Mortgage references: why accountants should stick to the facts
25 February 2020: ICAEW has recently updated its guidance on providing mortgage references, but the basic tenet of the advice remains the same: chartered accountants should stick to the facts when processing such requests.
In a society where streams of income are becoming ever more diverse, it’s no surprise that chartered accountants are increasingly asked to assist clients with mortgage lending references.
While many are straightforward to process, they can also be the source of confusion, and occasionally conflict, between the accountant, the client and the lender around what type of information chartered accountants are able to provide.
ICAEW has recently updated its guidance around this area, which can be found here. However, according to Michelle Cardwell, Technical Manager at ICAEW’s Audit, Assurance and Financial Reporting faculty, the basic principle of the advice remains the same: chartered accountants should stick to the facts in this process.
“If the request relates to factual information relating to accounting periods declared to HMRC in a tax return or where the accounts have been filed to Companies House, such as net income or profits, then typically chartered accountants are in a position to help,” says Cardwell.
“However, if lenders start asking accountants to forecast the future and ask questions around the future profitability of a company or whether a client will be able to meet their mortgage liabilities then accountants can’t answer this.”
ICAEW guidance advises accountants not to provide anything except factual information in response to such requests.
However, in limited circumstances, such as when individuals and other small borrowers do not have access to prepared audited financial statements, accountants can provide a limited opinion along the lines of: “based on the reporting accountants’ experience ... the accountants have no reason to suppose that the client would be likely to enter into a commitment, such as that proposed, that the client did not expect to be able to fulfil.”
Even in these cases, however, accountants may decline to express a view due to a limited amount of experience, insufficient information or if they have only recently started acting for the client.
Cardwell cautions accountants to only provide information of which they have direct knowledge. “If a request extends beyond your knowledge, you should decline to provide the reference. Accountants should also make clear any limitations to their view in the reference.”
A common question asked on accountancy and small business forums is around whether accountants should charge for providing such references.
ICAEW guidance outlines that to avoid the possibility of an implied contract, accountants do not charge any additional fees for the type of reference outlined in the guidance and the accountant should disclaim, in writing, any liability for providing the reference.
If a lender requires further assurance, a separate engagement can be agreed between the borrower, lender and the accountant, but accountants should ensure engagement terms clearly set out the scope of work, type of report and a reasonable limitation of liability. ICAEW has guidance on this in TECH 4/00 AAF.
However, when providing references, accountants should remember: if the risks of providing the reference are too high or the questions asked by the lender beyond their knowledge, accountants can decline to provide a reference.
For the full guidance document, including examples of an accountants’ reference for a lender, click here or contact the Audit, Assurance and Financial Reporting faculty.