What am I signing? – A quick guide to management representation letters

Disclaimer: All blog posts are valid as of the date published.

Defined Contribution Plan Auditor - 401k Plan Audit Plan administrators probably view the management representation letter as a document they must sign so they likely do so without reading it closely. However, it is critical that plan sponsors understand the purpose and content of the letter, so that they know exactly what they are signing and taking responsibility for.

Generally Accepted Auditing Standards (GAAS) require all benefit plan auditors to obtain a representation letter from plan management. Representation letters include written statements made by plan management regarding its responsibilities. Key items that management acknowledges responsibility for are discussed below.

Fair Presentation of Financial Statements – It is plan management, not the auditor, who is ultimately responsible for the financial statements. Plan management must acknowledge its responsibility for the fair presentation of the financial statements in a signed representation letter to the auditor.

Internal Controls – Plan management has a responsibility to design, implement, and maintain an internal control system to prevent error or fraud which could materially affect the plan’s financial statements. Key areas where controls should be in place are receipts and disbursements from the plan.

Access to Information – Plan management must provide a written statement to the auditor that it has provided the auditor access to all information relevant to the fair presentation of the financial statements, to the best of their knowledge.

Knowledge of Fraud – Plan management must provide a written statement that it is not aware of, nor suspects, any fraud that affects the plan’s financial statements. Note that if plan management does suspect fraud, it have a responsibility to communicate the suspicion to the auditor.

Regulatory Compliance – Plan management must provide a written statement that it is not aware of any noncompliance with laws or regulations set by regulatory bodies such as the DOL and the IRS.

Supplementary Schedules – Management must acknowledge its responsibility over the fair presentation of supplementary statements, including, but not limited to, the Schedule of Assets Held for Investment and the Schedule of Non-exempt Transactions.  These schedules are not a part of the financial statements, but are presented as required supplemental information along with the financial statements. Plan management, not the auditor, is ultimately responsible for the fair presentation of the schedules.

Plan administrators should only sign the management representation letter if they understand and acknowledge everything for which they are assuming responsibility.

Photo by Juli (License)