What Is a CPA Letter and When Do You Need One?

A CPA letter is a formal document from a Certified Public Accountant (CPA) that verifies an individual’s or business’s financial information for a third party, such as a lender or government agency. As a licensed professional, the CPA lends credibility to the information, allowing outside parties to rely on the financial data without conducting their own full review.

The letter offers a specific attestation about a financial matter and is not a guarantee of future success or a blanket endorsement of financial health. Instead, it is a focused communication that addresses a particular requirement from the party requesting it.

Common Scenarios Requiring a CPA Letter

Third parties often request CPA letters for independent verification of financial information, particularly when standard documents like pay stubs are unavailable or insufficient. Lenders are a primary source of these requests for mortgage or business loan applications. A self-employed individual applying for a mortgage, for instance, cannot provide a W-2, so a lender may ask for a CPA letter verifying the income reported on their tax returns for the past several years.

Immigration authorities also rely on these letters for certain visa applications, especially those tied to investment or financial self-sufficiency. An investor visa application may require an applicant to demonstrate a minimum net worth. A CPA can provide a letter that verifies the applicant’s assets and liabilities based on client-provided bank statements, brokerage reports, and property appraisals.

Landlords and co-op boards may ask for a CPA letter to assess a potential tenant’s financial stability. For a small business leasing a new retail space, the landlord needs assurance that the business generates enough revenue to cover rent. A CPA can provide a letter confirming the business’s historical revenues or profitability.

Business transactions, such as a sale or merger, often involve CPA letters as part of the due diligence process. A potential buyer of a company will want to verify the seller’s financial representations. A CPA can be engaged to examine the company’s financial statements and issue a report on the accuracy of the financial data.

Levels of Assurance and Types of Letters

The term “CPA letter” covers several types of reports, each offering a distinct level of assurance to the third party. The specific letter issued depends on the scrutiny required by the requesting party, which dictates the procedures the CPA performs. These levels range from no assurance to the highest level available in an accounting engagement.

No Assurance Services

The most basic services a CPA can provide offer no assurance, as defined by the American Institute of Certified Public Accountants (AICPA). In a preparation engagement, a CPA uses a client’s data to prepare financial statements without verifying the information’s accuracy or issuing a formal report.

A compilation is another no-assurance service that results in a formal CPA report. The CPA takes the client’s financial data and presents it as financial statements, but the report explicitly states that the firm has not audited or reviewed them. Professional standards prohibit CPAs from guaranteeing a client’s solvency or ability to make future payments in any letter.

Limited Assurance: Review Reports

A review offers “limited assurance,” which is more in-depth than a compilation but less comprehensive than an audit. The CPA performs analytical procedures and makes inquiries of management to identify unusual items in the financial statements. The goal is to see if modifications are needed for the statements to conform with a framework like Generally Accepted Accounting Principles (GAAP).

Limited assurance means the CPA is not aware of any material modifications needed. This is achieved without testing internal controls or examining source documents for most transactions.

Reasonable Assurance: Audit Reports

An audit provides “reasonable assurance,” the highest level available. This detailed examination includes a wide range of procedures, such as testing evidence, confirming balances with third parties, observing inventory counts, and assessing internal controls. The objective is to express an opinion on whether the financial statements are free of material misstatement.

Reasonable assurance is high but not absolute, as sampling and inherent system limitations mean a small risk of undetected misstatement always exists. The auditor’s opinion is presented in a formal audit report.

Information and Documents to Prepare for Your CPA

Before engaging a CPA, you should gather all necessary documentation. Start with the written request from the third party, which should state what financial information needs to be verified and the level of assurance required. This determines the type of engagement the CPA must perform.

You will also need to provide the following:

• Your full legal name, address, and Social Security Number, or the business’s legal name, address, and Employer Identification Number (EIN).
• A complete set of financial statements for the relevant period, including the Profit & Loss statement, balance sheet, and statement of cash flows.
• Copies of federal and any other relevant business tax returns for the years in question.
• Supporting documentation like bank and brokerage statements to substantiate cash balances, investments, and income deposits.
• For a business, legal documents such as articles of incorporation, partnership agreements, or significant loan agreements may also be required.

How to Engage a CPA and Finalize Your Letter

After gathering your documents, find a qualified, licensed CPA and schedule a consultation. During this meeting, present the third-party’s request and your financial documents so the CPA can understand the scope of the engagement.

The CPA will then provide an engagement letter, which is a formal contract. This document outlines the scope of work, the type of report to be issued, the responsibilities of both parties, the projected timeline, and the service fees.

Once the engagement letter is signed, you will submit your documents to the CPA. The accountant will perform the necessary procedures, which can take from a few days for a simple verification to several weeks for an audit.

The CPA may provide a draft for your review to check for factual inaccuracies. Once you approve it, the CPA will issue the final, signed letter on their official letterhead for you to deliver to the third party.