News & Events

The ABA Statement on Audit Responses: A Framework that Has Stood the Test of Time

This article originally appeared in Vol. 75, No. 3 of The Business Lawyer by the Business Law Section of the American Bar Association.

By Alan J. Wilson, Stanley Keller, Randall D. McClanahan, Noe¨l J. Para, James J. Rosenhauer, and Thomas W. White, Audit Responses Committee, ABA Business Law Section*

This article summarizes key developments in the preparation of audit response letters concerning loss contingencies since the American Bar Association Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information was published in 1976. These developments illustrate both the utility of the framework set forth in the ABA Statement and the responsiveness of the American Bar Association through the Business Law Section Audit Responses Committee (and predecessor committees) to issues arising under the ABA Statement and changes in accounting and auditing standards and practice. The ABA Statement, throughout its use, has served two important objectives: (i) to facilitate effective auditing as the underpinning for public confidence in financial reporting, and (ii) to preserve client confidences as mandated by attorney ethics rules and to protect attorney-client privilege, each of which is a critical component of our legal system. With these objectives in mind, the article highlights some challenges that the legal and accounting professions have navigated over the past forty-plus years, offering perspectives on the current framework that should serve as a resource to the legal and accounting professions going forward.

INTRODUCTION

Much has changed since the American Bar Association Statement of Policy Regarding Lawyers’ Responses to Auditors’ Requests for Information (the “ABA Statement”)1 and the related American Institute of Certified Public Accountants Statement of Auditing Standards No. 12 (“SAS 12”)2 were approved in December 1975 and January 1976, respectively. Those statements establish the framework for auditors to obtain information regarding legal claims against the company under audit. Under this framework, pursuant to SAS 12, the client of the auditor requests its attorney to provide information regarding such claims, and the attorney responds to that request in a letter following the guidance of the ABA Statement.

Since adoption of the ABA Statement and SAS 12 over forty years ago, we have seen an increased emphasis on the quality of loss contingency disclosure, an expansion of private litigation and SEC enforcement actions against accountants and other professionals, a new regulatory regime for the accounting profession established by the Sarbanes-Oxley Act of 2002, the development of new technologies to facilitate the audit letter process, and a substantial change in the standard auditor’s report to require disclosure of critical audit matters. Despite these changes, the ABA Statement has stood the test of time and shown its flexibility to adapt to meet changing circumstances. Indeed, as this article demonstrates, since publication of the ABA Statement over forty years ago, there have been relatively few formal statements about it by the American Bar Association (“ABA”) or its committees, and no substantive amendment to it.

To continue reading, click here to view a PDF version of this article in its entirety.