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.
In more government bureaucracy news, the FTC is granting a reprieve to CPAs when it comes to a new law that deals with identity theft, one which some CPAs say is useless given professional responsibility.
The new FTC rules requires businesses to “develop and implement written identity theft prevention programs to help identify, detect and respond to patterns, practices or specific activities -– known as ‘red flags’ — that could indicate identity theft.” The problem with that, of course, is that the AICPA Code of Professional Conduct already deals with the issue of identity theft in that there is an iron-clad confidentiality rule by which all CPAs must abide. Seems simple, right?
The US District Court has ordered an FTC delay of the rule for AICPA members in public practice, says the Maryland Association of CPAs. Barry Melancon, AICPA President said in 2009 when the AICPA filed a lawsuit against the FTC, “We do not believe that there is any reasonably foreseeable risk of identity theft when CPA clients are billed for services rendered. As trusted advisors, CPAs are personally acquainted with their clients and already adhere to strict privacy requirements governing identifying information.”
Don’t take it personal, Barry, the FTC is just trying to do its job, even if that means overreaching its authority and attempting to place restrictions on professionals who already go above and beyond the intent of the FTC on a daily basis.
In the meantime – and just in case the rule cannot be delayed indefinitely (as is, implementation has been put off until June 1, 2010) – the AICPA has some guidance for CPAs on creating an identity theft prevention program. Keep in mind the new requirements, if implemented, only affect CPAs who bill their clients on a monthly or revolving basis as it is meant to place additional controls in client billing.
The American Bar Association is also fighting the rule.
2010. What a year, amiright? It got off to a bit of a rough start after our facelift but as the year went on, things stayed interesting…most of the time. Anyway, since most of you aren’t getting Jack Squat done this week, let’s take a look back at the year that was.
1. Compensation – Shocking revelation here, we realize but – YES! – it’s true, red about most in 2010. After two years of disappointment, the Big 4 and the aspiring “Bigs” (Grant Thornton, BDO, McGladrey) all returned to merit increases and bonuses this year. PwC shot out of the gate with Ernst & Young keeping pace while KPMG remained steady but slightly behind. Deloitte, lagging behind, made a late charge with the announcement of a mid-year adjustment, which may or may not have set off a rash spreading amongst the other firms to provide bonuses throughout their fiscal year-ends. Was it a successful 2010 on the compensation front? Some say “yes,” some say “no,” but there’s little doubt about what keeps your attention.
2. PwC Email Hottiegate – Unless you were in a coma during the second week of November, you were aware of the email that listed the top 10, errr 13, new female associates that came out of PwC in Ireland. The gents who passed around the list weren’t so concerned with using work email to give the ladies the Letterman treatment and the Irish brass didn’t take too kindly to the “tradition.” This story dominated our pages for a few days and the last we knew, a total of five employees had been suspended, the women weren’t planning on lawsuits and Adrienne gave her point of view (as a member of the fairer sex).
5. Large firm vs. Small firm – An anonymous reader submitted an essay on the main differences between life in the Big 4 (and aspiring Bigs) life and that of the lives working in the smaller firms. Most have wondered what life would be like in their bizarro public accounting existence and some have actually lived it. There are pros and cons to each but life at the small firm is decidedly different.
6. An auditor’s life:
7. Layoffs – 2010 saw fewer mass layoffs than the past couple of years but that doesn’t mean there weren’t spots of cuts here and there. Most notably were the nationwide cuts at McGladrey as well as the 500 cuts made by PwC in Florida. Grant Thornton was busy slimming down its exposure in smaller markets but layoffs were not always part of the “transition” as practices were often sold or employees were giving the opportunity to transfer. And last but not least, we learned that Deloitte claimed “our bad” on their cuts from May 2009.
9. PwC Houston Happy Hour – The team happy hour. Typically a festive event filled with free booze, laughs and the occasional awkward advance. The latter allegedly took form of a partner towards an associate this past summer in PwC’s Houston office that resulted in a odd pick-up line, a sloppy kiss (our vision) and then a knuckle sand. The latest we heard was there were multiple associates approached, the partner-in-question was still with the firm and that the associate(s) involved were shipped off to other engagements. So all is well in H-town. PwC never returned our calls, emails or singing telegrams on this story.
10. Accounting Career Drama – One of the most popular series on GC is the career advice that we throw out here and there. Everything from trying to quit nicely during busy season to defection amongst Big 4 firms to explaining why your fantasy football roster is constantly on your computer screen. We’re here to help you get through the purgatory that is your time on Earth so if you’ve got a problem and want advice, email us at advice@goingconcern.com.
If we missed any of your favorites, feel free to recall your fondest memories on this here site. As we head into the new year, here’s a friendly reminder of how to get in touch with us: