Accountant’s letters: How to weigh the benefits and risks

Requests for accountant’s letters have surged in the past few years, and this should be a huge area for concern. That’s according to three spokespeople, representing each of the three accounting bodies in Australia, at Ignition’s ‘Accountant Letters: To-do or not to-do?’ webinar.

Access the IPA Accountant’s Letters Toolkit today.

“This has been an area of concern for a really long period of time,” Vicki Stylianou, Group Executive, Advocacy & Policy, Institute of Public Accountants, told attendees, adding that the concern has increased lately as requests have become more frequent.

“The need to de-risk by lenders and others has increased through difficult economic times. We’re definitely seeing more and more queries coming through from members.”

Stylianou has not only observed an increase in the requests for these letters, but also a shift in the scope of letters requested.

“We’re seeing accountant’s letters, tickets to pay, tickets to repay. The other one we’re commonly seeing more and more of is solvency letters. We’re seeing them come not just from primarily financiers and banks, but we’re also seeing them come from mortgage lenders and lawyers. We’re seeing more government agencies, especially at the state level across different industries, asking for these types of letters. It is a disturbing trend.”

So why is this causing such great concern in the accounting profession?

The main reason, Stylianou said, is the legal risk.

“Lenders and the banks and various others are seeking to de-risk themselves. They should be doing their own credit assessment, their own risk assessment and due diligence, but that takes time and costs money. It’s easier to pass on that task and the liability onto accountants.”

Passing on the liability is likely even more valuable than passing on the task. And it’s also the issue accountants should be focused on.

“Accountants really want to help their clients, they’re trusted by their clients and they have professional indemnity insurance. In many different scenarios, accountants are an attractive target,” Stylianou said. “This is something that everyone should be concerned about.”

Managing the risks of accountant’s letters

Accountants can find themselves in a difficult position if they're asked to verify a client’s financial position – particularly if that verification includes a future financial position.

There are steps that can help accountants to protect themselves. Some of the key advice suggested by the webinar panel includes:

• Prepare early: “In an ideal world you would be engaged with your client, know what they’re planning and understand their business. [It’s good if you] can have a conversation with them early on about what you can and can’t do.” – Kristen Wydell, GM, Professional Standards, CA ANZ.
• Consider building accountant’s letters into your engagement terms: If an accountant’s letter then comes up, you have a clear process to follow because you set the scope and expectations early. – Wydell
• Talk to your client early on: If it’s not part of your formal terms, have a conversation with clients about it before the accountant’s letter is requested – so before it becomes an urgent and emotive issue, suggested webinar host and Head of Accounting at Ignition Rebecca MIhalic.
• Check your Professional Indemnity Insurance.
• Before agreeing to provide an accountant’s letter, ensure you wouldn’t be in breach of the National Consumer Credit Protection Act 2009, which regulates all consumer credit, including credit predominantly for personal use.

“If a client is seeking finance that is predominantly for personal use, that will be caught by the NCCPA,” said Keddie Waller, Senior Manager, Public Practice, Financial Planning & Ethics Policy at CPA Australia.

“Signing one of these letters could be deemed credit assistance because you’re helping your client secure that loan. Credit assistance is a regulated activity and it would require you to be a credit representative or to hold an Australian credit licence. It’s really important to understand the purpose of that loan.”

• Maintain client confidentiality: “Client confidentiality is paramount to everything we do,” said Wydell. “The more common requests are for small businesses and family businesses. Just because one owner of the business has asked you to send information on, has their wife or husband also asked for it? If you receive a request for an accountant’s letter make sure everyone is giving you consent,” said Wydell.

She also advised checking all the documentation you plan to send through, and redacting any private information such as a date of birth or tax file number.'

Turn to the toolkit for guidance

In response to increasing queries from accountants, the three membership bodies recently collaborated to produce a toolkit, including a template that accountants can use to write letters that push back against requests.

While the IPA has offered a guide for members previously, this collaboration shows the lending sector that the profession is united on this issue.

The toolkit helps members understand the benefits and risks involved in writing an accountant's letter, and decide how to respond to requests. It empowers members to decline a request if required, and enables with guides and templates.

Ultimately, determining whether you should write an accountant’s letter comes down to a judgement call.

“If you are going to give a letter, make sure you’re comfortable with it, have gone through the checklist and have come to an informed decision. Make sure the client also understands the situation and what you are doing,” Stylianou said.

In some situations, it might also be necessary to step away from an engagement. Being asked to forecast a client’s future financial situation is a major red flag – accountants should not verify a client’s future financial state.

So sometimes, pushing back might be the best course of action to protect yourself.

“Tell the truth, say it as it is, push back if you need to. That’s one of the best ways to protect yourself,” said Stylianou.

Access the toolkit today – it’s your guide to responding to requests for accountant’s letters.