Welcome to Luca!globe
 The CPA Journal Online Current Issue!    Navigation Tips!
Main Menu
CPA Journal
Professional Libary
Professional Forums
Member Services
April 1989

Management of an accounting practice. (management letters)

by Stone, Peter F.

    Abstract- Communication between auditors and client management can improve the quality of recommendations and avoid politically insensitive statements in management letters. Suggestions for changes should emphasize benefits and not symptoms of problems. Auditors should also bear in mind that management letters are often viewed by boards of directors and creditors, who may regard letters as report cards on management. When describing problems and solutions, auditors should focus on clients and not on their own process of auditing.

Writing Effective Management


Politically insensitive advisory comments in a management letter can sour the client/auditor relationship. Clearly, you may sacrifice a fair hearing and even lose the client's goodwill by ignoring the political context of your recommendations. This article suggests some techniques to make your advisory comments politically acceptable. It also suggests how ordinary tact can assure a more sympathetic management review of your recommendations.

The auditor can forestall unpleasant political reactions by discussing each comment with a responsible member of management before including it in the management letter. The auditor is independent and not involved with client management on a daily basis. So, he or she may lack management's detailed understanding of:

.Industry conditions;

.Marketing strategies;

.Management priorities;

.Technical aspects of operations; and

.Relationships within management. Misunderstandings of these factors (and a host of others) could be a source of embarrassment to the auditor. Without informed management preview, the auditor can easily make unsound or politically unacceptable recommendations which could destroy his or her credibility.

There are other advantages to discussing recommendations with management before issuing the management letter.

.Management suggestions can improve the recommendations.

.Management has been put on notice that it will be considering the recommendations.

.Concerned members of management are more likely to support the recommendations because they have participated in developing those recommendations.

Even though you discussed your comments with members of management, do not write the comments as if management's acceptance will be automatic. Someone may read the letter who has not had a chance to discuss the comments with the auditor. You should anticipate possible objections.

Different Perspectives

To anticipate objections, you must look at your recommendations from the client's viewpoint. The auditor and client may look at the same problem from different perspectives. The auditor's desire for lowered audit risk influences his view. The client's desire for higher profits influences his view. Because of these parallex views, certain polarities may occur in the auditor/client client relationship. See Figure I for an illustration of some of these differing perspectives.

If you look at the same problem from different viewpoints, you are better able to anticipate specific objections to your recommendations. Then you can counter those objections in your advisory comments. Emphasizing the client's concerns in the comments will foster acceptance, while emphasizing the auditor's concerns may foster opposition.

Offensive Comments and Defensive


Here is an example of a comment that lacks tact:

"Our report was qualified because the financial statements departed from generally accepted accounting principles. Computations for estimates are erroneous. Loss experience does not justify the large amounts accrued or provided. These are accrued warranty expenses and the allowance for bad debts. Excessive accruals or allowance could be used by management to generate misleading statements."

A comment that faults management's knowledge, competence, motives or integrity provokes defensive reactions. The auditor must present suggestions in a way that elicits cooperation, not defensiveness. A helpful tactic is to place emphasis on solutions and benefits rather than on symptoms and problems. The comments will then have a more positive and constructive tone. Consider this same suggestion, presented in a positive manner.

"Our report was qualified because the financial statements departed from generally accepted accounting principles. Amounts for accrued warranty expenses and the allowance for bad debts are too large. The following schedule summarizes loss experience and suggested provisions to anticipate such losses. By reducing the accrual and allowances to the recommended amounts, the Company would provide only for those losses that can be estimated. In addition, the Company would avoid a qualified opinion in the future."

Management Letter as Report Card

Because of their experience with advisory comments that are tactless or insensitive, some managers dislike them. Comments can be especially threatening when management is dealing with an unsympathetic Board of Directors or Audit Committee. Under these circumstances, management may view the management letter as a report card rather than as helpful suggestions. The auditor should consider how directors or creditors may view the comments. Are the comments fair or are they unduly critical? Restating management's objections may be desirable if there is a disagreement between the auditor and management on some substantive matter. In cases where the issue is not significant, however, there is no point in including recommendations over management's objections. The recommendation only becomes a focus of disaggreement.

Who Does the Comment Help?

An advisory comment is most likely to succeed if it makes friends -- the right friends. The benefits of the recommendation must appeal to those with the power to accept and implement the recommendation. Written recommendations should be tempered by the answers to these questions:

.How will different members of management view a recommendation?

.Who has decision-making authority for different functions or areas? Your recommendation has the greatest chances of success when it supports the goals of the individual exercising decision-making authority.

Client-Centered Comments

Advisory comments describe symptoms, problems, solutions and benefits -- all relating to the client. The client is the center of attention, with the auditor in the background. When comments are dominated by the pronoun, "we," readers get the impression that the auditor is the star. Consider the revisions shown in Figure II to get the focus back on the client.

Given a choice, management usually prefers to improve profitability rather than information systems. Your recommendations to significantly improve profitability or cash flow are the ones that grab and hold management's attention. So, in sequencing comments within the management letter, place them in order of importance to management. Place significant comments dealing with profitability up front unless there are good reasons for doing otherwise.

Use subheadings within the management letter to reinforce your message. Instead of heading the comment by account name or function, highlight the benefit. Some examples are shown in Figure III.


CEO: "Did you see that excellent comment in the management letter? It described the advantages of integrating our inventory control and traffic control systems."

Internal Auditor: "Yes! It's an idea I've been working on. The auditor picked up my suggestion from a conversation we had two months ago."

Because the auditor did not credit his or her sources, this advisory comment has negative side effects. The internal auditor feels exploited and won't be as cooperative with the auditor in the future. The CEO wonders how much of the auditor's work is original and how much is borrowed.

Positive recognition in the advisory comments is a good way to win friends and influence people. People support what they help to create. By crediting his or her sources, the auditor enlists advocates for the recommendations and gains stature as a team player. Here's an example:

"During the past year, Wilma Collins designed and implemented a budgetting and forecasting system. This system has increased control over resources and focused operational efforts on defined goals. This year's 7% increase in profitability is largely due to the Company's reliance on this system."

When People are the Problem

When client personnel are the problem, the obvious solution is to change people. Too often that solution is the wrong one. There are usually better alternatives than sacrificing experience and loyalty through personnel turnover. These alternatives include:


.Close supervision;

.Improved communication;

.Positive reinforcement;

.Using reference manuals; and

.Redesigning procedures. Before recommending a change of personnel, you should carefully consider these alternatives.

You may find situations where a personnel change is the only solution. Suppose there's an individual within the client's organization who is not qualified by experience, training, understanding or temperament. Such an individual, in a responsible position, could do great damage to the client.

The auditor has several options in communicating this problem to management. If circumstances permit and the auditor believes the client will act, a confidential discussion is probably the best route. If the auditor believes documentation is desirable, a confidential and very carefully worded letter may be needed. Only as a last resort should such a matter be raised in the management letter.


For management, recommendations are not compelling simply because they're included in the management letter. The auditor's recommendations face the same corporate hurdles as any other proposal. These are the hurdles of:


.Fixed priorities;

.Opposing interests; and

.Competing demands on resources.

By considering the political context of your recommendations, you improve your chance of boosting them over corporate hurdles. These specific steps help assure that your advisory comments will be adopted:

.Use a client-centered writing style.

.Emphasize the ways in which recommendations support the decision- maker's goals.

.Use tact in framing your recommendations.

.Deal sensitively with matters relating to client personnel.

.Anticipate objections by considering the client's viewpoint in writing comments.

.Discuss recommendations with management before placing them in the management letter.

.Consider how your comments may influence the opinions of others towards management.

.Credit your sources in the management letter.

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2009 The New York State Society of CPAs. Legal Notices

Visit the new cpajournal.com.