Inside Straight: Stop The Audit Letter Lunacy!
In his days as a law firm partner, Mark Herrmann assumed that audit letters served some purpose. Since going in-house, his opinion has changed....
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.
Firm policy dictated that we would speak only pablum in response to audit letters. We would identify each case by name, court, and number; explain that a complaint had been filed; list the causes of action; say where we stood in discovery and whether a trial date had been set; and then say that we didn’t have a clue who would win. (If we thought that the client’s chance of losing was either “probable” or “remote,” we were required to say so. I’m not sure we ever saw such a case.)
Every once in a while, a junior associate would receive an audit letter and write a real response to it — analyzing the lawsuit, the tactics, and who would win. When the powers that be learned about that mistake, there’d be hell to pay: “How could you write those things? Didn’t you run this past an audit letter review partner? We don’t actually provide information in those responses, you fool! Never do this again!”
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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.
But 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.
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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.”
If I’m wrong about all this, and someone — anyone! — profits from the sending of audit letters and preparation and receipt of the responses, then please speak up. I’d be delighted to learn that we’re not all engaged in a heroic waste of time, and the audit letter kabuki dance should continue.
But if I’m right on this subject, can we please stop the lunacy? If no one — client, auditor, or law firm — derives any value from going through the annual audit letter drill, then let’s stop already.
I’m not sure who’s at the helm of the audit letter nonsense — the AICPA, maybe? — but let’s route this request on to those people and implore them to put people’s time and money to a more productive use.
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Mark Herrmann is the Chief Counsel – Litigation and Global Chief Compliance Officer at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law and Inside Straight: Advice About Lawyering, In-House And Out, That Only The Internet Could Provide (affiliate links). You can reach him by email at [email protected].
