Used by auditors as a check on the accuracy of management-prepared financial statements

• Letters are sent to third parties to confirm various items on the company's books and records

• Sent to customers, suppliers and banks, etc.
• To confirm account receivables, account payables and cash balances, etc.
• Per SAS 67: The Confirmation Process

• Typical letter lists financial items and asks third party to confirm after check against their own records

SEC enforcement action  2005

• Against Royal Ahold vendors for
  submitting false audit confirmations
• SEC press release  11.02.05
• Litigation release

• Fried Frank commentary

Many third-parties have stopped responding over concerns with liability under SEC Rule 13b2-2(b)

• Coverage of this SOX Act rule extends to "any other
  person acting under the direction [of a company director or officer]"
• SEC final release commentary
• When adopting this rule, SEC acknowledged concerns that it could chill audit confirmation process
• SEC took position that its historic practice had already been to bring enforcement actions against those who negligently provide misleading confirmations to auditors
• Unless contractually required, third parties have no obligation to respond

PCAOB Standing Advisory Group  SAG

• Studying whether to make changes to confirmation process
• SAG meeting agenda  9.08.04
• Notes that many third parties are no longer responding to confirmation requests because of concerns over liability under SEC rules

Books and records