Creditworthiness verifications and PPP loans
By Duncan B. Will, CPA/ABV/CFF, CFE
September 21, 2021
CPA firms receiving requests from lenders for creditworthiness verifications for clients who had requested Paycheck Protection Program (PPP) loans were often unsure of how to respond. The advice CAMICO gave CPAs assisting their clients with PPP loan applications is valid for similar circumstances in which a lender wants the borrower’s CPA to provide creditworthiness feedback to the lender.
Many lenders, in response to economic challenges precipitated by the pandemic, stated they needed borrowers’ accountants to sign financial statements supporting borrower loan applications. Government regulations did not require this step. CAMICO has historically cautioned accountants not to accommodate such requests. Not only is accommodating these requests not required but it could violate professional standards, were the accountant to provide assurances regarding a borrower’s solvency or ability to repay the debt.
CAMICO discourages accountants from communicating directly with lenders. If
the accountant chooses to do so, CAMICO offers its policyholders wording to specify the services performed, point out those services did not contemplate accommodating their request, and indicate the lender would need to rely on its own underwriting procedures.
Prior to the issuance of Statement on Standards for Accounting and Review Services (SSARS) No. 21 in October 2014, accountants were required to perform a compilation of financial statements engagement when they chose to accommodate lenders’ requests for financial statements. AR-C Section 70 of SSARS No. 21 introduced the preparation of financial statement engagement. CPAs whose license does not permit them to compile financial statements are not prohibited from performing preparation of financial statement engagements. Accountants who perform this service typically do not issue a report and instead prepare financial statements with a legend appearing on each page which clearly states no assurance is provided.
However, accountants may issue a disclaimer report when engaged to perform a preparation of financial statements. CAMICO has steadfastly discouraged accountants from using the disclaimer report option, as doing so would eliminate the anonymity associated with the typical legend approach, which does not require a disclaimer.
AR-C 70 mandates each page of prepared financial statements and related disclosures include a statement indicating no assurance is provided. AR-C 70 does not prescribe specific language. CAMICO recommends practitioners use the legend “No CPA provides any assurance on these financial statements,” so financial statement readers are aware of the CPA’s association with the financial statements and don’t mistakenly interpret the abbreviated “no assurance is provided” to mean the client isn’t providing assurance, but presume the CPA is providing assurance.
The scenario when lenders request financial statements signed by the accountant is the exception that defines the rule regarding disclaimers. If
the lender insists on receiving a “financial statement signed by the borrower’s accountant,” instead of performing a compilation engagement, CPAs can accommodate the request by performing a preparation engagement and issuing a disclaimer report. CPAs choosing this path will need to obtain a signed engagement letter detailing the client’s and accountant’s mutual responsibilities. Neither the compilation report nor the disclaimer report provides assurance, but the language in a disclaimer is concise, and if the firm is not already subject to peer review, the engagement would not subject the firm to peer review. When compelled to sign a report and a disclaimer is added, the legend is no longer required, but CAMICO encourages accountants to use the “belt and suspenders” approach and in addition to the disclaimer report, have each page of the financial statements and disclosures include the aforementioned legend.
An illustrative disclaimer might read:
The accompanying financial statements of <entity> as of and for the year ended <date>, were not subjected to an audit, review, or compilation engagement by <me/us>, and <I/we> do not express an opinion or a conclusion, nor provide any assurance on them.
[Signature of <accounting firm/accountant>]
[Accountant’s city and state]
[Date]
To be clear, accountants may opt to perform a compilation engagement instead of performing a preparation engagement. However, accountants performing compilations will be subject to peer review,
must issue a report (before SSARS No. 21, management use only compilations did not require a report),
must consider whether they are independent and if NOT independent
must specify in their compilation engagement letters and their compilation reports that they are not independent. CAMICO discourages CPAs from indicating why their independence is impaired, because were they to do so, AR-C 80 requires accountants to indicate in their report each reason their independence is impaired, and accountants could inadvertently omit a reason.
Duncan B. Will, CPA/ABV/CFF, CFE, is loss prevention manager/accounting and auditing specialist with CAMICO (www.camico.com). He leverages his more than 40 years of experience in accounting, including public accounting, forensic accounting, consulting and audit and tax compliance, to manage the loss prevention department, respond to accounting and auditing risk management issues and offer risk management advice to policyholders.
