It’s that time of year when lawyers for local governments will get letters, signed by their clients, asking for a report to the auditor. Information from the attorneys is important to an auditor’s evaluation of the client’s financial statements, especially as to whether there are “loss contingencies” that the statements need to reflect.
The request letters follow a standard format because of a mid-1970s “treaty”
worked out between auditor and attorney trade groups. Under this treaty, auditors send a standardized request, and they agree to accept a response that conforms to the standards set out in an ABA Statement of Policy. If you’re not basing your responses on the ABA Statement, let us strongly recommend that you start.
Using the standard response has several advantages:
- The accountants won’t bother you for further explanations.
- If you’ve wondered what exactly is a “loss contingency,” there’s a definition in there.
- It helps streamline your process for responses.
- It gives you a good reason not to predict the outcome of most disputes or to estimate the client’s exposure except in unusual circumstances.
- It limits the amount of confidential information you disclose – remember the privilege is gone for whatever is in that letter, and your negative evaluation of a claim can be set up as an admission by your client.
- And this one is dear to the hearts of lawyers: you’ll be following an industry-standard template that takes you a long way in establishing your reasonable care and helping you avoid making statements that could be misleading to the auditors or others.