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.
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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