Five Court Cases Every Internal Auditor and Audit Committee Member Should Know

Are your workpapers privileged? The Institute of Internal Auditors (IIA) recently presented a webinar entitled “Five Court Cases Every Internal Auditor and Audit Committee Member Should Know.” The webinar focused on court cases related to privileges that may protect internal audit workpapers and how to protect privileged information.

 Four main privileges related to your workpapers include:

• Work Product
  • Protects work prepared in anticipation of litigation.
• Self-Critical Analysis
  • Protects self-evaluative materials and results of candid assessments of compliance with laws and regulations from discovery when the public interest in preserving the internal evaluations of organizations outweighs a plaintiff’s right to the evidence.
• Attorney-Client
  • Protects communications between client and attorney made for the purpose of obtaining professional legal advice or assistance.  Generally, this implies an establishment of a relationship. Some jurisdictions only allow this privilege with external counsel.
• Accountant-Client
  • Protects information shared by a client and their accountant. The purpose of the accountant-client privilege is to create an atmosphere in which the client is able to provide all relevant information to an accountant without fear of subsequent disclosure.
  • No confidential accountant-client privilege exists under federal law.  Some states including Pennsylvania recognize Accountant-Client Privilege. 
  • Pennsylvania accountant-client privilege statute specifically notes “certified public accountant, public accountant or firm” but does specifically include internal audit.

Accountant-client, attorney-client, and work product privileges do not extend to matters disclosed to a third party.  Reference IIA: Practice Advisory 2400-1: Legal Considerations in Communicating Results for additional information regarding privileges.

 

Some Relevant Court Cases

Case law regarding internal audit and their work has helped to shape the legal landscape in this area.

Cardinal, Inc. Case

• Court held that turning over documents to the government does not automatically represent a waiver for attorney-client privilege or work product protection.

Chinn Case

• Court denied work product privilege associated with an internal audit forensic accounting investigation. The court based the denial on the fact that the Audit Committee discussed the matter at two meetings with the external auditor present.

Specialties, Inc. Case

• Court upheld work product privilege related to an Audit Committee Report written in response to suspected irregularities that was not prepared in the normal course of business.

Del Global Case

• Court fined and permanently barred an Audit Committee member that allegedly knew a signed confirmation letter received as part of audit fieldwork was false from serving as an officer of a public company.

Moore Case

• SEC barred an Audit Committee Member that allegedly knew of a failure to disclose a related-party transaction and a failure to discount receivables in accordance with GAAP.

These last three cases illustrate the importance of Audit Committee accountability. 

 

What can you do to protect information?

To increase the likelihood of maintaining the privileged status of your internal audit information, consider taking the following steps.

Plan of Action

• Before an event occurs, develop a plan of action for handling sensitive information.
• Work with counsel to develop a clear method for handling information you consider privileged.

Comprehensive Policy

• All organizations should have a clear policy on confidentiality and periodically remind employees of the policy.

Procedure

• Establish clear steps on how to proceed in specific situations.
• Internal Audit and Audit Committee procedures should be included. 
• Reference IIA Practice Advisory 2440-2: Communicating Sensitive Information Within and Outside the Chain of Command for additional information on communicating audit results and sensitive and information
• Counsel should help develop and approve the steps.

Investigations

• Immediately discuss with counsel.
• Formally engage counsel.
• Limit the number of personnel involved.

Maintaining the confidentiality of your work requires some forethought and planning, but with some preparation and understanding, you can be in compliance and on track.

If you have any questions or comments, contact Elaine Nissley at ENissley@macpas.com.

 

Comments

[accounting services]

Internal Audit is the equivalence of Forensic Science in application to Judiciary investigations on financial matters.

[online writing]

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