An audit management letter: how can an auditor's report help to improve the company’s situation?

This article answers the following questions:

• What recommendations can auditors give to the client's board members?
• How can an auditor's work contribute to stimulating the client's business activity?

Is a financial audit a source of benefits or rather a dire necessity? Entrepreneurs often fail to realise that a good audit firm – which audits financial statements fairly and with due care, instead of focusing merely on the accounting and financial affairs of the company – can be more than just a controller. It can also give recommendations with respect to the correct operation of the systems and processes of the audited entity. The recommendations of statutory auditors are a tool used to initiate discussions with the client about the procedures and processes which are worth improving, possibly bringing long-term benefits and saving the company a lot of money and time in the future.

How can companies take advantage of auditors' visits?

An auditor's visit may prove very useful for the audited entity. A statutory auditor is normally a skilled specialist, with extensive professional experience gained by having audited many entities operating on different markets, who is able to easily determine which actions are necessary to resolve various issues, both common and rare. The observations of such an expert, made in the course of auditing the financial statements, may turn out to be incredibly precious and provide a real added value to the audited company.

The concept of a management letter – when can you request the auditor to provide their observations in written form?

The auditor's recommendations given during their visit at the company can take various forms – from a casual conversation to a formal letter addressed to the management board or supervisory board. 

RSM Poland's long experience shows that a post-audit letter addressed to the management or supervisory board is a really good and welcomed practice. Such a letter is expected by the management also in the subsequent audited year (even if the issues previously found by the auditor have been resolved).

A formal letter is typically more credible than words spoken during a meeting or teleconference. So, a letter to the management or supervisory board should be sent before the audit is concluded. Any risks, uncertainties, or improvement proposals should be put forward before the fiscal year-end close. Thanks to the auditor's proactive approach, the client gains time for considering the indicated issues, follow up with the recommendations, and take corrective actions, for example by improving the internal control system.

It may be particularly important if the auditor clearly states in the letter that a reply from the management or supervisory board is expected. Notably, a management letter is confidential and intended only to be viewed by the executives of the company. Nevertheless, its content is not so significant to affect the auditor's opinion in the auditor's report. The letter to the management or supervisory board includes the ideas which emerged in the course of the audit and which may be implemented by the company to improve its current situation.

Do companies have to adopt the recommendations included in the management letter?

The audit management letter is nothing to worry about – it does not lead to a qualified opinion or additional disclosures in the financial statements. However, it might be the first step in improving the company's health, for example by encouraging the executives to perform deep analyses aiming at reducing tax risk or consider the correctness of the warehouse management operations.

The letter should be first and foremost addressed to local management, who need to have the possibility to analyse the actions and introduce corrective measures, if necessary. Often, such an externally triggered "cure" of the organisation turns out to be critical also for its further operations and performance. Each auditor's recommendation – even though not binding – is therefore worth viewing not through the prism of the cost of the financial audit alone (which is obligatory anyway), but in the context of valuable advice which may provide considerable benefits (mostly in terms of savings). Therefore, even companies which are not subject to the audit obligation should consider consulting a statutory auditor, who could examine the entity's books of account and the internal control system, not necessarily by auditing the financial statements, but, for example, by means of an internal audit.

Such an opinion or report delivered by an external expert always constitutes an added value to the company.