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| April 15, 2004 | The
Monthly Newspaper of the NYSSCPA |
Vol.
7, No.7 |
Mortgage Brokers and Going-Concern-Type Assurances
A Liability Pitfall for CPAs
By James A. Woehlke, NYSSCPA Counsel
Members of the New York State Society of CPAS have been receiving requests from clients applying for mortgages to issue their mortgage lender a letter with an assurance akin to a going-concern opinion.
But one requirement of a loan commitment letter poses serious liability issues for CPAs.
Specifically, loan commitment letters require, among other things, “A letter from the company accountant on letterhead confirming that any withdrawal of the business funds will not affect the running of the company.”
From a New York legal perspective, once a CPA issues such a letter, he or she could well stand in privity to the mortgage lender, which would expose the CPA to liability if the client were later to become insolvent. The NYSSCPA’s website contains an informative discussion of the privity doctrine at www.nysscpa.org/prof_library/lrm/whole_book.htm#protecting.
New York law establishing a strict privity requirement before an accountant would be found liable in a negligence action was first set with the 1931 New York State Court of Appeals decision of Ultramares v. Touche Ross. Recognizing the immense potential impact on the profession if just anyone who might rely on financial statements, about which a CPA had rendered an opinion, could assert a claim against the CPA, the court limited the CPA’s exposure to those in privity or a relationship closely approximating privity.
In 1985, the New York Court of Appeals’ Credit Alliance Corp. v. Arthur Andersen & Co. decision held that a nonclient party could not hold accountants liable for negligence unless three prerequisites were met:
(1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes;
(2) in the furtherance of which a known party or parties was intended to rely; and
(3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants’ understanding of that party’s or parties’ reliance.
Interpreting the third prong of this test, the court later decided that a phone call from a bank indicating it intended to rely on the auditor’s opinion was not sufficient conduct on the part of the accountant to establish privity.
The mortgage closing letter requirement mentioned above would be a letter from the CPA, issued specifically to induce a mortgage lender to make a loan. This could well be sufficient conduct on the part of an accountant to “evince” an understanding on the part of a CPA that the mortgage lender is relying on the CPA’s opinion. For the record, the analysis would differ if either the “foreseeability” standard or the “restatement” standard, both of which are used outside New York to determine if an accountant is liable to a plaintiff for negligence, were used. However, the end result—that issuing a mortgage lender a letter with the desired quasi-going-concern assurance mentioned above could result in a CPA’s being held liable to the mortgage lender—would very likely be the same.
The context of the letter to the mortgage lender is also problematic from the standpoint of CPA professional standards. One presumes that the letter is being requested of the CPA on an informal, gratis basis, despite the potentially immense liability exposure. In similar circumstances, when CPAs are asked to “certify” some information that falls outside an audit of financial statements, such engagement is handled according to the American Institute of CPAs’ attestation standards. Practitioners can structure an engagement to attest to the client’s assertion to the mortgage lender following the standards presented in Statement on Standards for Attestation Engagements (SSAE) No. 10. A CPA cannot, however, certify to solvency.
