Attorney's letter definition
/What is an Attorney’s Letter?
An attorney’s letter is issued by a CPA to the attorney of a client, requesting verification of pending litigation information provided by the client to the CPA. In essence, the letter seeks to confirm that the information provided by the client is accurate and complete. This is a key audit step, since the auditor needs to know if there is any pending litigation that may have an adverse impact on the client’s financial statements.
Upon receipt of a response from the attorney, the CPA determines whether the client’s legal situation has a material impact on the information reported in its financial statements, especially in regard to any possible losses from damages awarded as the result of a lost lawsuit.
When the information provided by an attorney differs from what a CPA has been told by client management, this is an indicator that either management is hiding information, or that the client has poor procedures in place for tracking and accounting for litigation issues.
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Characteristics of an Attorney’s Letter
Below are the key characteristics of an attorney's letter:
Purpose. The letter helps auditors obtain information about litigation, claims, and assessments that might affect the financial statements. It serves as corroborative evidence to management’s assertions about legal matters.
Content. The attorney’s letter typically includes the following:
Identification of Legal Matters: A list of pending or threatened litigation, claims, or assessments.
Progress of Cases: A description of each case’s current status and significant developments.
Likelihood of Loss: An evaluation of the likelihood of unfavorable outcomes (e.g., probable, reasonably possible, or remote).
Estimated Financial Impact: An estimate of potential financial losses if the outcomes are unfavorable.
Attorney's Limitations: Any limitations in providing information, such as confidentiality or insufficient data.
Attorney’s scope. Attorneys provide information only about matters they are actively involved in or have knowledge about through their representation of the client. They may not disclose confidential information unless authorized by the client.
Confidentiality. Attorneys are bound by legal ethics and privilege; they can only disclose information explicitly authorized by the client.
Role in the audit. The attorney’s response helps auditors assess the completeness and accuracy of disclosures in the financial statements related to contingencies. The letter also serves to confirm or clarify the management’s representations.
Timing. The letter is usually requested towards the end of the audit to ensure that the most current legal information is included.
Limitation of liability. Attorneys may include disclaimers or limits on their responses to ensure they are not held liable for judgments beyond their knowledge or expertise.
The attorney's letter is essential in identifying and quantifying potential liabilities, ensuring that the audited financial statements fairly present the company’s financial position.