PORTFOLIO

Auditor's Need to Know v. Counsel's Need to Protect Client Confidences (Portfolio 5407)

Bloomberg BNA Tax and Accounting Portfolio 5407-2nd, Auditor's Need to Know v. Counsel's Need to Protect Client Confidences (Accounting Policy and Practice Series), outlines the competing roles that independent auditors and counsel for public companies play and the professional conflicts those roles create regarding the independent auditor's responsibility to the public and the attorney's responsibility to the client. 

Price: $400 Print

GET MORE WITH THE FULL PORTFOLIO LIBRARY

This Portfolio is part of the Accounting Policy and Practice Series, an essential resource including more than 70 accounting Portfolios and the latest news and developments.

FREE TRIAL

DESCRIPTION

Bloomberg BNA Tax and Accounting Portfolio 5407-2nd, Auditor's Need to Know v. Counsel's Need to Protect Client Confidences (Accounting Policy and Practice Series), outlines the competing roles that independent auditors and counsel for public companies play and the professional conflicts those roles create regarding the independent auditor's responsibility to the public and the attorney's responsibility to the client. The Portfolio, directed to both independent auditors and attorneys, is particularly relevant in light of the emphasis placed on independent auditors' certifications of the internal controls and financial statements of public companies.
This Portfolio highlights situations in which the conflict between the independent auditor's duties of independence, documentation, and inquiry and the attorney's duties to maintain client confidences and zealously represent the client's interest tend to arise. These include independent auditors' analyses of a public company's loss contingencies, corporate internal investigations, and decisions on tax matters.
The authors provide an analysis of the factors driving the conflict. The Portfolio discusses the impact of enhanced public auditing standards and rules, and the liability facing independent auditors for the breach of those standards and rules. The Portfolio describes the contours of the attorney-client privilege and work-product doctrine, focusing on the history, scope, limitations, and waiver regarding these essential evidentiary privileges. The authors also discuss liabilites facing attorneys who disclose confidential communications or protected work-product. The Portfolio then discusses the accountant-client privilege and the role that evidentiary privilege plays with respect to the conflict.
The Portfolio provides a comprehensive look at the conflict between the auditor's need to know and counsel's need to protect client confidences, including available case law on whether disclosure to independent auditors vitiates the attorney-client privilege or work-product doctrine vis-à-vis third parties in subsequent litigation and legislative action on analogous conflicts. The Portfolio concludes with recommendations for managing the conflict.
Please note that the Portfolio is intended for general informational purposes only. It is not intended to be and should not be considered legal advice or a substitute for obtaining legal advice from independent, legal counsel. Publication of this information is not intended to create, and receipt does not constitute, an attorney-client relationship.
This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5407-2nd, Carney and Campbell, Auditor's Need to Know v. Counsel's Need to Protect Client Confidences (Accounting Policy and Practice Series).


Buy Auditor's Need to Know v. Counsel's Need to Protect Client Confidences (Portfolio 5407) now


AUTHORS

JOHN J. CARNEY, ESQ., CPA
John J. Carney, Esq., CPA; J.D., Rutgers University School of Law; B.A., Accounting, Rutgers University. Mr. Carney is a partner with Baker & Hostetler LLP in New York City and Co-Chair of the firm's national corporate investigations and white collar practice teams. Mr. Carney focuses on representing corporate and individual clients in securities regulatory enforcement matters, white collar corporate investigations, Foreign Corrupt Practices Act compliance and defense, monitorships and government enforcement defense, and complex litigation. Prior to joining Baker, Mr. Carney served for more than 14 years with the U.S. Securities and Exchange Commission, advancing to senior counsel with the Commission's Division of Enforcement in Washington, D.C., and the U.S. Department of Justice, finishing his tenure there as Chief of the Securities and Health Care Fraud Unit for the Office of the United States Attorney for the District of New Jersey. During his service with the SEC and DOJ, Mr. Carney specialized in investigating and litigating accounting and disclosure cases, and served as lead counsel in many of the government's most prominent and complex cases. Mr. Carney also worked for five years as a certified public accountant at a “big four” accounting firm where he provided audit and tax services to publicly held corporations prior to attending law school.

PATRICK T. CAMPBELL, ESQ.
Patrick T. Campbell, Esq.; J.D., New York Law School; B.B.A., Baruch College of the City University of New York. Mr. Campbell is an associate with Baker & Hostetler LLP, representing clients in a variety of white collar defense, corporate investigation, and general commercial litigation matters.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction and Scope

A. Common Scenario

B. Roles of Company Counsel and Independent Auditors

C. The Conflict Between the Auditor's Need to Know and Counsel's Need to Protect Client Confidences

II. Situations in Which the Conflict May Arise

Introductory Material

A. Evaluation of Loss Contingencies

1. Loss Contingencies-Generally

2. Litigation Contingencies

B. Internal Investigations

C. Tax Matters

D. Technical Legal Situations in Which the Conflict May Arise

III. The Treaty

Introductory Material

A. Provisions of the Treaty-ABA Statement of Policy

B. Current Validity of the Treaty

IV. Auditor's Duties

A. Historical Origins and Scope of Relevant Law and Governing Bodies

1. The AICPA

2. The PCAOB

3. The SEC

4. GAAS

a. GAAS in Relation to PCAOB AU 150

b. GAAS in Relation to PCAOB AS 1

5. State Accountancy Boards and Societies

a. New York Accountancy Rules

(i) The NYSBPA

(ii) New York State Society of Certified Public Accountants

b. California Accountancy Rules

(i) California Board of Accountancy

(ii) California Society of Certified Public Accountants

B. Auditor Duty of Independence

1. Auditor Independence Under the PCAOB

a. PCAOB Promulgations

(i) PCAOB Rule 3520-Auditor Independence

(ii) PCAOB Rule 3502-Responsibility Not to Knowingly or Recklessly Contribute to Violations

(iii) PCAOB Rules 3521, 3522, 3523, and 3524-Prohibitions Against Engaging in Certain Activities

(iv) PCAOB AU 220 and 110-Independence and the Auditor's Responsibilities and Functions

b. The AICPA and Independence Standard Board's Contribution to Auditor Independence Under the PCAOB

(i) PCAOB ET 101 and 191-Auditor Independence

(ii) ISB No. 1 and PCAOB Rule 3526-Auditor Independence and Audit Committees

(iii) ISB Standards Nos. 2 and 3-Audit of Mutual Funds and Employment With Audit Clients

(iv) ISB Interpretation 99-1-Advising on FAS 133

c. Discussion and Interaction of Independence Rules Under the PCAOB

2. Auditor Independence Under State Laws

a. The NYSBPA

b. The CBA

3. Auditor Independence Under SOX

C. Auditor Duty to Document

1. Duty to Document Under the PCAOB

a. PCAOB AS 3-Audit Documentation

b. PCAOB AS 4-Reporting on Material Weaknesses

2. Duty to Document Under State Laws

a. The NYSBPA

b. The CBA

D. Auditor Duty of Confidentiality

1. AICPA Rule 301-Confidential Client Information

2. PCAOB AS 3

3. Duty of Confidentiality Under State Laws

a. The NYSBPA

b. The CBA

E. Auditor Duty to Inquire

1. Section 10A of the Exchange Act

a. Legislative History and Purpose

b. Reporting Obligations

2. The PCAOB

a. Interim Auditing Standards

(i) PCAOB AU 230-Due Professional Care in the Performance of Work

(ii) PCAOB AU 312-Audit Risk and Materiality in Conducting an Audit

(iii) PCAOB AU 326-Evidential Matter

(iv) PCAOB AU 333-Management Representations

(v) PCAOB AU 337 (SAS 12)-Inquiry of a Client's Lawyer Concerning Litigation, Claims, and Assessments

(vi) PCAOB AU 316 and 317

(a) PCAOB AU 316-Consideration of Fraud in a Financial Statement Audit

(b) PCAOB AU 317-Illegal Acts by Clients

b. PCAOB AS 5

(i) Planning the Audit

(ii) Conducting the Audit and Testing Controls

(iii) PCAOB AS 5 v. PCAOB AS 2

3. SOX

a. SOX § 404-Management Assessment of Internal Controls

b. SOX § 302-Corporate Responsibility for Financial Reports

4. State Laws

a. NYSBPA

b. The CBA

V. Auditor Liability

Introductory Material

A. Forms of Liability

1. Common Law Liability

a. Contract and Negligence-Based Theories of Auditor Liability to Third Parties

(i) Privity or Near-Privity Doctrine

(ii) Negligence and the Foreseeability Doctrine

(iii) Negligent Misrepresentation and the Restatement of Torts § 552

b. Fraud-Based Theories of Auditor Liability to Third Parties

c. Malpractice Liability

2. State Securities Laws

a. New York

(i) The Martin Act

(ii) The NYSBOR and the NYSBPA

b. California

(i) Anti-Fraud Securities Statute

(ii) The CBA

3. Federal Securities Laws

a. The Securities Act

(i) Section 11

(ii) Section 17(a)

b. The Exchange Act

(i) Section 10A

(ii) Section 10(b) and Rule 10b-5

(iii) Section 13(a)

(iv) Section 13(b)

(v) Section 18(a)

c. SEC Suspension Power

d. SOX

4. The PCAOB

5. Criminal Liability

B. Breach of the Duty of Independence

1. PCAOB Proceedings

2. SEC Enforcement Actions

C. Breach of the Duty to Document

1. PCAOB Proceedings

D. Breach of the Duty to Inquire

1. PCAOB Proceedings

2. Section 10A of the Exchange Act

3. SEC Enforcement Actions

VI. Privileges

A. Attorney-Client Privilege and Work-Product Doctrine

1. Historic Origins and Purposes

a. Attorney-Client Privilege

b. Work-Product Doctrine

2. Scope

a. Protected v. Merely Confidential Information

b. Common Law v. Statute: How Are the Privileges Governed?

c. Effect of Third Parties on the Privilege

d. Advice in Anticipation of Litigation v. General Business Purpose

e. Communications With Accountants Facilitating Rendition of Legal Advice

(i) The Kovel Doctrine

(ii) Applications and Limitations of the Kovel Doctrine

3. Limitations and Waiver of the Attorney-Client Privilege and Work-Product Doctrine

a. Generally

(i) Waiver of Attorney-Client Communications

(ii) Waiver of Work-Product Doctrine

b. Inadvertent and Deemed Waivers

(i) Pre-Federal Rule of Evidence 502 Case Law

(ii) Federal Rule of Evidence 502

c. Involuntary Disclosure

d. "At Issue" Waiver

e. Regulatory Limitations (Selective Waiver)

(i) Case Law

(ii) SEC and DOJ Positions

(a) The Thompson Memo

(b) The McNulty Memo

(c) The Filip Memo

(d) The Seaboard Report

(e) The SEC Enforcement Manual (Revised October 6, 2008)

(iii) Congress on Selective Waiver

B. Attorney Liability for Disclosure of Protected Communications or Work-Product

1. Attorney's Professional Ethical Legal Standards (ABA, New York, and California)

2. Sanctions if Attorney Inadvertently/Negligently Discloses Protected Communications or Work Product

3. Malpractice Ramifications if Attorney Inadvertently/Negligently Discloses Protected Communications or Work Product

C. Additional Attorney Work Product Resulting From SOX and SEC Rules

1. Rule 205

2. Section 302

3. Rule 13b2-2, the SEC's Expansive Interpretation of SOX § 303: Increased Attorney Liability Regarding Auditing Standards

D. Accountant-Client Privilege

1. Federal and State Common Law Application

2. State Statutes

3. Federally Authorized Tax Practitioners (I.R.C. § 7525)

VII. The Conflict Between the Auditor's Need to Know and Counsel's Need to Protect Client Confidences

Introductory Material

A. Case Law

1. Waiver of Attorney-Client Privilege in the Context of Disclosure to Independent Auditors

2. Waiver of Work-Product Doctrine in the Context of Disclosure to Independent Auditors

a. Disclosure to Independent Auditors Causes Waiver of the Work-Product Doctrine

b. Disclosure to Independent Auditors Does Not Cause Waiver of the Work-Product Doctrine

B. Legislative Resolutions of Analogous Conflicts

1. Enacted Legislation Supporting Selective Waiver

2. Proposed Legislation Supporting Selective Waiver

3. Proposed Legislation That Would Render Privileged Material Inaccessible to Federal Agencies

VIII. Managing the Conflict

A. Guidance and Policies From the ABA and IRS

1. ABA Task Force on the Conflict

2. Clarification of PCAOB AS 3

3. Long Live the Treaty

4. IRS Policy of Restraint

B. Practical Suggestions

1. Planning, Communication, and Negotiation

a. Initial Discussions Between Company Counsel and Independent Auditors

b. Independent Information Gathering

c. Planning by the Auditors

d. Planning by Client and Counsel

e. Subsequent Communications Between Client and Counsel

2. Joint Education

C. Responding to Audit Inquiry Letters

D. Congressional Action

IX. Conclusion

Working Papers


WORKING PAPERS

TABLE OF WORKSHEETS

Worksheet 1 Definition of "In Anticipation of Litigation" by Federal Circuit

Worksheet 2 Whether Disclosure to Government Waives the Attorney-Client Privilege or Work-Product Doctrine by Federal Circuit

Worksheet 3 Whether Disclosure to Independent Auditors Waives the Work-Product Doctrine by Federal Circuit

Worksheet 4 Example of Auditor-Provided Client's Request to Lawyer

Worksheet 5 Example of Audit Inquiry Response Letter

Worksheet 6 Example Audit Response Letter Policy

Worksheet 7 Section 10A of Securities Exchange Act of 1934

Worksheet 8 Federal Rule of Evidence 502

Worksheet 9 2006 ABA Task Force Report on the Attorney-Client Privilege