A task force of the American Bar Association is planning to ask regulators to give auditors better guidance on what kinds of documents they should avoid asking clients to produce to minimize the risk of exposing a company’s sensitive, private information.
Stanley Keller, a partner with the law firm Edwards Angell Palmer & Dodge and a member of the ABA task force on attorney-client privilege, says case law has sent some conflicting signals to auditors and attorneys alike about the extent to which an auditor’s interaction with his or her client is privileged.
Keller
“The ABA task force has been trying to explore what information auditors are seeking and what information auditors in fact need,” Keller says. “We’re asking is there a way to weave a path through those waters, so that the circumstances under which auditors need otherwise protected information is in fact limited?”
The question came to a head earlier this year when the Texas Supreme Court settled a disputed construction contract by allowing a utility company to access certain financial records via Ernst & Young, the auditor of the construction firm that was sued.
Keller says some confusion exists over whether giving otherwise privileged information to auditors puts that data at risk of ending up in a third party’s hands when such disputes arise. Some courts have held that information provided to auditors should be afforded the same protection as attorney-client privilege. Others have ruled that since the auditor’s charge is to protect the investing public, any information available to auditors should be regarded as public.
“It’s fair to say that clearly there has been an issue as to whether information provided to auditors results in a waiver of privilege,” Keller says. The ABA task force wants auditors and regulators to “recognize the overriding importance of attorney-client privilege.”
Keller says the ABA task force has drafted a report—currently circulating internally for review—to ask the Securities and Exchange Commission and the Public Company Accounting Oversight Board to give auditors some direction about what they should and shouldn’t ask for in light of recent court decisions.
Susan Hackett, senior vice president for the Association of Corporate Counsel, says auditors believe PCAOB rules require that they leave no stone unturned, especially if clients or their attorneys resist revealing information on sensitive issues.
Hackett
“We are looking for the PCAOB to consider issuing guidance or amending their rules to make it clear that an auditor who does not demand that clients waive their privileges is not acting unreasonably,” she says. “We want to rules to recognize that auditors can be fully diligent in their work without demanding privilege waivers.”
Hackett would like to see the PCAOB affirm a 1970s-era treaty between the ABA and the American Institute of Certified Public Accountants that created a mechanism for auditors to issue audit opinions without accessing attorney-client privileged information. That agreement involved a third party reviewing sensitive material and attesting to the audit firm that the information would not prevent the auditor from issuing a clean audit opinion.
Technically that understanding still exists, but the reality is that accounting firms have been so cowed by the high expectations of Auditing Standard No. 2, promulgated by the PCAOB, that they have lurched into an “ask for everything mode” even if that bumps against attorney-client privilege.
“We don’t believe that the intention of the PCAOB’s charter was to force clients to waive the confidentiality of their legal counsel or turn over their attorney-client privileged material to future plaintiff’s counsel suing the entity,” Hackett says. “That kind of damage is actually very inconsistent with the auditor’s role in serving the company. Auditors may be independent of the clients they serve, but that doesn’t mean that they are necessarily adverse to them unless the client is doing something illegal that must be reported or stopped.”
IASB Proposes Short-Term Equity Classifications
The International Accounting Standards Board has decided not to wait for the outcome of a long-term joint project with the U.S. Financial Accounting Standards Board to amend international accounting rules regarding how companies classify equities and liabilities.
The IASB has published an exposure draft that would amend International Accounting Standard No. 32, Financial Instruments: Presentation, and IAS No. 1, Presentation of Financial Statements, to classify certain financial instruments as equity instead of debt. The proposed amendments focus on ordinary shares redeemable at fair value, ordinary shares of limited life entities, and partners’ interests in a partnership that must liquidate when the partner retires or dies.
Currently, international rules and U.S. Generally Accepted Accounting Principles classify such instruments as liabilities, meaning companies that have issued them to shareholders must show them as a liability on the balance sheet. IASB says it has faced requests from entities around the world to make some changes, so it decided to focus on those limited instruments in a short-term project rather than wait for the outcome of the long-term project with the FASB.
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