The Art of ‘Pushing Back’

The Art of ‘Pushing Back’
CPAs Should Not Certify Creditworthiness for Lenders

By Suzanne M. Holl

When a tax-return client applies for a loan, sometimes the loan or mortgage broker will ask the client to obtain a letter from his CPA, confirming that the client is self-employed, financially sound, or in a position to be able to repay the loan in accordance with the terms of the loan agreement.

How should a CPA respond to that request?

It is important to understand the motives behind the request. The client’s motive usually is innocent enough: He just wants to cooperate with the lender in order to get his loan approved.

The lender’s motive is not necessarily so innocent, though. Normally, when a lender grants a loan to a borrower, it relies on many factors, including, but not limited to, assessing the creditworthiness of the customer, his collateral and primary sources of repayment, as well as market conditions, to determine the advisability of extending credit. Some lenders, however, attempt to pass on to another party (the CPA) the responsibility of assessing the creditworthiness of the financial information supplied by borrowers. The lender is looking to share or shift the burden of responsibility onto the CPA in the event that the customer defaults on the loan and the lender incurs a loss. This is not in the CPA’s best interests; nor is the CPA compensated for the risk.

Now comes the balancing act. How does the CPA balance the desire to provide valuable clients with the assistance they need, without taking added risk? If the CPA complies with the request as is, the CPA will provide a false sense of comfort to the lender, because the CPA has not actually audited, reviewed or otherwise verified the client’s financial soundness in the preparation of the client’s tax returns. Consequently, if the customer does default on the terms of the loan, the lender could argue that it relied on the CPA’s letter in lieu of other due diligence steps and, as a result, suffered damages. In this instance, the CPA may be at risk for a lawsuit.

In this type of scenario, Camico recommends the art of “pushing back.” The CPA’s best defense is to communicate to the client and the lender (if the client has authorized the CPA to) that although the CPA would like to comply with the request, the services the CPA rendered in this situation were limited to the preparation of tax returns from the information that the client had given to the CPA. Since the CPA has not audited, reviewed or otherwise verified the information provided by the client, the CPA is not in a position to make any conclusions or assurances on the accuracy or completeness of the information, nor on the future ability of the client to repay a loan.

If the client agrees, the CPA may, however, offer to confirm with the lender that the tax returns in the lender’s possession are the same as the returns prepared by the CPA.

The bottom line is that the client needs to clearly understand that the CPA has not been engaged to perform any procedures to certify creditworthiness. The CPA would be falling below professional standards of care by complying with the lender’s request.

Suzanne M. Holl, CPA, is director of loss prevention services with Camico Mutual Insurance Company. She provides Camico policyholders with information on a wide variety of loss-prevention and accounting issues. Holl is a co-author of the CCH-published book CPA’s Guide to Effective Engagement Letters.