The opening paragraph of the model privity letters sometimes refer to a "credit agreement dated...." The New Jersey Bankers Association has advised us that some agreements, presumably with smaller customers, may be less formal, and may in fact be oral agreements. It is important for the CPA to discuss the nature of and terms of the lending agreement between his client and the bank and to be as specific as possible in describing the credit agreement in the privity letter.
Generally, the letter should contain:
- An identification of the engagement to which the professional service relates.
- An acknowledgment that the professional service is to be furnished to a named third party in connection with a particular transaction, contract, or agreement and that the accountant is aware that the third party has indicated an intention to rely on the professional service in connection with the transaction, contract or agreement.
- A statement that the report issued by the accountant is issued in connection with an audit, review, or compilation of financial statements performed in accordance with professional standards, followed by a description of the purpose and inherent limitations of the particular engagement involved.
- A statement that the third party must exercise its own due diligence.
- A statement restricting the letter to the particular report or professional services described within the letter, and a statement that the accountant's acknowledgment of privity does not apply to reports or professional services that may be issued in connection with other current or future engagements.
Accountants should be cautious that their use of the model reliance letters does not breach any requirement in the accountant's professional liability insurance contract or otherwise conflict with policies of their carrier. Consequently, the accountant should consult with his or her insurer prior to using any model letter.
The model letters are intended to provide guidance on developing a letter where the services involve audits, reviews, or compilations involving a complete set of historical financial statements. Also, there is a letter for situations where the accountant does not believe the third party should rely upon the work performed for the client. These letters are not intended as legal advice, and do not cover all situations, particularly when services other than compilations, reviews or audits, or if there are report modifications for matters such as scope limitations, reliance of other auditors, or going-concern problems. Accountants should consult with legal counsel when revising the model letters to ensure they address professional standards involving report modifications.
PRIVITY LETTERS REGARDING TAX RETURNS
Many practitioners have been requested to provide privity letters regarding tax returns. Where a request is made for a tax return in conjunction with a financial statement which covers the same period, we believe that the privity letter should only cover the financial statement, as it involves the higher level of professional service, and that the tax return is merely ancillary to that financial statement. This should be discussed with the client and the bank representatives.
Occasionally, a privity request is received for a tax return, presumably a corporate or partnership return with a balance sheet and profit and loss schedule, that has been or will be issued without an accompanying financial statement. With regard to such a privity request for a tax return, SAARS 1 imposes no requirement on the accountant to report on financial information contained in the tax return. However, if the accountant deems it appropriate to grant privity to the third party, it is recommended that practitioners prepare a compilation or review report on the financial information contained in the tax return. Such a report should utilize the language recommended for financial statements prepared in accordance with an Other Comprehensive Basis of Accounting (OCBOA).
On the subject of personal income tax returns, a privity request may be made by a Bank for a return which includes a Schedule C. In such a case, again if the accountant deems it appropriate to grant privity, it is recommended the practitioner prepare a compilation report on the financial data included on the Schedule C utilizing the OCBOA reporting language. Regarding a personal tax return without a Schedule C, such a document, because of its incomplete information, would seem to fall outside the scope of a privity reliance letter. Each of these situations should be reviewed with your client, the requesting entity, and, if appropriate, legal counsel prior to the issuance of the privity letter.