FYI: Attorneys Think Auditors’ Legal Confirmation Letters Are a Giant Waste of Time

Posted on by Caleb Newquist

Mark Herrmann, the in-house legal columnist at Above the Law, has a bone to pick today and it's one the opiners out there are intimately familiar with:

When I worked at a law firm, I knew that lawyers’ responses to audit letters — in which the firm confirms to auditors the status of litigation pending against a client — were a massive waste of time.

Go on…

I always assumed that someone — the client, the auditors, someone — thought those ridiculous letters served a purpose. Now I’ve gone in-house, and it turns out that audit letters serve no purpose at all….
 
Corporations send the letters because the auditors insist that the letters be sent. The corporations don’t much care what the law firm responses say (unless they contradict something shown in the corporate files, or something the corporation has told the auditors), because the corporations don’t use the letters for anything.
 
Remarkably, the auditors don’t really use these communications for anything, either. The auditors ask corporations to send requests for information to their outside lawyers because some accounting rule requires that the letters be sent. But the auditors know that they won’t receive any useful information in return: “The European law firms usually just ignore audit letters. And the American firms send back boilerplate that doesn’t tell us anything about the litigation that we didn’t already know. We solicit the information only because we’re required to; it doesn’t add any value.”
I remember chasing down those legal confirmations and every so often it would be a pain in the ass but for the most part, it was a harmless CYA exercise. Like many things auditors do, obtaining the legal confirmation letter is just another hoop in the endless series of hoops that auditors jump through as a part of required procedures by the Overlords of GAAS. Hence, "the auditors insist that the letters be sent." I know it sounds weird, but it doesn't really matter if the letter has value; it matters that the auditors got a response to the letter.
 
As for the "massive waste of time," I suppose that's debatable. From the sounds of it, it's definitely a time suck for the lawyers. Here's Herrmann again:
As a partner at a firm, I knew that responding to audit letters was an expensive nuisance: A full-time audit letter assistant cranked out first drafts of responses to the letters. (That’s all she did, eight hours per day, 52 weeks per year — honest.) The appropriate client relationship partner reviewed each draft. An “audit letter review partner” (I had the misfortune to be one of those for four or five years) took another pass at the thing. Only then — after the letter had been stripped of all content — did the response go out the door. That was an awful lot of time and money invested to insure that the firm didn’t accidentally say something. 
Admittedly, that sounds pretty terrible and I'm sure a lot of lawyers would much rather bill their time for something else but for auditors it's much less painful. Some associate provides the boilerplate text for the client and says, "Send a copy of this to all your outside lawyers." The client says, "Sure. Now go away."
 
If the timing is done right, the response will be received near the end of the audit so if anything material comes up while the engagement is going on, the law firm will say so. The letter(s) gets thrown in the workpapers, is reviewed by the engagement team to make sure the client didn't forget anything and that the law firm says how much the client owes them for their services. This is what happens 99% of the time.
 
Occasionally, these letters will be ignored or forgotten and some poor associate will have to go to the client again and say, "Hey, did you send those legal letters?" The client will say, "Yes. Now go away." The associate may have to repeat this until the letters finally arrive, confirming everything that the client has already shared with the auditors re: legal entanglements.
 
What's amusing to me is that this is such a point of strife for the attorneys. I understand that many lawyers are cautious to the point of making accountants look downright reckless, but it seems like unnecessary busy work to have an "audit letter review partner" go over something that another partner has presumably picked over. 
 
So Herrmann's audit letter pet peeve seems a little overblown, especially his silly demand that they been done away with altogether. Auditors are just doing their thankless jobs in accordance with standards. And besides, auditors give enough work to lawyers that they shouldn't mind accommodating this one little thing. 
 

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Going Concern March Madness: The Coolest Accounting Firm – The Final 4 Sans Big 4

Now that we’ve reached the Final 4 without any Big 4 firms (all bounced in the first round), some of you may have lost interest in Going Concern March Madness: Coolest Accounting Firm. Well, that would make you a loser and anyway, we must press on! Face it, you’ll go for anything to distract you from the fact that you’re stuck inside whispering sweet nothings to Microsoft Excel while spring is slowly emerging outside. And it’s a pretty compelling Final Four anyway. Let’s take a look shall we?


So you’ll notice that we have the very interesting match-up between Moss Adams and Grant Thornton, the two firms that have subject of merger rumors (unfounded!) since January. Obviously the winner here will enjoy the upper hand in any future negotiations between the two firms, so anyone from either firm wishing to upset the leverage here would be wise to take a page from the Reznick Group strategy book.

Speaking of Reznick, we briefly mentioned the fact that their first round magic was nowhere to be found in round two. A tipster filled us in as to why:

I think the higher-ups were embarrassed by the public calling out and subsequent mockery in the comments, not a single other email went out about it – reminders about the competition or the beatdown they suffered at the hands of the commenters 🙂 Serious loss of billable hours that day too, everyone kept checking the site all day long for more comments, emailing and IMing each other about it.

So make a mental note – if your firm’s leadership has a thin skin and isn’t down with wasting a number of billable hours, the Reznick strategy may not be the way to go after all.

Moving on to the second match-up we have the perennial dark horse Rothstein Kass against McGladrey. Rothstein continues their hot streak in GCMMTCAF after their impressive performance in this year’s Vault rankings and McGladrey is…well, we’re pretty surprised to see McGladrey in the semi-finals, to be honest. Perhaps there are sweet incentives being offered internally but right now we haven’t been made aware of any such temptations. Anyway, McG has quietly made a run, so it makes for a decent showdown.

All right, enough with pleasantries. Let’s get to the voting. Polls close tomorrow night at 11:59 PT.

First up – GranMA

Cinderella vs. Mickey G’s.

UK Whitepaper Seeks to Reconcile Mother Nature’s Books

When do you recognize maple syrup, when it is earned (sucked from the tree) or realized (when it goes down your big fat gap)? How much goodwill does a forest have?

The UK Department for Environment, Food and Rural Affairs has published its first white paper on the natural environment in 20 years hoping to answer some of these questions. The natural choice: securing the value of nature suggests the UK should set up an independent Natural Capital Committee (sort of like FASB for forests) to advise the government on when, where and how natural assets are being used unsustainably.

This would create “green accounts” which give an idea how the country’s natural assets are being used.

The authors of the paper suggest that economic growth and the natural environment are mutually compatible, implying that “nature’s bank balance” should not be ignored when looking at the country’s overall economic growth.

“Past action has often taken place on too small a scale. We want to promote an ambitious, integrated approach, creating a resilient ecological network across England. We will move from net biodiversity loss to net gain, by supporting healthy, well-functioning ecosystems and coherent ecological networks. We will publish a new Biodiversity Strategy for England, responding to our international commitments and setting a new direction for policy over the next decade,” the paper says, proving that someone obviously read their accounting textbooks before they tried to write a framework for valuing nature’s assets.

[Insert bad money doesn’t grow on trees joke here]

America’s Hottest CPA Goes on Reality TV Looking For Love

Do you guys remember Tripp Davis? Last year, this number-crunching Southern gentleman from Mississippi made Cosmo’s Hottest Single Bachelors List, calling first date sex skanky and girls sans chonies sexy. Our kinda man.

Anyway… Judgmental hater and bad Photoshopper that I am, I made the mistake of publicly rre angle at which his stunningly perfect abs appeared to be cut in the photo Cosmo used. It took a few hours of staring to figure it out but I finally saw that it was just a weird camera trick (part pose, part flowy white shirt they stuck him in) and word is Tripp has been a pretty loyal reader of Going Concern since. Yay kismet (and forgiveness)!

So when he recently got in touch to tell us about his latest adventure, we absolutely had to share it with you all.

What happens when you put 10 “city” guys and 10 “country” guys in a house to battle for the affection of one gorgeous bachelorette? Well, you get Sweet Home Alabama, which debuted last week on CMT. What does this have to do with Tripp’s perfect swimmer’s abs? Well because he’s on the show, obviously.

Raised on fried chicken, turnip greens and grits, it’s no wonder show producers reached out to Tripp to get him on the show after spotting him on Cosmo’s list. He’s actually looking for the love of his life (how cute) and says he won’t date a girl unless he can see himself marrying her down the road. Some of his opponents include a tobacco farmer from Tennessee, a Hollywood financial adviser, a Birmingham bartender named Tribble (first, not last, bitch) and – wait for it – one of Snooki’s ex-boyfriends who calls himself a singer/musician. This ought to be good.

Now I’m not easily swayed by southern manners and ripped abs but I have to say I was charmed by Tripp in our brief phone call for this post. So he may just have a shot to win the heart of Devin Grissom – a student at the University of Alabama in Tuscaloosa – if he can warm this salty Fedbasher’s cold black heart.

Check out our boy Tripp (he’s the one bawling at 1:55) on the show, which you can catch on CMT Thursdays at 9pm (8 Central).

Sweet Home Alabama: Thursday’s 9/8c on CMT! from Sweet Home Alabama (CMT) on Vimeo.

We hear the show includes lots of drama (surprise), douchebaggery and even a fight over the grill. Everyone knows you don’t mess with a man’s meat. Just sayin.

Tripp sums up the plot in words somewhat like this:

City guys are more interested in what they can buy the girl and showing their wealth, it’s all about the bling. They are defined by who they have dated. Country guys are more about who they are and their character, that shows through. Money shows through for city guys.

Good luck, Tripp, we’ll be rooting for you. Seriously. We’re pretty sure “reality star” wasn’t one of the manufactured scenarios many of you fell for when you were seduced into public accounting (much like work-life balance and prestige), which is why our hot little CPA friend here works for an unnamed private firm. Think about that next time you’re having a reality crisis, this guy is off chasing a chick. On teevee.

“It was such an amazing experience!” [Devin] says to a fan. “I’m a lucky girl … All of the guys on the show were so great,” said chick says on Facebook.

Someone has to blaze a trail with his sizzling fried chicken abs, it might as well be this guy. The accountant stereotype has been rewritten in recent years, not everyone is a WoW-playing, Dorito-eating shlub who doesn’t know what business casual actually means. Some are, yes. Some are also ripped. And, uh, on a reality show.