Date posted: 22/07/2021

Responding to requests from your client’s financiers

Members are advised to exercise a high degree of caution and when responding to requests from your client’s financiers

In Brief

  • The legal implications of financing letters can be severe
  • We recommend these engagements be classified at your practice’s highest risk level
  • Limit yourself to the facts

Several members have contacted us regarding requests being made by clients’ current or future financiers for statements that provide, or imply, assurance to the financier of matters such as the client’s ongoing solvency, future earnings, sustainable revenue streams, manner of use of assets, or ability to service loans (“financing letters”).

The legal implications of financing letters can be severe, including inadvertently adopting liability and risk associated with the related financing, as well as obligations and penalties associated with consumer credit legislation and professional standards. We recommend members exercise a high degree of caution.

The type of financing letter requested is varied, and we are unable to provide specific guidance or templates that will be relevant for each scenario. The following points will help you assess whether it is appropriate for you to agree to undertake this type of client engagement.

  • Do you have the skills and competency to undertake this engagement? This is particularly relevant if the financing letter involves estimating future earnings or ongoing solvency. If you don’t have the skills, providing the service would be a breach of the Code of Ethics’ fundamental principle of professional competence and due care, and would introduce considerable risk to your practice.
  • If the financing letter is to provide assurance, does it comply with auditing standards? Issuing an assurance report that doesn’t comply with the auditing standards would be a breach of APES 210 Conformity with Auditing and Assurance Standards.
  • Is the level of assurance appropriate? The AUASB’s Guide for Prescribing Assurance and Related Services (see link below) is helpful for determining the appropriate engagement.
  • Is this type of service included in your professional indemnity insurance policy? If it isn’t and the financial institution or your client seeks to make a claim against you, in addition to not having insurance cover you will not be able to seek the benefit of the Professional Standards Scheme. You will also be in breach of CA ANZ Regulation CR 2A Professional Indemnity Insurance.
  • If the finance is regulated under the National Credit Act, the financing letter can only be issued by an appropriately licensed individual. If you are not licensed, you may be in breach of the National Credit Act.
  • Do you understand the implications of the financing letter you have been asked to sign? If you are not sure, you should seek your client’s permission to discuss it directly with the requestor, or engage an expert, i.e. a lawyer. You should ensure your client has agreed to reimburse you for this cost.
  • Can you limit the financing letter to an explicit statement of fact? Some examples of this may be:
    • “I am the tax agent for Mr J Jones of 1 Smart Street, Sydney. On 1 July 2021, I lodged an income tax return for him for the financial year ending 30 June 2021 that declared income of $100,000.”
    • “The attached unaudited financial report for the financial year ended 30 June 2021 for J Jones and Sons Pty Ltd was downloaded by me from the ASIC website on 1 July 2021.”
    • “On 1 July 2021 my client, Mr J Jones, advised me that the Nissan Patrol that they are seeking to purchase will be used exclusively for business purposes.”
  • Even with this type of engagement, care should be taken to ensure documents are bona fide. To minimise the risk that the documents or the financing letter are amended without your knowledge you should submit the documents directly to the requester.

If, after consideration of the above, you determine that it is appropriate to undertake this type of engagement for your client, we recommend that it is classified at your practice’s highest risk level in accordance with your risk management policy.

You may also find our engagement letter template helpful to document the terms, conditions and limitations of the engagement (see link below).

Our Professional Standards and Ethics team are also available via phone or email to assist you with this or any other professional and ethical matter.