My CPA firm wants me to sign a representation letter. What do they think I am? A lying skunk?

I remember being an entry level staff accountant and one of our audit clients asking me if we were going to require him to sign a liar’s letter. After all, didn’t we think that he was nothing but a lying skunk!

Even though the public accounting profession refers to this letter as a representation letter, most CPA’s can understand how a client could think of it as an insult. So, what’s up with representation letters anyhow and why does your outside CPA require one?

Let’s assume that your CPA firm is performing a review of your financial statements. If you read the report that your CPA firm attaches to your financial statements, the third paragraph will say – Our responsibility is to conduct the review engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA.

Those standards provide specific guidelines for the outside CPA firm to follow when you have engaged them to review your financial statements. These rules are important because when a third-party user (such as your bank) receives your “reviewed” financial statements there is a presumption that the procedures outlined in those standards have been followed.

Those standards require the outside CPA firm to obtain written representations. Not only are written representations considered additional review evidence, there are certain specific representations that are required to be included in the liar’s (oops I didn’t mean that) representation letter.

The professional standards require representation letters when the outside CPA firm is retained to perform review and/or audit services. A representation letter is optional for compilation services.

I am confident that your CPA firm does not think that you are a lying skunk simply because they require you to provide a representation letter. There may be other reasons, but that’s another subject for another day!

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