What is a Management Representation Letter?

A management representation letter is a form letter written by a company's external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis. The CEO and the most senior accounting person (such as the CFO) are usually required to sign the letter. The letter is signed following the completion of audit fieldwork, and before the financial statements are issued along with the auditor's opinion.

In essence, the letter states that all of the information submitted is accurate, and that all material information has been disclosed to the auditors. The auditors use this letter as part of their audit evidence. The letter also shifts some blame to management, if it turns out that some elements of the audited financial statements do not fairly represent the financial results, financial position, or cash flows of the business. For this reason, the statements that the auditor includes in the letter are quite broad ranging, encompassing every possible area in which management's failings could lead to the issuance of inaccurate or misleading financial statements.

An auditor typically will not issue an opinion on a company's financial statements without first receiving a signed management representation letter.

The Public Company Accounting Oversight Board provides considerable detail regarding the content of a management representation letter in its AU Section 333.

Related AccountingTools Courses

How to Conduct a Review Engagement

How to Conduct an Audit Engagement

Contents of a Management Representation Letter

Following is a sample of the representations that may be included in the management representation letter:

Management is responsible for the proper presentation of the financial statements in accordance with the applicable accounting framework
All financial records have been made available to the auditors
All board of directors minutes are complete
Management has made available all letters from regulatory agencies regarding financial reporting noncompliance
There are no unrecorded transactions
The net effect of all uncorrected misstatements is immaterial
The management team acknowledges its responsibility for the system of financial controls
All related party transactions have been disclosed
All contingent liabilities have been disclosed
All unasserted claims or assessments have been disclosed
The company has disclosed all liens and other encumbrances on its assets
All material transactions have been properly recorded
Management is responsible for systems designed to detect and prevent fraud
Management has no knowledge of fraud within the company
The financial statements conform to the applicable accounting framework

Auditors typically do not allow management to make any changes to the content of this letter before signing it, since this would effectively reduce the liability of management. A change in the letter might shift liability to the auditor.

Advantages of a Management Representation Letter

Here are several advantages associated with the use of management representation letters:

Provides confirmation of assertions. The letter offers formal, documented confirmation from management regarding their assertions about the financial statements. This documentation strengthens the reliability of management’s statements.
Enhances accountability. By signing the letter, management takes explicit responsibility for the information in the financial statements and acknowledges their responsibility for fair presentation. This encourages accountability and clarity about the division of responsibilities between management and auditors.
Helps auditors comply with audit standards. Auditors are required by auditing standards to obtain management representations on various financial and operational aspects of the company. This letter helps auditors fulfill these regulatory and compliance obligations, thereby reducing their risk.
Mitigates legal liability. By obtaining a management representation letter, auditors have documented evidence of management's claims and representations. This can be crucial in cases of misstatements, fraud, or subsequent legal action, protecting auditors from potential liability.
Encourages transparency. Drafting and signing the letter often involves discussions between management and auditors about key aspects of the financial statements. This process promotes transparency and allows for the clarification of any ambiguous issues before the audit is finalized.
Supports auditors’ opinion. The representations in the letter serve as part of the evidence supporting the auditors’ opinion on the financial statements. This evidence strengthens the audit's credibility and supports the validity of the auditor’s conclusions.

In summary, a management representation letter benefits both management and auditors by providing documented assurances, enhancing accountability, supporting audit standards, and contributing to the overall credibility and transparency of the financial reporting process.