Accountant's Letter (Opinion) - Explained
What is an Accountant's Letter?
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Table of ContentsWhat is an Accountant's Opinion?How does an Accountant's Letter Work?Contents of an Accountants Letter
What is an Accountant's Opinion?
An accountant's opinion, also known as an accountant's letter, is a statement in writing issued by an independent public accountant or auditor to describe the results of an assessment of a firms financial reports.
Usually, the purpose of an accountants opinion is to certify that a firms financial statements are accurate and complete. Such opinions can either be unqualified or qualified, with unqualified opinions following auditing and accounting standards established under the generally accepted accounting principles (GAAP).
How does an Accountant's Letter Work?
There are three main components of an accountants opinion:
- An introduction that provides a synopsis of the responsibilities of the company's management as well as the responsibility of the accountant or the audit firm.
- An identification of the company's financial statements, based on which the accountants opinion will be delivered.
- The actual statement of the opinion.
An accountant's opinion usually forms part of the accountant or auditors annual report that accompanies the filing of Form 10-K. Any publicly-traded company that does not include an accountant's opinion in its annual filing is likely to cause concern among investors. An accountants opinion can be either unqualified or qualified, depending on the scope of the assessment as well as the accountants conviction in the veracity of the financial statements.
An unqualified opinion, also known as a clean opinion, is one of the most common forms of accountant's opinions, and also the best indicator of the accuracy, completeness and compliance of a company's financial statements. An unqualified report almost always contains the word independent in the title, which signifies its creation by an unbiased third party. On the other hand, a qualified opinion expresses concern on the part of the auditor about not being able to form a comprehensive opinion about a company's finances, or a portion thereof, usually as a result of the financial statements failing to comply with the generally accepted accounting principles (GAAP). However, the implications of a qualified opinion are not always negative. In rare scenarios, an accountant may also hand out an adverse opinion, which is classified as the most unfavorable opinion that any company may receive. An adverse opinion usually signifies that the company's financial statements are in violation of certain accounting or auditing standards established by GAAP. Adverse opinions often are an indication of fraud on the part of the audited companies, and such businesses are required to make the necessary changes to their financial statements and also agree to a follow-up audit. In certain situations, the auditor may not be able to complete a financial audit due to the absence or insufficiency of financial statements or lack of cooperation from the company's management. In such situations, the auditor hands out a disclaimer of opinion, which is a statement (not considered an accountants opinion) that indicates the auditors inability to render opinions based on the financial statements of the company.
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.