Counsel’s Response Letter to Auditors’ Request Letter

Summary

This template response to an Auditor’s Request Letter may be used by a company’s in-house counsel to respond to a request letter sent by the company’s auditors as part of the audit process. This template includes practical guidance, drafting notes, and optional clauses. During an audit, an accountant reviews the company’s financial statements to make sure the company adhered to appropriate accounting and financial reporting standards in their preparation. These standards have been established by governing bodies that include the Financial Accounting Standards Board (FASB), the American Institute of CPAs (AICPA) Auditing Standards Board, and the Public Company Accounting Oversight Board (PCAOB). As part of the audit process, auditors are required to obtain written representations from the company’s management relating to certain matters that may impact the company’s financial statements, including information relating to “possible loss to an entity arising from litigation, claims and assessments.” See PCAOB AS 2505. Management obtains this information through an inquiry of the company’s lawyers (in practice, sent by the auditors in the form of a request letter to counsel). See AICPA AU-C Section 501 and Section 580). The scope of the lawyer’s response letter has been established by a “treaty” between the legal and accounting communities, as set forth in AICPA and PCAOB rules and in the American Bar Association (ABA) Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information (Statement of Policy). See AICPA AU-C Section 501.A69 and PCAOB AS 2505A. The treaty addresses information counsel must provide regarding pending litigation and other claims known as “loss contingencies” (as discussed in this response letter) pursuant to FASB ASC 450-20 (FAS 5). The Statement of Policy is reproduced in PCAOB AS 2505C PCAOB AS 2505C (Exhibit II). The lawyer’s response letter provides the information that in-house counsel should include to the extent permitted by the treaty. It identifies threatened and pending claims the lawyer is addressing and unasserted claims as to which the Company specifically requests comment, alerting the auditor to the existence of such claims. The response letter confirms that the lawyer is fulfilling their professional responsibility, so that the auditor may rely on the lawyer’s continued involvement. The ABA issued a Statement on Updates to Audit Letters in 2015, providing a framework for updates to counsel’s initial response. When necessary, counsel’s update should be delivered in writing in accordance with the ABA Statement of Policy. The ABA noted that a short-form letter response should “(1) refer to the relevant client request(s), the entity or entities covered by the response, and the most recent long form response letter and previous update letters, if any, identifying them by date, and (2) state expressly that the response is subject to the same limitations and qualifications contained in the earlier letter.” See Statement on Updates to Audit Response Letters. For more information on the auditing process generally, see Accounting and Auditing Professional Bodies and Standards.