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The "Rep" Letter: the Biggest Little Three-Letter Word in Your Annual Audit

Stuart Saft in Legal/Financial on February 26, 2016

New York City

Rep Letter
Feb. 26, 2016

The American Institute of Certified Public Accountants (AICPA) requires that accountants obtain a rep letter from their review clients, which makes this letter a mandatory part of the audit process.

The accountant must comply with rigorous standards that govern the process and procedures of a review. The AICPA has deemed that the “management” of co-op or condo associations includes offsite management companies, on-site management personnel, and the board, so the accountant needs the rep letter to support management’s statements. The manager and the board have access to the most detailed information about the entity and have daily, first-hand exposure to transactions and other events reported in the financial statements.
 
A rep letter documents the information relating to the manager’s and board’s knowledge of the entity and its intentions. The letter complements other procedures the accountant performs to review the financial statements. Since the manager has primary responsibility for receipts and expenditures, the management company’s completion is of particular relevance to the auditor, the board, the owners, and anyone else reviewing the financial statements.

The rep letter also has several benefits for the board and management. It prevents misunderstandings and provides a checklist for important matters that affect the financial statements. During the review, the agent responds to many of the accountant’s questions. The rep letter contains these answers, but the representations made in a rep letter do not displace other essential review procedures. As part of a review of financial statements, the accountant is required to obtain a written representation from management to confirm the oral representations that are made to the accountant. Without the rep letter, the CPA is left to wonder if management has withheld information, which might raise doubts about the reliability of management’s oral responses to the accountant’s inquiries.

The opening paragraph of the rep letter usually states that “we confirm, to the best of our knowledge and belief, the following representations made to you during your audit.” So the letter seeks to ascertain only what the manager knows.

Generally, the purpose of the rep letter is to reassure the accountant that the audit is complete and accurate. The members of boards are usually too busy with their private lives and jobs to monitor every action taken on their behalf by the manager. Since the members of the board have a fiduciary duty to shareholders and unit-owners, the board has to rely on its professional advisors – particularly the management company – to act on its behalf.

(Stuart Saft is a partner in the law firm of Holland & Knight.)

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