Comfort Letter

What is a Comfort Letter?

A Comfort Letter is a document issued by an auditor or accountant that provides assurance but not a guarantee about the accuracy and reliability of financial information presented in a company’s documents, usually in connection with a public offering of securities.

It is mainly used to “comfort” underwriters, investors, or lenders, helping them assess the risk of relying on the company's financial statements.

Purpose of a Comfort Letter

The primary role of a comfort letter is to:

• Support confidence in the company’s financial disclosures.
• Help underwriters fulfill their due diligence responsibilities.
• Reduce the risk of financial misstatements affecting investment decisions.

Who Issues It and When?

• Issued by: An independent external auditor (usually a firm of Chartered Accountants).
• Used during: Public offerings (IPOs or FPOs), private placements, or large financing deals.

Key Contents of a Comfort Letter

A comfort letter typically includes:

• Reference to Financial Statements: Confirms that audited financial statements comply with applicable accounting standards.
• Procedures Performed: Describes the limited review or agreed-upon procedures (not a full audit).
• Changes Since Last Audit: Notes whether there have been any major changes in financials after the last audit.
• Unaudited Information: Provides limited assurance on unaudited financial data, like interim results.
• Management Responsibility Disclaimer: Clearly states that the company’s management is responsible for the financial information.

Example Scenario

Let’s say a company is going public through an IPO:

Investment banks underwriting the issue will request a comfort letter from the auditor.

The auditor issues a letter confirming that:

• The financial statements were audited in accordance with standards.
• Nothing has come to their attention indicating material misstatements in unaudited financials.

Certain financial data included in the prospectus are consistent with the company’s books.

Importance in Capital Markets

In capital markets, comfort letters help:

1. Reduce the legal liability of underwriters.
2. Enhance investor confidence.
3. Ensure a smoother regulatory process, especially with SEBI or other stock exchange requirements.