Comfort Letter – Definition

Cite this article as:"Comfort Letter – Definition," in The Business Professor, updated March 2, 2019, last accessed October 20, 2020,


Comfort Letter Definition

A comfort letter is a written document that provides a level of assurance that an obligation will ultimately be met. In its traditional context, a comfort letter is given to organizations or persons of interest by external auditors regarding statutory audits, statements, and reports used in a prospectus. The comfort letter will be attached to the preliminary statements as assurance that it will not be materially different from the final version.

A Little More on Comfort Letters

A comfort letter, also known as ‘solvency opinion’ or ‘letter of comfort’ is a written assurance that the obligations from an external audit will be met. The letter, given to individuals or organizations, comes attached to the initial statements as a show that it will not differ in content from the final version.

Comfort letters are issued to lenders by auditors as assurance that borrowers are in a position to repay loans. Here, the comfort letter is a solvency opinion, not an guarantee, that the borrower’s company will remain solvent until the loan is repaid.

Underwriters can also be issued with comfort letters before they undertake newly issued securities to mean that investigation into the shares of a company will be done. The comfort letter will seek the match the reports given with GAAP (generally accepted accounting principles) to help the underwriter understand a company’s financial data before investing.

Parent companies can issue a letter of comfort to a bank or a supplier who wishes to loan or supply its subsidiary company. This also applies in international contracts where a parent company issues a comfort letter on behalf of a subsidiary as an assurance that it will give the subsidiary the needed resources to fulfill a contract. However, the European Union and international law does not require the parent company to take responsibility for obligations incurred by a subsidiary after issuing a letter of comfort.

When a parent company issues a letter of comfort for its subsidiary company, there are three terms involved:

A confirmation from the parent company that the subsidiary has entered a contract

An assurance that the parent company will not break legal links with the subsidiary until all the terms of the contract are met

A comfort statement clearly establishing what the parent company will do to support the subsidiary in meeting the terms of the contract.

Canada recognizes two types of comfort letter; a letter of awareness in which the parent company confirms that a subsidiary has entered a contract and a letter of comfort in which the parent company shows its intention to offer support to a subsidiary.

In the US, letters of comfort are not legally enforced but depending on the wording of the letter, a company may be legally liable based on rule of reliance.

References for Bring-Down Comfort Letter

Academic Research on Comfort Letter

  • Legal Opinions in Business Transactions—An Attempt to Bring Some Order Out of Some Chaos, Fuld, J. J. (1973). The Business Lawyer, 915-945. This paper shows why a legally abiding comfort letter is better than one where a parent company is not legally responsible for the activities of a subsidiary during the contract period.
  • Asifma comfort letter initiative to speed up HK deals, Lee, A. (2014). International Financial Law Review. This is a study that shows how comfort letters can be used to hasten the awarding and execution of contracts. It details how different companies have been able to speed up deals with comfort letters.
  • Legal Opinions on Incorporation, Good Standing, and Qualification to Do Business, FitzGibbon, S., & Glazer, D. W. (1986). The Business Lawyer, 461-481. This paper explores how businesses can qualify other businesses when they are entering into a contract and how this affects the contract. It expounds on the legal implications of entering into contracts and the use comfort letters in making contracts work.
  • Liability for Counsel for Underwriter, Henkel, D. S. (1968). Bus. Law., 24, 641. This paper shows how parent organizations can be liable based on the words they use in a comfort letter for the activities of a subsidiary. It further expounds on situations where parent organizations can find themselves liable and where they are not liable.
  • Emerging Practice, Bushner, D. (2008). Int’l Fin. L. Rev., 28, 28. This is a paper that studies the current market and how subsidiary are interacting with parent companies and contractors. It shows the legal side of business contracts and how market trends are contracts.
  • Reputation and discretion in financial contracting, Boot, A. W., Greenbaum, S. I., & Thakor, A. V. (1993). The American Economic Review, 1165-1183. This shows companies why they should use discretionary financial contract which gives them a choice in honoring or not honoring a contract. It further shows how a discretionary contract enhances the development of reputation and why discretion is an important tool among mutual fund contracts, holding company relationships and bank loan commitments among other contracts.
  • Perceptions and misperceptions regarding the unqualified auditor’s report by financial statement preparers, users, and auditors, Gray, G. L., Turner, J. L., Coram, P. J., & Mock, T. J. (2011). Accounting Horizons, 25(4), 659-684. This study looks deeper in the intended use of an auditor’s report. As more entities continue to raise questions on auditor’s report, focus groups were conducted with CFOs (financial statement preparers), users who include banks and analysts and external auditors. This study concluded that while financial statement users may value audits but they seldom read the whole report as it is not fully clear what the report’s intended use or level of assurance is. While stakeholders have a lot of suggestion to improve auditors’ reports, the suggestions may affect the auditors risk profile thereby increasing fee. To tell if the additional costs are worth it, a research into how changes on an auditor’s report will affect user’s behavior is necessary.
  • The global audit profession and the international financial architecture: Understanding regulatory relationships at a time of financial crisis, Humphrey, C., Loft, A., & Woods, M. (2009). Accounting, organizations and society, 34(6-7), 810-825. This paper shows how the prevailing financial crisis is affecting regulatory relationships in the international auditing industry. The paper explores institutional interactions and policy debates and initiatives. Of key interest are the interactions between international regulators, International Federation of Accountants and large audit firms. The interactions are compared with the current international financial structure. This paper continues to show active regulatory responses to the financial crisis and how key participants in the auditing arena influence the financial architecture. It further shows that audit researchers need to consider the global financial architecture and how it affects the study of audit practice.
  • Letters of Comfort, Faul, W. (1990). JS Afr. L., 73. This is a paper that explores every angle of comfort letter including what they are, their applications in trade, their implications, and how to create them for successful trading.
  • Analyzing Comfort Letters: The Brazilian Legal Perspective Tsu, F. (2007). Law & Bus. Rev. Am., 13, 167. This paper analyzes the use of comfort letters in different companies, the effectiveness of these letters and their legal implications. The paper focuses on companies in Brazil and how parent organizations can be found responsible for activities of subsidiaries.
  • Comfort letters: How does SAS 72 affect them?, Sullivan, J. B., & Mancino, J. M. (1993). Journal of Accountancy, 176(6), 61. This paper takes a deeper look at comfort letters and their relationship with SAS 72 letters. It delves into the auditing process and how it affects the contents of a comfort letter. It looks at the legitimacy of audit reports and how their illegitimacy can affect letters of comfort.
  • Good Faith and Letters of Comfort, Lipton, J. (1999). UW Austl. L. Rev., 28, 138. This report shows how letters of comfort serve no purpose if no party is legally responsible if the terms of a given contract are not met. It shows how letters of comfort compare to good faith, that is, the belief that the parties in a contract have no intentions of harming each other.
  • Financial Keep-Well Agreements: When Comfort Becomes Discomfort, Harvey, W. L. (1998). Banking LJ, 115, 1061. This is a paper clearly outlining factors that lenders should consider before they give out loans. It also shows different ways of reducing the legal risks involved when a lender accepts a comfort letter as credit support.
  • Kleinwort Benson Limited v. Malaysian Mining Corporation Berhad–A Comparative Note on Comfort Letters, Wittuhn, G. A. (1989). McGill LJ, 35, 490. This report shows that the issuer of a comfort letter is not always rogue but issuers avoid guarantees as they are more binding. It shows how receivers of letters of comfort have a decision to make on going into a contract with an issuer who may not be abiding. It compares two companies and how they have used comfort letters.

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