Simple English definitions for legal terms
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A letter of comfort is a type of letter that can be used in two different situations. In the world of finance, it is a letter from a certified public accountant that confirms that the financial statement accompanying a securities offering is accurate and truthful. However, this type of letter is limited in its effect because the CPA can only attest to certain representations and warranties that the issuer has authorized them to rely on. In the corporate world, a letter of comfort is a letter, usually from a parent corporation on behalf of a subsidiary, that expresses support for the activities and commitments of another corporation. It is important to note that this type of letter is not a guarantee, but rather a statement of support.
A letter of comfort is a document that provides assurance or support to another party. There are two common types of letters of comfort:
A comfort letter is a letter from a certified public accountant (CPA) that certifies that no false or misleading information has been used in preparing a financial statement that accompanies a securities offering. This letter is usually limited in its effect because the CPA only attests to certain representations and warranties that the issuer has authorized the CPA to rely on. It is also known as a cold-comfort letter.
Example: A company is preparing to issue securities and hires a CPA to review their financial statements. The CPA provides a comfort letter to the company, which is included in the securities offering to provide assurance to potential investors that the financial statements are accurate and reliable.
A letter of comfort is a letter, usually from a parent corporation on behalf of a subsidiary, that provides support (but not a guarantee) for the activities and commitments of another corporation.
Example: A subsidiary company is seeking a loan from a bank, but the bank is hesitant to lend because the subsidiary has a limited operating history. The parent company provides a letter of comfort to the bank, stating that they support the subsidiary's activities and commitments. This letter provides assurance to the bank that the subsidiary has the backing of a larger, more established company.
These examples illustrate how letters of comfort can provide assurance and support to parties involved in financial transactions.