A comfort letter is a document prepared by an
accounting firm assuring the financial soundness or backing of a company. The comfort letter can be issued by a
Certified Public Accountant
Certified Public Accountant (CPA) is the title of qualified accountants in numerous countries in the English-speaking world. It is generally equivalent to the title of chartered accountant in other English-speaking countries. In the United Sta ...
declaring no indication of false or misleading information in the financial statements and that the company's
prospectus follows the prevailing accounting standards. This is sometimes used in connection with an
initial public offering
An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investme ...
. Comfort letters are also sometimes provided by those involved in evaluating a company's assets, for instance, in the case of oil and gas companies, third-party reserve engineering firms.
A comfort letter may also be used as written assurance by a
subsidiary's parent company or bank used to offer 'comfort' to the buyer as to the seller's ability or willingness to perform its obligations. Comfort letters are often used because the seller is unable or unwilling to provide a guarantee on a certain outcome, such as the performance of a
security" \n\n\nsecurity.txt is a proposed standard for websites' security information that is meant to allow security researchers to easily report security vulnerabilities. The standard prescribes a text file called \"security.txt\" in the well known locat ...
.
Comfort letters are typically signed prior to the pricing decision or closing date for a given public offering or other transaction, as a part of the
due diligence
Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care.
It can be a ...
process. Subsequently, a "bring-down" letter is used to re-verify, as of a later date, that the original comfort letter is still valid.
Antitrust usage
The
European Commission
The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...
also adopted a practice of issuing ''ad hoc'' written "comfort letters" in its ''Temporary Framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak'' published in April 2020. The first such "comfort letter" was issued to "Medicines for Europe" and related to an agreement designed to facilitate cooperation in increasing the supply and improving the distribution of medicines.
[Gueret, A. and Rigby, L.]
The European Commission’s comfort letters: an adaptation of EU competition law?
''Hausfeld LLP'', published 4 May 2021, accessed 25 July 2023
See also
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Letter of credit
A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an ex ...
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Financial audit
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Negative assurance
Negative assurance within accounting ethics (also known as limited assurance), is a method used by the Certified Public Accountant to assure various parties, such as bankers and stockbrokers, that financial data under review by them is reasonabl ...
References
Auditing terms
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