Responding to Legal Audit Letters = Risk Management Headache
As many of you probably know, auditing standards require that an auditor confer with the attorneys for the audited entity about certain types of loss contingencies, such as pending litigation and unasserted claims. During this process, the audited entity/client asks that its attorneys respond to the “legal audit letter.” Some attorneys may view this procedure as cumbersome and perhaps even annoying, but it is a required element of the auditing process and must be taken seriously. This is especially so because the attorney’s response to the legal audit letter presents risk management problems particularly with respect to the potential waiver of the attorney-client privilege.
Generally, any disclosure to a third-party of otherwise privileged information acts as a waiver of the attorney-client privilege. There are limited exceptions to this rule. Accordingly, an attorney’s response to a legal audit letter could compromise the privilege. The ABA took note of this conundrum and issued a Statement of Policy Regarding Lawyers’ Responses to Auditor’s Requests for Information, which delineates the appropriate scope of a lawyer’s response to the auditor’s request. Attorneys should play close attention to this statement.
Under the ABA’s Statement, a lawyer may properly respond to the auditor’s request for information concerning loss contingencies if the client has authorized the disclosure, the disclosure would not reveal any confidences, and the client has been informed of the legal consequence of the disclosure. The Statement further instructs the lawyer to limit the scope of the engagement and the items to which the representation pertains. Additionally, the Statement provides that it is appropriate for a lawyer to provide information regarding pending litigation, contractual obligations identified by the client, or an unasserted claim identified by the client. However, the attorney should generally refrain from expressing judgments as to outcomes. Lastly, even if a disclosure is proper, the Statement reiterates that the lawyer still has a professional obligation to inform the client regarding the advisability of the disclosure and an ethical duty to preserve client confidences.
The ABA’s Statement serves as a general guide to lawyers providing auditor information and a reminder of the potential repercussion of unwittingly revealing client secrets. Lawyers may be required to supplement or modify the approach in particular situations but some general practice pointers include:
- Establish an objective “materiality limitation”;
- Disclose no confidences;
- Structure opinions with care or avoid any opinions;
- Communicate with the client;
- Develop a written policy governing responses to audit letters; and,
- Include in the response that any disclosure does not act as a waiver.