Accountant's Letter - Explained
What is an Accountant's Letter?
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Table of ContentsWhat is an Accountant's Letter?How does an Accountant's Letter Work? Contents of an Accountants LetterBank Requirements for Accountants LettersValidity of an Accountants LetterAcademic Research on Accountant's Letter
What is an Accountant's Letter?
An accountant's letter, also referred to as an auditor's opinion, is a written statement usually preceding a financial report that describes and substantiates the accuracy of a company's financial statements and practices and evaluates its compliance with Generally Accepted Accounting Standards (GAAP). As the name suggests, an accountants letter is written and signed by an independent accountant (or auditor) and is expected to be unbiased and qualified in its evaluation. An accountant's letter can also be used by a self-employed borrower as evidence to support his/her claims regarding income.
Back to: ACCOUNTING, TAX, & REPORTING
How does an Accountant's Letter Work?
An accountant's letter, in general, contains an unqualified opinion, which attests the auditors belief that the financial statements are fair and accurate in their representation of the financial condition of the company in question. On the other hand, if the auditor detects deficiencies in the company's financial statements in the form of inaccuracies or non-conformance of GAAP principles, he/she might issue a qualified opinion in the accountants letter. A third, and much rarer possibility is of an accountants letter containing an adverse opinion. An adverse opinion such as a going concern, for example, asserts the auditors doubts that the audited company has misrepresented its financial position and as such, would most likely be unfit to remain in business. In addition to the auditors opinion, an accountants letter also includes details about the period of time covered by the financial statements.
Contents of an Accountants Letter
The contents of an accountants letter are strictly regulated by federal regulatory bodies such as the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Corporation (FDIC). These regulatory agencies, together with various state regulatory bodies, have put forward the following requirements regarding an accountants qualification to issue letters:
- The accountants practices must conform with accounting standards formulated by the American Institute of Certified Public Accountants (AICPA).
- An accountant that seeks to issue an accountants letter about a firm must be independent of that particular firm.
- The accountant must possess a license issued by the state in which he/she is practicing.
- It is mandatory or the accountant to be a member in good standing in the AICPA.
Bank Requirements for Accountants Letters
There are also several requirements that banks (as lenders) have mandated for accountants letters. These are:
- The accountants letter must be written or typed on the accountants company letterhead.
- The letter must contain details of any industry memberships and Certified Public Accountants (CPA) qualifications.
- The letter must be dated and signed, and contain the name of the person who signed it.
- The letter must also specifically mention the name of the business that was audited and that the accounting firm acts as the accountant for that business.
An accountants letter forms an integral part of analysts' as well as investors opinion of the business since it accompanies the financial reports of that business. However, there have been several instances of investigations and subsequent punitive actions (such as fraud lawsuits and other enforcement actions) instituted by regulatory bodies against accounting firms for their failure to accurately formulate and present their opinions.
Validity of an Accountants Letter
Although accountants letters are valid for specific periods of time, certain lenders do accept these documents in lieu of bank statements or a BAS. However, as time passes, these letters lose their credibility as accurate representations of the financial health of the borrower.
Academic Research on Accountant's Letter
- The Accountants' Liability Controversy, Macchiarola, F. J. (1988). The Accountants' Liability Controversy. Colum. Bus. L. Rev., 177.Accountants Do More than Figure, Field, H. G., & Kleeman Jr, R. E. (1990). Accountants Do More than Figure. Fam. Advoc., 13, 20.