Requests for updates to lawyers’ audit response letters have become more frequent in recent years. Typically, the client’s audit inquiry letter to its lawyers calls for a response before the anticipated issuance date of the audited financial statements. An “update” or “bringdown” is an audit response letter provided to the auditor in which a lawyer provides information about loss contingencies as of a date after the date of the lawyer’s initial response to the audit inquiry letter and any previous update.
The ABA Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests1 does not specifically discuss updates to audit response letters. In view of the increased frequency of update requests and the lack of guidance regarding these requests, the ABA Business Law Section Audit Responses Committee has prepared this statement to outline the reasons auditors seek updates of audit response letters and to present the Committee’s views on appropriate practices for responding to update requests under the ABA Statement of Policy. The Committee hopes that the guidance provided in this Statement will enhance the ability of lawyers to respond efficiently to update requests, thereby facilitating the audit process and contributing to audit quality.
THE REASONS FOR UPDATE REQUESTS
The ABA Statement of Policy, including its reference to accounting and auditing standards, provides the framework for lawyers’ audit response letters. The ABA Statement of Policy recognizes the fundamental importance to the American legal system of maintaining client confidences. It makes clear that lawyers may provide information to auditors only at the request, and with the express consent, of their clients.2 In accordance with the ABA Statement of Policy, lawyers typically indicate in their audit response letters that the information they are furnishing is as of a specified date and disclaim any undertaking to advise the auditor of changes that may later be brought to the lawyer’s attention.3 The ABA Statement of Policy also contemplates that “the auditor may assume that the firm or department has endeavored, to the extent believed necessary by the firm or department, to determine from lawyers currently in the firm or department who have performed services for the client since the beginning of the fiscal period under audit whether such services involved substantive attention in the form of legal consultation concerning” loss contingencies.4
In recent years, requests for updates have become standard procedure for many auditors. This reflects changes in applicable accounting standards and auditing practices, as well as increased emphasis on loss contingencies by the Securities and Exchange Commission (“SEC”) and Financial Accounting Standards Board (“FASB”), which in turn has increased auditors’ focus on loss contingencies. Requests for updates to audit response letters typically are made in three contexts:
- Audit of annual financial statements. Changes to financial reporting standards require the issuer of financial statements to evaluate “subsequent events,” which can include changes in loss contingencies, through the date the financial statements are issued or are available to be issued.5 As a result of changes in auditing practices,6 most auditors’ reports are now dated as of the date the financial statements are issued or are available to be issued, as opposed to the date on which fieldwork is completed. Accordingly, the auditor may seek to obtain audit evidence, in the form of audit letter updates, to corroborate management’s identification of and accounting for loss contingencies as of the issuance date.
- Review of quarterly financial statements. As with annual financial statements, an issuer is required to consider subsequent events, including loss contingencies, through the date of issuance of its quarterly financial statements. SEC rules require that …