Auditor liability and accounting expert Dr. Barry Epstein explains why claiming reliance upon fraudulent or misleading information provided by the management of a company in a management representation letter is not a viable defense against auditor malpractice claims, even when that assertion (i.e., having been deceived by the client) is actually true. Notwithstanding that obtaining a written representation letter is mandatory, its actual value as real audit evidence is minimal.
Under common law an auditor may be liable to a client for breach of contract, negligence, gross negligence (constructive fraud), and actual fraud, and may be liable to third parties for negligence, gross negligence (constructive fraud), and fraud. Attempting to rely on a deceitful or otherwise inaccurate representation letter from management is a defense that has been shown to ring hollow in the courtroom.
This article demonstrates that formal management representations – albeit required under auditing standards, and even when highly specific about accounting practices employed by the reporting entity – are not, in and of themselves, adequate evidence to support the auditor’s opinion on the financial statements.
Dr. Epstein is available to answer questions about auditor liability or accountant malpractice. He can be reached at 312-464-3520 or BEpstein@SSandG.com.
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