CLO/GC Signing Management Reputation Letter for Auditors

Description:

This Wisdom of the Crowd, compiled from a question and responses posted in the Corporate and Securities Law eGroup,* addresses the topic of how a CLO/GC or similarly situated in-house counsel should approach a request by an auditor to sign a management reputation letter.

*(Permission was received from the ACC members quoted below prior to publishing their eGroup Comments in this Wisdom of the Crowd resource.)

Question:

As part of the annual audit process this year our outside auditor (E&Y) has asked that the General Counsel sign the management rep letter. This is being requested in addition to the traditional legal letter describing litigation and threatened claims. I am interested in whether other CLOs/GCs/counsel have been "asked" by outside auditors to sign the management rep letter. If so, when did this type of request start and what is the reason given for the CLO/GC to sign? What position have other companies taken in response to this request? Thanks.

Wisdom of the Crowd:

Response #1:

I have not heard of this - could it be because of some particular, large, unique item in the financial statements for the period?

Others in the group, please join in the conversation - your input is welcomed!

Thanks.¹

Response #2:

I've never been asked to sign a management rep letter for an auditor in my capacity as General Counsel. I also don't believe that I ever would sign one if asked while serving just as General Counsel/Chief Legal Officer since many of the representations would require an enormous amount of diligence before a lawyer could make them.

For about 4 years, however, I was both GC and CFO. The auditors insisted that the CFO sign the rep letter. I could understand their position - they wanted assurances from the head of the finance and accounting department. I believed, and they agreed, that they should not get a higher level of assurances because I also happened to be the company's GC.

Accordingly, I carefully revised the management representation letter to make sure any of the reps that could implicate a legal opinion or information protected by the attorney-client privilege were appropriately qualified. I also excluded from the reps that I was making anything that could not be adequately qualified. Finally, I incorporated language similar to the qualifying language in the audit letter responses regarding the non-waiver of privilege, ABA Statement (on Audit Responses), unasserted claims, and matters disclosed in the audit request letter.

Perhaps ACC should be advocating that it is an inappropriate overreach by auditors to ask CLOs/GCs to sign an auditor's management representation letter?²

Response #3:

I agree that it is not appropriate for the GC to sign the management rep letter. The GC should only provide a legal rep letter to the auditors. I have been asked once to provide more of a "legal opinion" on a matter and I would not (and did not) do so.

Good topic to raise for this group!³

Response #4:

I also find this an odd request. For us (a public company) I provide a Dodd-Frank 404 subcertification to the CEO and CFO and a standard legal audit response letter to the auditors, but do not sign the management rep letter, which is done only by the CEO, CFO and CAO.⁴

Response #5:

I have been "requested" to sign this letter for at least the past 4 or 5 years - and informed the audit will not be completed and results tendered to management without the letter. I have attempted to obtain the external counsel letters also submitted, and craft my letter in coordination with those, including similar standard reservation of rights and caveat language. At the end of the day, I view it as just one more "checklist" item from external auditors as an attempt to (i) avoid taking a position and (ii) being held to any liability for their opinion/findings.

Not sure if this helps . . . .⁵

Response #6:

Ten years ago was asked to sign as well. The big four auditor acknowledged that at best half of the CLO's in their audits would sign. I declined and the auditor dropped it. The concern is that signing the rep letter undercuts the CLO letter to the auditors.⁶

Response #7:

Hi - As GC, I have always been asked to sign the letter, but I said I would "qualify" my signature with reference to the items that I could reasonably be expected to know something about (as opposed to say, technical accounting issues). See below for the things I agreed to certify to. We also take care to distinguish draft from final minutes.

1. We have made available to you: a. . . . b. All minutes of the meetings of stockholders, directors, and committees of directors, or summaries of actions of recent meetings for which minutes have not yet been prepared.

The following is a complete list of meetings of stockholders, directors and committees of directors from [date], through the date of this letter:

1. Meeting of the Board of Directors, [month, day, year] (not yet ratified by Board or recorded in minute books) The minutes as recorded in the minute books described above are true and correct record of all business transacted at meetings of stockholders, directors, and committees of directors of the Company from [date] through the date of this letter.

2. Except as disclosed to you in writing, there have been no: a. Circumstances that have resulted in communications from the Company's external legal counsel to the Company reporting evidence of a material violation of securities law or breach of fiduciary duty, or similar violation by the Company or any agent thereof. b. Communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices.

3. There are no: a. Violations or possible violations of laws or regulations, whose effects should be considered for disclosure in the consolidated interim financial statements or as a basis for recording a loss contingency. b. Unasserted claims or assessments that are probable of assertion and must be disclosed in accordance with FASB Accounting Standards Codification (ASC) 450, Contingencies. c. Other liabilities or gain or loss contingencies that are required to be accrued or disclosed by FASB ASC 450, Contingencies.

4. We acknowledge our responsibility for the design and implementation of programs and controls to prevent, deter and detect fraud. We understand that the term "fraud" includes misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets.

5. We have no knowledge of any fraud or suspected fraud affecting the entity involving: a. Management, b. Employees who have significant roles in internal control over financial reporting, or c. Others where the fraud could have a material effect on the consolidated interim financial statements.

6. We have no knowledge of any allegations of fraud or suspected fraud affecting the entity received in communications from employees, former employees, analysts, regulators, short sellers, or others.

7. We have no knowledge of any officer or director of the Company, or any other person acting under the direction thereof, having taken any action to fraudulently influence, coerce, manipulate or mislead you during your review.

8. The following have been properly recorded or disclosed in the consolidated interim financial statements: a. Related party transactions including sales, purchases, loans, transfers, leasing arrangements, guarantees, ongoing contractual commitments and amounts receivable from or payable to related parties.

The term "related party" refers to affiliates of the enterprise; entities for which investments in their equity securities would, absent the election of the fair value option under FASB ASC 825, Financial Instruments, be required to be accounted for by the equity method by the enterprise; trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; principal owners of the enterprise and its management; and other parties with which the enterprise may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. Another party also is a related party if it can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

9. The Company has complied with all aspects of contractual agreements that would have a material effect on the consolidated interim financial statements in the event of noncompliance.⁷

¹ Anonymous (Corporate and Securities Law, February 27, 2014).
² Gavin G. Galimi, Executive Vice President, General Counsel, and Chief Compliance Officer, March Vision Care, Inc., Los Angeles, California (Corporate and Securities Law, February 27, 2014).
³ Lisa Bodensteiner, Executive Vice President & General Counsel, SunPower Corporation, San Jose, California (Corporate and Securities Law, March 1, 2014).
⁴ Anonymous (Corporate and Securities Law, February 28, 2014).
⁵ Anonymous (Corporate and Securities Law, March 3, 2014).
⁶ Anonymous (Corporate and Securities Law, March 3, 2014).
⁷ Anonymous (Corporate and Securities Law, March 3, 2014).