Negative Confirmation

Negative confirmation is a method of communication that requests a message recipient only respond to the sender of the message in the event the message recipient has a problem with the contents of the message or wants to opt out of the event the message is discussing. It can be used in many types of business situations and is often used in the financial industry. The purpose of a negative confirmation communication is to reduce the number of incoming responses an organization receives in response to a message it sends to its client base. In a negative confirmation or negative consent communication situation, the company or entity sending the message only receives responses from "no" votes, as opposed to responses from everybody regardless of their opinion.

Negative confirmation as applied to the auditing process is a request by an auditor sent to a sample of a company's customers asking them to respond only if they find a discrepancy between their books and the account recorded on the financial statements of the company being audited. Negative confirmation is used when the accounting controls of a company have historically had very few errors and are thus considered to be strong. The company is asked to double-check the numbers and only confirm if there is a discrepancy.

An example of negative confirmation takes place often with 401(k) plans that have an auto-escalation feature. With an auto-escalation feature, the percentage of an employee's paycheck they contribute every pay period is automatically increased every year. The intent of this automatically increasing savings rate is to help people save more money for retirement. This escalation will happen every year unless the participant contacts the 401(k) recordkeeper and says they want to opt out of the increase and keep their contribution the same. A month or so before the escalation takes place the recordkeeper sends out a negative confirmation or negative consent letter instructing the participant that this increase will take place unless they contact the recordkeeper and opt out.

As it relates to the auditing process, negative confirmation is simply a professional way for an auditor to say "don't bother me unless there is a problem." Sending out a negative confirmation as opposed to a positive confirmation, which requires a response, can save time that would be spent tracking replies and hounding companies that are late in responding. The accountant is just making sure both companies have the same numbers.

For example, there could be a negative request to a car manufacturer on the sale of 200 cars, which were sold to a dealership for $6 million. If this were the correct transaction, the manufacturer would not reply; if the cost price was only $5 million, the manufacturer would notify the accountant of the discrepancy in the dealership's books.