Friday, April 6, 2012

Audit Management Representation Letter

Parsley Sage Rosemary & Ginsburg llp
“always a reasonable result for a reasonable fee, always”
MEMORANDUM

To:
Learned H. Sage, Managing Partner
From:
Mike Marget
Date:
April 6, 2012
Re:
The Auditors are Coming!  -- Management Representation Letter

Good News.  The auditors have substantially completed their work and have concluded that no adjusting journal entries are required to the books for the year ended December 31, 2011. 

They did offer one proposed adjusting entry – which I talked them out of.  It is the same suggestion they make every year – we should set aside a $25,000 reserve for possible uncollectible client costs advanced.  This proposed entry would reduce firm income by $25,000 and reduce the net assets by a similar amount.

I oppose the proposed entry (for the same reasons as in prior years) – it serves no real purpose.  Even conceding that $25,000 of our client costs advanced will not be collected next year, we recognize the cost write-offs as they occur.  Moreover, we manage our accounts receivable diligently and attempt to collect as much as possible and timely write-off amounts which grow old and appear uncollectible.  Finally, this $25,000 reduction of net income is not deductible for tax purposes – so there is no tax rationale for doing so.

Frankly, this entry has become a game with us.  They propose it; I reject it.  They get to make the point that they are doing their job, but because the amount is not material, I get to reject it thus putting them in their place.  It’s okay.  This item will undoubtedly be discussed again at the Final Meeting with the Auditors.

Attached is a draft copy of the financial report – income statement, balance sheet, cash flow statement (as well as subsidiary reports showing changes in partners’ capital accounts), together with the auditor’s written opinion.  Also attached is a copy of the Management Representation Letter which the firm must provide to Beane & Beane before everything is completed.  So you know, pursuant to the firm’s loan agreement with Big Bucks Bank, we need to provide the bank with a copy of the financial statements and audit report on or before April 30th. 

As to the Management Representation Letter, the language (as in prior years) is what Beane & Beane asks us to attest to or represent to them.  It states that we have not withheld any pertinent financial information from them and lists any number of things we do and don’t do – just as we have told them – but they want it in writing. 

It is customary for the Management Representation Letter to be signed by the law firm’s chief executive officer, chief operating officer (Administrator) and chief financial officer.  I am prepared to sign it and to go over any questions you may have prior to you signing it.

The date of the letter corresponds to the date Beane & Beane substantially completed their work on this year’s examination of the financial statements.

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