Why accountants’ letters don’t offer financial guarantees

This article was current at the time of publication.

As small business funding from mainstream lenders becomes harder to access, many accountants are under pressure to sign off on financial details they can’t verify.

Bernadette Smith FCPA, Director at Perth-based practice Aspen Corporate, has seen a spike in demand for accountants’ letters from second-tier lenders asking her to “predict the future”.

“We’ve been receiving more requests for accountants’ letters,” Smith says. “I’ve received two requests over the past few weeks.

“It puts us in an awkward position because we have to say no to our clients, but I’m not going to put them or my practice at risk.”

Assessing the risks

Data from the latest SME Growth Index by Australian lender ScotPac shows more than 66 per cent of small-to-medium enterprises (SMEs) were using new sources of funding in September last year, up from 46 per cent at the start of 2021. 

“I think the reason [for this] is that some of the big banks are tightening their lending requirements, so SMEs are going to second-tier lenders,” Smith says.

Accountants’ letters and “capacity to repay” certificates are used by some lenders to assess a borrower’s ability to service a loan before they will approve it. They require accountants to confirm that they have assessed their client’s ability to repay a loan.

CPA Australia has been advising members against signing client declarations for loans since the implementation of the National Consumer Credit Act (the Act) in 2009.  

“If the finance is for consumer credit, signing an accountants’ letter could be considered a form of credit assistance and may be a breach of the National Credit Act if you are not licenced as a credit representative,” says Keddie Waller, Head of Public Practice & SME, Professional Standards and Business Support, CPA Australia.

“It also may not be something that’s covered by your professional indemnity insurance.”

Accountants ‘on the hook’

There are other risks for accountants who sign these financial guarantees.

“If you're signing off on information you can’t predict or guarantee, you are essentially then on the hook as part of that lending process if anything goes wrong,” Waller says.

She cites a recent example of an accountant pressured by a client to sign a letter about their lending capacity to buy a new business, even though they had not disclosed all their banking statements. The client received the loan but defaulted on repayments. 

“The accountant was dragged into the matter as he had signed off on the initial letter advising that the client could repay the loan,” Waller says. 

“There was a $400,000 settlement plus legal costs. He was a sole practitioner, and because of the quantum of the claim, he had to enter retirement with no run-off cover and close his business.”

No crystal ball

CPA Australia has issued guidance on accountants’ letters and capacity to pay certificates. “As your professional accounting body, we recommend that you do not sign these letters because of the risk it poses to you and your practice,” Waller declares.

“You can support your client in the lending process by providing factually verifiable information – financial statements, profit and loss, cash flow, and balance sheets. These are the kinds of documents lenders should be looking at and reviewing, but you can’t predict a client’s future cash flow, especially in such a fluid economic environment.

“We’re also starting to see lenders asking accountants to sign a letter to say the finance their client is accessing will be used predominantly for business purposes, such as purchasing a new car they’ll use for work.”

Waller insists that accountants should not be expected to verify such matters. 

“How can they guarantee a client will in the future use any asset predominantly for business purposes?” she asks. “We strongly advise that you do not sign these types of guarantees, because if there is any recourse, you’ll be pulled into it.”

Verifying the facts

Along with the legal challenges such guarantees present, accountants can also be pressured by clients who need the letters to access finance.

Smith says it’s important to explain the risks of signing, as clients may not be fully aware of them. However, she notes that not all second-tier lenders require accountants’ letters.

“One of my clients, who I’ve worked with for 20 years, was very understanding when I explained the reasons why I couldn’t provide the letter,” she says. 

“Another client went to a different lender and was just asked for factual information about their finances, which I was happy to confirm in a letter.

“We can certainly verify facts in terms of previous financial performance, but we can’t predict the future,” Smith emphasises.

“Lenders are pushing their responsibility onto accountants. They should be doing their own due diligence.”