Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Thursday, August 10, 2006

Attorney-Client Privilege in Audits

The American Bar Association adopted a resolution this week asking that the SEC, PCAOB, AICPA and other relevant organizations clarify how the attorney-client privilege will be preserved during the audit process. The ABA had established a Task Force to consider the issue. The Report of the Task Force is available here. The existing Statement of Policy on how attorneys respond to auditors is 30 years old.

Not surprisingly, the issue of privilege comes up in connection with contingent liability issues such as litigation (FAS 5) and environmental (FAS 143) reserves. As auditors attempt to determine whether appropriate reserves have been established, providing documents covered by the attorney-client privilege raises the possibility of waiver of the privilege. Sometimes, those documents may even make it into the audit workpapers. Legal determinations are often crucial to the proper accounting for issues such as whether environmental remediation is required and what a company's legal exposure is in a particular lawsuit or group of lawsuits.

The privilege issue also arises in connection with rendering of tax advice. The AICPA advises auditors to obtain a copy of any opinion rendered by anyone providing advice on tax matters "notwithstanding potential concerns regarding attorney-client or other form of privilege." (AICPA Standard of Field Work AU Section 9326.22)

Finally, because Section 10A of the Exchange Act imposes special responsibilities on auditors, internal investigations that may be subject to the attorney-client privilege can be directly relevant to the auditor's evaluation of the issuer's internal controls.

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