Audited financial statements typically come with a management letter that can be used to improve your business’s performance, lower risk and add value. Auditors observe the operations of many companies and often specialize in industry niches. So they know what works — and what doesn’t work — as well as the latest business trends. Why not leverage your auditor’s experiences and knowledge by implementing the recommendations contained in this letter? Here are some answers to frequently asked questions.
What does a management letter cover?
Auditing standards require auditors to communicate in writing about “material weaknesses or significant deficiencies” that are discovered during audit fieldwork.
Material weakness. The AICPA defines this as “a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.”
Significant deficiency. This is generally considered less severe than a material weakness. It’s defined as “a deficiency, or a combination of deficiencies, in internal control that is … important enough to merit attention by those charged with governance.”
Auditors may unearth less severe weaknesses and operating inefficiencies during the course of an audit. Reporting these items is optional. However, they’re often included in the management letter, or they may be reported to management verbally.
How do companies respond to management letters?
Audit clients differ in their responses to management letters and verbal suggestions. Some ignore the advice, thinking that it may be a way to up-sell consulting services. Others may take offense, thinking that the auditor is “grading” management’s performance. But open-minded clients pay attention — and often reap substantial benefits.
Observant auditors may comment on a wide range of issues they encounter during the course of an audit. Examples — beyond internal controls — include:
· Cash flow management,
· Operating workflow,
· Control of production schedules,
· Capacity issues,
· Defects and waste,
· Employee benefits,
· Safety,
· Website management,
· Technology improvements, and
· Energy consumption.
Consider the restaurant owner who embraced her auditor’s recommendation to take advantage of early-bird discounts offered by food, beverage and supply vendors. Last year’s management letter pointed out that early-bird discounts could have saved $25,000 in the first quarter, based on the auditor’s review of cash disbursements.
Instead of filing invoices by due date, the restaurant’s general manager now files them by discount date and pays them early when extra cash is available. The owner estimates this simple change saved the company roughly $80,000 in 2023.
Don’t just file it away
Some clients view audits as an exercise in compliance, required by regulators or lenders. However, audits provide more than financial reports. The management letter that accompanies your company’s financial statements can be a valuable add-on — if you take the time to review it and implement the suggestions into your daily business operations. Reach out to your Hood & Strong team for more information.
