Answer the right one before you draft anything. For example, in commercial lending, a letter of comfort is a note from a parent company or bank about a borrower. No CPA standard covers it.

Section 11 of the Securities Act can make underwriters liable when a registration statement is wrong or leaves out a key fact (15 U.S.C. 77k, Securities Act of 1933, section 11). It also gives them a defense if they made a reasonable investigation (15 U.S.C. 77k, Securities Act of 1933, section 11).

A comfort letter is one of the tools underwriters use to show that investigation (PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties). For a company that is not an SEC issuer, the AICPA rule is AU-C 920. SAS No. 129 amended it for letters issued on or after December 15, 2014 (Journal of Accountancy (AICPA), “ASB issues SAS No. 129 to amend letters for underwriters auditing standard,” July 2014).

The letter is addressed only to the client and the named underwriters, or the named intermediary, never to “any underwriters to be selected” (PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties). Its procedures run to a cutoff date set in the underwriting agreement, and the auditors take no duty to update it for events after that date (PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties).

Other parties can get one only in set cases. A party with a section 11 defense needs a law firm to confirm that defense to the auditors in writing (PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties). Another dealer or intermediary signs a representation letter to the auditors, stating that its review is “substantially consistent with the due diligence review process” it would run in a registered offering (PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties).

The standard lists the topics (PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties). A letter covers some or all of them, as the underwriting deal requires:

• The auditors’ independence (PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties).
• Whether the audited statements meet SEC accounting rules as to form (PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties).
• Unaudited interim figures, with negative assurance only after a review under AS 4105 (PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties).
• Pro forma figures, and changes in key items since the latest statements, up to the cutoff date (PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties).
• Tables and statistics in the filing, such as amounts the auditors traced to the records (PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties).

Negative assurance is a statement that nothing came to the auditors’ attention that suggests a problem. On later changes, auditors may give it only up to a date less than 135 days after the latest audited or reviewed period ends (PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties).

At 135 days or more, the auditors may only report the procedures performed and their findings (PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties). For example, after a December 31 audit, negative assurance runs to May 14 (PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties). This is the AS 6101 rule; check AU-C 920 for the nonissuer wording.

Here the lender really wants to hear that the borrower can pay. The AT-C 9105 interpretation bars a CPA from giving any assurance on solvency or on the ability to make debt payments (The Tax Adviser (AICPA), “Third-party verification requests,” Sept. 2018).

You can offer three things instead. First, facts you know, with the client’s written consent. Second, copies of the filed returns. Third, a separate engagement, such as a review or agreed-upon procedures, that says nothing on solvency (The Tax Adviser (AICPA), “Third-party verification requests,” Sept. 2018). The AICPA also has a lender comfort-letter resource with an example (AICPA & CIMA: CPA comfort letter to lenders and third-party verifications).

Lenders rarely know these standards, so explain them once, politely. The reply below does that. For a facts-only letter, use the CPA letter template.

• PCAOB AS 6101, Letters for Underwriters and Certain Other Requesting Parties: Comfort letters help underwriters build a reasonable-investigation record under section 11; the standard limits the addressees, ties procedures to a cutoff date, sets the representation letter other parties sign, allows negative assurance on interim figures only after an AS 4105 review, and sets the 135-day limit.
• 15 U.S.C. 77k, Securities Act of 1933, section 11: Section 11 makes underwriters, among others, liable for a misleading registration statement, with a defense for those who made a reasonable investigation.
• Journal of Accountancy (AICPA), “ASB issues SAS No. 129 to amend letters for underwriters auditing standard,” July 2014: AU-C 920, Letters for Underwriters and Certain Other Requesting Parties, was amended by SAS No. 129, effective for comfort letters issued on or after Dec. 15, 2014.
• The Tax Adviser (AICPA), “Third-party verification requests,” Sept. 2018: A CPA can confirm facts but must not attest to income accuracy; the AT-C 9105 interpretation bars assurance on solvency or debt service; Section 7216 requires written client consent.
• AICPA & CIMA: CPA comfort letter to lenders and third-party verifications: The AICPA publishes resources, including an example letter, for CPAs asked for comfort or verification letters by lenders and agencies (free account).