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Are You a Friend or Foe of Auditor’s Management Letters?
As a government auditor, we have two types of clients: management letter friends and foes.
Management letter friends are clients who encourage us to give them a comprehensive letter with many recommendations. They are disappointed when our letters are short. They have a healthy perspective on the audit process and the value they receive from that process.
Management letter foes are clients who resist every recommendation we include in the letter. They are troubled when our letters have any comments at all. They often view the management letter as a “report card” on their ability to manage the organization. This perspective could be reducing the value an audit can bring to your organization.
Required management letter comments
Auditing standards require certain management letter comments. These comments relate to control deficiencies that could result in the inappropriate collection of data for financial reporting or compliance purposes. The control deficiencies are called either significant deficiencies or material weaknesses, depending on the likelihood of material errors or fraud passing through the government’s systems without detection.
These control deficiencies should be studied and corrected as soon as possible. As an auditor, we are required to assess the financial and compliance risks in our clients’ organizations. Once we identify a risk, we must understand the internal controls designed to mitigate those risks. If a control is absent or ineffective, we are required to report a control deficiency, so management can address the risk appropriately as part of its risk assessment process. This audit process is critical to building and reinforcing a system that mitigates risks of error or fraud.
Our professional standards do not require us to offer advice to our clients. A firm’s philosophy guides the engagement team in terms of the quantity and depth of the advice it provides. Additionally, management’s attitude toward advice can affect the amount of advice they receive. This is the ironic nature of the auditor-client relationship: auditors are hired for their knowledge and experience, but when they provide advice in a management letter, some clients become sensitive.
An auditor’s perspective
An auditor views the management letter as the formal communication that finalizes the engagement for the year. It is the written presentation of the observations and communications between management and the governance body. The management letter is an opportunity for auditors to demonstrate the depth of their knowledge and offer the insight and objective perspective that is only available to someone not directly involved in the organization’s daily operations. Auditors with industry expertise bring relevant experience and data from clients in similar situations. These comments can help improve organizations — they are arguably the most valuable pieces of the audit.
Maybe it is too simplistic to divide the world into management letter friends or foes. In essence, a management letter is an assessment — but it is an assessment from professionals who are committed to your success. To get the most out of an audit engagement, leaders should thoroughly understand the auditor’s observations and recommendations, and then seriously consider how to strengthen the organization based on those suggestions.