RESPONDING TO AUDIT LITIGATION LETTERS

As a company executive or board member, you have a responsibility to periodically report the financial condition of your company to your investors. To do that in a professional way, to be accurate, and to protect yourself against liability for mistakes or intentional misrepresentations, you have your outside auditors perform an audit and present the results to your investors. Your outside auditors are regulated by professional standards, so your investors are assured the information reported to them is accurate.

To protect their professional reputation and to make sure they have complied with generally accepted accounting principles, your outside auditors need to account for any contingencies of liability by the company that may have a negative impact on the financials. To do that, as part of the audit process, they will send a letter to your company attorney asking for information about any contingent company liability based on pending or threatened litigation loss. The letter must be signed by an authorized company officer or board member to authorize the attorney’s response. The letter is only needed when the potential financial loss is material, which is decided between the auditor and the company.

This situation puts you in a difficult position between a rock and a hard place. You need to report your financial status to your investors, including an account for any litigation, claims, and assessments against the company, but the attorney’s response to the audit letter presents a problem of 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. The attorney’s response is critical and delicate and needs to be prepared in consultation with you as the client.

The American Bar Association dealt with this problem by issuing guidelines for the appropriate scope of a lawyer’s response to the auditor’s request. 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 attorney-client confidence
• The client has been informed of the legal consequence of the disclosure
• The response is limited to the scope of the engagement and the items to which the representation pertains
• The client has already disclosed information regarding pending litigation, contractual obligations, or an unasserted claim
• The attorney does not express any opinion or judgment as to outcomes
• Disclosure is limited to materiality
• It is clearly included in the response that any disclosure does not act as a waiver of attorney-client privilege

The securities lawyers at Corporate Securities Legal LLP have been responding to audit litigation letters for many years. They vigorously protect communications with their clients while giving disclosure to auditors that satisfies their professional obligations. They understand the delicate situation their clients face in meeting the needs of their investors and achieving full compliance with all SEC regulations. They understand that professional standards for both lawyers and auditors are only there to protect their clients.