Navigating the challenges of accountant’s letters

If you are an Australian accountant in practice it’s likely that at some point you’ve been asked by a client to supply a letter to help them secure finance. The letter may be called different things, including an accountant’s declaration or a ‘capacity to repay’ certificate.

Lenders have been requesting these letters and declarations for many years, but as the economy faces tougher times you may have noticed an increase in these requests from clients as finance is becoming harder to get.

These letters usually ask the accountant to confirm financial information or details that have been supplied by the client to the financier, or to fill in the gaps if there’s no supporting information (such as financial statements and tax returns). When these letters are requested, accountants are often advised that the finance depends on it, putting pressure on the accountant to keep their client happy.

To date, the scope and requests for accountant’s letters have varied greatly from lender to lender and for different circumstances. These letters or declarations can ask for anything from confirming historical financial information to forecasting future events – or even asking the accountant to determine a client's ability to repay the loan (you know, the job the lender’s credit risk team is supposed to do).

The inconsistency and potential risk with supplying these letters has resulted in the accounting community being frustrated and unsure about how to proceed. Until recently, they have had little guidance on how to handle these requests. But help is now available.

In response to the increase in accountant’s letter requests, and calls from the accounting community for support, the three major Australian Professional Bodies (Chartered Accountants Australia and New Zealand, CPA Australia, and the Institute of Public Accountants) have joined forces to provide a toolkit to help their members deal with the issue of accountant’s letters.

This comprehensive guide will help you decide whether you should or shouldn’t supply a letter for your client’s finance by guiding you to consider:

• Do you require any licences to provide the letter (you must have an Australian credit licence to provide letters regarding most personal lending and in other circumstances)?

• Can this letter be seen as providing credit assistance?

• Does your professional indemnity insurance cover accountant’s letters?

• Do you have the skills, ability and information required to accurately complete the letter?

• Is there an appropriate amount of time to undertake all necessary due diligence for the work?

• What are the privacy concerns with supplying this information?

It may be worthwhile taking these factors into consideration and checking these items now in advance of being asked to supply a letter, especially ensuring you have the right insurance. This may cause a delay in service in the future, and it’s always good to understand your position and coverage.

Once you’ve gone through all of the steps to ensure that supplying a letter is something you can do, before supplying it you should send an engagement letter and fee advice.

Your updated or new engagement letter should be clear on the scope of the work and the level of responsibility that you undertake with this engagement. It can include:

• Confirmation the information you provide will be limited to historical statements and facts only.

• Confirmation the engagement is not an audit.

• An appropriate disclaimer and limitation on the information you will provide in accordance with your policies, procedures and any advice from your insurer or lawyer.

• Agreement about any fees you’ll be charging for this work. (To adequately go through your due diligence, collate the required information and complete the letter takes time, which you should be remunerated for.)

Your engagement letter can also be used to obtain your client’s consent to provide confidential information to a third party.

Once you have appropriately scoped the work, have a signed letter of engagement, and have agreed on the fee, you can use the checklist and letter template in the Accountant's Letter Toolkit to ensure you stay within the appropriate guidelines.

When you’re used to being the person that helps your client, it’s often hard to say no to them. To deal with what can be an awkward conversation, it’s best to rely on the facts. Feel comfortable to explain why you can’t supply the letter by leaning on the guidance from the professional bodies.

Remember, it’s not your role to obtain your client finance, assess their capacity to pay or take responsibility for any statements they may have made to their financier.

To help you with saying no there’s a letter template to decline the request and a client information sheet in the Accountants Letter Toolkit that you can use.

If you still have questions after reviewing the Accountant Letter Toolkit, Ignition is hosting a webinar with CA ANZ, CPA Australia and IPA Australia early August 2023. Don’t miss this insightful session. Register your interest today to receive your invitation to the live session.