FINANCIAL STATEMENTS: questions raised about extent of legal professional privilege


Lawyers need updated guidance on what information they can disclose to auditors and what remains subject to legal professional privilege (LPP), or the quality of companies' financial statements could be adversely affected, it has been claimed.



A report by the Audit Quality Forum (AQF), a stakeholder group hosted by the Institute of Chartered Accountants in England and Wales, said third parties - such as lawyers, but also customers and suppliers - may hold information material to the truth and fairness of financial statements, but which does not reach the board of directors or the company's auditors.



The AQF acknowledged that the key responsibility for the truth and fairness of financial statements should remain with the board, but added that public policy-makers need to be aware of the impact that third parties could have on audit quality.



Its working group - whose members are drawn from the accountancy, actuarial and legal professions, and bodies such as the CBI and the National Association of Pension Funds - said in a report that 'the difficult question' of LPP is a particular area of concern. It insisted that lawyers can reveal a considerable amount of information to auditors without risking privilege.



The working group also called for a public debate on the balancing of the right to LPP with the benefits of true and fair financial reporting. 'Such debate should encompass the possibility of the extension of the scope of privilege to include company auditors and their regulators, where third-party advice impacts on financial statements,' the report added.



Stephen Lewis, working group chairman and a partner at City law firm Clifford Chance, said: 'It is really important for the legal and accountancy professions to agree updated guidance in this area, because both the law and the professional priorities of the two professions are complex and not necessarily identical.



'Both professions, however, should have a mutual interest in ensuring that financial statements are prepared on a sound basis, with auditors having access to all the information they require.'



But the call for lawyers to be issued with revised guidance met with a sceptical response from the Law Society.



A Chancery Lane spokeswoman said: 'LPP is a crucial protection for clients, which needs to be zealously guarded. Equally, we are not persuaded that it should be available to other advisers. Rather, it should remain solely within the legal profession.



'We note with interest the recently published report of the Audit Quality Forum, but have yet to be convinced of the need to update guidance on the inter-relationship between lawyers and auditors.'



Philip Hoult