In the Spring, a Young Man’s Fancy Lightly Turns to Thoughts of...
I wish it were “love,” but with apologies to Lord Tennyson, it turns out to be “audit inquiry letters.”
Every spring, we receive a large number of letters from the CEOs of our association and MLS clients, asking us to answer certain questions in order to assist their auditors in compiling audited financial statements for the previous year. These are the infamous “audit inquiry letters.” These letters come at other times of the year for clients who are not on a calendar fiscal year, but the numbers are greatest in the spring. We end up charging clients anywhere from $300 to $500 to prepare audit inquiry responses, and we feel pretty sheepish about that when a client may only have done $1,500 worth of business with us on a narrow range of association or MLS issues in the last year. Well, it turns out there may be a way for our clients to avoid getting these expensive responses from us.
The standard audit approach
Auditors are bound by Financial Accounting Standards, including Statement No. 5, which requires that certain “unasserted possible claims or assessments” that the attorney has advised the client are “probable of assertion” must be disclosed on financial reports. Lawyers are naturally cautious about disclosing possible liabilities to auditors, because disclosures to auditors are probably outside the attorney-client privilege. More the 30 years ago, the CPA and bar associations reached an entente on this issue, embodied in the American Bar Association’s “Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information.” (I recommend it as a cure for insomnia—there is no risk that it will cause you to sleepwalk, and I doubt there is any risk of dependency, either; but these claims have not been evaluated by the FDA.)
Clients don’t understand why the letter we send in response to the audit inquiry letter, which is nearly identical from year to year and from client to client, and is copied almost verbatim out of the ABA’s Statement of Policy, should cost the client $300--$500. This is especially true if, for example, the client contacted us only once or twice during the year to discuss an entirely mundane rule issue. Unfortunately, the time required to do the audit letter has nothing to do with preparing the letter itself. It has everything to do with liability: When the auditors ask an attorney to answer questions about possible claims against the client, the attorney has a professional responsibility to ensure that the response is accurate. The auditors and the company’s board of directors will rely on the attorney’s response in preparing and accepting the audit.
For us, that means a review of all client notes, documents, and emails from the previous year, to be sure that we have not overlooked a possible liability that should be disclosed under the standards. Even for a client where we have done very little work, reviewing the file and reviewing our letter in response before it is sent likely takes an hour or more of work. Because we assume liability for our response, we charge for providing it.
But I hate doing audit inquiry responses, and I hate clients having to pay for them.
I contacted a CPA friend of mine, who has done audits of all kinds of businesses large and small, including a large regional MLS, and asked whether our clients could avoid getting audit inquiry responses from us. Here’s what he said:
Attorney letters are tough because of the potential for lawsuits and contingencies etc. that the attorney may know about but aren’t in any of the accounting records. What we have sometimes done in the past for attorneys that have a very narrow involvement with the client in an area less prone to litigation risk is get a representation from the client and examine all the legal invoices for the year. If it is apparent from the invoices that there isn’t anything of interest to an auditor then we would be okay not sending the attorney letter if we get the client representation. However, that is tough to do for those attorneys functioning as a general counsel for the client.
So if your auditors are asking you to send audit inquiry letters to all law firms that advised you in the previous year, it may be worth your while to propose the solution my CPA friend outlined. It won’t work for your general counsel, but it may work with any attorneys that provided limited or specialized advice. We will be suggesting it to our clients for whom we have done very little work or work on very narrow topics clearly not involving litigation. Let me know in the comments how you fare with your auditors if you try this.
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