CPA Comfort Letter vs CPA Letter of Explanation: Key Differences Explained
You are looking in the business world to secure a mortgage, verify income, or simply verify financial status. In that case, you will find two significant documents: the CPA comfort letter and the CPA letter of explanation. Third parties frequently request both, including lenders, landlords, and business associates, but they serve different purposes. In this article, we compare the distinctions between these two forms of CPA letters, detail their applications, and assist you in deciding which to use in your case. What Is a CPA Comfort Letter? The Purpose of a CPA Comfort Letter A CPA comfort letter is a written confirmation from a Certified Public Accountant (CPA) attesting to specific financial facts. The comfort letter generally confirms that specific financial statements are accurate, that no adverse economic consequences will negatively affect the business or individual financial condition, and that the information shown is correct. For example, if the lender asks for a CPA mortgage loan, they may need a comfort letter to ensure income, assets, and financial standing. The comfort letter confirms that the CPA audited the economic reports and found nothing unusual. What is included in a CPA Comfort Letter A CPA comfort letter often includes: Income verification Financial health confirmation Assurances that no adverse financial actions will affect the business or individual Statements about the validity of financial statements, typically in business transactions Detail About CPA Letter? Purpose of a CPA Letter of Explanation A CPA letter of explanation differs significantly from a comfort letter. While a comfort letter assures financial facts, a letter of explanation addresses specific financial circumstances or discrepancies that need further clarification. This could include explaining a sudden drop in income, a late payment, or other behavioral financial situations. Furthermore, lenders or third parties often request a CPA letter of explanation when they require a deeper understanding of an individual’s or business’s financial situation. What is included in a CPA Letter? A CPA letter of explanation typically includes: A detailed description of the situation that requires clarification An explanation of why the financial discrepancy occurred Information on how the situation has been resolved (if applicable) Assurance that the issue will not negatively impact future financial stability Key Differences Between a CPA Comfort Letter and a CPA Letter of Explanation Purpose and Function The CPA comfort letter confirms the accuracy of financial information and provides assurance that there are no adverse issues that could affect the individual or business’s financial situation. On the other hand, a CPA letter of explanation is primarily used to clarify discrepancies or unusual situations in a person’s financial history or statements. Content and Focus While both letters come from a CPA, their content varies greatly: A CPA comfort letter is focused on confirming the stability and accuracy of financial data. A CPA letter of explanation delves into the specifics of a particular financial issue that may raise red flags, providing context and reasoning. When Each Letter Is Used CPA comfort letters are commonly requested during loan applications, especially for mortgages. If you’re applying for a CPA mortgage loan, the lender may require a comfort letter to verify your income and financial status. CPA letters of explanation are typically requested when something unusual has been flagged in a person’s financial history, such as a missed payment or a significant financial fluctuation. When Do You Need a CPA Comfort Letter? For Mortgage Applications If you are applying for a home loan, lenders may require a CPA letter for a mortgage to verify your financial standing. This is particularly important for self-employed individuals, who might not have traditional pay stubs or W-2 forms to confirm their income. A CPA comfort letter assures the lender that the income and financial data are accurate. Companies mostly need a comfort letter from a CPA when seeking loans or investors. The letter assures third parties that the company is in good financial standing and that there will be no issues preventing it from repaying the loan. When Do You Need a CPA Letter of Explanation? To Correct Financial Irregularities If inconsistencies or irregular transactions appear on your credit report, tax returns, or other financial statements, a CPA letter of explanation may be needed. The letter can account for such things as late payments, differences in income, or other irregularities. For Self-Employed Individuals For freelancers, the CPA self-employment verification letter can sometimes be accompanied by an explanation letter justifying discrepancies in income or changes in finances based on business. This facilitates the lender’s understanding of the person’s financial status and the reasoning behind certain discrepancies. Sample CPA Letter for Self-Employed If you work for yourself and require a letter from a CPA for a loan or mortgage, a sample of a CPA letter for the self-employed can guide what the letter will do. The letter will usually certify your income and confirm how your company is organised. Sample CPA Letter for Self-Employed If you are self-employed and need a CPA letter for a mortgage or loan, a sample CPA letter for self-employed can give you an idea of what to expect. This letter typically verifies your income and explains how your business is structured. So, if there is anything fixed about your income, a CPA letter of explanation might also be requested to clarify those issues. CPA Comfort Letter vs. CPA Letter for Mortgage Role in Mortgage Applications A CPA letter for mortgage serves as an official confirmation of your income and financial stability. However, a CPA comfort letter might be required if the lender needs extra assurance that there are no significant economic risks. Both letters are designed to facilitate the loan approval process by confirming your secure financial situation. What is the Difference in Application? A CPA comfort letter is a more general document that assures lenders that your financial documents are accurate and complete. A CPA letter for mortgage, on the other hand, is specific to confirming income and other loan-related financial data. Lenders often request both when they need detailed and
