Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Accountant's Letter

What it is:

An accountant's letter, also called an auditor opinion, is a written statement describing an auditor’s independent, unbiased and qualified evaluation of the accuracy and completeness of a company’s financial statements and practices, as well as an evaluation of a company’s compliance with Generally Accepted Accounting Standards (GAAP).

How it works (Example):

When an auditor feels that a company’s financial statements are fair and accurate, it issues an unqualified opinion and does so using a standard reporting template (this is why many opinions read the same way). An accountant's letter also includes a statement that the audit was conducted in accordance with GAAP. When the auditor cannot give an unqualified opinion, it issues a qualified opinion, which lists the reasons for the auditor’s concern about the company’s financial statements and controls and the possible effects on the financial statements.

Here is an example of an accountant's letter, for the Disney Corporation:

Why it Matters:

An accountant's letter is an opinion of the trueness and fairness of a company’s financial statements. This is done for the sake of the shareholders, regulatory authorities, lenders and other people with an interest in the health of the company.

There is always a chance that an auditor gives an unqualified opinion when in fact the financial statements are materially misstated. This is called audit risk, and the auditor must use his or her judgment about how much is acceptable and what errors are material enough to warrant the restatement of the financials. In these situations, the definition of the word material becomes especially important, because shareholders, lenders and other interested parties make crucial decisions based on the quality of the information in a company’s financial statements.