Lenders and banks escalate demands for accountant’s letters

This article was current at the time of publication.

Signing a so-called accountant’s letter for a client to take to a lender or a bank can be risky for public practitioners. 

This document – to approve a loan, lease or rental agreement – is often referred to as an “accountant’s declaration” or “capacity to repay” certificate and anecdotal evidence suggests requests for it are rising. 

“What has happened is that some banks or smaller lenders are looking for another way to validate the information that a customer or small business is providing,” says CPA Australia’s Keddie Waller, Senior Manager Public Practice, Financial Planning & Ethics Policy.

New guidance is now available

“Often, they are also looking for assurance about the future income generated about servicing a loan,” Waller says. 

“Effectively, this is passing risk from the lender to a third party – the accountant – which is why CPA Australia, Chartered Accountants Australia and New Zealand (CA ANZ) and the Institute of Public Accountants (IPA) have issued guidance about accountant’s letters and engaging with banks on a client’s behalf.

“Our joint position is that such requests should be declined because credit assessment is the responsibility of the lender.”

Irrespective of this, Waller says requests from clients – especially those in small business – continue to increase and public practitioners may want to find ways in which they can offer support without inadvertently breaching professional standards, the law, or indemnity requirements.

To this end, it’s important to understand your responsibilities with providing financial documentation that may be used to support a loan, she says. 

Make the boundaries clear

Preparing a financial report, current business plan, profit and loss statement, or budget for a client to take to a bank may well be the least risky activity you take with a loan.

However, it’s not risk-free and the lender needs to understand that while you have prepared the documents you’re not providing assurance about the information they contain, including that it’s accurate and bona fide, Waller cautions.

As such, include appropriate disclaimers to protect yourself and your business in any correspondence with your client’s bank. 

Refusing to attest is best

“If the lender is looking for an accountant to ‘attest’ to any financial information, it may form an assurance engagement and would require you to comply with relevant assurance standards to undertake this,” Waller says.

“Additionally, the original financial information must have been prepared by a separate accounting professional.”

The challenge for accountants is that the bank or lender may not necessarily understand these legal obligations.

“All they want is for someone to tell them that the financial information in front of them is correct,” she explains.

Never gaze into a crystal ball

With a growing number of small businesses asking accountants to confirm their capacity to repay a loan to a bank or lender, you may find yourself under pressure to estimate their future income and expenses.

At any stage in business – especially in a challenging, volatile market – you cannot predict whether your client will continue to meet their financial obligations. Doing so will put you at risk of assuming liability for your client’s debt and that may risk the future of your own business. 

You’re an accountant, not a loan broker

Unless you hold an Australian Credit Licence, you are not authorised to provide advice about personal loan choices such as a mortgage product to a client.

“Should you do so, you won’t be covered by professional indemnity insurance,” Waller says.

Before undertaking anything that is not part of your everyday work, check with your insurer. 

If you’re not sure about the requirements of the National Consumer Credit Protection Act 2009, you can find more information within the Australian Securities and Investments Commissions Regulatory Guide 203 Do I need a credit licence?.

Be honest and open

Refusal can offend, but there are plenty of ways to support a small business client through the lending process.

These include providing financial information you have helped prepare or have direct access to related to gross taxable income, principal sources of income, or years that tax returns have been lodged. 

Use a professional template, not one supplied by a bank

Within the new guidance issued by the accounting bodies, you’ll find a template for a letter to a client advising them about documents that can be provided to a lender and one declining a request, plus a template for an accountant’s letter.

Use the latter even if a client or lender has supplied you with their own.

“That will have been designed to meet the lender’s needs and risk management approach – not necessarily yours,” Waller notes.

“Examples we’ve seen could result in the accountant inadvertently [subject] to liability and risk associated with the related financing.”

Documentation, documentation, documentation

Above all, make sure you keep all relevant documents concerning an accountant’s letter, including – but not limited to – requests from your client or their lender, notes of discussions with your insurer, and consent from your client to provide confidential information to a third party.