What Is an Attorney's Letter?

An attorney's letter is a formal business letter sent by a certified public accountant (CPA) to a client's attorney. The attorney's letter verifies the information sent by the management of a company pertaining to pending litigation of the company.

The purpose of the attorney's letter is to inform and certify to the auditor of any legal action against the client that could result in an adverse financial impact on the company's financial statements.

Key Takeaways

  • An attorney's letter is a formal business letter from a certified public accounting to a company's attorney.
  • Information sent to an accountant by a company's management related to pending litigation is verified through an attorney's letter.
  • The attorney's letter is used in the audit process with the goal of disclosing potential losses arising from lawsuits against the company that could negatively impact a company's financial position.

Understanding an Attorney's Letter

The attorney's letter makes up a significant part of the financial audit process. When auditors are conducting a review of a company's financials, they need to take into consideration any litigation that may have a negative impact on the financials. Therefore, they need a full account of any pending lawsuits the company faces.

Auditors will request this letter for any audit and particularly if they have a doubt that the management of the company they are auditing has litigation pending against it that they have not disclosed. This letter will then provide them with the information that they need.

Essentially, the letter seeks to confirm that the information provided by a client is accurate and complete. Upon receipt of a response from an attorney, a CPA can better determine whether a client’s legal situation has a material impact on the information reported in its financial statements.

This is of special care when possible losses from damages awarded as the result of a lost lawsuit are a possibility. The payout would hurt the company's financial strength, therefore, shareholders and potential investors need to be made aware of these risks.

Accounting and Auditing Considerations

It is primarily management's responsibility to put in place procedures to account for any litigation, claims, and assessments against the company when preparing financial statements in compliance with generally accepted accounting principles (GAAP).

In relation to litigation, claims, and assessments, the auditor needs to obtain information related to the matter. The information that they will need to gather will need to be the following:

  • The existence of any situation that could be a potential loss to a company that has come about through litigation.
  • The exact time period when the matter that caused the litigation occurred.
  • The likelihood of an outcome that would be negative to the company.
  • An estimate of the potential loss.

An attorney's letter is meant to verify all of the above information that would come from management. The letter is usually only needed when the financial loss would be material, which would be decided on between the auditor and the company.