Accountant’s comfort letter: Overview, definition, and example
What is an accountant’s comfort letter?
An accountant's comfort letter is a formal document issued by an independent accountant or accounting firm to provide assurance to a third party (such as a potential investor or lender) regarding certain financial information or statements. The letter is typically requested during transactions such as mergers, acquisitions, or securities offerings and serves as a form of validation or confirmation of the accuracy of financial data.
The purpose of the comfort letter is to provide the recipient with confidence that the financial information presented in the transaction documents (such as financial statements or projections) has been reviewed by an independent professional and is free from material misstatements or omissions. The letter is not a guarantee or audit but rather an expression of professional opinion about the reliability of the financial data.
Why is an accountant’s comfort letter important?
An accountant’s comfort letter is important because it helps to instill confidence in financial statements or reports, especially when those documents are being used for decision-making by parties who may not have direct access to or expertise in reviewing the financial details.
For businesses, having a comfort letter from an independent accountant can reassure potential investors, lenders, or buyers that the financial information presented in a deal is credible. It is commonly used in situations where a transaction depends heavily on the integrity of financial data, such as:
- Securities offerings: Ensuring that the financial statements included in a prospectus are accurate.
- Mergers and acquisitions: Providing validation of the target company’s financial position.
- Lending agreements: Offering confidence that the borrower’s financial information is reliable.
Understanding an accountant’s comfort letter through an example
Imagine a company is planning to issue shares to the public through an Initial Public Offering (IPO). The investment banks involved in the offering require a third-party confirmation of the company’s financial statements to ensure that they are accurate and conform to regulatory requirements. The company then hires an independent accounting firm to review its financial records, and the accountant issues a comfort letter stating that the financial statements are accurate, properly prepared, and comply with relevant standards. This comfort letter helps potential investors feel more secure in their investment decisions.
In another example, a company is being acquired by another business, and the buyer wants assurance that the financial statements provided by the target company are reliable. The target company’s accountant provides a comfort letter affirming that the financial records are accurate and free from material misstatements. This reassurance helps the buyer make an informed decision about proceeding with the acquisition.
An example of an accountant’s comfort letter
Here’s how an accountant’s comfort letter might look:
“We have reviewed the financial statements of [Company Name] for the fiscal year ending [Date]. Based on our procedures, we are not aware of any material modifications that should be made to the financial statements for them to be in conformity with [applicable accounting standards]. We do not express an opinion or provide an audit on the financial statements, but based on our review, the financial data presented in the documents appears to be accurate and consistent with the results as reported by the company.”
Conclusion
An accountant’s comfort letter provides a level of assurance regarding the accuracy and reliability of financial data, offering confidence to third parties in transactions where financial information is critical. While not as comprehensive as an audit or a full opinion, it serves as a helpful tool in validating financial statements or projections. For businesses, securing a comfort letter from an independent accountant can enhance the credibility of their financial information, facilitating smoother transactions and providing reassurance to investors, lenders, or buyers.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.