Accountant’s Letter Definition
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 accountant’s 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.
A Little More on What is an Accountant’s Letter
An accountant’s letter, in general, contains an unqualified opinion, which attests the auditor’s 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 accountant’s letter. A third, and much rarer possibility is of an accountant’s letter containing an adverse opinion. An adverse opinion such as a going concern, for example, asserts the auditor’s 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 auditor’s opinion, an accountant’s letter also includes details about the period of time covered by the financial statements.
Contents of an Accountant’s Letter
The contents of an accountant’s 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 accountant’s 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 accountant’s 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 Accountant’s Letters
There are also several requirements that banks (as lenders) have mandated for accountant’s letters. These are:
- The accountant’s letter must be written or typed on the accountant’s 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 accountant’s 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 Accountant’s Letter
Although accountant’s 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.
Reference for “Accountant’s Letter”
- https://www.investopedia.com › Investing › Financial Analysis
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.