What Is a Comfort Letter?
A comfort letter is a written document that provides a level of assurance that an obligation will ultimately be met. In other words, it assures the financial soundness or backing of an individual or entity. A comfort letter is also known as "letter of comfort" or "solvency opinion."
Understanding Comfort Letters
In its traditional context, a comfort letter is given to organizations or persons of interest by external auditors regarding statutory audits, statements, and reports used in a prospectus. The Securities and Exchange Commission (SEC) requires a prospectus to be filed for an investment offering for sale to provide details about the offering to the public. After a full audit is done, the comfort letter is often attached to the preliminary statements of a prospectus as assurance that it doesn't contain misleading or false information and that the offering will not be materially different from the final version.
- A comfort letter assures the financial soundness or backing of an individual or entity.
- Comfort letters can be issued by auditors, accounting firm, and companies.
- A comfort letter does not represent a commitment on behalf of the issuer.
Other Types of Comfort Letters
In other practical uses, comfort letters are often issued by auditors to lenders as solvency opinions on whether a borrower can meet the payment obligations of a loan. They are opinions, not guarantees, that the underlying company will remain solvent.
Comfort letters can also be issued to underwriters from accounting firms as an obligation to carry out "reasonable investigation" into offerings of securities. These letters of comfort will ensure that the reports conform to generally accepted accounting principles (GAAP). This helps the underwriter better understand aspects of the financial data that might not otherwise be reported, such as changes to financial statements and unaudited financial reports.
Yet another broad category of comfort letter application is parent company to a subsidiary. For example, a parent company can issue a letter of comfort on behalf of a subsidiary that needs to borrow from a bank in its locale. It could also provide a letter to a supplier of a subsidiary that wishes to transact a large purchase order of raw materials.