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ABA Urges the Adoption of Standards on Attorney-Client Privilege

The American Bar Association has urged the PCAOB and the SEC to adopt standards ensuring that attorney-client privilege and work product protections are preserved throughout the independent outside audits of public companies. The ABA resolution grew out of a report by a task force on attorney-client privilege.

The task force concluded that the circumstances for permitting information to be obtained that might implicate the attorney-client privilege or work product protections should be strictly limited to situations where it is clearly necessary for purposes of the audit and not where it merely would be convenient or would provide additional confirmation or comfort. These circumstances also should be limited to factual information that is not available from other sources or solely when relied upon by the client to justify its financial reporting position, applicable legal advice and opinions, according to the task force.

The task force urged regulators to clarify the information that auditors need, and more importantly what they do not need, for the proper conduct of the audit. This clarification would reaffirm the importance of the fundamental policy of preserving attorney-client privilege and work product protections as a priority and outline carefully the information that can properly be sought and still be consistent with the preservation of these protections.

In the area of tax advice and opinions of counsel, auditor requests should be limited to those circumstances in which the opinion or advice is asserted by a company as the basis for its tax position. The ABA task force believes that, in most circumstances, it will be possible for the company to produce materials to satisfy audit requirements that disclose the factual and legal bases for the tax position taken by the company without the need for inquiry by the auditor into the advice or opinion of counsel.

The task force noted that issues of audit documentation generally concern attorney-client privilege and work product protections arising in the context of furnishing documents to the auditor, including letters, e-mails, faxes and legal opinions. The task force believes it is unfortunate that the PCAOB's Auditing Standard No. 3 on audit documentation has been interpreted as establishing new substantive documentation requirements. The task force urged the Board to clarify that AS3 does not establish the information required for an audit, but addresses the need to document the audit process and to preserve that documentation, partially to support the Board's inspection process.

According to the task force, documents evidencing advice of counsel to the audited company would not themselves appear to constitute procedures performed, evidence obtained and conclusions reached by the auditor merely because they exist and may be used by the client in connection with the preparation of, as opposed to support for, its financial statements. The documents appear only to constitute evidence obtained to support the audit and, therefore, would be limited only to documents appropriately obtained by the auditor as an integral part of the audit.

In addition, relevant auditing literature indicates that the evidence obtained by auditors does not appear to include documents prepared by others that might be used by the company in connection with presenting the components of the financial statement unless it was needed by the auditor as corroborating information. The task force believes that the PCAOB could appropriately clarify that the purpose of audit standards with respect to audit documentation and audit work papers is to preserve evidence of work done by the auditors, rather than to preserve the work of others that may have been used by the audited company but are not appropriately considered to be corroborating information.

Many believe that excessive exposure to civil liability is a prime source of auditor requests for information beyond what is necessary for the audit. With this in mind, the task force recommended the development of a safe harbor for accounting for transactions that would protect well-intentioned preparers of financial statements from regulatory or legal action when the process is appropriately followed and results in an accounting conclusion that has a reasonable basis.

The task force noted that, for the past 30 years, a statement of policy between the ABA and AICPA has preserved the attorney-client privilege and work product protections in the context of communications between lawyers and auditors of public companies. This agreement, referred to as the Treaty, has been a hallmark of the interaction between the legal and accounting professions for three decades.

The task force has asked the PCAOB to confirm the integrity and continuing application of the Treaty, including clarifying that nothing contained in AS3 or rule 3101 is intended to negate its provisions. The task force said the PCAOB could also issue a statement explicitly reaffirming that the principles of confidentiality recognized in the AICPA interpretations that have been adopted by the Board as interim auditing standards are fundamental values entitled to respect.

James Hamilton