Attorney’s Letters in Finance: Definition, Verification, and Impact

An attorney’s letter is a crucial component in the realm of finance, representing a formal communication from a certified public accountant (CPA) to a client’s attorney. This communication serves a pivotal role in the audit process, specifically in verifying information provided by a company’s management regarding pending litigation.

In the complex landscape of financial audits, the attorney’s letter emerges as a critical document. When auditing a company’s financials, auditors must meticulously consider any ongoing litigation that might have adverse effects. The attorney’s letter acts as a linchpin, providing auditors with a comprehensive understanding of pending lawsuits.
This formal communication becomes particularly indispensable when auditors harbor suspicions about undisclosed litigation. It serves as a tool to confirm the accuracy and completeness of information provided by the client. Responses from attorneys empower CPAs to assess whether a client’s legal situation could significantly impact reported financial statements.

Special attention is directed towards potential losses resulting from damages awarded in lawsuits. Such losses could substantially dent a company’s financial strength, necessitating transparent communication with shareholders and potential investors regarding associated risks.

Within the framework of financial reporting, it is primarily the responsibility of a company’s management to institute procedures for accounting for litigation, claims, and assessments. This adherence to generally accepted accounting principles (GAAP) ensures transparency and accuracy in financial statements.
In the context of litigation, claims, and assessments, auditors must gather specific information:

An attorney’s letter emerges as a crucial tool to verify the above information sourced from management. Typically, its necessity is contingent on the materiality of the potential financial loss, a determination collaboratively made between the auditor and the company.

No, the necessity of an attorney’s letter depends on the perceived materiality of potential financial losses resulting from litigation. It is typically requested when auditors suspect undisclosed litigation.

Materiality is often collaboratively determined between auditors and the company. It involves assessing the potential impact of financial losses on a company’s overall financial position.

No, the primary focus of an attorney’s letter is to verify information related to pending litigation. It is not typically utilized for addressing non-litigation-related financial matters.