It is common sense to keep tabs on the leadership of an organization, especially when it comes to financial matters. Never trust a greedy manager. There are several tools to do that, and one of them is a management representation letter.
A management representation letter is a specialized letter written by a company’s external auditors and then signed by the senior company management. The date of the document cannot be later than the date at which the audit finishes. The letter verifies that the information provided is accurate and disclosed to the auditors.
If for some reason it’s found that some elements of the audited financial statements are not accurate then auditors should conduct further investigations. As you can imagine, to say there’s a lot of pressure to get it right the first time is an understatement.
The requisites of a management representation letter
All risks, uncertainties, liens, encumbrances, unrecorded and recorded transactions, legal violations, contingent liabilities, and unasserted claims or assessments have been adequately recorded and disclosed.
All financial records have been made available to the auditors.
All board and shareholder meeting minutes have been made available to the auditor.
Management is responsible for systems designed to detect and prevent fraud and has no knowledge of fraud within the company.
Management does not intend to make changes that will impact the value of company assets or liabilities.
Management is responsible for the proper presentation of the financial statements by the applicable accounting framework and the team acknowledges its responsibility for the system of financial controls.
Management has made available all letters from regulatory agencies regarding financial reporting noncompliance.
A difference of representation
It is important not to confuse a management letter with a management representation letter. They both contain essential information about accounting and the management issues of the company, but they differ in their intention.
The idea behind a management representation letter is to take away some of the legal burdens of delivering wrong financial statements from the auditor to the company. It’s basically a get out of jail card for the auditor.