The Value of Management Letters to Unlisted Companies

Management letter comments: Their determinants and their association with financial reporting quality in local government

“…This result supports the suggestion by Manson et al (2001) that newly-appointed auditors might offer comparatively more ML comments to ''impress'' auditees. However, other interpretations of this finding are that the number of initial ML comments declines with auditor tenure because: (1) newly appointed auditors endeavor in good faith to assist their auditees as much, and as soon, as possible with ML comments, (2) new auditors offer a fresh perspective, and/or (3) auditors become complacent over time.…”

“…Following Krishnan (2005), we do not predict the sign of the coefficient for EXPERTISE. 5 Manson et al (2001) suggest that the longevity of the auditor-auditee relationship is important in the development of ML comments. They posit that newly-appointed auditors tend to generate comparatively more ML comments to ''impress'' auditees.…”

“…Although ML comments typically are thought to be practical and actionable (Manson et al, 2001), certain comments may not be implemented. Cherry (1992, p. 144) notes that ''not every uncorrected weakness represents management error or negligence.…”

“…The extent of audit firm specialization in government auditing proxies for audit quality. Manson et al (2001) suggest the longevity of the audit engagement is a factor in the generation of ML comments, hence we include auditor tenure as an engagement characteristic.…”

“…Cox and Wichmann also suggest that auditors can use MLs to document areas of risk to limit audit liability. Manson et al (2001) surveyed managers of unlisted companies in Great Britain regarding MLs. Manson et al report that, in contrast to Wallace's (1992) finding, managers tend to view MLs as valuable.…”