A comfort letter, also called solvency opinion or letter of comfort, is a document prepared by an independent auditor. A comfort letter expresses an opinion about an organization’s preliminary audited financial statements. It also confirms that reports in a prospectus comply with regulations and attests that the preliminary statements will not differ greatly from the final version.
Comfort letters are issued to any person or entity (i.e. another firm or the government) interested in the financial status of a firm. Comfort letters are primarily meant to assure the interested party that the financial statements of a firm are in order, and that the initial facts given to them are true and consistent.
Note that while comfort letters assure the interested party that the financial statements are reports are reliable, it does not in any away guarantee the solvency of the firm under review. It merely attests to the fact the firm being reviewed is being transparent and is presenting a real financial picture and unlikely to be hiding records that could point to the possibility of insolvency in the near future. As such, the comfort letter should never be considered as a binding document that points to the financial stability of a firm.
In case a comfort letter indicates any possibility of irregularities in the initial financial statements and reports of a firm, it is always best to conduct a full audit before jumping into any conclusions and coming to any decision. This is to avoid any transactions that might precipitate into a disastrous business decision.
