Should you provide a certificate of financial health?
What should you do if a financial institution, government department or other organization asks you to provide a signed certificate of financial health or solvency for a client?
First of all, this type of requirement (often in contract or legal form) can be essential for a client seeking financing or assistance for a project.
Before accepting such an engagement (be it compliant with a contract or legislation), make sure to always obtain clear criteria in order to properly assess the request.
Financial health and solvency: Are these criteria sufficiently clear?
Some financial ratios are good overall indicators for assessing a company’s financial health. That said, target ratios can vary significantly across industries.
Credit-ratings agencies generally agree on the criteria for determining the ratings they assign to large companies. These criteria, however, are not consistently applied to all business types, nor are they consistently used by all stakeholders.
Do stakeholders rely on the same criteria to make business decisions?
No, since their assessment of “financial health” and “solvency” can vary greatly from one company to another.
So what should you do?
For these reasons, you should not accept engagements to attest to an entity’s financial health.
Alternatively, you can provide other professional services that are likely to meet the requester’s needs, such as:
- an audit or a review of financial statements or other financial information;
- a report on the results of applying specified auditing procedures to financial information (other than financial statements).
Be careful when issuing an opinion on financial information other than financial statements (e.g. sales). The work performed in an audit of financial statements taken as a whole is probably not sufficient to issue an opinion on a specific financial statement item.
Similarly, the work done in a compilation engagement is not sufficient to certify that the information presented in the financial statements is reliable.
In short, above all, talk to the requester to gain a clear understanding of its needs so you can suggest the appropriate reports. If you clearly explain the engagement-related issues, the requester will be open to discussion and willing to adjust its request.