Letter: The new watchdog must avoid damaging the auditor-client privilege

The proposed overhaul of corporate governance and audit regulations, and the creation of the new Audit, Reporting and Governance Authority, will increase costs for companies and create personal liability for directors. It can also put legally privileged documents in danger of becoming public (Report, June 15).

The government’s white paper proposes controversial new regulatory obligations for directors and a new power to investigate and impose penalties on violators. But the White Paper’s suggestion that the new regulator might have the legal power to obtain legal advice from companies shared with their auditor is also of great concern.

Currently, companies can share legally privileged advice with their auditors on a “limited waiver of privilege” basis without losing legal privilege vis-à-vis third parties.

This allows companies to provide legal advice to their auditors, but does not allow the regulator to obtain these documents against the will of the company.

The Financial Reporting Council, which Arga replaces, says it needs to see this privileged material, but it has failed to demonstrate that legal advice to a company is essential to carrying out its duties. No other regulator or authority has such power and handing it over to Arga would cross the Rubicon.

While the white paper talks about “appropriate safeguards” to prevent legal advice from becoming more widely available, it does not address how this might work in practice. It is also silent on how the regulator could rely on evidence when deciding to proceed with enforcement without making the gist of the opinion public. International companies also face the risk that in some jurisdictions the mandatory production of documents to the regulator could destroy their privileged status elsewhere.

While it is important for the regulator to be able to assess audit standards, the potential threat to the effective conduct of audits and the intrusion into the fundamental right to legal privilege outweighs the benefit of Arga having unlimited access to all elements of the audit file.

The government says it wants to ensure that any solution “does not have a chilling effect on the willingness of audited entities to seek legal advice.” He asks whether it is appropriate to introduce the power of constraint. The regulator has not been proven effective and the answer must therefore be no.

Sarah thomas
Partner,
Addleshaw goddard
London
EC1, United Kingdom

About Leah Albert

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