You and Third-Party Verification

By Peter J. Renzulli, CPA, Bookkeepers2go – October 28, 2016
You and Third-Party Verification

The key to providing great client service and meeting the professional and legal requirements for third-party verification is understanding the real question and expected response from the client and third party.

Requests by third parties are usually nonfinancial, attestation service or factual. The nature of the request dictates the fees and services to be provided. Clearly defining the scope of services will help to prevent falling into a trap of providing prohibited services, especially in response to second requests made by the third party. Clear communication, written agreements, and educating clients and third parties are at the heart of providing great client service and reducing risk to the firm.

Understanding the nature of the engagement is the starting point to risk management and compliance with professional standards. Third-party requests come in many forms; the form determines the level of service that should be provided. The easiest request is a question of fact. CPAs are always permitted to confirm a fact, such as “We have prepared the following years’ tax returns.” But beware: The third party may put a greater reliance on the factual statement than you intend. For example, the third party may believe that a prepared tax return is a statement of accuracy, which creates risk for the firm. When making a statement of fact, be sure to narrowly limit the statement to prevent any confusion.

Requests about the accuracy of financial statements or tax returns are true attestation engagements and should be conducted as such. Third parties sometimes provide letters to be signed to “save” the client money and avoid a proper attestation engagement. Be careful of these form letters as they may not meet professional standards.

Another common request is who owns the business: This appears to be an accounting question, but, in fact, evidence of ownership is a legal question. The fact that a return includes self-employment income is insufficient proof of ownership. Be cautious when addressing such questions — the answer is not as obvious as it appears.

Another legal question that a CPA is not allowed to answer concerns the solvency of a company. There is no legal or accounting agreement on the definition of solvency, and CPAs are not permitted to opine on such matters. Nonfinancial confirmations can also cloud the third party’s understanding of a CPA’s attestation services, so take great care when addressing these issues.

Communicate with the client to more clearly define the scope of the request. If the request is prohibited by the professional code of conduct, the CPA can help the client modify the request. Usually, a detailed explanation of the code and suggestions regarding what is allowed result in a modified request by the third party. The danger with modifying the request is when the third party requests additional information as a follow-up. Many times the CPA does not realize that the second request is a prohibited service. Each third-party request should be separately evaluated to prevent this trap.

Many third-party verifications come on a standard form prepared by them. Be wary of these forms as they are not designed by CPAs and omit key language, creating risk and misunderstanding. Generally speaking, I recommend CPAs not fill in the third-party form but instead put “see attached” and use a firm-prepared document.

There is no prohibition against verbal communication for third-party verifications. However, as with all engagements, it is not a good idea. Verbal communication about engagement scope and third-party communications leads to confusion and increased risk for the firm. The third party can speak with the CPA, but that conversation should be followed up with a detailed letter confirming the understanding and stating clearly that only the content of the written communication can be relied upon.

The CPA and firm should have a set of procedures clearly defined to assist members of the firm plan, accept and bill for third-party verification services. Many firms do not bill for these services! These services are full of risk and, done properly, take a great deal of time. Remember to have written engagement letters and to charge appropriately for the service.