CO-OP CONDO ACCOUNTANT AUDIT REP LETTERS

A rep letter – accounting jargon for a "representation letter" – is an important document. When a managing agent recently abused the rep letter process, I realized that, like so many things, too little is understood about something that is just routinely signed. Apartment owners and co-op/condo boards need to know why rep letters are important and why, except for a limited change, they should not be modified.

Rep Rap

What is a rep letter? It is written confirmation from management to the auditor about the fairness of various financial statements. Its purpose is to emphasize that the statements are management's representations, and thus management has the primary responsibility for their accuracy. It also gives replies to auditor questions regarding matters that did not come to the auditor's attention when the audit was performed.

Some auditors request written representations of all financial statement items. All auditors require representations regarding receivables, inventories, plant and equipment, liabilities and subsequent events.

Frequently, all these representations are included in one letter. The letter is required at the completion of the audit fieldwork and before the financial statements are issued. Management acknowledges its responsibilities for running the company and the adequacy of financial policies employed, and confirms both the practices observed during the audit and that management has made full disclosure of all material activities and transactions in its financial records and statements.

A rep letter clarifies the traditional roles that management and the accountant perform. Moreover, the standards for review engagements — the Statements on Standards for Accounting and Review Services — require that accountants obtain rep letters from their review clients, making the letter a mandatory part of the audit process.

The American Institute of Certified Public Accountants has deemed that the "management" of cooperative corporations and condominium associations includes off-site management companies, on-site management personnel, and the board of directors, so the board needs the letter to support its statements.

This is important because the manager has access to the most detailed information about the property and has daily, firsthand exposure to transactions and other events reported in the financial statements. A rep letter documents the information relating to the manager's knowledge of the entity and its intentions, and complements other procedures the accountant performs to review the financial statements.

What a Rep letter Says

A typical rep letter often reads like this:

"We are providing this letter in connection with your audit(s) of the [identification of financial statements] of [name of entity] as of [dates] and for the [periods] for the purpose of expressing an opinion as to whether the [consolidated] financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of [name of entity] in conformity with generally accepted accounting principles. We confirm that we are responsible for the fair presentation in the [consolidated] financial statements of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. 

"Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement. We confirm, to the best of our knowledge and belief, [as of date of auditor's report,] the following representations made to you during your audit(s)."

This is typically followed by such representations as "The financial statements referred to above are fairly presented in conformity with generally accepted accounting principles" and "We have made available to you all: a. Financial records and related data b. Minutes of the meetings of stockholders, directors, and committees of directors, or summaries of actions of recent meetings for which minutes have not yet been prepared."

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