Walking Through the Minefield–Ethical and Liability Risks in Auditor Response Letters
Your client writes a letter, asking you to send to its auditor information about certain types of loss contingencies, such as litigation and unasserted claims. As you draft a response, you are entering a minefield, thick with issues relating to waiver of privilege, terms of art such as “probable” and “remote,” risk of disclosure to litigation opponents, and the only “treaty” affecting most domestic U.S. lawyers. Missteps bring severe consequences.
When preparing responses to auditors’ requests for information, the lawyer must also understand the general principles of Statement of Financial Accounting Standards No. 5 (“FAS No. 5”) and the American Bar Association’s Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information (“ABA statement of policy,” or the “treaty”). following some simple guidelines for preparing these responses, most of the “mines” can be avoided.
The same pitfalls also expose such responses to discovery. The reported decisions are far from unanimous in regard to attempts to subpoena or require production of these litigation evaluations. Appropriate language in the lawyer’s response to the auditor reduces the risk of disclosure.
Compliance with the treaty requires careful adherence to a multistep process. Although not mandatory, a written policy is recommended.
Differing Duties of Auditor and Lawyer
The auditor’s duty is to the reader of the client’s financial reports and is public in nature, for the purpose of stating an opinion on whether they present fairly the financial position and results of operations of the client. Pursuant to FAS No. 5, the auditor must account for (possibly accrue or disclose) loss contingencies (litigation, and unasserted claims and assessments) which are within the lawyer’s special knowledge because of legal services rendered to the mutual client. The auditor requests the client to ask the lawyer for information intended to assist the auditor in properly accounting for those loss contingencies.
The lawyer’s duty is to the client and is private in nature. The lawyer represents or advises the client in some defined capacity—for example, general counsel, litigation only, specific litigation only, or specific nonlitigation matters only. In responding to the client’s request, the lawyer must give the information the auditor needs to form an opinion regarding the client’s financial reports, but neither the lawyer nor the client intends to waive the attorney-client privilege or the attorney work-product privilege by disclosing protected information to a third party, the auditor. To preserve these important privileges, the lawyer must respond within the scope of, and incorporate the limitations on, the response delineated by the treaty.
An obvious tension results from the differences between the duties of the auditor and the lawyer. Each must meet a different professional standard of care. recognizing the divergent roles and duties of the lawyer and the auditor, the lawyer will more likely be successful in reaching an appropriate resolution of issues that arise in the context of responding to auditors’ inquiries.
FAS No. 5: Accounting for Contingencies
FAS No. 5 establishes standards of accrual and disclosure of loss contingencies, followed by accountants in auditing and opining on financial reports. FAS No. 5 defines “loss contingency” as “an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.” Examples of loss contingencies include litigation, claims arising from product warranties, potential assessments of fines or penalties by regulatory agencies, self-insurance risks, collectibility of receivables, letters of credit, and guarantees of indebtedness. In the typical request letter, the auditor (through the client) requests information from the lawyer about two general classifications of loss contingencies: 1) pending or threatened litigation or other proceedings, and 2) unasserted claims and assessments. (Standard form of “Auditor-Provided Client’s Request to Lawyer” is at the end of this article.)
Accrual. The primary purpose of the auditor’s inquiry to the lawyer is to determine whether accrual or disclosure of a material loss contingency is required. Accrual of a liability results in a reduction of net income and net worth. On the other hand, disclosure of the liability usually occurs in a footnote to the financial statement; even though it may not reduce net income or net worth, it is still undesirable. Such accruals and disclosures can have adverse effects upon investors, lenders, and creditors. At the extreme, the auditor may conclude there are materially adverse effects upon the client’s business, and refuse to issue a “clean” audit opinion.
Accrual is required if information available before issuance of the financial statements indicates that it is probable that an asset is impaired or a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. A loss is “probable” under FAS No. 5 if it is “likely to occur.”
FAS No. 5 provides two other classifications of the likelihood that the future event or events will confirm the loss. First, “reasonably possible” is defined as more than remote but less than likely. Second, “remote” is defined as slight. The auditor will request information from the lawyer about the following factors, in order to assess whether a material loss contingency is “probable:”
1) The nature of the litigation, claim, or assessment;
2) The history of the matter or progress of the litigation;
3) The lawyer’s opinion about the likelihood of an unfavorable outcome;
4) The company’s experience with previous similar contingencies; and
5) How the company’s management intends to respond to the matter.
Disclosure. If the conditions requiring accrual of a material loss contingency are not met, the auditor must then determine whether disclosure of the loss contingency is required as a footnote in the financial statements. Disclosure is required if there exists a “reasonable possibility” of loss or additional loss beyond the amounts already accrued; however, no disclosure of an unasserted claim or assessment should be made unless the potential claimant has manifested an awareness of the claim or it is probable that the claim will be asserted and an unfavorable outcome is reasonably possible.
ABA Statement of Policy
The treaty1 is not a required format for the lawyer’s response to the auditor’s inquiry, but it is foolish not to seek its protection. Before writing a response to the auditor’s inquiry, the lawyer should review the treaty and its supporting works.2 The treaty incorporates into the lawyer’s response the understanding between the ABA and the American Institute of Certified Public Accountants (AICPA) about the limitations on the lawyer’s response. A lawyer gains the protection of the treaty by using the model response letter set forth in the treaty. (See Sample Lawyer’s Response to Auditor at the end of this article.)
1991 Opinion Accord. The treaty is not changed or otherwise affected by the 1991 Third-Party Legal Opinion Report (sometimes called the “Silverado report”), which includes the Legal Opinion Accord of the ABA Section of Business Law.3
Loss-contingencies Limitations. The treaty recognizes limitations on loss contingencies about which the lawyer can furnish information to the auditor. First, the two general types of loss contingencies about which lawyers may have information are: 1) pending and threatened litigation and other proceedings; and 2) unasserted claims and assessments. Second, the lawyer is limited to responding to those matters which involve loss contingencies to which the lawyer has devoted substantive attention in the form of legal consultation or legal representation. Third, the lawyer should respond only with respect to material loss contingencies. The auditor should state an objective standard of materiality, such as a dollar amount, in the request to the lawyer; if there is none, the lawyer may wish to consult with the auditor about the standard.
Evaluation Limitations. The treaty also recognizes limitations on the information furnished by the lawyer to the auditor. The treaty states that no evaluation of the probability of loss should be provided to the lawyer unless an unfavorable outcome is either: 1) “probable,” which means “the prospects of the claimant not succeeding are judged to be extremely doubtful and the prospects for success by the client in its defense are judged to be slight;” or 2) “remote,” which means “the prospects for the client not succeeding in its defense are judged to be extremely doubtful and the prospects of success by the claimant are judged to be slight.”
It is critical to note that FAS No. 5 and the treaty define “probable” differently. The FAS No. 5 definition embodies a much lower threshold of likelihood, but lawyers are governed by the higher threshold of the treaty. Thus, unless the likelihood of an unfavorable outcome is “probable” as defined in the treaty, the lawyer should not opine on the likelihood of an unfavorable outcome.
Unasserted Claims. The lawyer should provide the auditor with information about only those unasserted claims and assessments specifically identified in the client’s request to the lawyer. The request will include unasserted claims and assessments only if all three of the following conditions are fulfilled:
1) It is probable that a possible claim will be asserted;
2) Assuming such assertion, there is a reasonable possibility that the outcome will be unfavorable; and
3) The resulting liability will be material to the financial condition of the client.
Client Consultation. Finally, the treaty recognizes the lawyer’s professional responsibility to consult with the client about possible disclosure of unasserted claims and assessments in the financial statements. The auditor’s request for information made through the client will ask confirmation of the client’s understanding that the lawyer has accepted this professional responsibility. The treaty’s model response to the auditor provides for such confirmation.
Response to Auditor
Follow the Treaty. All lawyers’ responses to auditors’ requests for information should follow the ABA statement of policy, using the “model response” set forth in the treaty. Note, however, that most CPA firms will accept responses not prepared in accordance with the treaty if the response contains answers to the inquiries on contingencies and does not indicate unacceptable limitations. Examples of other responses acceptable to CPA firms include: “The liability is not material”; “The company’s liability would not exceed a few hundred dollars”; “The action against the company has no merit”; and “While no assurance can be given as to the outcome, we believe the company should prevail.”
Certainly, the lawyer’s response letter is no place for a rambling, stream-of-consciousness dissertation about the claim. The lawyer undertakes significant representations to the auditors, and, therefore, significant risks, in choosing not to use treaty language.
Obtain the Appropriate Client Request. The privileged status of the lawyer’s response under the treaty is conditioned on its being made in response to the appropriate request of the client. Therefore, the lawyer must obtain from the client an appropriately written request for the lawyer’s response to the client’s auditor, signed by a person in authority at the client. (See Standard Form of Auditor-Provided Client’s Request to Lawyer at the end of this article.)
Conduct an Internal Investigation. Under the treaty, the lawyer’s response implies that the lawyer has made reasonable efforts to determine, from all lawyers currently employed by the lawyer’s firm, all matters involving loss contingencies to which such lawyers have devoted substantive attention in the form of legal consultation or representation of the client. Therefore, the lawyer must conduct an internal investigation to determine the matters to be disclosed in the response. The lawyer’s multilayered investigation should include:
• Distribution of a general memorandum to all lawyers, with adequate time provided for response;
• Distribution of specific memoranda or other communications with lawyers known to be working or to have worked on matters for the client; and
• Communication with the client prior to the lawyer’s response, confirming the completeness of the lawyer’s list of matters to be disclosed.
Establish an Objective Materiality Limitation. Unless the lawyer’s response is limited to “material” loss contingencies, the scope of the lawyer’s internal investigation and the preparation of his or her response will be unduly burdensome. Therefore, the lawyer must reach an understanding with the client’s auditor as to a dollar-amount threshold for materiality and establish that the lawyer’s response is limited to matters exceeding the threshold. This understanding should be set forth in the client’s letter requesting the lawyer’s response and incorporated into the lawyer’s response by reference to the client’s request letter.
Disclose No Confidences. Some courts have ruled that lawyers’ responses to auditors are discoverable. (See discussion below.) It is extremely rare for the informational requirements of the response to require disclosure of a client confidence. Therefore, in most cases, the lawyer’s response should not disclose any. The cautious lawyer will also insert specific language expressly stating that there is no intent to waive the attorney-client privilege by making a response.
Structure Opinions with Care. Pursuant to the instructions of its auditor, the client usually requests that the lawyer’s response include “an evaluation of the likelihood of an unfavorable outcome [of the litigation, claim, or assessment] and an estimate, if one can be made, of the amount or range of potential loss.” Under the treaty, the lawyer is not required to, and should not, provide such an opinion or evaluation unless the lawyer is satisfied that an unfavorable result is either “probable” (as defined by the treaty, not by FAS No. 5) or “remote.” Until the late stages of the litigation process, it is very unusual for the lawyer to be able to determine whether the likelihood of an unfavorable outcome to the client is probable or remote; rather, a statement that “the litigation is being defended vigorously and the client has meritorious defenses” is generally appropriate. The lawyer must also avoid giving oral or “side door” opinions when discussing the response with the auditor.
Communicate with the Client. Once a lawyer’s draft response is prepared, it often makes sense to review the draft with the client to confirm the completeness of the list of matters disclosed and the absence of disclosure of any confidences. It may also be appropriate to discuss with the client the effect of future contingencies in the matter upon disclosure in future responses. Additionally, as set forth in the treaty’s model response, the lawyer has a professional responsibility to advise and consult with the client with respect to unasserted claims or assessments which may call for financial statement disclosure.
Consider SEC Loss-Contingency Disclosure Requirements. For publicly held clients and those involved in securities offerings, Securities and Exchange Commission accounting and disclosure rules add another layer of complexity and analysis to responding to auditors’ requests. With the advent of the Sarbanes-Oxley bill and the Edward Amendment, more SEC rules will be forthcoming. The SEC also has long-standing, but constantly evolving, interpretive positions on disclosure of certain type of loss contingencies, such as compliance with environmental and civil rights laws, and proceedings by regulatory agencies and other governmental bodies.
Develop a Written Policy. Consider adopting an officewide audit response letter policy. A sample policy is at the end of this article.
The Best Protection. When the lawyer undertakes an evaluation to a third party, the lawyer must speak truthfully.4 The treaty, its scope and disclaimers permit the lawyer to restrict the audit response letter to the terms in the treaty, without being “misleading.” Following the treaty has historically protected the lawyer form claims of civil liability based on allegations of incomplete disclosures.5
Discovery to Obtain Audit Responses
Some Cases Permit Discovery. Not surprisingly, lawyers’ auditor response letters have become the subject of discovery requests.6 One of the foremost cases permitting discovery of auditor response letters is Independent Petrochemical Corp. v. Aetna Casualty & Surety Co. ,117 F.R.D. 292 (D.D.C. 1987), in which a federal magistrate judge in a declaratory action permitted an insurer to obtain response letters prepared by the plaintiff’s attorney for the plaintiff’s accountants. The case recognizes the “public” duty of the auditor and makes reference to the Advisory Committee Note to Rule 26(b)(3) of the Federal Rules of Civil Procedure, which states that the work-product doctrine does not extend to materials “assembled in the ordinary course of business, or pursuant to public requirements unrelated to litigation, or for other nonlitigation purposes.” (emphasis added.) The court also determined that any attorney-client privilege intended to be attached to the communications was waived when the letter was sent to the accountants.
Most cases permitting discovery of attorneys’ audit responses have involved discovery requests by the U.S. government and its regulatory agencies. For example, United States v. El Paso Co. , 682 F. 2d 530 (5th Cir. 1982), involved an Internal Revenue Service administrative subpoena for estimations of a taxpayer’s contingent liabilities for additional tax in the event of an unfavorable tax determination. The case of United States v. Gulf Oil Corp. , 760 F.2d 292 (Temp. Emerg. Ct. App. 1985), involved a Department of Energy subpoena for responses to auditors evaluating the impact of previous litigation.
Other Cases Disagree. Of those holding that an audit letter is not subject to discovery, the leading case is Tronitech, Inc. v. NCR Corp. , 108 FRD 655 (S.D. Ind. 1985). In Tronitech, the court considered El Paso and Gulf Oil and rejected the reasoning of those decisions, holding that the attorney’s letter to the accountants was not within the scope of discovery.
In accord with this view is another aspect of the same Gulf Oil case, involving U.S. Department of Energy subpoenas issued against Arthur Young & Co., Gulf’s CPAs.7 The court there ruled that attorney-client privilege prohibited such discovery, specifically noting that the attorney had sent the letter in reliance on an understanding that confidentiality would be maintained, and that such letters were not relevant to the issues before the court and that any probative value would be “substantially outweighed by the danger of unfair prejudice and public interest concerns.”
Attorney-Client Privilege. Even as the treaty was adopted, concern was repeatedly expressed that attorneys’ responses to auditors could constitute a waiver of the attorney-client privilege.8
A principal protection against waiver might be an express statement of intent of nonwaiver in the text of the response. (See example in Sample Lawyer’s Response Letter.) This could help document the type of reliance on continued confidentiality that would fit the rationale of Arthur Young & Co.9
The fact that auditors intend to use these responses to compose publicly disclosed documents constitutes the greatest threat to the privilege.10 Nevertheless, the fact that the final work product might be intended for disclosure to the public does not necessarily mean that the components of that work product were also intended to be publicly available.
In Carey-Canada, Inc. v. California Union Insurance Co. , 118 F.R.D. 242 (D.D.C. 1986), the court ruled against the discovery of preliminary versions of annual report notes describing the company’s litigation, noting that “the fact that the final drafts were intended to be disclosed to the public does not render the privilege inapplicable.” (emphasis added)
Attorney Work-Product Privilege. The work-product privilege has received little attention in the few decisions on point and also received no mention whatsoever in the treaty commentary when the treaty was adopted.11
Accountant-Client Privilege. The nonwaiver argument is strengthened in state court if a statute establishes an accountant-client privilege, which then may be stacked on the common law attorney-client privilege. Only 16 states and Puerto Rico recognize the accountant-client privilege.12 Under federal law, no accountant-client privilege is recognized.13
“Substantial Need. ” Auditor response letters are usually not “prepared in anticipation of litigation or trial.” Nevertheless, the mandate of Fed. R. Civ. P. 26(b)(3) is that “the Court shall protect against disclosure of the mental impressions, conclusions, opinions or legal theories of an attorney or other representative of a party concerning litigation.” (emphasis added) Decisions which focus on the motivating purpose of the document often hold that, because it was not “prepared in anticipation of litigation,” the response letter should be produced.
A better view would recognize that both the primary purpose of Fed. R. Civ. P. 26(b)(3), and its public policy, do not rely on this test. Instead, the rule focuses on protection of the attorney-client relationship and the need to protect communications inherent in that relationship. The opponent must show both a “substantial need” for the materials sought and “undue hardship.” The requisite “substantial need” of Fed. R. Civ. P. 26(b)(3) may not be present, because opposing litigants obviously have their own attorneys to assess the litigation.14
Confidential Commercial Information. Fed. R. Civ. P. 26(c)(7), which gives the court the power to order that “a trade secret or other confidential research development, or commercial information not be disclosed or be disclosed in a designated way,” after making the same inquiries regarding “relevancy” and “need” as it makes under Rule 26(b)(3).15 S ome production may be ordered, given the much broader discretion permitted under that rule.16 In addition, if parts of the file are to be sealed, some public notice and hearing may be necessary.17
“ Self-Critical Analysis ” Privilege. The purpose of the analysis is future loss prevention,18 Involving a balancing test, again focusing on the requesting party’s need for the materials,19 and resulting in the production of documents that relate to causation, because causation is an element in plaintiffs’ proofs;20 however, at least one court has said that materials produced under government mandates fall under this privilege, even if voluntary evaluations do not.21
Conclusion
Although court rulings have been decidedly mixed, litigants should expect increasingly frequent requests for lawyers’ responses to audit inquiries. In order to avoid discovery, the lawyer must draft auditor response letters with great care, using the protection of the “treaty.”
Avoidance of potential liability is also enhanced by strict compliance with the treaty, and using its terms of art. To ensure that compliance, lawyers should become thoroughly acquainted with the treaty. A written policy is recommended.
1 American Bar Association, Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information (Dec. 1975), reprinted in 31 Bus. Lawyer 1709 (1976) (ABA Publication No. 507-0232) (“the treaty”).
2 Recommended reading includes:
• American Bar Association, Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information (Dec 1975), reprinted in 31 Bus. Lawyer 1709 (1976).
• Committee on Audit Inquiry Responses, American Bar Association Auditor’s Letter Handbook (1976).
• Fled, James J., Lawyers’ Responses to Auditors—Some Practical Aspects , 44 Bus. Lawyer 159 (Nov. 1988).
• Irvin, James K., Discovery of Attorneys’ Responses Audit Inquiry Letters , For the Defense (Defense Roes Inst., Dec. 1989).
5) Subcommittee on Audit Inquiry Responses, Committee on Law and Accounting, American Bar Association, Inquiry of a Client’s Lawyer Concerning Litigation, Claims, and Assessments: Auditing Interpretation A U Section 337 , 45 Bus. Lawyer 2245 (Aug. 1990).
3 The 1991 Opinion Accord is reprinted in 47 Bus. Lawyer 167 (1991). (ABA Publication No. 507-0252. Both this and the treaty are available from ABA Order Fulfillment Dept., 800/285-2221.)
4 Tew v Arky, Freed, Stearns , et al ., P.A., 655 F. Supp. 1571 (S.D. Fla. 1987), affd . 846 F.2d 753 (11th Cir. 1988).
5 Restatement of the Law Third, The Law Governing Lawyers, §95; MRPC 2.3.
6 Sharp and Stanger, Audit-Inquiry Responses in the Arena of Discovery: Protected by the Work-Product Doctrine , 56 Bus. Lawyer 183 (Nov. 2000).
7 United States v. Arthur Young & Co , 1 Fed. R. Serv. 3d 448 (N.D. Okla. 1984).
8 The treaty, 31 Bus. Lawyer 1709, 1716 (1976).
9 Arthur Young & Co , 1 Fed. R. Serv. 3d 448.
10 Independent Petrochemical , 117 F.R.D. at 298.
11 Gulf Oil , 760 F.2d at 297.
12 Independent Petrochemical, 117 F.R.D. at 295–96.
13 Arthur Young & Co ., 1 Fed. R. Serv. 3d at 815; Couch v. United States , 409 U.S. 322, 335 (1973).
14 James K. Irvin, Discovery of Attorneys’ Responses to Audit Inquiry Letters , For the Defense 5 (Defense Res. Inst., Dec. 1989).
15 Hartley Pen Co. v. U.S. Dist. Ct., 287 F.2d 324, 328 (9th Cir. 1961).
16 Chem. & Indus. Corp. v. Druffel , 301 F.2d 126, 129 (6th Cir. 1962); A.H. Robins Co. v. Fadley , 299 F.2d 557, 562 (5th Cir. 1962).
17 Compare In re Knoxville News Sentinel Co., Inc. , 723 F.2d 470 (6th Cir. 1983).
18 See Granger v. National R.R. Passenger Corp ., 116 F.R.D. 507, 509–10 (E.D. Pa. 1987); Wylie v. Mills , 195 N.J. Super. 332, 478 A.2d 1273 (law Div. 1984).
19 Hardy v. New York News, Inc. , 114 F.R.D. 633 (S.D.N.Y. 1987).
20 Granger , 116 F.R.D. at 510.
21 Roberts v. Carrier Corp. , 107 F.R.D. 678 (N.D. Ind. 1985). Compare Gulf Oil , 760 F.2d at 297.
John W. Allen is a partner with Varnum, Riddering, Schmidt & Howlett, L.L.P., Kalamazoo, Michigan. He has served on the Bar’s Out-of-State Practitioners Division and chaired its Multi-state Practice Committee. Mr. Allen is incoming chair of the ABA Tort and Insurance Practice Section Professionalism Committee. He thanks Steve Lesser and Joe Levan for their assistance with this article.
Dear Good & Careful Attorney:
Our auditors, Worldwide Bean Counters, P.A., are performing their usual audit of our financial statements.
Please furnish to our auditors the information requested below involving matters as to which you have been engaged and to which you have devoted substantive attention on behalf of the Company (and/or any of its subsidiaries) in the form of legal consultation or representation. Please provide the information requested below, taking into consideration matters that existed at [balance sheet date] and for the period from that date to the effective date of your response. Please specify the effective date of your response if it is other than the date of reply. Your response should be sent to our auditors at Worldwide Bean Counters, P.A.
I. Pending or Threatened Litigation (excluding unasserted claims and assessments )
Please furnish a list representing all litigation, claims, and assessments (excluding unasserted claims and assessments) considered to be material. Materiality for purposes of this letter includes items involving amounts exceeding $500,000 individually or items involving lesser amounts which exceed $500,000 in the aggregate. Your information regarding each case should include:
1. The nature of the litigation;
2. The progress of the case to date;
3. How management is responding or intends to respond to the litigation, e.g., to contest the case vigorously or to seek out-of-court settlement; and
4. An evaluation of the likelihood of an unfavorable outcome and an estimate, if one can be made, of the amount or range of potential loss.
Please furnish to our auditors such explanation, if any, that you consider necessary to supplement the foregoing information, including an explanation of those matters as to which your views may differ from those stated. In addition, please identify any pending or threatened litigation, claims, and assessments that are omitted, or provide a statement that the above list of such matters is complete.
Also, please identify any pending or threatened litigation with respect to which you have been engaged but as to which you have not yet devoted substantive attention.
II. Unasserted Claims and Assessments
Please furnish our auditors with a summary of unasserted claims and assessments against the Company which are probable of assertion and, if asserted, will have at least a reasonable possibility of an unfavorable outcome. Please provide the following information with respect to each matter identified in your summary:
1. The nature of the matter;
2. How management intends to respond if the claim is asserted; and
3. The possible exposure if the claim is asserted.
We understand that whenever, in the course of performing legal services for us with respect to a matter recognized to involve an unasserted claim or assessment which may call for financial statement disclosure, you have formed a professional conclusion that we should disclose or consider disclosing such possible claim or assessment, as a matter of professional responsibility to us you will so advise us and will consult with us concerning the question of such disclosure and the applicable requirements of Statement of Financial Accounting Standards No. 5. Please specifically confirm to our auditors that our understanding is correct.
OR:
We have represented to our auditors that there have been disclosed by management to them all unasserted possible claims that you have advised are probable of assertion and must be disclosed in accordance with Statement of Financial Accounting Standard No. 5 in the financial statements currently under examination.
OR:
We have represented to our auditors that there are no unasserted possible claims that you have advised are probable of assertion and must be disclosed in accordance with Statement of Financial Accounting Standard No. 5 in the financial statements currently under examination.
III. Other Matters
Please identify the nature of and reasons for any limitation on your response. Also, please indicate the amount we (and our subsidiaries) were indebted to you for services and expense as of [date].
Please be advised that the Company does not intend either its requires that you provide information to our auditors or your response to the request to waive the attorney-client privilege or the attorney work-product privilege.
The scheduled completion date of the auditors’ examination is such that you should send your letter to our auditors on or about [date].
GOOD & CAREFUL
ATTORNEYS, P.C./P.A./L.L.P.
Dear Auditor:
letter dated X, [name and title of officer signing request] or [name of client] (the “Company”) [(together with its subsidiaries, the “Company”)] has requested that we furnish you with certain information in connection with your examination of the accounts of the Company as at [balance sheet date].
While this firm represents the Company on a regular basis, our engagement has been limited to specific matters as to which we were consulted by the Company. We do not exercise internal supervision of the Company’s legal affairs and, therefore, this response is necessarily limited to those matters as to which we have been specifically engaged and to which we have devoted substantive attention in the form of legal consultation or representation as of [balance sheet date] and during the period from that date until the date of this letter.
[ OR: This firm does not represent the Company on a regular basis as outside counsel. We have been retained for the purposes of the litigation detailed below. We do not exercise internal supervision of the Company’s legal affairs, and therefore this response is necessarily limited to those matters as to which we have been specifically engaged and to which we have devoted substantive attention in the form of legal consultation or representation as of [balance sheet date] and during the period from that date until the date of this letter.]
[ OR: We call your attention to the fact that this firm has during the past fiscal year represented the Company only in connection with certain [federal income tax matters/litigation/real estate transactions; describe other specific matters, as appropriate] and has not been engaged for any other purpose.
Privilege Nonwaiver. The Company has advised us that by making the request set forth in its letter to us, the Company does not intend to waive the attorney-client privilege with respect to any information which the Company has furnished to us. Moreover, please be advised that our response to you should not be construed in any way to constitute a waiver of the protection of the attorney work-product privilege with respect to any of our files involving the Company.
Pending or Threatened Litigation. Subject to the foregoing and to the last paragraph of this letter, we advise you that as of [date of fiscal period ended] and during the period from that date until the date of this letter, we have not been engaged by the Company to give substantive attention to or represent the Company in connection with [material (as defined in this Company’s request dated X and referred to in the first paragraph of this letter)], loss contingencies coming within the scope of clause (a) of Paragraph 5 of the Statement of Policy referred to in the last paragraph of this letter. [, except as follows:]
[Describe litigation and claims which fit foregoing criteria. An example description follows.]
Smith v. Company. On [date], John Smith, filed a civil action in Federal District Court for the Southern District of Florida alleging that he was wrongfully terminated from employment by the Company. He alleges that his termination resulted from discrimination on the basis of age and that he Company breached an “employment contract” he had with the Company. He claims that he has suffered mental and emotional injury and seeks unspecified damages in excess of $10,000. Discovery is not completed. A pretrial conference is scheduled for [date].
At this stage of litigation, it is impracticable to render an opinion about whether the likelihood of an unfavorable outcome is either “probable” or “remote;” however, the Company believes it has meritorious defenses and is vigorously defending this litigation.
Unasserted Claims and Assessment. With respect to the matters specifically identified in the Company’s letter and upon which comment has been specifically requested, as contemplated by clauses (b) or (c) of Paragraph 5 of the ABA Statement of Policy, we advise you, subject to the last paragraph of this letter, as follows:
[Provide information as appropriate or, if the Company has not identified and requested comment on any unasserted claims and assessments, insert the following paragraph:]
The Company has not specifically identified any unasserted claims and assessments nor has the Company specifically requested that we supplement or comment on any unasserted claims and assessments of which they are aware. [With the exception of the pending litigation previously discussed,] [w]e have made no review of the Company’s transactions for the purpose of identifying loss contingencies or unasserted claims and assessments.
The information set forth herein is [as of [date], the date on which we commenced our internal review procedures for purposes of preparing this response], except as otherwise noted, and we disclaim any undertaking to advise you of changes which thereafter may be brought to our attention.
Please be advised that pursuant to clauses (b) and (c) of Paragraph 5 of the Statement of Policy and related Commentary referred to in the last paragraph of this letter, it would be inappropriate for this firm to respond to a general inquiry relating to the existence of unasserted possible claims or assessments involving the company. We can only furnish information concerning those upon which the company has specifically requested that we comment nor can we comment upon the adequacy of the company’s listing, if any, of unasserted possible claims or its assertions concerning the advice, if any, about the need to disclose same.
Other Matters. [Insert the following sentence only if referred to in Company’s request.] We are not aware of any information concerning financing statements filed under the Uniform Commercial Code or any other assignment of the Company’s assets. As of the date of this writing, the Company [is current with respect to] [owes $ X in] attorneys’ fees and expenses to this office.
Limitation. This response is limited by, and in accordance with, the ABA Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information (December 1975); without limiting the generality of the foregoing, the limitations set forth in such Statement on the scope and use of this response (Paragraphs 2 and 7) are specifically incorporated herein by reference, and any description herein of any “loss contingencies” is qualified in its entirety by Paragraph 5 of the Statement and the accompanying Commentary (which is an integral part of the Statement). Consistent with the last sentence of Paragraph 6 of the ABA Statement of Policy and pursuant to the Company’s request, this will confirm as correct the Company’s understanding as set forth in its audit inquiry letter to us that whenever, in the course of performing legal services for the Company with respect to a matter recognized to involve an unasserted possible claim or assessment that may call for financial statement disclosure, we have formed a professional conclusion that the Company must disclose or consider disclosure concerning such possible claim or assessment, we, as a matter of professional responsibility to the Company, will so advise the Company
a nd will consult with the Company concerning the question of such disclosure and the applicable requirements of Statement of Financial Accounting Standards No. 5.
Good & Careful Attorneys, P.C./P.A./L.L.P.
By:______________________________
cc: [Officer signing Company’s request]
GOOD & CAREFUL
ATTORNEYS, P.C./P.A./L.L.P.
The following outlines the firm’s policy and procedure for processing all audit response letter requests:
1. CLIENT CONSENT. Any request for information not coming directly from or approved by the client must be discussed with the client before releasing any information to the auditors.
2. PUBLICATION. Notice of the receipt of a request must be published in the firm’s daily newsletter for at least two (2) consecutive business days before the release of our response. The date of commencement of our internal review procedure is the date that publication of the notice begins.
3. RELEASE. Audit Response Letters should not be released until the publication period has ended.
4. NAMES; CONFLICT SEARCH. The published notice should contain the full name of the company, as well as the names of any subsidiaries, specified in the request. All names shall be placed into the firm conflict system.
5. FILING. A copy of the newsletter from the first day of publication should be placed in the file, along with a copy of the client’s request and our response.
6. FORM. Audit letters must be in the form attached to this policy.
7. SIGNATURE. All audit letters must be signed by a partner and should have the firm name above their signature.
8. LETTERHEAD. Partners are encouraged to use the “opinion letterhead” (without the listing of names of all attorneys) for Audit Response Letters.
9. EMPLOYEE BENEFIT ISSUES. Questions relative to proper disclosure of information pertaining to pension or other employee benefit plans should be referred to partner, E. Risa.
10. CENTRAL CONTROL. All audit letter responses are to be prepared and reviewed by legal assistant, Perry Legal, to assure that the responses are consistent with this policy, that the internal review procedures are followed, and to monitor the proper filing of documents related to the request and the response. Perry Legal will also manage the review of pension and other employee benefit plan requests with E. Risa.
11. UPDATES. All requests for an update to any audit letter will be treated as if it were an original request. Another Audit Response Letter update will be prepared, following the above procedures.
12. DEVIATIONS. Any deviation to any of the above procedures, including any deviation in the wording of the attached response letter form, must be cleared by partners, Ree Sponsible and Ima Hardsell.