Compliance Week
By Tammy Whitehouse
In light of regulatory action against fraudulent third-party audit confirmations, some law firms are advising their clients to proceed more carefully when asked to provide such confirmations.
“We’re cautioning our clients regarding providing third-party confirmations, as are most major law firms,” said Frederick Lipman, partner with Blank Rome and president of the Association of Audit Committee Members. Lipman said the firm advises its clients to run all responses to audit confirmation requests through the accounting department, rather than sales or marketing functions, so the company can have confidence in the accuracy of the information it provides.
Auditors often confirm figures in the financial statements of public companies by asking third parties, such as vendors or customers, to verify invoices, outstanding balances, terms of transactions, or other details, says Bruce Webb, a partner in McGladrey & Pullen’s national office of audit and accounting. Companies receiving such requests are under no legal obligation to provide the confirmations, but they often do as a business courtesy to the company being audited.
While providing such a confirmation doesn’t constitute a filing with the Securities and Exchange Commission, the SEC nonetheless has chased such third parties with enforcement actions when they found evidence that the confirmations were bogus, provided either in collusion with the public company or under pressure to falsify financials.
Steve Poss, a senior partner with Goodwin Procter, says the SEC has tightened its focus on gatekeepers—those “who may not be making actual SEC filings or disclosures, but who may have some involvement in the process by which they get made.” Poss says the SEC believes it and the public should be able to rely on confirmations without concern for whether there’s a “side letter or wink-and-nod deal” providing terms to the contrary.
“We’re not saying they shouldn’t provide” confirmations, Lipman says. “We’re saying if you plan to provide them, it should be done by one person through the accounting department, someone with finance expertise who knows what the company is providing.”
Webb at McGladrey & Pullen is unaware of any change in the number of entities that provide third-party confirmations when asked, “and if it were happening at our firm, I would know it,” he says. In virtually any audit, a certain number of third-party confirmation requests will not be answered, he adds. Some companies decline or ignore such requests simply because their systems won’t allow such confirmations to be issued conveniently or at all.
Poss says a clear moral to the story of the SEC’s expressed interest in third-party confirmations is that companies should establish policies on how to review and to respond to requests for confirmations from auditors of other entities.
Chuck Landes, director of the Auditing and Attest Standards team at the American Institute of Certified Public Accountants, said the AICPA’s Auditing Standards Board has considered providing guidance on third-party audit confirmations, perhaps even in concert with the International Auditing and Assurance Standards Board, but no action has been taken so far.
Tracy Coenen, a forensic accountant with Sequence Inc., said audit confirmations are seen as a “nuisance,” but most third parties understand their importance to the audit process and shouldn’t fear SEC action by complying. “If companies are confirming amounts honestly, and have documentation that supports their figures, they should have no fear of responding to a confirmation request,” she say
