Accountant's Letter: What It Is, How It Works

What Is an Accountant's Letter?

An accountant's letter is a written communication that usually precedes a financial report. An accountant's letter is produced by a company's independent auditors. It summarizes the scope of the accountant's audit and its results in very general terms. The term is frequently used interchangeably with the term "auditor's opinion."

Understanding an Accountant's Letter

The accountant's letter usually expresses a "clean" opinion, which means the accountant or accounting firm believes the financial statements are accurate and that they fairly present the company's financial condition, known as an unqualified opinion.

A qualified opinion indicates deficiencies in the company's procedures or presentation, meaning the financial statements may not be accurate or may not conform to generally accepted accounting principles (GAAP). For companies outside of the U.S., this would indicate a failure to comply with International Financial Reporting Standards (IFRS).

The accountant’s report also states the period of time covered by the financial statements as well as the method of accounting (GAAP or cash) the company presenting the statements uses.

An adverse opinion, which indicates that a company's financials are misrepresented, is yet another possibility. The most well-known opinion is the going concern, which means that the accounting firm has doubts about the company's financial health and its ability to remain in business.

An accountant's letter along with the inclusion of the auditor's opinion provides significant insight into the health of a company that is useful for investors and shareholders; however, given past history, such letters may not reveal a company's true financial standing, witnessed through many accounting scandals, such as Enron and Worldcom.

What Is Included in an Accountant's Letter?

A number of federal and state regulatory agencies issue and enforce requirements that stipulate what information should be included in an accountant’s letter. These include the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation (FDIC), and state regulatory bodies.

Among other requirements accountants must meet to support their qualifications to issue accountant’s letters are: that they are independent of the firm’s about which they are issuing opinions; that their practices are in conformance with accounting standards as set out by the American Institute of Certified Public Accountants (AICPA), the industry’s trade association which sets ethical and professional standards and grants credentials; that the accountant has a license issued by the state in which it practices, and that it is a “member in good standing in the AICPA.”

Because the accountant’s letter is disseminated together with a company’s financial reports, it is considered an integral part of analysts' and investors’ view of the firm. Over the years, regulators have launched investigations, filed suit for fraud, and taken enforcement actions against accounting firms for failing to accurately present their opinions as well as for negligence in arriving at their opinions. One major case involved accounting firm Arthur Andersen’s accountant’s letters for Waste Management’s financial reports.

An accountant's letter is not enough for an investor or shareholder to understand a company's financial health or its reporting accuracy. Knowledge of the business, the industry the company operates in, as well as the information contained in the financial statements, is all needed to properly assess a good or bad investment.