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The ability of lawyers to provide companies with confidential advice could be under threat from new US rules forcing auditors to take more responsibility for rooting out corporate fraud, a number of multinationals have warned.
Attorney-client privilege has emerged as a central battleground in the fight over new audit standards proposed by the Public Company Accounting Oversight Board, which the accounting profession is trying to defeat.
Auditors currently have access to a limited amount of legal correspondence directly relevant to a company’s financial statements, such as provisions for legal settlements. The PCAOB’s new rules would force auditors to consider whether a company is complying with all the laws and regulations that apply to it, forcing it to cast a wider net for evidence.
In a flurry of comment letters released by the PCAOB this week, companies said the new rules could mean more correspondence with their lawyers would have to be shared with auditors, with the result that it loses its legal privilege and could become evidence in litigation.
“Company personnel could be more hesitant to disclose legal violations to their counsel if they fear that the communication will not be privileged,” wrote Ronald Edmonds, controller at the chemicals group Dow.
“Attorneys may also hesitate to prepare written analysis for their clients for fear that it would end up non-privileged and ultimately in the hands of a legal adversary.”
The energy company Marathon Oil, health insurer Cigna, mining group Freeport-McMoRan and a group of company directors including the audit committee chairs of Beyond Meat, Verizon and Whirlpool were among those echoing the argument.
“The broad scope and volume of information that would be required to be shared with auditors is likely to encompass sensitive attorney advice,” Amy Johnson, controller at RTX, the defence group formerly known as Raytheon, wrote in its submission.
Audit firms say the rules expand their responsibilities into areas better managed by corporate compliance departments and legal advisers, and will prove either too costly or even unworkable.
Erica Williams, PCAOB chair, defended the proposal in an interview with the Financial Times.
“Companies’ non-compliance with laws and regulations, including fraud, can really have devastating consequences for investors,” she said. “This proposal is simply making sure that the protection investors think they’re getting today matches what the standard requires.”
Letters in support of the rule came from investor groups and from the AFL-CIO, which represents union members. “All too often when a fraud is exposed, it rarely comes to light from the auditors,” wrote Brandon Rees, the organisation’s deputy director. “Auditing standards should require auditors to have uncomfortable conversations with management.”
The PCAOB will have to consider feedback from its consultation period before deciding whether to push ahead with the proposal, or to amend or scrap it. Two of the five board members have said they are opposed to the new rules, but a simple majority is all that is needed.
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