A comfort letter is a document that an accounting firm prepares to assure the backing of the company or the financial soundness.
A comfort letter is used for various purposes. In banking, this document means an informal letter that a bank gives to assure a customer that it is willing to provide short- term loan to support him when required. However, a comfort letter is not a letter of commitment.
In case of government affairs, this document refers to the assurance of the state or federal government to a supplier or lender of a public enterprise to support the enterprise for settling its obligations timely.
In the auditing context, a comfort letter is a letter or a document from an independent auditor which is included in the preliminary prospectus and which states that though a complete audit has not been done, a review has been done by the auditor which is sufficient for assuring that the information in the financial statement in the preliminary prospectus is prepared properly to the best of his knowledge.
The auditor also states that the final audit of the financial statement will not be substantially different from the review that the auditor has done and showed in the preliminary prospectus.
A CPA can issue a comfort letter for declaring that the financial statement does not show any indication of misleading or false information and that the prospectus of the company follows GAAP.
Comfort letter is occasionally used for an initial public offering. This is also sometimes offered by the people who are involved in the evaluation of the assets of the company.
Often, a comfort letter is also issued by a parent company to its subsidiary as a written assurance to support it, if and when any financial difficulty arises. This letter does not mean that the request of the loan is authorized or is in order and that a careful eye will be kept by the parent company on the whole transaction.
Before the closing date for a particular public offering or pricing decision or any other transaction, the comfort letters are signed.
How CPAs Should Address Comfort Letters
These documents are usually issued when the seller is unwilling or unable to give guarantee on a particular outcome.