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Simple English definitions for legal terms
comfort letter
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A quick definition of comfort letter:
A comfort letter is a statement from an auditor that says they reviewed a company's financial information and it is accurate. When companies sell stocks to the public, underwriters ask for comfort letters to protect themselves from being sued for securities fraud. The letter includes information about the auditor's independence, how they checked the financial information, and how confident they are that it is accurate. If the financial information has been audited, the auditor will say they are very sure it is accurate. If it hasn't been audited, they will only say they didn't see any problems.
A more thorough explanation:
A comfort letter is a statement from an auditor that confirms the accuracy of a company's financial data. It is often requested by underwriters in public offerings to establish a due diligence defense against liability for securities fraud. The letter includes information about the auditor's independence, the accuracy of the financial statements, and the procedures used to review them.
For example, if a company is planning to go public and sell shares of stock, the underwriters may request a comfort letter from the company's auditor. The letter would confirm that the financial statements provided by the company are accurate and comply with accounting standards.
Another example is when a company is seeking a loan from a bank. The bank may request a comfort letter from the company's auditor to confirm the accuracy of the financial statements provided by the company.
These examples illustrate how comfort letters are used to provide assurance to third parties about the accuracy of a company's financial data.