Southwest Airlines

M E M O R A N D U M

DATE: December 13, 2010

TO: Joe Boss – Supervising Partner

FROM: Team A

RE: Challenges of communicating accounting changes regarding SAS 112

Often detecting fraud during an audit is difficult. Solid internal controls are the best way to fight fraud. Thus an auditor’s detection of potential weaknesses in internal controls may be the greatest value of an audit. The auditors’ best vehicle for conveying this information is in the management letter. Unfortunately, rather than looking forward to constructive comments contained in the management letter, organizations often dread it. Organizations anticipate the letter will be full of criticisms and the organization and its staff perceive the management letter as a judgment of their integrity.

SAS 112, Communicating Internal Control-Related Matters Identified in an Audit, replaced SAS 60. This new standard contains two key provisions to discuss. First, communication must be in writing. Verbal communication of deficiencies is no longer acceptable. Second, the auditor must report the item in every audit until the client fixes the deficiency. Organizations may complain that the same points appear year after year, even though the organization had evaluated the condition and decided not to alter procedures. Under the old rule, if the auditee complained, the auditor could drop the point after the first year to keep the peace. This action is no longer an option.

Some examples of significant deficiencies or material weaknesses to report in the management letter include ineffective oversight, restatement of a previous error, identification of a material misstatement, and ineffective regulatory compliance. The management letter must be written with care to communicate issues effectively to different groups within the organization without offending them. The letter should state clearly any issues found in the audit. The letter should report the facts as they are, maintain a judicial...