Reporting to third parties

Michael McAllister writes:

Chartered Accountants Ireland often receives requests from members for clarification on how to deal with confirmation requests from third parties, such as banks or other funders, concerning client matters. For example, a bank may request some form of confirmation regarding a proposed loan.

Usually there is no obligation on accountants and auditors to provide the reports/assurances being sought, as they are not bound by arrangements between clients and third parties to which they were not party. However, accountants may come under pressure from lenders and funders, and wish to assist their clients wherever possible.

The general principles that need to be applied when members are asked for these confirmation requests are set out in ‘Miscellaneous Technical Statement M39 – Reporting to third parties’ (M39). The main steps in the process that should be followed are:

• Determine who will rely on the accountants’ work and for what purpose;
• Consider the form of report requested by the third party;
• Agree the work to be performed and the form of report to be given;
• Agree appropriate terms of engagement;
• Perform the work; and
• Report.

It is advisable that appropriate engagement terms are agreed at the commencement of the engagement for providing such reports, in order to avoid disagreements with the client or the third party regarding the form of the report that is needed, and to ensure sufficient time for the work to be completed and the report to be given.

Confirmation requests often take the form of a standard form for the accountant to complete and sign. The Institute advises members to avoid signing such forms where they incorporate a broad and open- ended statement confirming the client’s ability and/or willingness to repay borrowings. Sometimes, the assurance being sought is of a legal nature, in which case it should either be a matter for the third party’s own lawyers, or contact should be made with the client’s legal advisers.

Should you agree to provide any form of report to a third party, Appendix 2 of M39 provides some examples of types of wording or opinions that are “unacceptable”. Accountants are advised against using language such as “we certify”, “correct”, “accurate” or “we have ensured” since it implies a level of certainty which cannot necessarily be given. The Institute also advises against the use of words such as “we verify” or "certificate”. Notable other examples in M39 include “true and fair” opinions (other than with regard to the auditor’s opinion on financial statements), opinions that are open-ended or that are beyond the professional competence, knowledge and experience of the accountant.

Appendix 2 also advises against providing qualifications to the report in a covering letter – such qualifications should be included in the main body of the report.

The Representation & Technical Policy Department has recently issued TR 11/2016 ‘Third Party– Letters of Confirmation’ (which replaces IS 01/2005 ‘Bank of Scotland (Ireland) – Letter of serviceability’). This provides a pro-forma wording for a letter to a third party in connection with a request for confirmation that members may use instead of a standard form. It is confined to confirming some factual information that the accountant is in a position to stand over and may be amended to suit particular situations.

Another common area is that of grant claims, the subject of ‘Miscellaneous Technical Statement M45 – Grant Claims’ (M45). The usual scenario is that a claim for payment under a previously approved grant must be accompanied by an independent accountant’s report. M45 highlights matters on which accountants cannot provide meaningful assurance, such as whether expenditure was incurred on an “arm’s length basis” or non-accounting criteria such as engineering specifications.

Sometimes, the agency issuing the grant asks for confirmation on whether the expenditure claimed has been the subject of another grant claim. It is unlikely that the accountant will be in a position to provide such an assurance.

M45 includes an example accountant’s report at Appendix C. The opinion is worded as follows: “Based on the procedures set out above, in our opinion, the statement of grant claim attached dated [date] is consistent with the records we inspected and has been prepared, in all material respects, in accordance with the requirements set out in the letter of offer or grant agreement dated [date]”. It should be noted that the opinion does not “certify” anything. Instead, it provides an opinion based on the conclusions of work carried out by the accountant, in accordance with the principles explained above. M45 also provides a recommended work programme and model terms of engagement.

M45 was produced in conjunction with several agencies in the Republic of Ireland, but the principles set out therein should be applied to all accountant’s reports on grant claims. However, members should note that, for grant claims from Invest NI, ‘Information Sheet IS 02/2009 - Invest NI Grant Claims’ sets out a proforma engagement letter and several example pro forma reports. Reports to Invest NI should be worded in accordance with this document rather than M45.

Members are advised to read the abovementioned documents in full, which are available on CHARIOT at www.charteredaccountants.ie