The Irony of Responding to Regulators' Pressures: The Case of Management Letter Precautionary Representations.

This article examines the use of precautionary representations in control-related communication by accounting practitioners in the United States. Communications regarding controls have been an issue which arises periodically in the regulatory setting. Much as we have witnessed the Securities and Exchange Commission's (SEC) turnabout from restricting certified public accountant's (CPA) association with forecasts to a position of endorsing CPA association and even chastising the profession for non-association, we are likely to witness other changes in regulatory attitudes and suggested action. Despite the consistent focus on effective communication, the policy prescription has shifted from a need to communicate the presence of material weaknesses and limitations tied to the scope of audit work to a contention that no such language would represent clearer communication. Given the pre-1975 evolution of precautionary representations, their extension in 1979 subsequent to considerable regulatory pressure, including the Foreign Corrupt Practices Act and their carryover to the non-SEC sector, reason exists to believe such disclosures have value. Before such communications are rescinded, their purpose should be considered, the consequences of their removal should be assessed, and the inconsistency with past behavior to the same problem reconciled. This implies a policy prescription of no reactionary response to pressure without evaluation of historical precedents and likely ramifications.